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Increased Savings Needed To Lift Investment

2 February 2005

Increased Savings Needed To Lift Investment And Growth And To Reduce Interest Rates

A report released today shows that New Zealand’s consistently low levels of household savings and high levels of external debt have significant economic costs, and calls for deliberate action to raise the level of household savings to lift investment and growth and to reduce interest rates.

The report, called “Home is Where The Money is: The economic importance of savings”, is the third in a series of four papers to be released by the New Zealand Institute around the theme of ‘Creating An Ownership Society’ in New Zealand.

The New Zealand Institute’s first two reports, released last year, described the lack of assets held by many New Zealanders, the difficulties that many New Zealanders face in building wealth over their lifetimes, and the evidence on the profound benefits to both individuals and communities that are generated by asset ownership – and concluded that improving the asset ownership position of New Zealanders ought to be an important priority for action.

This latest report focuses on the economic arguments for creating an ownership society by increasing household savings.

New Zealand’s household savings rates have consistently been amongst the lowest in the OECD. As a consequence of the low level of domestic savings, New Zealand is heavily reliant on foreign savings – as is reflected in New Zealand’s large and persistent current account deficits.

Drawing on a substantial body of international evidence, the report argues that the low level of domestic savings is likely to constrain investment in the New Zealand economy. New Zealand Institute chief executive Dr David Skilling notes that “the international evidence shows clearly that the financing of much investment remains local, despite the globalisation of capital markets, and that the level of domestic savings continues to have a significant impact on the level of domestic investment”. In short, domestic savings are more likely to finance productive investment in New Zealand than are foreign savings.

Indeed, New Zealand’s business investment rates are significantly lower than in many other developed countries, and low investment is likely to be an important reason for New Zealand’s relatively low levels of productivity and income.

Further, New Zealand is one of the most indebted countries in the developed world as a result of its consistent reliance on foreign capital. This leads to higher interest rates in New Zealand, and makes New Zealand vulnerable to changes in the availability and cost of foreign capital. High external debt is a major reason why New Zealand’s mortgage borrowing rates are higher than in other countries.

The report concludes that increasing household savings will have a positive effect on investment, productivity, and growth, as well as on reducing interest rates. Dr Skilling notes that “a key challenge is for the New Zealand economy to shift from being consumption led to being investment and productivity led. New Zealand can’t simply spend its way to prosperity”.

The report emphasises the importance of deliberate policies to encourage household savings to achieve these economic benefits. Dr Skilling argues that “simply relying on income growth is insufficient, as the past decade has shown clearly where relatively high economic growth rates have been generated and yet household savings and financial wealth have declined consistently”.

Dr Skilling argues that the increasing importance of assets, the lack of asset ownership among many New Zealanders, and the international evidence on the need for deliberate action, suggest that New Zealand’s current hands-off approach to savings and asset ownership is inadequate.

“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”.

Dr Skilling notes that the economic arguments for creating an ownership society made in this report strengthen the case for action made in the Institute’s two previous reports. “Together, these social and economic arguments create a compelling case for action to raise the level and broaden the distribution of asset ownership by New Zealanders”.

The next and final report in the New Zealand Institute’s Ownership Society series will outline a series of solutions that will help many more New Zealanders to get ahead financially. The report will draw on the best international thinking and practice, as well as an analysis of the New Zealand situation, to design a creative scheme that works in a New Zealand context. The report is currently scheduled for release at the end of March.


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