Budget 2011 ignored almost all the Savings Working Group ideas. Chairman says much more needed to boost national savings.
By Amanda Morrall
The head of a taskforce appointed by the Government last year to look at ways to boost national savings says National has "a lot of unfinished business" to attend to if it hopes to spare New Zealand a similar fate as Europe's economically-doomed PIGS.
While the Savings Working Group made some 43 recommendations on its January 2011 report to Government, several core suggestions (including a more effective tax rate on savings and a rebalancing of the marginal tax rate to correct a property bias) were sidelined in the Budget.
- Reducing the effective tax rate on savings providing an "indexation" mechanism so only real returns are taxed;
- Applying reduced rates of tax to all forms of investment income at standard discounts to marginal tax rates.
SWG chairman Kerry McDonald said while Government's constraints in the Budget were understandable it would undoubtedly have to take a closer look at policy recommendations that would achieve more significant savings.
"My judgement on it (SWG recommendations versus what was adopted in the Budget) is that quite a substantial amount of it was picked up but some of it was picked up in a fairly limited way. I think that over the next month to a year there will be a substantial amount of additional work on key recommendations that we made.''
McDonald said proposed changes to KiwiSaver announced last week by Budget would achieve relatively minor savings compared to what was needed. National calculated changes to KiwiSaver would save NZ$2.6 billion over four years.
"We don't expect Kiwisaver to make much difference to the national savings picture so we saw that intervention being more of a fiscal efficiency, we thought we could improve the contribution Government is making on KiwiSaver.''
In its report to Government, the SWG recommended that the Member Tax Credits be doubled from their present rate. Instead, Government has halved the Member Tax Credit.
McDonald said the public service sector was an obvious place to achieve greater overall savings.
Lift the game: cuts Government jobs
"Outwardly, they are working at it on a superficial level with performance improved in state sector, striving for higher productivity and performance improvement in the state sector and to some extent that was underway before our report was tabled, but I think we've given strong encouragement for them to pick up the game in that area. I think there will be an intense programme in that area over the next one to three years.''
Asked specifically how that would be achieved, McDonald suggested it would come as a result of public sector job losses.
"Employment numbers in the state sector should fall but that's not necessarily linked with a reduction in the quality of output. The ministers have referred to this and the results to date suggest there is big scope for improvement and that's my view as well.''
PriceWaterhouseCoopers chairman John Shewan agreed Government's Budget 2011 fell short of achieving necessary savings. (To see PWC's analysis of Budget 2011 click here).
"The quite substantive ones were deferred for future consideration. Some of the smaller ones were picked up but things on the tax side such as amendments to extend PIE rates to other investment instruments, and indexing the tax system against inflation; government kicked the touch on that and said `We might look at that in some point in the future.''
Shewan said he couldn't quantify the savings that could be realised by adopting such measurres and said there were complexities that would make them difficult to implement.
"Overall, it was not a budget targetted toward savings and welfare which is what we had expected so in that respect it was a little disappointing but we know the reasons why. Clearly there is much work to be done on both savings and welfare.''
The view was echoed by Working Group insider on the Budget:
"A pessimist might say that it appears as if a lot of what the SWG recommended has been passed by. An optimist might say that what has been picked up (so far) is not too bad a first step in a “policy-free,” austerity Budget.''
A rough break down of what was proposed by the SWG and what was adopted by Government
|
Policy |
SWG recommendation |
Budget 2011 |
|
Increase govt saving |
SWG recommendation |
Return to surplus a year earlier than signalled in Budget 2010 |
|
Tax changes |
Many recommendations, some of which are govt policy already, some of which were dismissed early on (eg GST changes) |
Tax changes to lessen the negative impact on saving behaviour are still under active consideration. Decision to issue Inflation-indexed bonds (and the Earthquake bonds also positive), and tightening thin cap rules (this time for banks). |
|
KiwiSaver overall |
More private, more govt contributions (uncertain effect on national savings?) |
Reduced contribution share from govt; larger share of employers and employees - changes will raise national savings |
|
Kick start of $1k |
Spread kick start over 5 years |
Keep as is |
|
Employee contribution rate |
Keep minimum rate at 2%; increase default to 4% |
Minimum employee/employer contribution rate will climb over two years to 3% (also default); optional to go to $4 or 8% |
|
ESTC exemption |
Apply ESTC rate to all employers' contributions |
Tax employer's contribution at employee's marginal tax rate |
|
Member tax credit |
Increase MTC to $2 for every $1 contributed |
MTC rate will be halved from $1 to 50c for every $1 contributed by members, up to $521 a year – half the current maximum |
|
Auto-enrolment drive |
SWG recommendation |
Subject to discussions with employers about how to do this without making admin costs burdensome |
|
Compulsion |
Remain voluntary "at this time" |
Not at this time |
|
Default schemes |
Reduce number and introduce an ultrasafe scheme |
Still being considered |
|
Decumulation |
Develop annuities market, or “buy” more NZS |
Still being considered |
An excerpt from PWC report: Budget 2011; a Budget for an extraordinary year
In August 2010 the Government set up the Savings Working Group to consider how New Zealand’s national savings level could be improved. The Government was concerned that New Zealand’s ratio of national debt to national income had reached levels similar to those of Greece, Portugal, Ireland and Spain where there is major economic upheaval and in some cases civil unrest. While New Zealand has low levels of Government debt compared to those countries, there is significant private debt, mostly sourced from offshore via the major banks.
This places New Zealand in a vulnerable position if a national or international shock causes foreign lenders to lose confidence in New Zealand and withdraw their capital. The Group concluded the fastest way to reduce national debt is to reduce Government borrowing. Therefore its key recommendations were to return to and maintain budget surpluses and to improve public sector productivity. These objectives are the cornerstones of all aspects of this year’s Budget, as evidenced by constant references to the Group’s findings throughout the Minister’s Budget speech.
The Budget also picks up on two of the Group other recommendations – that the Government issue long dated inflation indexed bonds and that it consider whether to create broadly diversified, listed passive debt and equity vehicles to provide easily understood (and presumably low cost) access to local capital markets.
The Group’s tax recommendations included:
• reducing the effective tax rate on savings by providing an “indexation” mechanism so only real returns are taxed;
• applying reduced rates of tax to all forms of investment income at standard discounts to marginal tax rates. The Government signalled earlier this week that it regards the issues raised by the Group as complex and wants to take more time to consider policy changes. It is true that many of the recommendations could not be implemented easily in the short time between the Group’s report and the Budget.
However, it is likely the short term cost of a number of the recommendations is also an important factor in explaining the absence of further policy changes at this time given the fiscal constraints imposed by the Christchurch earthquake. It is ironic that the recommendations of a Group formed to determine how to protect the country from the consequences of a major economic shock, such as a natural disaster, cannot be implemented partly as the result of the very occurrence of such an event in the month following the Group’s report.
The Budget includes several positive references to recent increases in private and business savings reflecting that individuals and businesses have focused on paying down debt in tough economic conditions. We would be concerned if this reflects a view that private savings have now been “dealt with”. In the absence of changes to the savings environment, we would expect households and businesses to revert to previous behaviour once economic confidence returns.
22 Comments
The only ways the domestic private sector can save are:
- the government runs a budget deficit greater than the nation's current account deficit, or the nation runs a current account surplus greater than the governments budget surplus, or both a budget deficit and current account surplus
Solution to New Zealand's private saving problem:
Increase (or keep it constant over the next few years) the government's budget deficit, which adds (penny for penny) to the private sector's net financial assets. After-all, government deficit = non government surplus. There is no debating this accounting identity. Furthermore, the budget deficit needs to be greater than the current account deficit, or otherwise even with the budget deficit, the NZ domestic private sector will still be negatively saving.
Solution to New Zealand's government savings "problem":
The New Zealand government doesn't need to save! There is never a "saving problem" for a sovereign issuer of a non convertible fiat currency. The New Zealand government never has nor doesn't have NZ dollars.
Are u kidding..???? Sounds like u are parroting that "modern monetary theory " stuff.
True savings in a classic economic sense, is... "deferred consumption".
Financial accounting practices are representative of an underlying reality.... not the other way round.
What u are implying is that Govts can simply print money....... which is hardly a solution to NZs' savings problems...
Cheers Roelof
If you think about it, you will realize that "deferring consumption" doesn't create any new net financial assets (savings), but rather than reduces the flow of existing 'money' around the economy. Remember that all spending = income, so if spending is reduced, so is income.
"Printing money" is a big misconception. When the government spends, the Treasury's account at the RBNZ is debited, and a commercial bank's reserve account is credited. This spending can be offset in a number of ways (offset meaning the reserve transaction occurs - credit Treasury's account, debit commercial banks reserve account): taxes, the issue of securities, the RBNZ buying government securities directly, or just allowing the Treasury's account to go into overdraft and not worrying about it.
The latter two options are seen as "money printing", but in terms of net financial assets and effects on the real economy, the latter three options (including the issue of securities) are all the same.
What I am saying is that a government deficit offset by the issue of securities (like we have now) is no different to "money printing" in terms of its effect on the economy and net financial assets (savings).
Many people like yourself preach about the dangers of "money printing" without realizing that effectively, the government is already doing that every day without a hitch. The only difference now is that politicians think we "are the next Greece" because we CHOOSE to issue securities (Greece must issue securities to cover its deficit, whereas we do not have to), when nothing could be further from the truth.
Firstly.... I disagree with your definition of savings.
U said....
"What I am saying is that a government deficit offset by the issue of securities (like we have now) is no different to "money printing" in terms of its effect on the economy and net financial assets (savings)."
You are wrong about this as well... It would be money printing if it was the RBNZ who was buying those securities by expanding its' balance sheet.. ( ie. printing money ).
"Many people like yourself preach about the dangers of "money printing" without realizing that effectively, the government is already doing that every day without a hitch"
NO... wrong... this is not printing money... The Govt is borrowing, already existing $NZ.
"Remember that all spending = income, so if spending is reduced, so is income"
Oh yes..... Once my Visa card limit was reached...I realized that...!!!!! AND now my spending is reduced because I can borrow no more..... and as a consequence... aggregate income, out there in the economy, is reduced... ah.... if only there was such a thing as a "free lunch".
you actually have to dig down to a microeconomic level to see if these Macroeconomic ideas actually make sense ... or are in fact , flawed and not valid.
MMT sounds good on paper...but in reality....if u strip all the "financial accting " , double entry bookkeeping stuff, aside.... you are left with simply ..."money printing"....
Putting the ability to simply print money...in The Govts' hands..... is like asking a Kid to mind the lolly shop..
cheers Roelof
Situation One - $100 Deficit Spending and $100 of Securities -
Private Balance Sheet Before Issue of Securities: 200 Deposits, 200 Equity
After Issue of Securities: 100 Deposits, 100 Securities, 200 Equity (100 deposits swapped for 100 equity)
After Govt Spending of $100: 200 Deposits, 100 Securitues, 300 Equity
Net Result: Private net financial assets increase by 100, in the form of securities
Situation Two - Govt Spending but No securities:
Private Balance Sheet Before Issue of Securities: 200 Deposits, 200 Equity
After Govt Spending: Deposits 300, Equity 300
Net Result: Private net financial assets increases by 100, in the form of more deposits
Difference: The negligable difference between the most liquid financial investment in the world (Treasury securities), and cash. Treasuries are to cash like a term desposit is to a savings account.
Inflationary Impact: The issue of securites scenario is MORE inflationary than the "money printing", because of the additional interest payments on the securities. Remember that when someone buys a Treasury security, that does not mean they "won't be spending like they otherwise would be, hence less inflation" because a) They can sell the security at any time and b) Anyone who buys a Treasury is not going to be spending either way (a pensioner isn't going to go out spending because their retirement portfolio is not securities but rather cash).
Your problem is that you look at the micro analysis and then make macro judgements based on it. For example, at the micro level, it would be fair to say increased interest rates would increase saving, right? However, at the macro level, the private sector as whole can't save unless the criteria I stated above are met.
Funny that you talk about stripping away the reserve accounting.... You don't realize that once you strip away the words "government borrowing" and "money printing", what NZ does now (deficits + Treasury securities) is functionally no different to what I am talking about. That is the sad part.
Lastly, you should look at this, and play around with it, then get back to me: http://econviz.com/balance-sheet-visualizer.html
I'll just add...
the evolution of money grew out of a "barter economy"... The economy came first and then there was money.
You have to have the cart behind the horse...
The REAL productive economy is what I call the "everyday economy "..
It can exist WITHOUT the financial economy BUT the financial economy CAN"T exist without the REAL economy.
Money is not magical.... Creating lots more of it does not make a Country more wealthy or better off.
Borrowing money is taking from the future and consuming today.
Saving is deferring consumption today so you can consume more in the future... if u wish.
Printing more money , simply devalues all money already in existence..... It is not the holy grail of wealth and economic growth.
Exactly! I couldn't agree more.
It is the real economy that matters. That is exactly my point.
For example, everyone is talking about how the government "doesn't have the money to do this, or do that". Nonsense. As long as there are real resources (labour, raw materials, etc) to bring to the task, any task can be done! It has nothing to do with how much "money" is involved.
"Money is not magical.... Creating lots more of it does not make a Country more wealthy or better off. "
Precisely! That's exactly what MMT agrees with - but you aren't making the link. We say that the way to create wealth is by ensuring all resources are being used productively, and that none are idle. To ensure this, citizens must have the right amount of cash in their hands so that they feel compelled to spend, and therefore employ resources. If there is not enough aggregate demand (spending power), not all resources will be employed. This will reduce real wealth and income.
I see people like you all of the time - you understand that it is about resources and the employment of those resources, not "money". MMT says exactly that - all this financial jargon with government securities, interest rate and Fed manipulations etc takes away from the real economy. However, you misrepresent our position, probably because you haven't taken the time to read it.
rpcas.... Most of my understanding comes from the writings of Warren Mosler.. I've actually ordered his book.
I've put in a few hours trying to understand it.... at this stage I don't believe it will work..... It does not sound much different to current Keynesian economic policies....
I'm keen to carry this on... let me carefully read what u have written...and I will respond.
The summary of what MMT is ... is that rather than the banking sector creating money thru Govt,.... MMT says that Govts can create money directly.
The whole MMT argument lies with the Govts' ability to expand the money supply , because Fiat money is a creation of Govt in the first place. Fiat money can only exist because it is what one legally has to use, to pay tax with.
U said:
"Precisely! That's exactly what MMT agrees with - but you aren't making the link. We say that the way to create wealth is by ensuring all resources are being used productively, and that none are idle. To ensure this, citizens must have the right amount of cash in their hands so that they feel compelled to spend, and therefore employ resources. If there is not enough aggregate demand (spending power), not all resources will be employed. This will reduce real wealth and income."
Who on earth is going to determine this....????? economists..??? Sounds like a command economy to me..??... Special interest groups would love this.... A gusher of money flowing their way...as they productively use resourses...
Anyway... I'll thoughtfully read what u have written
Cheers Roelof
Good to see you have ordered Warren's book! I have read it too. You must remember that the book is targeted at the very beginners and avoids complications, technicalities, and most of all, the accounting. I can see how one can think, "Warren proposes splashing cash around without reason", but this is not really the case.
"The whole MMT argument lies with the Govts' ability to expand the money supply , because Fiat money is a creation of Govt in the first place. Fiat money can only exist because it is what one legally has to use, to pay tax with."
Essentially yes. Our government is the monopolist supplier of NZD's which can be created out of thin air. This means it is ridiculous to even talk about the idea of the government running out of New Zealand dollars, or having to borrow them from someone in order to spend them (they create them after-all).
And yes, fiat money can only exist because it is what one legally has to use to fulfill their tax liabilities. Absolutely correct!
Who on earth is going to determine this....????? economists..???
The best thing is the market determines this. If a government continues to provide the basic services like healthcare/school etc (keeps spending constant), but lowers taxes, everyone will have more cash in their pockets at he end of the week. They will then go and spend more, increasing demand for goods and services, therefore requiring more resources etc etc.
The balancing act is exactly how much to net spend. If the government lowers taxes by too much, and the deficit is too big, the spending power (aggregate demand) of the population will exceed the real productive capacity of the nation, driving up prices (inflation). However, if taxes are too high, and spending power (aggregate demand) too low, then resources will go unemployed - which is a terrible waste. If resources like labour are not employed, New Zealanders are not living as well as they could be.
Obviously the key question is how do we know how much to net spend? The answer is that automatic stabilizers currently do a lot of the work, but could definitely do more. (MMT experts have put a lot of work into designing automatic stabilizers that would help meet the goals of full employment and price stability.) At the most sophisticated level and providing an adequate level of stabilizers, it can be said that the government's deficit equals the non government sectors desire to net save.
Apart from that, PLEASE spend some time looking at the macroeconomic balance sheet visualizer that I linked you to in a previous post. That was the single most important tool in my learning process. Trust me - nothing will make a lot of sense until you see it visually and as a whole.
This is a terrific resource, and more in depth that Warren's book. There are regular new discussions on the site as well : http://pragcap.com/resources/understanding-modern-monetary-system
Thanks,
rpcas
Ps: Regarding my first post - in situation one, the "after issue of securities" change is 100 deposits exchanged for 100 securities, not 100 equity. Equity remains constant.
Also, regarding "Private Balance Sheet Before Issue of Securities" in situation two - this should just be "private balance sheet before". I was copy and pasting the titles without enough care.
I don't know exactly when Cullen Roche left Merrill, but he regularly and consistently rallies against the Wall Street casino in which Bernanke deals the cards. Same thing with Warren Mosler - an experienced bond trader and successful hedge fund manager who understands that the financial sector is not very productive. To understand this sort of thing, generally practical experience is required.
Higher savings come from higher interest rates. In a truely free market (without reserve bank manipulation) interest rates would become attractive when savings rates are low, and unnatractive when savings rates are high.
Inflation will be low if there is a lot of saving and high if there is a lot of borrowing. Interest rates should be free to find its own price, instead of being another lever used by the coercive sector to manipulate the money market.
You say, "Improve housing affordability and that will free up more income for savings".
For that to be true, the result of lower house prices would have to be that a household would pay less money for the same house, compared to before.
But isn't it more likely that they'd pay the same money for a better house, compared to before? So no impact on the availability of income for savings?
de M, I hadn't thought of that you indicate, you are probably spot on. Part of the problem with so-called over-priced housing is that these days most want a place 50% larger, with less family, than what we used to find as perfectly acceptable. People will buy what they can raise and sevice, so yes, if housing prices drop, they will buy bigger and /or better than what they would have
A sobering address by Kerry McDonald (savings group Chair)
"It's [New Zealand's] citizens are eating its breeding stock and next season's seed – it's dangerously in debt but still borrowing heavily," he said.
To solve the problem the Government needed to increase national savings and to focus on such things as the tradeable goods sector. However, to do this the Government needed to take a harder line.
The public did not understand the extent of the weakened economy and would not support the Government, making it harder for politicians to make changes, he said.
"The public that does not understand the nature and significance of the issues ... is the problem," he said.
Without Government changes the foreign ownership of New Zealand would also continue to rise rapidly and Kiwiswould no longer own capital or get returns, Mr McDonald said.
This would "leave New Zealanders as wage earners, in a global market which is dominated by the low wage, high productivity (and) emerging economies", he said.
http://www.stuff.co.nz/business/5051060/NZ-dangerously-in-debt-top-businessman
Not a dickie bird on this in the Herald BTW
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