Cullen's need: to turn dissaving into saving

Alan Bollard is really bothered about our savings habits — actually, our habit of not saving. Finance Minister Michael Cullen is bothered, too.

The Reserve Bank calculates that households’ dissaving rate is 12 per cent of their disposable income. The country’s dissaving rate is impressive, too: the current account deficit is 8 per cent of GDP and climbing.

At this point foreign journalists start to call asking if we might be the next Argentina.

We are not. At base the economy is resilient and flexible enough to trade through a hard landing if that is now what we are headed for.

Moreover, Cullen has a lot of fiscal and monetary headroom to offset a hard landing, even over and above the election-binge fiscal impulse of 1.5 per cent already committed for 2006-07, when the slowdown/recession is likely to be at its worst.

But stopgap government spending is no way to a high-income economy.

For that, Cullen is crucially aware, we need higher productivity growth and in the past couple of years productivity growth appears to have slowed.

A critical ingredient is investment. And higher savings are an underpinning of higher investment. That is one part of Cullen’s focus of saving.

Some of the rise in household debt has almost certainly gone into investment. Small business owners typically borrow against their houses to grow their businesses — what you might call good debt.

Likewise, bigger companies borrow offshore to fund investment. An important offset within the bulging merchandise trade deficit has been that some imports have been machinery and equipment — that is, investment in future higher productivity.

Actually, small businesses borrowing against houses are also borrowing offshore. Retail investors have been buying mountains of New Zealand dollar bonds chasing Bollard’s high interest rates. Because they are taking all the exchange rate risk, banks here have been able to onlend these cash mountains to households at what to them seem low rates.

This torrent will stop when the currency falls and foreign retail investors lose their shirts — or at least enough buttons off their shirts to scare them off. And the currency will fall because the current account deficit is unsustainable — the only question is when. Again, Bollard and Cullen agree.

At that point big companies are left with much more expensive offshore debt and small businesses can’t easily jack up the borrowing against their houses.

Cullen’s view in that event is that if we want investment to continue to lift future productivity growth and thereby future incomes, we will have to go local — to depend more on our own savings to fund investment to get productivity growth up.

This is especially so because the case for direct investment by foreign companies into productive activity here of the sort that lifts productivity growth has weakened since we no longer can offer cheap energy.

So the focus shifts to home-grown small-to-medium enterprises (SMEs) and local capital.

Hence Cullen’s preoccupation this parliamentary term with getting the savings rate healthily back into the black.

He has no silver bullets. “Brick by brick” is his approach.

He remains determined to level the tax between savings invested onshore and offshore, and is rejigging his autumn discussion paper which was condemned for introducing a “capital gains tax” on existing “grey list” country investments. He thinks he can soothe those objections.

And it is possible the inquiry into the company tax regime, triggered by the post-election deal with Peter Dunne, may lead to a reconfiguration of the system, with (unstated) potential implications for saving.

Legislation is due in March to set up KiwiSaver, the opt-out tax-based savings scheme for new employees which others can opt into. He has a majority for the bill, so should meet the start date of April 1, 2007.

Cullen hopes KiwiSaver will encourage employers to top up employees’ savings with their own private employee superannuation schemes. The savings industry worries that it will do the opposite. Some want compulsion, as in Australia; Cullen shies away from that.

Cullen will not countenance partially individualising his superannuation pre-fund and linking it to KiwiSaver, even though New Zealand First got a section written into the original legislation enabling individualisation. He thinks that would undermine the integrity of the fund’s aim to maintain pensions at current real levels when the baby boomers retire en masse.

That leads to Cullen’s other main saving concern: are we saving enough for retirement? The low level of employment-based retirement savings schemes compared with Australia suggests we are not. KiwiSaver and his pre-fund are partly predicated on an assumption that we are not.

But a new book reckons by and large we are. Grant Scobie, John Gibson and Trinh Le have developed a 2004 Treasury working paper based on Statistics New Zealand’s 2001 household savings survey into book-length study, Household Wealth in New Zealand, for the Institute of Policy Studies.

That survey was before the household debt binge — but some economists argue that that debt buildup, to nearly one-and-a-half times disposable income, is covered by an asset buildup, mainly in higher-valued houses.

Fine if house prices hold up. But if they don’t, that might produce its own correction by scaring people off debt and into savings. Cullen would rather not have a house price crash, because that would probably also produce an opinion poll crash. But there would be a silver lining for the economy.