Savings and investment need to rise – Wheeler

Graeme Wheeler: need to save more and spend less

If New Zealanders want economic growth they need to save more and spend less, Reserve Bank governor Graeme Wheeler says.

The country’s desire for high consumption has been financed by other nations’ savings, Mr Wheeler says in his first annual Reserve Bank governor’s address to Canterbury business delivered today.

That high level of debt-funded consumption means higher interest rates, which in turn hits economic growth as business have to pay higher rates for expansion.

“Our desire for such high levels of consumption was met by borrowing the savings of foreigners," Mr Wheeler says.

One of highest ratios

“As a consequence, our net foreign liability position is 73% of GDP, one of the highest ratios in the OECD, and not much different from some countries that have been at the centre of the financial crisis in the euro area.

“The build-up in external debt increases our vulnerability to economic shocks and the high propensity of New Zealanders to borrow means that higher interest rates than elsewhere are required to achieve similar inflation outcomes.”

In other words, if you want lower interest rates – and, probably, a lower currency, too – save more.

A major World Bank study into countries which averaged 7% growth in GDP or more over the previous 25 years showed a clear group of similar characteristics, he says – many of which New Zealand does have, including openness of the economy, macroeconomic stability and market-based resource allocation.

“One key difference, however, is that all these countries had savings and investment ratios in excess of 25% of GDP and often over 30%.

“Over the past three decades our net national savings rate averaged only 3% of GDP – almost five percentage points below the OECD median.

"For the past 25 years, our net household savings as a percentage of household disposable income averaged minus 2.25% – the lowest in the OECD (where data are available) – and 10 percentage points below the OECD median.”

That does not mean New Zealand should be turning overseas investment away, however, quite the reverse.

“Although, our national savings ratio is low, our investment rate over the past three decades has been around the OECD average, and this is also true of business investment.

"But our capital to labour ratio, or the amount of capital that labour works with, is low by OECD standards.

"Second, much of our investment goes into housing rather than more productivity-promoting investment, and in 2011, 70% of households’ net wealth was in the form of net equity in housing.

“We need more investment, including foreign investment, that can bring benefits of job creation, technology transfer and market opening. Today, about 75% of global trade is undertaken by multinational corporations and about a third is intra-firm trade.

Tax and regulation

“However, instead of welcoming foreign investment, we have one of the more restrictive frameworks among OECD countries. We should re-examine the factors, including tax and regulation, that diminish and distort the incentives to both save and invest.”

New Zealand also needs to put more effort into education, he says. While the country’s education system ranks well overall, there are major problems at the bottom end, and this has a major impact not only on economic well-being but overall well-being.

“We have the greatest difference in reading performance between students from different socio-economic backgrounds out of all OECD countries, and the PISA scores for Maori and Pacific Island students are much lower than the average for students of European descent.”

That is a major reason why unemployment is so high among those groups, Mr Wheeler says.

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You can fix the problem of people borrowing too much by fixing the cause - open ended mortgages where borrowers borrow for the house and then borrow again for everything shiny and new to go in it, along with the new car parked in the garage.
Tell the banks you won't bail them out on housing debt when the bubble bursts and then you may get some more reasoned lending decisions.


The problem isn't people borrowing too much, it is what they are spending those borrowings on. The best way to shift spending from consumption to investment is increasing GST and simultaneously reducing other taxes so the budget is balanced (I would suggest withholding tax on interest and company tax).

From a monetarist point of view spending on housing doesn't matter, unless it is spending on new housing or maintenance so a capital gains tax is unnecessary and since it would also tax other forms of investment it would be damaging.


Its time for regional mortgage interest rate rises, up for Auckland and areas where housing prices are out of control and maintain rates at a realative level for the rest of the country.


Graeme Wheeler is absolutely right, but his comments will probably fall on deaf ears. It's like asking alcoholics on a binge to adopt moderate habits. Also, perhaps he has to be tougher on retail banks with loose lending policies.


The kid's a genius, he truly is.


Scintillating analysis. Must be why the RBNZ has interest rates at record lows and has yet to lift a finger to slow down bank lending on housing etc.

Surely comments like this from Wheeler as some kind of twisted joke?


You don't need to do anything compulsory to increase savings, indeed, the opposite. An income tax on investment income is a second bite from the same taxpayer anyway, as it was taxed when they earned it as income, so don't tax investment income (interest and dividends), and savings will rise.

And yes, go looking for foreign investment by making it attractive (low income tax rate-wise) for foreign money to earn returns here. Stupidly, as Mr Wheeler says, we do the opposite, especially through the ludicrous new thin capitalisation rules. Indeed, if you want a policy that will boost the economy, give all business investors the low rates the Amazons, Starbucks, etc, prudently use, and let every business be competitive off the same low tax base: the only losers will be the rest of the world, or all higher tax jurisdictions, that business will migrate to NZ from.

Prosperity, savings, and more freedom: win win.


Low wage economy does not help savings rates. Only a small minority can afford to. A shift to higher value jobs and tax incentives for saving would help. On the latter, our incentives are second lowest in OECD.


Deregulate the dairy industry, repeal DIRA and split Fonterra up.
NZ has no business in commodities like milk powder. As Jim Bolger said, we will never get rich by selling to the poor.
The dairy industry has had long enough to provide justification for its exemption from the Commerce Act. It has simply used the exemption to go further in the wrong direction, with the result that many dairy farmers are unprofitable, in spite of having externalised their environmental costs.
Investment in added-value dairying will produce the wealth that the country needs to get it out of its indebtedness.
But who will make that investment while the playing field is skewed in the favour of big-monopoly commodity production?


These comments make me angry. Is this guy for real? I, like many of my friends, are savers, sitting on cash, not little amounts but, in the millions saved over many years of six and seven day work weeks.

The cash rate, meaning the return on the savings, has caused me to invest unwillingly into more property, something I am not keen to do as maintanence becomes an issue as one gets older. The one reason, and one reason only, for buying more property is to protect my savings from becoming worthless due to the low cash rate.
4.8% in moderate-risk cash savings investment is a poor return after tax, so why would one save? 3.5% as most might get from banks is a zero return, in effect. No wonder they have built their loan books up - again.
Share investments I have are simply trading in stock, could be car or a house. The company does not benefit much after the IPO.

Low interest rates fix nothing. Look to Japan and the USA. They just cause big problems to get bigger - later.

Market interest rates set a balance, and balance is critical.



What a great shame that it seems that we are going to get another master of the empty word heading the Reserve Bank.
What the country needs is positive action.
And why is the governor worried about lack of savings? It's within his power to do something about it.
Here's a thought: change the interest rate setting to a level that will attract savings, rather than leaving rates at a level that encourages borrowing.
The Reserve Bank has been the direct cause of excessive borrowing for many years now, leading to the continuation of our boom/bust cycle and the necessity to fund our deficits from overseas.
If rates were set correctly we would start to build, at long last, some domestic investment capital which, to state the obvious, would give us a basis for sustained economic growth.
This change in policy is long overdue and if the Reserve Bank had the courage to admit that it's policy had been incorrect, pressure from the political front would need to be resisted, politicians being more concerned with preserving votes above all else.


The new Reserve Bank governor has identified the well-known causes of some of our problems.
We would like to think that this is a prelude to the bank taking some corrective action.
An increase in interest rates to encourage savings would be a useful start.


Mr Wheeler will act on the problems he has identified --- Yeah Right


How can anybody save when the govt. and local councils take almost half of a guy's wages off him?


Great. Amazing insight. We have FBU, and rats and mice. What is in the middle to give us growth in this amazing 4m person economy with a govt that gives its major non-agr chances (Ed payroll, iRD, etc) to useless overseas providers, instead of building local capability.


Just look at the man, grey, grey, grey.


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