For many years savings have been a major subject of public debate, media comment, surveys and even a referendum. Much heat has been generated, by vigorously propagated and conflicting assertions - with very little result. This should not be a surprise since accurate statistics on saving have been extremely deficient. Hence most of the participants have had an extremely limited understanding of what constitutes saving and thus their assertions have generally had little or no substance. Thus the first objective in this paper is explain what is meant by "saving" as shown in the annual "National Income Accounts"(appendix), the experimental "Institutional sector accounts"(appendix) and the 2001 survey of "Household Net Worth" .. The composition of these savings statistics is extremely important. For instance total (gross) savings in the Institutional Sector Accounts comprise savings from twelve sectors including government, business, households, financial intermediaries etc - together with depreciation allowances. Assets, in the net worth survey are analysed under three main headings - property, business and financial.

New Zealanders alleged aversion to retirement saving arises from the widespread belief that retirement saving mainly comprises investment in managed funds - including superannuation funds. It is repeatedly asserted that the relatively small inflows into such funds, by comparison with some other countries, is proof of New Zealander’s unwillingness to save for their retirement. In fact the converse is true. New Zealanders. through a combination of well justified scepticism and good luck, have eschewed managed/superannuation funds and opted for other assets with. generally speaking. much lower risk and achieving much better rates of return. It is also important to note that in all countries only the top 10% of income earners hold significant investments in managed funds and other financial assets.

The decline in New Zealand’s household savings ratio, over the last decade, reflects a debt binge which has raised household debt from 47% of disposable household income in 1990 to over 114% in 2002. Similar trends have occurred in many other countries. This large debt increase, primarily the result of financial liberalisation, has significantly boosted consumer spending and economic growth. Sooner or later household debt ratios, currently at a relatively high level, will cease rising. The consequence being a higher savings ratio probably leading to slower growth, rising unemployment, lower profits etc.

More importantly, particularly to overseas financial markets but attracting much less public attention, is the significant deterioration in New Zealand`s net international investment position, which has increased from a deficit of $47 bill in 1989 (70% GDP) to $101bill in 2002 (83% GDP). This deterioration results from the need to either borrow overseas or sell New Zealand assets to finance continued large external deficits. These occur because New Zealand savings are insufficient to finance domestic investment (Gross capital formation) with the deficit being made up by overseas savings.

New Zealand’s net international investment position is much the worst of any OECD country (OECD Report 2001), whilst servicing charges paid to overseas investors total some $8.9 Bill annually.- absorbing some 21% of export income. This ratio has recently fallen because of the major boost to exports from the outbreak of foot and mouth decease in the UK. Another penalty is higher interest rates than in other English speaking countries, whilst there are increasing warnings, from both the OECD and the IMF, that overseas financial markets may at some future date further increase the present interest penalty and/or be reluctant to finance further overseas borrowing on favourable terms. Consistently large external deficits, 5% GDP and over, also in time inevitably lead to major forex depreciations.

However, it should be realised that it is not only the quantum of savings which is important. Misdirected savings leading to low quality investment have been a major cause of New Zealand`s core economic problems - low productivity and poor export growth.

A deterioration in a country’s net international investment position can be justified if the funds have been primarily used to enhance productivity and investment - particularly in the export and import competing industries. This has not occurred in New Zealand where funds have been primarily used to boost consumer expenditure .

Annual increases or decreases in net worth are much the best measure of Household savings or dissaving. It was to accurately estimate this key statistic that Statistics New Zealand undertook its excellent survey on the "Net Worth of New Zealanders" undertaken in 2001 and published in 2002. Broadly similar information will become available from Statistics New Zealand`s 2003/2004 survey of family income and employment. The 2001 survey is extremely useful since for the first time there is an accurate sample by age, sex, occupation, income, race, etc of assets and debts. Even more valuable, will be subsequent surveys, as noted above, which will show key savings trends (changes in assets and debts) over three year periods. This is the primary statistical information required for effective policy formulation on savings.

Houses, farms and business were the most valuable assets and comprised 54% of total asset value which amounted to $444 bill (incl Maori assets) - derived from an economic population of 1,786,000. Farms, houses, rental property and trusts had much the highest median values.

Table 1 Asset Composition Of Economic Units

Population with Asset Total Value Total Asset Value Median

% $Bill % $

House 48 159 37 160,000

Farm 4 39 9 350,000

Business 12 38 9 43,000

Trusts 4 29 6 216,000

Bank deposits 91 26 6 2,300

Superannuation 21 25 6 25,000

Rental Property 6 19 4 135,000

Motor vehicles 77 17 4 8,000

Shares 21 14 3 5,000

Managed Funds 9 12 3 23,900

Total Value 444,030 125,300 (1)

(1) Excludes units with no assets Source Statistics New Zealand

The median value for non partnered individuals with asset holdings was $20,209 whilst for couples it was $242,700

The international comparison (shown in Table 2) of asset distribution and debts is highly relevant as it gives a useful benchmark for analysing the asset structure of New Zealand’s Household assets .

Table 2 Asset Composition

Canada USA New Zealand

Real Assets 58 43 53

Business and

Farm equity 12 17 17

Superannuation 15 11 6

Bank deposits 6 6 6

Shares 3 9 3

Managed funds 3 9 3

Trusts na na 6

Other Fin assets 3 5 6

Total Fin assets 29 41 30

Ratio Debt/ Assets 16 14 16

There will have been very considerable changes in many of the above proportions since the NZ survey was conducted over August/November 2001, the USA survey in 1998 and the Canadian survey in 1999. With the very substantial decline in international share values, particularly in the US market, and the significant rise in house prices, the proportion of real assets will have markedly increased and that of shares, superannuation and managed funds will have markedly decreased.

Indeed there are many highly publicised instances, particularly in the USA and the UK, of retirement savings invested in superannuation managed funds being decimated - with serious financial hardship resulting. Many firms also face serious financial problems due to falling share prices, with very adverse consequences on their profits and share prices because of the difficulty in meeting their (employer) contributions to their defined benefit staff superannuation schemes. Estimates place USA underfunding at around US$250 bill.

In retrospect, it can be seen that .New Zealanders are fortunate, or alternatively have displayed remarkable financial wisdom and foresight in refraining from entrusting their hard earned retirement savings to generally high cost/high risk/low return managed/

superannuation funds. The net worth survey revealed that half the couples with superannuation assets had employer sponsored schemes with a median value of only $39,700 - double the value of private schemes. The largest holdings of financial assets, shares, managed funds etc were in the top quartile (25%) with the median value for non partnered individuals being $20,000 and for couples $49,000.

It is clearly absurd to argue that the relative unimportance of these assets denotes that New Zealanders are unwilling to save for their retirement - as is so often claimed. The unwillingness of New Zealanders to increase their holdings of financial assets, particularly shares and managed funds, reflects the greater attraction of real assets, widespread distrust of incompetent funds managers, self serving financial planners some with an "atrocious track records"(Consumer Australia), very poor investment returns, relatively high costs, little concern for the interests of small savers, dishonest advertising, inaccurate company accounts and the greater awareness of risk. An underfunded Securities Commission has been a boon to business, large investors and financial organisations - but not to small investors. For a supporting criticism of fund managers see the "London Economist" editorial ( 5/7/03) ,entitled "The Blame Game" .

The Net Worth survey also revealed much other information of substantial relevance to savings issues. For instance, it confirmed that estimates of a high degree of income inequality in New Zealand were parallelled in net worth holdings.

For instance, the top 20% of economic units accounted for around 60% of total net worth within most of the over 35 age group - with the remaining 80% owning only 40%. Of the 84% with positive net worth, the ninth and tenth deciles held nearly 70% of the total. The ninth decile held 19% of total net worth with a median value of $466,600. The tenth decile owned 48% of total net worth with a median value of $903,400.

The 2001 survey of the "Living Standards of older New Zealanders" by the Ministry of Social Policy, revealed broadly similar results. Homes were owned by 68% of single persons and by 86% of couples. Excluding the value of homes, 45% of single persons owned less than $5,000, 82% owned less than $ 50,000. and 89% less than $100,000. For couples, 29% owned less than $5,000, 64% less than $50,000 and 74% less than

$100,000. The median value of singles investments was $7,500 and for couples $37,500.

The very high concentration of net worth in the top 10% is repeated in other English speaking countries - with Canada 53%, the USA approx 66% in 1998 with Australia`s top 10% owning "more than half".

The survey also confirmed that median net worth is largely a function of age, income

and race as shown in Tables 3-6 below

Age group European/ Pakeha Maori

18-24 $2,020 0

25-34 $74,600 $12,200

35-44 $203,900 $62,200

45-54 $311,000 $82,400

55-65 $353,700 $118,200

European/Pakeha $209,900

Maori $34,700

Pacific Peoples $11,100

Asian $120,100

(1) Ethnic group of the chosen respondent in the couple

Total Annual income Proportion in each income band Median net worth

$ % $

loss or Zero 1 15,600

1-15,000 5 117,000

15,001-50,000 42 108,200

50,001-100,000 39 204,200

100,001-150,000 9 400.900

150,001 - 200,000 3 550,800

200,000 or more 3 760,500

Table 6 Distribution of population by main source of income

Main source of Income Non partnered individuals Couples

Wages and Salaries 51 61

Self Employment 5 17

NZ Superannuation 15 12

Other Superannuation 1 1

Other Income Support 22 6

Investment Income 2 2

Other regular or one off income 3 1

Household Saving

There are a very wide range of considerations which influence Household saving. Brief comments on some are set out below

Differences in income and wealth are the major influence on savings in all countries. Poor people have great difficulty in saving and it is well nigh impossible for welfare beneficiaries and superannuitants to save. Many of the latter are dissaving either from necessity or choice.

The vast majority of the employed population has little scope for accumulating financial assets after meeting living expenses (transport, food, clothing, medical, rates, insurance etc), after paying their income tax - which includes substantial contributions to funding NZS as well as repaying student loans and mortgage debt. For these people most retirement saving comprises achieving a mortgage free house and paying tax contributions to New Zealand Superannuation. This requires a fairly high level of saving.

The ability to build up significant holdings of financial assets, that is for those on well above average incomes, probably starts around age 50-55 when mortgage and student debts have been repaid, when both partners are earning and when children are (hopefully) self supporting. Even for the vast majority of this older group with the highest net worth, holdings of financial assets are relatively small as the net worth survey demonstrates. In these respects, New Zealand experience is very similar to that in overseas countries.

Cultural changes have been important in influencing savings. Notably, thrift has become very unfashionable. Some decades ago there was a widely propagated savings culture, strongly encouraged in schools, with particular emphasis on thrift via banks and savings banks - even buying on hire purchase was frowned upon. Currently savings banks have disappeared and all banks are vigorously propagating spending via credit cards and revolving credits - and offering major inducements to younger persons to spend . The influence of advertising has greatly increased, particularly with TV, with the prime objective being to encourage spending.

Company Pensions never very significant in New Zealand have further diminished in relative importance. This reflects a number of influences. For instance abolishing tax subsidies and the high costs involved for small employers. .In addition, the employer’s contribution, including administration, adds to costs with very little corresponding benefits - particularly since life time employment commands much less support. More recently, the high investment risks to employers involved in defined benefit schemes, together with increased longevity, has greatly reduced the attraction of such schemes. A further disincentive has been the prospect of protracted and costly legal proceedings.

Social Welfare: There is widespread debate over whether the welfare state and Government Superannuation has had an adverse impact on saving. Generally there is little evidence to support this contention. People on low incomes, as noted above, are generally in no position to save.

Moreover, there are strong arguments for postulating that compulsory tax contributions to funding NZS should be ranked as personal savings. Although there is no asset created, such payments entitle the contributor to NZS on reaching the age of entitlement. NZS is clearly not a welfare payment or a government "hand out" since all contribute to, and all receive NZS. By contrast ,social security benefits are clearly welfare payments since although they are funded from general taxation they are only received by a targeted minority.

NZS is a compulsory, low cost, tax funded government managed PAYG super scheme. The rich pay more but live longer. The tax contributions from the poor are much less but they die much earlier. Women, with relatively low tax contributions and with much greater longevity than males, are the major beneficiaries of NZS - and deservedly so.

Policy considerations and options - before making judgements on saving policies it should be born in mind that

- there are a very wide range of human goals, lifestyles, preferences, attributes etc etc, and it would be very unwise to try and change or influence what are often rational personal objectives or attempt to pigeon hole savers into homogeneous groups.

- public debate on savings has been focussed on household savings but these are no more important than government or business savings. In fact, a strong case can be made for considering tradeable (export and import competing industries) sector savings as the most important sector savings as they are the key determinant of export growth - a major influence on overall growth.

- in no country do the vast majority of the population accumulate substantial financial assets to finance their retirement. In all countries only a rich minority hold substantial financial assets.

- the present low household savings ratio is probably self correcting thus raising the risks of precipitate action. Sooner or later the household debt/disposable income ratio will cease rising and this will lead to an improved household savings ratio and to lower growth in consumer spending .In all probability a rise in unemployment and lower business profits will follow .This would have very adverse electoral consequences which explains why all governments, irrespective of party, show a distinct lack of enthusiasm for effective measures to increase personal savings whilst constantly paying lip service to its desirability.

- consistently large Balance of Payments deficits, ie exceeding 5% GDP, are also self correcting or more accurately will, sooner or later, be corrected by overseas financial markets . This event has been postponed because a major fall in interest rates since 1990 has greatly benefited debtor countries. In addition, New Zealand has derived substantial short term benefits from the UK foot and mouth disease outbreak - specifically a major rise in the terms of trade, the primary cause of our relatively good economic performance over the last two years. These good fortunes have bred much complacency over our deteriorating international investment position, including a rather smug attitude to IMF and OECD warnings. Nevertheless, without further substantial good fortune, a rather difficult adjustment lies ahead when New Zealand will, of necessity, have to live within its export income.

A compulsory savings scheme, based on individual accounts, has been advocated as a means of raising the household savings ratio. However, advocates of compulsion usually forget that NZS is a compulsory scheme financed by mandatory tax contributions. Moreover, there is no evidence that the introduction of an additional form of compulsory savings or a switch to another form of compulsory saving increases household savings. In addition, there is little apparent understanding that substituting household savings for government savings is most unlikely to increase total savings - although it would increase the profits of fund managers. Also worth noting, is that Australian policy has created a costly bureaucratic, accounting and legal quagmire - a very profitable one to those involved, to the detriment of investors - and has not stopped the household savings ratio from significantly declining.

Individual accounts raise many problems. Costs are much higher than with NZS thus reducing the amount available for investment - often very significantly. Women would be seriously disadvantaged since they earn far less on average during their working lives than men and have a much longer retirement period since they live much longer. Hence female pensions would be very much lower than for males - unless subsidised from general taxation. Similarly, low income males (particularly Maori and Pacific Islanders) would also suffer because their average working life earnings are below that of other males. On the other hand, because of ill health, they have below average retirement periods.

Compulsory investment in managed or superannuation funds, based on individual accounts, would generally be highly disadvantageous to savers but a godsend to fund managers. In general, individual investors would earn a far better return with far less risk by reducing their mortgage debt. Similarly, investment in farming or small business would often achieve a much better return than managed funds - and performs a vastly more important economic role. Moreover, a house/farm/or business when sold - a very common occurrence - are excellent sources of retirement income.

Tax incentives - the OECD is very clear that tax incentives do not increase total saving - in fact the OECD clearly states that they "probably reduce total savings". This is because household savings are redirected to tax effective channels with total household savings remaining unchanged or at best marginally increased. At the same time, the cost of the tax incentives significantly reduces government savings with the result that total national savings are probably reduced. Tax incentives for saving are primarily a political bribe, to give a concealed tax reduction to high income earners and a boost to the profits of fund managers - who hopefully will demonstrate their gratitude at election time and by increasing their party political financial contributions.

Trusts - the Net Worth survey demonstrated the importance of Trusts as well as major deficiencies in information concerning their activities. They are clearly a major vehicle for relatively high income persons for a variety of purposes - with tax avoidance being prominent..... according to advertising brochures. They are also very profitable to the legal and other industries involved. A thorough survey should be undertaken for tax reasons, savings information and for future superannuation reviews.

Market Reform - every effort should be made to improve the workings of financial markets because of its important economic role. Enforcing recently introduced overseas reforms would be an excellent start. A further major move would be to substantially increase the funding of the Securities Commission and significantly strengthen its powers. Underfunding has enabled governments to pay lip service to Security Commission objectives and yet ensure that its activities are hobbled. Managed funds claiming to have superannuation or retirement objectives should only be permitted to hold small proportions of high risk assets.

The media, particularly the Press and the Retirement Commissioner, could play a major role in assisting small investors to make more informed judgements on investing in financial and real assets. This would be achieved by regularly publishing the return ,after ,tax, inflation and costs , of all the major investment categories . This would hopefully offset the barrage of misinformation to which investors are subjected. How many investors realise that the return over the last five years , after allowing for ongoing fees and tax but excluding front fees , for the two largest funds in all the thirteen major categories of managed funds is, according to commentator Chris Lee, less than the return from trading bank term deposits?

Compiling the necessary information which should at least be published monthly, requires considerable effort and skill - although much of the required information is readily available. The information required is the regular (at least monthly) publication of statistics showing the return, after inflation, after costs and after tax, for the various categories of financial assets - term deposits, Government Bonds, Kiwi Bonds, NZ and Australian equities, the major categories of managed and superannuation funds etc etc. The time periods should commence with 1985,. when the forex rate was floated and interest rates wholly decontrolled., and cover five year periods (1990, 1995) and annually from 2000. The tables should also include the equivalent returns from assets such as houses, farms, commercial property etc.

Government Retirement Saving Bond - there is a major problem for many persons who wish to save a retirement nest egg but who are reluctant, with strong justification, to entrust their lifetime savings to the real hazards of financial markets. One solution which would guarantee minimal risk and a modest return would be for government to promote retirement bonds with the rate of interest being the CPI + 3%. This would be tax free as long as the funds were held until 65 years of age - with a maximum holding of $200,000. It might well be argued that the government has a moral responsibility to offer a financial instrument of this nature to give retirement income certainty to its citizens.

Reverse Mortgages - many homeowners have high equity in their houses, the consequence of a lifetime’s saving and low incomes. Reverse mortgages are a mechanism for reducing equity and increasing incomes so that over time equity is substantially reduced and even wholly eliminated - greatly reducing the value of the homeowner’s estate. Many persons are reluctant to see the value of their equity and estate reduced, but for others reverse mortgages are a good mechanism for supplementing their retirement incomes. For the lender there are considerable risks - particularly if the property deteriorates, the occupier lives well past actuarial estimates or there is a substantial rise in interest rates. These risks can be minimised by having very conservative lending policies - say 20-25% of the property valuation for persons 70 years of age and older. However, it is unlikely that these problems can be wholly overcome, so encouraging widespread adoption by reputable financial institutions - without Government action. This would probably involve very little cost but achieve a major gain to many superannuitants’ quality of life. Reverse mortgages are opposed by many superannuitants as they believe that governments would force superannuitants to take out reverse mortgages and use the resultant increase in income as a justification for reducing or targeting NZS - a not wholly unjustifiable fear on past political performance.

The alterative to reverse mortgages is to release equity by selling and moving to a much lower cost residence . This is a very common means of increasing retirement income . Another solution is to sell, purchase an annuity and rent . This lacks the security of home ownership but also minimises or obviates much of the costs of home ownership ie maintenance ,insurance , rates etc besides turning home equity into income . However annuity rates are currently not particularly attractive .

.

Balanced macro policies - offer the best means of raising savings ratios.

First, such policies require accurate and up to date statistics of sector saving, as shown in the Institutional Sector Accounts and in the Net Worth Survey. It is important that these statistics are updated and improved so that policy can be formulated on the facts rather than on ill informed suppositions or biased concepts ..

Second, a major fiscal objective should be to achieve a satisfactory level of central government savings.- as in the UK. This requires consistently firm and balanced fiscal policies which at least moderate the massive (and destabilising) fluctuations in government savings over the last decade. The fiscal accounts should emphasise savings - the present Statistics New Zealand "Crown Accounts Analysis" admirably meets this objective - as well as many others - and should form the basis for much improved public accounts.

Third, the chances of achieving sustained higher savings ratios for tradeable business enterprises, which should also become recognised as a core policy objective, would be greatly increased by maintaining a competitive forex rate . Since the passing of the Reserve Bank Act in the late 1980`s, periods of high interest rates, enforced because of inflationary concerns, have led to significant rises in the real forex. These increases have had a very detrimental impact on tradeable sector savings, investment, growth, research and vitality - thus leading to poor export growth and decreased import competitiveness. These adverse trends have had to be compensated for by substantial overseas borrowing in order to maintain activity and employment - and win votes.

The harmful consequences of these policies would be largely ameliorated if fiscal policy, through a variable GST, made a greater contribution to maintaining price stability - rather than relying wholly on monetary policy. The resultant short term changes in tax revenue would be used to reduce/increase government debt. Such a change in policy would make it much easier to achieve a competitive forex rate, that is, one which enables the tradeable sectors to consistently achieve high levels of saving, investment, confidence, vitality etc. A competitive forex rate would enable economic growth to be sustained by export growth - thereby reducing dependence on large overseas debt increases - which in any case cannot be sustained.

The introduction of more flexible fiscal policies, via changes in indirect taxes, was advocated by the OECD in the 1960`s but met strong public opposition because it was considered as a sure way of financing increased government expenditure rather than reducing debt. Second, tax changes usually took time to effect through the parliamentary process when the need was for immediate action.- and parliament was reluctant to surrender its authority. Third there were a large variety of indirect taxes rather than an (almost) all embracing GST. There are some reports that the proposal for a more flexible fiscal policy has resurfaced to supplement monetary policy in macro economic stabilisation. For a commodity export economy such as New Zealand, the supporting arguments are particularly convincing .

APPENDIX

Saving in the National Accounts

The two statistical measures of saving, outlined in this paper are based on very different concepts. In the National Accounts, saving (or dissaving) is estimated as the difference between disposable (after tax ) current incomes and current (non capital) expenditures on goods and services. .By contrast, the Household Net Worth statistics embrace direct estimates of household assets and debts to arrive at net worth. Savings or dissaving is the difference between estimates of net worth made at different dates. Both these classifications of savings statistics should be used with great care and their basis understood. This applies both to New Zealand and to international savings statistics.

The statistics in Table 7 covering 1990/98 are headed "experimental" and were published in October 2001 as part of NZ Institutional Sector Accounts. These accounts, which Statistics New Zealand specifically states should not to be considered as official statistics, are currently being upgraded and updated. These experimental accounts break up total savings into twelve sectors... ie central and local government, personal, producer enterprises etc.etc, together with depreciation allowances. This pioneer and technically difficult analysis, is extremely important not only in revealing significant economic information essential to policy formulation but also in raising public understanding on savings matters. As noted earlier, most of the participants in public discussion on "savings" assume that all savings are personal savings when in fact business and central government saving has been much more important.

The National Income statistics for 1999/2002 shown in Table 7 are regularly published and updated by Statistics New Zealand. They do not include the Central Government and Household savings shown in the table above - these have been inserted to illustrate savings trends in these sectors. Both sets of statistics show that approx 65% of gross national saving, ie the funds required to finance gross capital investment, are provided by depreciation (Capital consumption) allowances, with overseas funds providing around 20% and domestic savings around 15%.

(2) (3)

2001 13.4 1.6 -2.5 1.9 15.4 4.6

(1) Includes other savings

(2) Crown Accounts Analysis Central Government October 2002

(3)Household Income and outlay Account Source Statistics New Zealamd

Table 8 reveals that New Zealand`s Gross Savings Ratio is the lowest amongst English speaking countries and is well below the average for all OECD countries. Even with the caveats noted above on savings statistics generally, it seems fairly clear that New Zealand is a low saving country.

1983/88 1989/94 1995/2000

Australia 20.4 18.2 18.5

Canada 20.1 16.2 20.4

Ireland 14.1 17.0 23.8

New Zealand 18.7 15.8 15.8

UK 17.7 15.3 16.1

USA 16.8 15.8 17.5

OECD 21.3 20.7 21.1

source OECD Outlook Dec 2002

The Statistics on Household Savings Rates shown in Table 9 should be viewed with especial care because of different country definitions affecting both past and current statistics. Quite a number of countries, including Ireland, whose statistics were published until fairly recently, have been omitted in the latest published OECD tables which is an indication of statistical unreliability or non comparability. Similarly, it should also be noted that OECD averages are not published for the same reason.

Moreover, these Household savings statistics take no account of changes in asset values whilst there are apparently other illogical definitions. For instance the US savings ratio is estimated by including tax on capital gains but excludes the same capital gains from estimates of income. In Australia, the statistics exclude compulsory superannuation savings and have recently been at a historically low level in part because drought has impacted adversely on the savings of unincorporated farmers. Japan`s very high household savings rate, a key part of that country’s post war economic miracle, is estimated at 7% in 2001 and is forecast to fall to 4% in 2002 - compared with 16% over 1985/90

1985/90 1991/96 1997/2001

Australia 8.8 5.2 3.1

Canada 13.2 10.7 4.7

New Zealand 5.3 2.3 -0.2

UK 7.3 10.1 5.2

USA 8.0 6.8 3.3

Japan 16.1 13.0 10.7

Source OECD Economic Outlook Dec 2002

New Zealand`s household saving ratio, which has fallen since 1985/90, is also below that of other English speaking countries. However, in these countries the ratio has also significantly declined - with the most convincing explanation being a major rise in household debt - mainly mortgage debt, as has occurred in New Zealand. New Zealand’s household savings ratio has been negative since 1993/94 and in 2000 this ratio was 4.6% because expenditure was $2.735 Bill (4.6%) in excess of household disposable income $59.9 Bill.

Apart from very substantial increases in household debt, the other main influence in the fall in the Household savings ratio was the massive rise in Central Government saving between 1992 and 1996 - equal to about approx 7% GDP.

1992 1993 1994 1995 1996 1999

Central Government - 2187 -1078 1565 3755 4474 112(2)

Households 1000 -43 -420 -1749 -1933 -2808(1)

(1) Household Accounts 2002 (2) Crown Accounts analysis.2002

Source Statistics New Zealand

It would be unwise to assume an inverse relationship between changes in government and household saving. There appears to be sound reasons for believing the very substantial rise in government saving over 1992/95 impacted adversely on personal saving largely because the government saving primarily reflected a major rise in tax receipts. By here contrast, the very major fall in government saving from $4474 mill in 1996 to $112 mill in 1999 was accompanied by a much smaller fall in household saving. This may reflect that the deterioration in Government savings mainly reflected increased expenditure rather than increased taxation. Indeed personal tax rates were substantially reduced with a claim (incorrect) that the lower tax would increase personal savings. Much caution is required before reaching definite conclusions.

In considering statistics of household saving, it is worth noting that they exclude incomes generated in the "black" economy. If these were capable of accurate estimation, the New Zealand savings ratio would almost certainly be greatly improved - but so would the savings ratios of many other countries. The National Accounts statistics also underestimate incomes from overseas assets - particularly those held for tax avoidance reasons - so also reducing the savings ratio.

From the evidence above, it appears that New Zealand’s relatively low National Savings ratio - particularly when allied to a substantial deterioration in the net International Investment position - appears to be a legitimate cause for concern. On the other hand, the USA and Australia both have a low savings ratio whilst the net International Investment position of the USA has also suffered a major deterioration. The important difference is that New Zealand’s labour productivity has deteriorated to well below that of the USA and Australia - indeed the USA`s productivity has shown a significant short term increase. In addition, international investment income in Australia has declined as a percentage of export income whilst New Zealand’s has increased. The latter has occurred in spite of the large increase in exports generated by the foot and mouth outbreak in the UK. In making judgements on overseas borrowing, the crucial factor is the use to which overseas funds are utilised - if this judgement is correct New Zealand should be concerned .