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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.