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Lifting national savings rate best way to drive down kiwi, McDermott says

Reserve Bank assistant governor John McDermott says lifting the country's savings rate will help reduce New Zealand's reliance on foreign funding and ultimately drive down an over-valued kiwi dollar.

The local currency is overvalued in both nominal and real terms, which is hindering the export sector's profitability and general business strategies, and an important issue in driving its strength has been the persistent gap between savings and investment, McDermott told rural lobby group Federated Farmers in Wellington today.

That's because New Zealand has to rely on international funding to pay for local investment, which pushes up interest rates and the exchange rate. The kiwi rose to 82.29 US cents from 81.91 cents immediately before the speech.

"Since the savings and investment gap plays a prominent role in New Zealand's exchange rate story, it seems reasonable to suggest that it will be necessary to tackle our reliance on foreign savings to finance our consumption and investment," he said.

"Addressing the residential investment needs of a growing population and increasing the incentives for private sector savings, such as the tax treatment of investment income and issues around the long-term design of public and private pension systems, are the sorts of issues that need to be debated to see what would work best in New Zealand," he said.

In its September forecasts, the Reserve Bank estimated New Zealand's household saving rate was negative 1 percent of disposable income in the 2013 March, and this month said gains in private savings were under threat by increased appetite for credit.

In its 2010 submission to the government's Savings Working Group, the central bank advocated consideration of the Nordic tax system, where tax on savings and investment is lower than on labour, linking the tax treatment of interest to inflation and investigate ways to reduce government incentives for KiwiSaver without putting people off as ways to lift the national savings rate.

The country's net international position was a deficit of $151.3 billion as at June 30.

McDermott said the bank does intervene in foreign exchange markets from time to time, though doing so "is unlikely to have a sustained impact in lower the exchange rate," he said.


Comments and questions

OMG,at long last a glimmer of common sense is appearing in reserve bank thinking.
Of course,it is obvious that the way out of our economic flat lining is to build some Domestic Investment Capital (DIC).
If we lack intestinal fortitude,we can take comfort from the sucess of Australia and others who have followed this policy.
It is also obvious that the way to do this is to hoover up all the money that is looking for a home.
How? By increasing the level of interest rates to a rate that will attract savings.
Without being unnecessarily rude to our pollies,they should have seen this years ago,instead of worrying about the possible loss of votes from mortgage loan holders.
Hindsight is 20/20 vision,but that should have been obvious even to blind Freddie and his dog.
The quality of economic thinking in government thinking on matters economic took a steep dive when Key found he couldn't work with Don Brash, and he (Brash) was cast out into the political wilderness.
How much better off we would have been if PPP(petty party politics) had not intruded!
paleo martin

Yes John,just get interest rates up and all your worries will disappear.

The Reserve Bank assistant governor John McDermott says we have an over-valued kiwi dollar because we don’t save enough.
The argument is that the persistent gap between savings and investment, means foreigners savings must flow in to fund the gap and that flow pushes up interest rates and the exchange rate. To tackle “our reliance on foreign savings to finance our consumption and investment,"
The answer for McDermott seems to lie in treating income from saving preferentially.
There is another reading of our situation. Much of the foreign money flowing into New Zealand is not funding the savings gap or helping increase real investment , but is driving up the costs of existing housing and keeping the exchange rate artificially high. This inflow is the result of inadequate domestic policies on home ownership and generous tax treatment of holding property.
In this environment, subsidising the returns to particular forms of financial saving is pointless and likely to make things worse. Tax revenue and government saving will fall, and eventually private saving will fall as people spend their subsidised saving.
If saving more is the answer, the way to close the gap is for the state to save on our behalf by, for example, reducing debt, building infrastructure or improving our education system. In this way no increased private claims on resources are created.
But saving more, whether private or public, may be dangerous in a less than fully employed economy. There needs to be a better deployment of resources. The New Zealand ‘free for all housing market’ needs urgent reform. Then, speculative money may exit New Zealand and the exchange rate will adjust downwards encouraging sustainable exports and discouraging imports. Interest rates can be higher than they otherwise would be, helping dampen the housing market.
McDermott’s suggestion to lower the tax rate on income from saving would actually intensify already worrying levels of inequality because tax breaks are regressive. It would also reinforce the damaging message that passive activity such as holding a KiwiSaver account is of more value than getting income from working. We might not have much to thank the Rogernomics revolution for but an important legacy is the ideal of comprehensive income taxation, where income from whatever source is treated the same for tax purposes.