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NZIER: Catching Australia requires 'short term pain'

It's an old message from NZIER, but a compelling one: New Zealand needs to save more to boost the economy and catch up with Australia.The NZIER report, Save Now, Prosper Later, released today models a modest increase in savings and concludes such a move

Matt Nippert
Fri, 12 Nov 2010

It’s an old message from NZIER, but a compelling one: New Zealand needs to save more to boost the economy and catch up with Australia.

The NZIER report, Save Now, Prosper Later, released today models a modest increase in savings and concludes such a move would reduce interest payments, boost foreign investment, real wages and GDP.

NZIER chief executive Jean-Pierre de Raad said: “When we become less indebted to the rest of the world it is likely that the country risk premium on borrowed funds will fall. This would make investment much more attractive, and we would held life New Zealand’s productivity and wages.”

Save Now, Prosper Later concludes reducing the proportion of gross national disposable income consumed from 84c to 80c would have the following effects in 2025:
• Reducing annual offshore interest payments by up to $10 billion.
• Increasing investment by 13% than would otherwise have been the case
• Boosting GDP by 4%, and national consumption by 7%
• Real wages rising 7% due to improved labour productivity.

Of course, rerouting disposable income to paring back debt would involve an immediate hit to economic activity, Mr de Raad admits: “Higher national savings will cause some short term pain, but for a longer term gain.”

In the bowels of the report proper, NZIER sketch out a key economic problem facing the country is our long-running current account deficit, particularly since May 2004.

“A consequence of the persistent deficit is that our level of net foreign liabilities has been steadily rising over the past decade and currently sits at 86% of GDP,” the report says.

NZIER used a target rate of  net foreign liabilities of GDP 60%, as achieved by Australia, and says its modest savings increase modelling would allow us to reach this level in 15 years.

Matt Nippert
Fri, 12 Nov 2010
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NZIER: Catching Australia requires 'short term pain'
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