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Opinion: Living on borrowed money and time

By Simon Louisson of NZPA

Friday 4th February 2005

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A report on savings out this week by an independent think tank makes sobering, if not depressing reading.

Economic growth over the past five years has averaged 3.8%, outstripping that of neighbour Australia, the United States, and the OECD average. But analysis of that superior growth rate by the New Zealand Institute shows it has mostly been driven by borrowing overseas.

That has underpinned a housing boom which in turn has made people feel wealthier, encouraging a consumer-led boom - hardly the path to long-term higher living standards.

In fact, it is all seems rather reminiscent of the days of the late Sir Robert Muldoon, except that today it is not the Government borrowing overseas (in fact it is a substantial saver through its surpluses), but the private sector via banks on-lending to mortgage borrowers.

New Zealand's per capita foreign debt is the worst in the OECD club of rich countries. It amounts to a net $118 billion - 82% of GDP, or $29,000 for every man, woman and child.

Most of the foreign "investment" has gone into Government bonds and housing rather than productive parts of the economy.

David Skilling, author of "Home is where the money is: the economic importance of savings", says overseas evidence shows foreign investment tends to be risk-averse - investing in government bonds, mortgages or in companies rooted in the domestic economy such as Telecom or Contact Energy.

This is typical internationally, but exacerbated in New Zealand because of its small size and distance from major capital markets.

"In short, domestic savings are more likely to finance productive investment in New Zealand than are foreign savings."

However, New Zealanders don't save enough and there is insufficient local capital to invest in new capacity to lift productivity and living standards, the former Treasury senior adviser says.

Worryingly, conditions have been favourable for saving in recent years - incomes have been rising, baby boomers have been in their prime earning years, inflation has been low and interest rates high.

Despite all this, New Zealanders' savings - already amongst the lowest in the OECD - have been dropping. Not only that, but these meagre savings are concentrated in housing assets with a much lower proportion in financial assets than in other countries.

Skilling says there is a substantial body of international evidence to show the low level of domestic savings constrains business investment and sustainable growth. Business investment is significantly below other developed countries.

Policies of the last two decades to remove incentives to save have set New Zealand apart from the international policy mainstream.

Skilling argues the hands-off approach to savings and asset ownership is largely to blame.

"It is very unlikely to be a coincidence that New Zealand has the most hands-off approach to asset accumulation in the Anglo world and also amongst the worst outcomes in terms of savings and household wealth."

While it has not yet reached crisis point, Skilling says it is a very serious problem and the sooner it's addressed the better.

A slew of recent statements from the leaders of Treasury, the Reserve Bank, the National Party and Government suggest there is recognition of a need to lift both savings and productivity.

Skilling took heart from Prime Minister Helen Clark's opening address to parliament this week which focused on the need to raise productivity. She said the Government was developing initiatives to help people establish "a saving habit".

The Government would this year be announcing programmes to encourage people to invest in workplace pension schemes, help first home buyers and encourage savings for tertiary education.

The New Zealand Institute's next paper in its series on "Creating an Ownership Society" due next month will focus on how to boost savings but Skilling has clearly showed his hand.

The hands-off approach and notion that people make rational decisions about the need to save has clearly failed.

Australia has compulsory superannuation, while Britain, Canada and the United States have tax concessions to encourage saving for retirement, education or home ownership.

"In all of those countries there are long-established programmes to assist people to put money in the bank to save for variety of purposes. We don't have any of those in New Zealand.

"That is one the primary reasons why New Zealand's savings outcomes are worse than you observe in other countries."

On Wednesday, Finance Minister and Economic Development Minister Jim Anderton trumpeted new figures showing New Zealand had in the last couple of years overtaken Spain in per capita income on the OECD ladder.

However, closer analysis suggested the rise in GDP per capita to 20th place out of 30 was meaningless in terms of the goal of lifting kiwi's living standards to the top half of the OECD. Using Gross National Income figures which net out income from foreign investments here against locals' income from overseas investments, New Zealand remained mired at 21st place.

Essentially, an apparent rise in living standards is accruing to the foreigners from whom we merrily borrow.

The Government has indicated the measures it plans to encourage savings will not be dramatic, so don't expect material incentives or change.

Skilling says that while the Government has an important role, it is a national problem affecting all of middle New Zealand. Attitudes and behaviour must change if people want a long-term rise in living standards.

He does not accept the argument New Zealanders don't earn enough to save, as incomes have increased in recent years while savings have declined.

"It's more an issue of how households have chosen to allocate income - between spending and saving."

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