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20 June 2005 Are New Zealanders Poor Savers - or Just Rational? by Roger Kerr The best-selling author Michael
Crichton recently wrote: "The greatest challenge facing mankind
is the challenge of distinguishing reality from fantasy, truth from
propaganda." He was talking about environmental
doom-mongering but the same comment applies to the New Zealand debate
about saving. Finance minister Michael Cullen
has claimed that New Zealand's household savings rate is too low
and that the country is too dependent on foreign capital. The New
Zealand Institute has claimed that home ownership rates have fallen
and that "New Zealand is facing a serious ownership challenge." In last month's budget the government
announced an additional subsidy for home ownership and a 'compulsory
opt-out' workplace savings scheme. But where is the evidence that
New Zealanders are not making rational savings decisions, and that
a wise and all-seeing government should try to change their ways? According to Statistics New Zealand,
net national saving as a percentage of national disposable income
has risen strongly since the early 1990s. In 2003/04 it stood at
6.8% compared with -2.6% in 1991/92. It is a statistical convention
that government and corporate saving is not counted as household
saving. But if households do not collectively own or control Crown
assets and many corporate assets, who does? Rational behaviour implies that
lower 'household' savings should go hand in hand with higher government
savings. This is what seems to have happened as large government
deficits turned into large surpluses since the early 1990s. If the
government wants New Zealanders to save more, perhaps it should
stop over-taxing them to fund wasteful spending. Treasury research has also found
that people in retirement generally enjoy comparable or higher levels
of consumption than prior to retirement. Those who say household
savings are too low should explain why it would be rational for
people to be even better off in retirement than during their working
lives. The claim that New Zealanders have
consistently been living beyond their means over the past decade
implies that their net worth has been declining. For persons other
than those in retirement, this is unlikely during a period of strong
economic growth, and is inconsistent with Reserve Bank data which
show that the net wealth of New Zealand households has grown from
around 2.8 times net disposable income in 1979 to about 5.4 times
in 2004. The New Zealand Institute has claimed
that the proportion of households with negative net wealth is much
higher in New Zealand (16%) than in Australia (4%). However, this
is an 'apples and oranges' comparison as the data for New Zealand
are collected from individuals whereas the Australian data refer
to households. The true gap is much narrower. In any case, New Zealand is less
wealthy than Australia, thanks to decades of poorer policies. Asset
ownership is ultimately about a stronger growth performance and
higher average incomes. The Institute's claim that home
ownership has fallen is based on data which are not robust and are
likely to be revised. In any case, what is the 'right' rate of home
ownership? It seems that around 70% of homes in New Zealand are
owner-occupied. This is much the same rate as in the United States,
and well above Germany at around 40%. If New Zealand has a "serious"
ownership challenge, where is it? The use of foreign capital is not
obviously a bad thing either. New Zealand was developed on foreign
capital. In broad terms, a balance of payments
deficit when the government is running a fiscal surplus signals
that private investment exceeds private savings. As long as the
investment is profitable it makes sense for foreigners or New Zealanders
to borrow from global capital markets to fund those investments. Furthermore, higher savings are
not necessarily a good thing. They come at a cost of lower levels
of current consumption, and there is no strong link between savings
and economic growth. In the final analysis, what business
is it of the government to try to influence savings decisions -
the choice individuals make between present and future consumption?
And there is little evidence that governments can influence aggregate
savings rates much anyway. If more widespread asset ownership
is the goal, an easily available option is to shift assets from
state ownership to private ownership. It is hardly credible for
the government to invoke an asset ownership goal and then rule out
an option for achieving it which does not require households to
cut current consumption. Arguably the government's best
'savings policy' should be to promote economic growth (by and large,
growth generates savings, not the other way round), to reduce distortions
to saving, in particular by income tax reductions, and to make access
to welfare benefits less open-ended. Puzzlingly, the government seems to have turned its back on a credible pro-growth, tax reduction and welfare reform strategy. Roger Kerr is the executive director of the New Zealand Business Roundtable For more information, contact: Roger Kerr Web: www.nzbr.org.nz |