Saving may encourage growth, but growth also encourages saving

The Savings Working Group announced this week is a good initiative and the group is well qualified for the task, but I do think they face some constraints.  An article of mine on this topic appeared yesterday on Business Day on Stuff.

In the article I suggest that a good starting point for the group would be to look at the results of the last similar exercise, which was part of the 2001 McLeod Tax Review, and focus on the facts about savings. In this post I’ll just touch on some of the review findings and some relevant facts.

 Some key findings of the McLeod Tax Review:

  • It was not apparent that New Zealanders save too little.
  • There is little evidence that changes to the tax system would induce higher saving.
  • The current account balance is the result of many influences (such as New Zealand’s international competitiveness), not just saving.
  • Most New Zealanders are making adequate provision for their retirement, given New Zealand Superannuation.
  • Higher private savings would lower the cost of NZS only if it were means-tested.

Some facts about savings:

  • Total national saving comprises government, business and household saving.  They are inter-related.  If governments save a lot (run large fiscal surpluses) the private sector is likely to save less. 
  • Saving is difficult to measure, but OECD statistics suggest New Zealand’s national saving rate is above that of the United Kingdom, the United States and some other OECD countries.
  • There is no ‘right’ level of saving.  People save to be able to consume more in the future. 

 Simply raising saving is not a valid policy goal, even if it helped to increase investment and economic growth.  Legislating for a 60-hour working week might also increase economic growth but most people would regard themselves as worse off. We value leisure.

Addressing New Zealand’s growth challenges and its vulnerability to high external debt levels requires a broad sweep of policy initiatives, not a narrow focus on saving.  Saving may encourage growth, but growth also encourages saving.

Read the full article here