A faster return to government operating surpluses is the measure most likely to result in a material rise in national savings in perhaps the next three to five years, the Reserve Bank says.In a submission to the government's Savings Working Group, the cen
A faster return to government operating surpluses is the measure most likely to result in a material rise in national savings in perhaps the next three to five years, the Reserve Bank says.
In a submission to the government's Savings Working Group, the central bank said it had not taken a view on the merits of compulsory private savings, beyond the default enrolment provisions that already existed with the KiwiSaver scheme.
Reserve Bank governor Alan Bollard said a rise in national savings would improve the country's medium term growth performance, as well as reducing vulnerability to financial shocks arising from New Zealand's high level of foreign debt.
"Most importantly, an improved savings level would reduce interest rates relative to foreign rates, thereby taking pressure off the exchange rate and promoting a more balanced growth mix across the export and domestic sectors," Dr Bollard said.
While there were no obvious failings in current policy which constrained national savings, there were a number of measures that, working together, would be expected to deliver an improvement in national savings in the medium term.
"Foremost could be a faster return to government operating surpluses than currently planned. The government might also give consideration to moving towards a Nordic-type tax system where income on capital is taxed at a lower rate than labour income. Savings would also be enhanced by inflation-indexing the tax treatment of interest," Dr Bollard said.
The introduction of KiwiSaver had already done much to promote retirement savings, and more could be done through that channel, both to promote a savings culture among New Zealanders and to reduce the fiscal cost of KiwiSaver, thus improving its contribution to national savings.
The Reserve Bank submission said the tax subsidies on KiwiSaver were quite generous, and it was likely that any gains in private savings could be achieved at rather less fiscal cost. It raised the possibility that a time limit could be considered on the eligibility for tax credits.
"In general, more cost-effective methods of incentivising savings should be considered," the submission said.
It was difficult to be definitive about why desired savings appeared to run below the investment needs of a growing New Zealand economy.
Without that definitive diagnosis it was wise to be modest in advocating significant policy measures that might affect private behaviour, the submission said.
This country's relatively poor overall economic performance might help explain savings outcomes.
Trends in business savings and retained earnings were likely to be at least as important as the saving behaviour of wage and salary-earning households.
New Zealand's economy had done poorly relative to the OECD as a whole, or to Australia, for 30 to 40 years, the Reserve Bank said.
"In that environment it is likely that there are fewer growing business than there otherwise would be, and perhaps firms and their owners have seen less basis for retaining profits and ploughing them back into expanding the business than they might in a stronger and more dynamic economy."
