No 'big bang' policies to tackle debt

Bill English. Photo / Doug Sherring

The Government said yesterday that it could not afford any "big bang" policies to tackle New Zealand's massive foreign debt, which stands at almost $37,000 for every man, woman and child in the country.

Instead, Finance Minister Bill English indicated his Government will continue to look for savings on its own books and may automatically enrol all New Zealand employees in KiwiSaver - while allowing an opt-out.

The Government's Savings Working Group yesterday released its final report into how best New Zealand's high debt levels may be addressed.

The report contains stern warnings that New Zealand's indebtedness to the rest of the world - at 85 per cent of gross domestic product (GDP) - places the country at dire risk of a Greek or Irish-style financial crisis.

Headed by former BNZ Bank chairman Kerry McDonald, the group said decisive steps were required to increase national savings - both in the state and public sector - above present levels and also to increase net exports to allow the country to better pay its way in the world.

"If New Zealand fails to act credibly and effectively it increases the risk that many of the required adjustments will be imposed by market forces, probably in an abrupt and damaging way."

While the group found retirement savings appeared high enough among people over 45, there was room for improvement and some of that could come from changes to KiwiSaver.

It did not believe the scheme should be made compulsory, but participation should be increased by automatic enrolment of all employees aged 18, or even 16 and over while preserving the right to opt out.

The group also recommended tax changes to make savings more attractive relative to property investment, and that GST be lifted to 17.5 per cent.

However, Mr English yesterday ruled out a GST rise and another recommendation to establish a dedicated social security tax to pay for NZ Superannuation Fund contributions. Prime Minister John Key dismissed a recommendation to reduce the interest rate on student loans.

"There may have been an expectation of a big bang but there isn't one thing that is going to have a dramatic effect on savings rates," said Mr English.

Given the Government's financial constraints, it could not afford to subsidise private sector savings with extra incentives. "If we were going to go down that route we'd have to save money somewhere else."

Mr English said New Zealanders were taking on less debt and were paying it down. "The good news is New Zealand has got the message, we are lifting our savings."

The Government would however, pick from the recommendations "to push New Zealanders in the same direction they're already going of increasing savings and reducing debt."

While Mr McDonald yesterday acknowledged many New Zealanders did not receive enough income to save meaningful amounts, Mr English said KiwiSaver data showed the scheme had been taken up by 1.6 million New Zealanders across the income range.

"It's one of the strengths of KiwiSaver ... it's starting to establish a habit, and if we can do something to reinforce that then we will."

Mr English pointed to the report's "pretty strong focus" on Government savings which was consistent with the fiscal plan outlined by Mr Key who said last week that his Government would hold increases in operational spending to about $800 million a year, rather than the $1.1 billion previously targeted, which could bring the Government into surplus by 2014 or 2015.

Labour's finance spokesman David Cunliffe said the report placed too much emphasis on government debt given it accounted for just 14 percentage points of New Zealand's net foreign liabilities of 86 per cent of GDP. It also ignored discussion about the impact of dramatically cutting public services.

Mr Cunliffe said the report re-opened debate about removing tax incentives for property investment and improving tax treatment of other saving. "Labour will carefully consider options in this area to ensure they are equitable, credible and sustainable."