Return to fiscal surpluses is most effective way to boost savings: RBNZ

Wednesday 24th November 2010 1 Comment

Returning to fiscal surpluses is the single most effective way the government could contribute to New Zealand's national savings rate over the next five years, the Reserve Bank says.

The advice is in the central bank's submission to the Savings Working Group and includes suggestions to adopt a Nordic-style tax system where income from capital is taxed at a lower rate than income on labour, and inflation-indexing tax on interest.

"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," Governor Alan Bollard said in a statement released with the submission.

He said Standard & Poor's move to put the nation's foreign currency credit rating on negative outlook underlines the vulnerability to global financial shocks as a result of high foreign debt.

The central bank submission says the SWG and other officials and analysts are hamstrung by a lack of high quality data sets to analyse savings. New Zealand has a track record of "consistent under-investment in providing and maintaining a rich array of top quality economic statistics" on saving.

"The magnitude of New Zealand's economic challenges means that this under-investment is not something that should be treated lightly," the bank said.

The national savings rate, though, isn't a policy lever that can be adjusted in the same way tax or interest rates can because of the wide range of view New Zealanders have on how much they ought to consumer or put aside for future consumption, the bank said.

New Zealanders' propensity to spend and consume have ultimately resulted in the nation's real interest rates being consistently higher than in comparable countries, which in turn deters investment that would help longer-term growth prospects, while keeping the real exchange rate overvalued relative to long-term economic fundamentals, the bank said.

"It is striking that over 30-40 years there has been no sustained decline at all in New Zealand's real exchange rate, despite the marked deterioration in our relative productivity performance and the large gap that has opened up between New Zealand incomes and those in other advanced countries," the bank said.

BusinessDesk.co.nz

Comments from our readers

On 24 November 2010 at 8:17 pm arty said:

Saving cash does just not pay. Interest earnings after tax returns well below true inflation - or dollar depreciation, which ever you call it. When rates are high true inflation is high, when rates are low, as they are now true dollar depreciation is still very high, perhpas higher than when rates are high. I for one have saved cash and it has not paid off. I brought property as well over the years and the money put into that has negated the dollar depreciation. Impossible to argue and very hard to fix, even with tax incentives, as property appreciation is basically tax free, interest earnings are taxed - highly.