Saving New Zealand - how are we getting 0n?

It’s been a little over a year since the Savings Working Group released its report on Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity. The Savings Working Group was formed out of concern at the apparent poor savings position of New Zealanders, with the inherent problems this presented to the economy, as represented by the current account deficits and large net external liabilities. The aim of the Group was to provide a framework for the Government as it developed its medium term savings strategy, and to stimulate public discussion on issues of national saving, linked to investment and growth.

From the public’s perspective, the aim was how to get New Zealanders to save more.

While the title of the final report was somewhat dramatic, “Saving New Zealand”, it was aptly so, given the report made sober reading. Despite our complacency in the belief that New Zealand really wasn’t as badly off as the rest of the world, it was in fact just as bad. Critically, New Zealand was seriously exposed to events beyond its control which could have immediate and catastrophic impacts on our economy.

The keys themes of the report were that:

  • New Zealand’s level of total debt was too high: particularly considering the whole of New Zealand’s net foreign liabilities were at a similar level to the troubled countries in Europe
  • New Zealand’s exposure to foreign debt meant it was extremely vulnerable: sudden events beyond New Zealand’s control could have a dramatic and lasting effect on the economy
  • Increasing National Savings was essential to reduce the vulnerability: a particular focus was required by government and households
  • Policies were required to reward savings, including government’s fiscal approach, increasing public  sector productivity and performance, restructure tax on savings and a raft of other measures.

Critically, a “no change approach” was not a viable option and major economic structural changes required to steer New Zealand away from the vulnerability that had built up over a decade of poor economic management.

Rather than a road map to solve our savings woes, the report instead opened the lid on what a poor shape the country was truly in and confirmed that some tough decisions and positive steps needed to be taken to fix it. Outside the scope of the report, and off the table for recommendations, were superannuation and capital gains tax.

Amongst a range of recommendations, those that caught the attention of both the public and Government related to:

  • Moving to a high performing public sector
  • Shifting the economy towards the vital Tradable Goods sector
  • Removing the tax penalty and disincentives on saving by providing a lower tax rate on savings (indexing of interest, making savings products available for PIE regime concessionary tax, and increasing the concession by lowering the PIE tax rate to between 5 and 10% lower than a person’s marginal tax rate)
  • Supporting an on-going switch from income tax to consumption tax, as a means of encouraging saving rather than consumption
  • KiwiSaver to remain voluntary, but move to auto-enrol which would require an opt out
  • A range of operational tweaks to KiwiSaver, the most notable of which was the removal of the tax exemption on employer contributions, and proposing a single default provider of indexed and low risk investments
  • Restarting Government contributions to the NZ Superannuation Fund.

Given the tight timeframe between the release of the report and Budget 2011, little from the report made it into fiscal policy last year. The most notable outcomes at the time were a rejection of an increase in the rate of GST, and the removal of the tax incentive of employer contributions to KiwiSaver.

Given how critical the position of New Zealand’s economy was, and the recommendation of the report that “doing nothing was not an option” what steps has the Government taken, and what can we expect to see in the Budget 2012?

The economy remains sluggish and despite recent consumer and business optimism, no-one is projecting a rapid rise out of the current financial doldrums. The delays in the rebuild of Christchurch have exacerbated the delay in the recovery of the economy. So we remain vulnerable, and the world is still in a shaky financial position, albeit a little more secure than when a range of European countries were knocking on the door of bankruptcy.

With the large fiscal deficits, restarting contributions to the NZ Superannuation Fund remains a “medium term” objective. We won’t see any change there.

KiwiSaver has had its tweaks, with changes to the taxation of contributions coming into effect from 1 April 2012, and an already announced increase in the employer contribution to 3% from 1 April 2013. The last round of changes were met with resounding cries for politicians to “leave it alone” to enable the KiwiSaver regime to be bedded into the New Zealand psyche without the threat of constant change undermining it. While the take up of KiwiSaver has been applauded as a resounding success, it is widely accepted that there has been little change in the savings behaviour of households, with rising KiwiSaver contributions offset by a reduction in other forms of saving. A significant portion of KiwiSaver “savings” are actually Government contributions through the kickstart and tax incentives.

Most notable over the last 12 months has been a reduction in household debt from 154% of GDP to 144%.  Still dangerously high, but as Bill English concedes, households have been scared into reducing debt levels in recognition that high level of debt is not good for the individual or the economy. In times of tight financial positions, it is not surprising that savings levels have not dramatically increased, due to a lack of surplus funds and a push to reduce debt levels.

A key focus therefore rests on the government sector. Changes have been gathering momentum since the last Budget, with the formation of the ‘Super Ministry’ of the Ministry of Business, Innovation and Employment, the launch of the “Ten Specific Results for the Public Sector” and a reduction in the cap on “core government administration’.

Expect more along this theme in the 2012 Budget, as the Government moves to explore innovation and efficiency in the  public sector, reducing Government costs and increase productivity and efficiency across the entire economy. However the challenge will be change that actually does increase performance and productivity.

A savings mentality can only exist where there is a change in spending habits (which has occurred), a reduction in debt levels (which is happening), removal of excess waste and cost (the process is starting) and a lift in wealth through productivity and efficiency gains. Of all these things, it is the last that will provide long-term gains for both the economy as a whole, and individual households, which will provide the ability for New Zealanders to save more and achieve a more prosperous economy and standards of living.

With an added benefit of reducing our vulnerability to world events, so begins our path of “Saving New Zealand”.

Further enquiries, please contact:

Greg Thompson
Partner, Tax
T +64 (0)4 495 3775
M+64 (0)21 281 7332