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Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity

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Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity Savings Working Group Final Report to the Minister of Finance January 2011 ISBN: 978-0-478-35088-3 (Print) 978-0-478-35095-1 (Online) Persistent URL is http://purl.oclc.org/nzt/r-1348 1 The Terrace, PO Box 3724, Wellington 6140 Tel: (04) 472-2733 Email: [email protected] Dear Minister We are delighted to complete this Report for you. In the time available it required an intense effort and I thank everyone who contributed to it, in particular, the members of this Group and its secretariat. The Report presents well-considered, robust and, where necessary, pragmatic views on economic policy and saving issues which we consider merit serious consideration, especially in the current economic and financial market context. However, some of our recommendations do require further detailed fiscal analysis, which we did not have time to complete. While our Terms of Reference excluded some issues this was not a significant constraint as our views on them are implicit in our higher-level analysis. Our views will challenge some strongly held and entrenched attitudes, and differ in some areas from genuinely held perspectives where the position is not helped by data difficulties. However, we are confident in the merits of the views in our Report, as a sound and realistic basis for policy. Best wishes Kerry McDonald Chairman Savings Working Group Members of the Savings Working Group Kerry McDonald MCom(Hons) DCom(hc) FAICD AFIOD – Chairman Company Director Dr Craig Ansley PhD FIA Visiting Professor, Macquarie University Dr Andrew Coleman PhD Senior Fellow, Motu Economic and Public Policy Research Senior Lecturer, Department of Economics, University of Otago Mary Holm MBA Financial Columnist and Author Dr John McDermott PhD Assistant Governor, Reserve Bank of New Zealand Paul Mersi BCA Financial Services Consultant Stephen Toplis MSocSci Head of Research, Bank of New Zealand Secretariat: Treasury (Brian McCulloch, Geoff Lewis, Paul Rodway, Lisa Meehan, Jaime Alaimoana), Inland Revenue Department (Matt Benge, David Carrigan), Reserve Bank of New Zealand (Phil Briggs, Daan Steenkamp), Statistics New Zealand (Jeff Cope). Readers’ guide Part 1 – concise, higher level overview – not technical, an easy read. Part 2 – the full story, more detail, technical in parts. Part 3 – more detailed and technical supporting information for Part 2. The presentation is designed to meet the needs of a variety of readers and this results in some repetition of important points. Contents Part 1 ........................................................................................................... 6 Overview .......................................................................................................... 6 Conclusions .................................................................................................... 10 Recommendations ......................................................................................... 14 Part 2 ......................................................................................................... 19 1 Introduction ............................................................................................ 19 1.1 Objectives .................................................................................................. 19 1.2 The saving problem ................................................................................... 19 2 New Zealand’s economic situation ....................................................... 21 2.1 The main issues ......................................................................................... 21 2.1.1 Poor economic performance ......................................................................... 21 2.1.2 Weak productivity growth .............................................................................. 21 2.1.3 Low saving relative to investment ................................................................. 24 2.1.4 Build-up of foreign debt ................................................................................. 24 2.1.5 Implications of high levels of foreign debt .................................................... 25 2.2 Understanding saving, wealth and debt .................................................... 27 2.2.1 New Zealand’s saving rate ............................................................................ 28 2.2.2 New Zealand’s wealth and assets ................................................................ 30 2.2.3 The adequacy of household wealth and assets ........................................... 32 2.2.4 The need to entrench higher household saving ........................................... 32 3 Implications of New Zealand’s national saving position....................... 34 3.1 Vulnerability ................................................................................................ 34 3.1.1 Macroeconomic vulnerabilities are of concern in New Zealand .................. 35 3.2 Growth and efficiency ................................................................................ 37 3.2.1 Issue .............................................................................................................. 37 3.2.2 Features of poor growth and links to saving ................................................ 37 New Zealand’s level and growth of GDP per capita are relatively poor ................................................................................................................ 37 Closing the gap is a big challenge ............................................................... 38 New Zealand’s gap is the result of low labour productivity ......................... 38 New Zealand’s growth has been driven by the wrong things ...................... 39 High private and government consumption have unbalanced the economy .................................................................................................. 40 Low national savings can depress growth through several other channels ............................................................................................... 40 Growth outlook .............................................................................................. 41 2 | Savings Working Group – Final Report 4 Factors contributing to New Zealand’s national saving performance ............................................................................... 42 4.1 Introduction ................................................................................................ 42 4.2 Households ................................................................................................ 42 4.2.1 Incentives and disincentives for household saving and building wealth ............................................................................................... 42 4.2.2 Private-sector debt and factors affecting it ................................................... 45 Housing loans ................................................................................................ 46 Taxes and house prices ................................................................................ 47 Migration and house prices ........................................................................... 47 Migration and total private-sector debt ......................................................... 48 Unsustainable economic booms ................................................................... 51 Summary ....................................................................................................... 52 4.3 Fiscal situation ........................................................................................... 52 4.3.1 Issue .............................................................................................................. 52 4.3.2 The move to structural deficit ....................................................................... 53 4.3.3 Pressures on government saving position projected to grow ...................... 55 5 Future scenarios .................................................................................... 57 5.1 Future prospects under business-as-usual ............................................... 57 5.1.1 The income burden of external debt ............................................................. 57 5.1.2 Implications of no policy change ................................................................... 58 5.1.3 Comparison with other countries .................................................................. 58 5.1.4 Reducing New Zealand’s vulnerability .......................................................... 58 5.2 Modelling national saving scenarios ......................................................... 59 5.2.1 Results of an increase in national saving ..................................................... 60 5.2.2 Results of increased national saving plus a lower cost of capital ............... 60 Assessment of the model results .................................................................. 64 6 Government saving ............................................................................... 65 6.1 Fiscal policy ............................................................................................... 65 6.2 A high-performing public sector ................................................................. 65 6.1.1 Government savings and productivity ........................................................... 65 6.1.2 Public sector performance
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