Domestic savings
New Zealand's national savings rate - the share of each year's GDP not consumed - has averaged 17 percent since 1990. That is among the lower national savings rates in OECD countries. Australia's national savings rate has averaged 20 percent of GDP over the same period - also a little below the savings rate in the average OECD country. But there is quite a range of advanced country experiences. For example, national savings rates in the United States and the United Kingdom (averaging around 15.5 percent) have been lower than those in New Zealand. However, because US and UK incomes are so much higher than those in New Zealand the real dollars saved per person are still lower than here than in the US and the UK.
Domestic savings can matter to future New Zealand living standards in at least two ways.
The first is uncontroversial. For any given amount of investment in the New Zealand economy, a lower (than otherwise) level of savings by New Zealanders means a smaller proportion (than otherwise) of the capital stock in New Zealand is owned by New Zealanders. Savings, once invested, generate additional income for the saver. If a greater proportion of the return on capital is paid to foreigners (because they provided the capital), our future incomes (GNI) will be lower relative to the total value of production in New Zealand (GDP). But provided the level of investment in New Zealand is not affected, the wage rates firms in New Zealand can support also won't be affected.
But if a lower rate of domestic savings did adversely affect the level of investment occurring in New Zealand then both GNI and GDP would be lower - there would be less activity taking place in New Zealand. A lower rate of investment, all else equal, would lower the wage rates that firms operating domestically could pay.
There are two possible channels. One argument sometimes made for why domestic and foreign investment might not be full substitutes in practice is that distance and unfamiliarity with New Zealand mean that foreign equity capital will be less likely to find its way to profitable domestic investment opportunities. How much weight should be given to this argument? Intermediaries exist to overcome those sorts of barriers. It is no doubt true that an individual saver in California looking for equity investment opportunities is unlikely to become aware of the growing high-tech company in Christchurch that needs equity capital. But there is less reason why an investment fund responding to profitable opportunities in New Zealand (and perhaps other similar countries) should not do so fairly effectively. At the very early start-up stage, some entrepreneurs are financed primarily by the savings of family and friends, and it is less likely that foreign investment can fill all those opportunities.
Probably more important is the likely connection between national savings and domestic interest rates. All else equal, a country with a high desired savings rate, relative to the investment opportunities firms see in that country, will tend to have lower domestic interest rates[23]. The central bank of such a country will need to set interest rates lower than elsewhere to maintain price stability: Singapore, Switzerland, and Japan are good examples of such countries. And a country with low desired savings relative to the investment opportunities firms see in that country will tend to have a relatively higher interest rate structure. On the one hand, that higher interest rate structure will encourage more savings than otherwise, and on the other hand it will also deter some investment projects that would otherwise have been considered. So the important stylised fact in New Zealand is not so much that our actual savings rate is low relative to the actual investment rate. Rather it is that if the same (real) interest rate applied in New Zealand as in the average OECD country, our savings rates would be materially lower and investment rates would be higher than in the average OECD country. In such a world, low desired savings raise domestic interest rates somewhat, and so constrain domestic investment.
Again, proximate causes are different from fundamental causes.
National savings can be analysed as the sum of public saving (what the government saves) and private savings. Over most of the last 15 years, New Zealand's public savings rate was among the highest in the OECD. For the time being that has changed: the rapid expansion in government spending and the unfunded tax cuts undertaken in the last five years mean that New Zealand now faces a reasonably extended period of operating deficits.
Private saving and consumption choices are just that: private. The government is not directly responsible for those choices. However, government policies can affect those choices, consciously or inadvertently, and can influence households to save less than they otherwise would do. Government surpluses themselves can encourage the private sector to save less - they have less reason to worry about the risk of future tax increases
At least two broad classes of specific government policies are also likely to influence private savings choices, even if the government's own books are balanced:
- Welfare policies. Government-provided retirement incomes are likely to materially influence incentives for the private sector to save. Generous state assistance for tertiary education, state-funded health services, and social welfare benefits are also likely to have somewhat similar effects. The New Zealand welfare system is more generous than the systems in Australia and the United States and our universal non-contributory New Zealand Superannuation is among the most generous anywhere in the developed world.
- Tax policies. Taxing both the income earned on capital (eg interest) as well as the labour income that first generated the income that was saved is widely regarded as, in effect, double-taxing savings and hence potentially quite costly. New Zealand obtains a relatively high proportion of its tax revenue from the taxation of capital (as does Australia), and until recently had a comprehensive approach to income tax, in which all domestic income earned on savings was taxed at the individual’s maximum marginal personal tax rate. That is very unusual internationally[24]. Taxation of income on capital would be expected to adversely affect both domestic investment and domestic private savings.
Australia also typically has had among the highest real interest rates among OECD countries. In Australia's case, it is plausible that desired rates of investment at any given domestic interest rate may be a significant part of what underpins the relatively high neutral level of interest rates. Over recent decades, on average, a consistently larger share of Australia's GDP has been devoted to investment than any other longstanding OECD country. That is consistent in part with the fact that Australia has had among the most rapid population growth in the OECD and with the rather capital intensive nature of the mining sector.
Notes
- [23]Across the advanced world as a whole, countries with low rates of national savings tend to have somewhat higher real long term government bond interest rates, all else equal.
- [24]In most other advanced countries, substantial social security taxes exist and are levied on labour income but not on capital income. In New Zealand, the social welfare system is funded from general taxation and, at a personal level, capital and labour income are taxed at the same rates.
