Abstract
1. The recent widening of the current account deficit has raised the question of whether more can and should be done to raise national saving in New Zealand. While national saving has risen since the early 1990s, it remains below the levels recorded in the early 1980s, and the increase has been insufficient to finance the additional investment expenditure that has been encouraged by the strong economic performance in recent years. Further, national saving in New Zealand remains below the OECD country average, as it has been throughout the 1980s and 1990s. This is despite the fact that fiscal consolidation has led to a significant increase in public saving. Of particular interest is the household saving rate, which has fallen dramatically in recent years, and is currently one of the lowest in the OECD.
I. Saving Trends and Issues1
A. Introduction
1. The recent widening of the current account deficit has raised the question of whether more can and should be done to raise national saving in New Zealand. While national saving has risen since the early 1990s, it remains below the levels recorded in the early 1980s, and the increase has been insufficient to finance the additional investment expenditure that has been encouraged by the strong economic performance in recent years. Further, national saving in New Zealand remains below the OECD country average, as it has been throughout the 1980s and 1990s. This is despite the fact that fiscal consolidation has led to a significant increase in public saving. Of particular interest is the household saving rate, which has fallen dramatically in recent years, and is currently one of the lowest in the OECD.
2. Despite the importance of the saving issue, there have been few recent studies of saving behavior in New Zealand. Consequently, it is difficult to determine the factors that have driven recent developments, and what policies could help to improve the saving performance. This paper begins to fill this void. Estimates from a recent study of household saving behavior in OECD countries (Callen and Thimann, 1997, forthcoming) are applied to New Zealand. The results suggest that the relatively low level of household saving in New Zealand can be explained by the favorable public saving performance, the poor growth performance during the 1980s, and the structure of the tax and social security and welfare system. The decline in household saving is due to higher public saving, the significant improvement in inflation performance, and to the expansion of the welfare system. The paper is organized as follows. The broad trends in saving and investment at both the aggregate and sectoral levels are outlined in Section B. Section C focuses on the reasons for the decline in household saving. Section D assesses the outlook for national saving, and Section E concludes.
B. Saving and Investment Trends
3. Gross national saving declined sharply in the late 1980s and early 1990s, reaching a low of 13¾ percent of GDP in 1992 (Chart I.1).2 It has since rebounded strongly and, in 1996, stood at 18½ percent of GDP. However, it remains below the levels of the early 1980s, and below the OECD country average, as has been the case throughout the 1980s and 1990s.
NEW ZEALAND: NATIONAL SAVING, 1978-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and international Monetary Fund, World Economic Outlook.NEW ZEALAND: NATIONAL SAVING, 1978-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and international Monetary Fund, World Economic Outlook.NEW ZEALAND: NATIONAL SAVING, 1978-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and international Monetary Fund, World Economic Outlook.4. Developments in national saving have been largely driven by the public sector (Chart I.2).3 Public saving declined sharply between 1987 and 1992, but has since risen strongly to 5½ percent of GDP in 1996. General government saving has been largely responsible for these swings, declining by nearly 4 percent of GDP between 1989 and 1992, but rising by 8 percent of GDP between 1992 and 1996. Saving of public enterprises has fallen gradually, partly because privatization has transferred public enterprise saving to the private corporate sector.
NEW ZEALAND: COMPONENTS OF SAVING, 1987-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; New Zealand Institutional Sector Accounts; and Fund staff estimate for public enterprises in 1996.NEW ZEALAND: COMPONENTS OF SAVING, 1987-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; New Zealand Institutional Sector Accounts; and Fund staff estimate for public enterprises in 1996.NEW ZEALAND: COMPONENTS OF SAVING, 1987-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; New Zealand Institutional Sector Accounts; and Fund staff estimate for public enterprises in 1996.5. Private saving (including unidentified saving) declined slightly in the late 1980s, rose strongly between 1990 and 1994, but has declined sharply over the past two years. Within the total, household saving has fallen significantly and, in 1995 and 1996, was less than 1 percent of GDP, while corporate saving has risen, boosted, in part, by privatization.
6. Meanwhile, investment has recovered strongly from the lows of the 1990s, and is currently above the OECD average (Chart I.3). The recent strengthening in investment has been driven by growth in plant and machinery investment, which has averaged 15 percent per annum since 1993 as firms have sought to increase efficiency and replace capital stock made obsolete by the reforms. Also, the surge in immigration has resulted in increased demand for housing and strong investment in the residential sector.
NEW ZEALAND: INVESTMENT, 1978-96
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; New Zealand Institutional Sector Accounts; and International Monetary Fund, World Economic Outlook.NEW ZEALAND: INVESTMENT, 1978-96
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; New Zealand Institutional Sector Accounts; and International Monetary Fund, World Economic Outlook.NEW ZEALAND: INVESTMENT, 1978-96
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; New Zealand Institutional Sector Accounts; and International Monetary Fund, World Economic Outlook.7. Consequently, the saving/investment imbalance which had started to narrow during 1990-91, narrowed further in 1992-93 as the increase in saving initially out paced the rise in investment (Chart I.4). However, it has subsequently widened as investment has continued to rise, while saving has remained broadly unchanged.
NEW ZEALAND: SAVING AND INVESTMENT, 1987-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and New Zealand Institutional Sector Accounts.NEW ZEALAND: SAVING AND INVESTMENT, 1987-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and New Zealand Institutional Sector Accounts.NEW ZEALAND: SAVING AND INVESTMENT, 1987-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and New Zealand Institutional Sector Accounts.8. At the sectoral level, the significant increase in public saving has seen the public sector move from a position where it was investing more than it saved, to one where its saving currently exceed its investment (by 3 percent of GDP in 1996), However, the private sector has moved in the opposite direction, with the saving/investment balance deteriorating to 6½ percent of GDP in 1996 as saving has fallen and investment risen. Within this, the household sector has moved from a position of broad balance in the late 1980s, to one where investment exceeded saving by 4½ percent of GDP in 1996.4
C. Explaining Household Saving
9. While the remarkable improvement in the fiscal position in recent years has been well documented elsewhere (see Scott, 1996), much less attention has been paid to developments in the private sector. This section concentrates on one component of this, household saving, and assesses the main factors behind its decline, and whether it is a cause for concern.
Household saving in New Zealand
10. The decline in household saving in New Zealand has been much more pronounced than in most other OECD countries, and the saving rate is currently one of the lowest in the OECD (Chart I.5).5 Since the early 1980s, the household saving rate has fallen from 13 percent to only 1½ percent at present, with the decline largely concentrated in two periods, 1982-84 and 1992-95.
NEW ZEALAND: HOUSEHOLD SAVING AND NET WORTH, 1976-97
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; Household Income and Outlay Account; New Zealand Institute of Economic Research; and International Monetary Fund, World Economic Outlook.NEW ZEALAND: HOUSEHOLD SAVING AND NET WORTH, 1976-97
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; Household Income and Outlay Account; New Zealand Institute of Economic Research; and International Monetary Fund, World Economic Outlook.NEW ZEALAND: HOUSEHOLD SAVING AND NET WORTH, 1976-97
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; Household Income and Outlay Account; New Zealand Institute of Economic Research; and International Monetary Fund, World Economic Outlook.11. An alternative approach to measuring the flow of household saving is to measure the change in the outstanding stock (household net worth). The largest component of household net worth in New Zealand is the stock of dwellings (home ownership rates in New Zealand are among the highest in the OECD at around 75 percent, and the importance of housing wealth in New Zealand is likely to be greater than in most other OECD countries). Household net worth tells a different story to the flow measure of saving (see Cook, 1996). While net worth declined between 1989 and 1993, it has since risen quite strongly. This difference reflects the inclusion of capital gains in the stock measure. Asset prices have risen strongly since 1992, resulting in large capital gains for their owners.
12. Of course, the two measures of saving are closely related, with additional saving in any period adding to the existing stock. Further, changes in the value of the stock of savings are likely to be an important element of the current saving decision. Over the past few years, the increase in net worth is likely to have been an important factor explaining the decline in the saving rate (see later). However, while net worth is an important concept for an individual in terms of the potential resources available for financing future expenditures, it is the flow of saving that is important from the perspective of the macro economy to finance investment and reduce the demand on foreign saving. Consequently, this measure is the focus in the rest of this section.
Empirical analysis of household saving in New Zealand
13. There has been little recent empirical research into the determinants of household saving in New Zealand, both because of the quality and availability of data, and because the extent of structural change in the economy over the past decade is likely to have resulted in significant changes in economic relationships. More generally, the nature of the saving decision suggests that the usefulness of a time-series investigation over a relatively short time period may be limited. Saving represents an intertemporal decision on the part of the household to delay consumption today in favor of consumption at some future date and is based on a number of motives, which often depend on life-cycle considerations. As such, the information contained in the available time-series data is unlikely to be rich enough to adequately capture the influences on lifetime saving decisions, while the lack of time-series movement in variables such as demographics and the tax structure mean they are unlikely to be significant in a single country time-series regression (the small number of observations available in countries like New Zealand may also lead to degrees of freedom problems in time-series estimation). The estimation of panel regressions using a data set from a number of countries can to some extent overcome these problems. The different saving experiences across countries will enrich the information contained in the data set and may help shed some light on the determinants of saving performance. Further, by adding more data points to the analysis, more precise coefficient estimates will be obtained.
14. A number of recent studies have looked at household (or private) saving in a cross-country framework (see Aghevli and others (1990), Bosworth (1993), Masson and others (1995), and Callen and Thimann (1997, forthcoming)). These studies have found a number of factors to be important determinants of saving behavior. A brief description of the behavior of these factors in New Zealand in recent years is provided below (with the exception of government and corporate saving and household net worth which have already been discussed):
Income growth was anemic during the 1980s, averaging only 1¾ percent (in real terms) per annum (about 1¼ percent in per capita terms) (Chart I.6). It has picked up in the 1990s, averaging 3½ percent per annum since 1991, as the economy has reaped the benefits of the reform program. Given New Zealand’s poor growth performance over the 1970s and 1980s, income levels have fallen relative to the rest of the OECD since the early 1970s, and are only about two-thirds of those in the United States.
Real interest rates were negative for long periods in the 1970s and early 1980s, but increased following the removal of interest rate controls in the mid-1980s. In recent years, real interest rates have been high at around 6-7 percent.
Inflation rose sharply in the mid-1970s, reaching nearly 16 percent in 1977, and remained around this level until the early 1980s. However, the inflation performance has improved significantly in recent years, averaging only 2 percent since 1992.
The unemployment rate remained quite low by international standards until the late 1980s, but increased to nearly 11 percent in 1991. However, it has subsequently fallen to around 6½ percent.
Financial deregulation. Significant liberalization of the financial sector began in 1984, and this has resulted in greatly increased access to credit for the household sector. The outstanding stock of credit to the household sector (as a ratio to GDP) has risen steadily since the mid-1980s.
The tax system may influence saving by both changing lifetime wealth and by affecting the rate of return on saving (under an income tax saving is effectively taxed twice, while a consumption tax applies only once). Further, the tax system may impact on aggregate household saving because income taxes are progressive and fall primarily on the working-age population. Consequently, the high-saving groups in the population are affected more by income taxes than by consumption taxes, which are distributed more evenly across income and age groups. While the tax system in New Zealand is relatively free of distortions, the government relies heavily on direct taxes, which could be expected to reduce saving.6 The introduction of a goods and services tax (GST) in 1986 (which replaced the existing wholesale sales tax system) has resulted in an increase in indirect tax revenues, but direct taxes still account for about two-thirds of tax revenue (compared to three-fourths in 1985). Australia, Canada, and the United States have tax structures similar to New Zealand. However, the position is significantly different in many European and Scandinavian countries, where less than one-third of tax revenue is raised from direct taxes (Chart I.7, top panel).
The social security and welfare system may adversely affect household saving by reducing the incentives for self provision. Its impact, however, will depend on a number of features, including its generosity, coverage, and financing. The latter is important because tax financing shifts the financing burden toward high-income earners, compared with social security contributions.7 In New Zealand, social welfare spending is financed from general government revenues, rather than from social insurance contributions and, consequently, net government transfers to households (as a percent of GDP) are the highest in the OECD, and the difference between gross and net transfers is small (Chart I.7, middle panel). In common with most other OECD countries, government transfers to households have risen steadily in New Zealand since the mid-1970s, partly due to demographic factors and the rise in structural unemployment, but also due to the increase in the comprehensiveness and generosity of the welfare system (Chart I.7, bottom panel). Social welfare expenditure increased from under 7 percent of GDP in 1975 to a peak of 16 percent of GDP in 1993, while expenditure on health and education also rose (Chart I.8).8 However, major reforms to the welfare system since 1991 have reduced benefit levels and tightened eligibility criteria, including through a phased increase in the retirement age to 65. Together with the favorable economic developments, these reforms have reversed the upward trend in social security and welfare expenditures, which, since 1993, have declined by 2½ percent of GDP to 13½ percent of GDP.9
The demographic structure. New Zealand has a slightly younger population than the OECD average. While the old-age dependency ratio rose by nearly 2 percent (from 16¾ percent to 18½ percent) in the late 1970s, it has risen only slightly further since (Chart I.9). The proportion of the working-age population in the 35-64 age group, who are likely to be the higher savers, has also risen since the early 1980s.
NEW ZEALAND: MACROECONOMIC DEVELOPMENTS, 1975-97
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; International Monetary Fund, World Economic Outlook; and Organization for Economic Cooperation and Development, Financial Sector Accounts.1/ Ratio of New Zealand real PPP-adjusted GDP per capita to the United States.NEW ZEALAND: MACROECONOMIC DEVELOPMENTS, 1975-97
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; International Monetary Fund, World Economic Outlook; and Organization for Economic Cooperation and Development, Financial Sector Accounts.1/ Ratio of New Zealand real PPP-adjusted GDP per capita to the United States.NEW ZEALAND: MACROECONOMIC DEVELOPMENTS, 1975-97
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; International Monetary Fund, World Economic Outlook; and Organization for Economic Cooperation and Development, Financial Sector Accounts.1/ Ratio of New Zealand real PPP-adjusted GDP per capita to the United States.
NEW ZEALAND: STRUCTURE OF THE TAX AND TRANSFER SYSTEMS
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: International Monetary Fund, Government Finance Statistics; and Organization for Economic Cooperation and Development, Financial Sector Accounts.1/ Net transfers, defined as gross transfers net of social security contributions paid by households, indicate the amount of transfers financed from general tax revenues.NEW ZEALAND: STRUCTURE OF THE TAX AND TRANSFER SYSTEMS
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: International Monetary Fund, Government Finance Statistics; and Organization for Economic Cooperation and Development, Financial Sector Accounts.1/ Net transfers, defined as gross transfers net of social security contributions paid by households, indicate the amount of transfers financed from general tax revenues.NEW ZEALAND: STRUCTURE OF THE TAX AND TRANSFER SYSTEMS
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: International Monetary Fund, Government Finance Statistics; and Organization for Economic Cooperation and Development, Financial Sector Accounts.1/ Net transfers, defined as gross transfers net of social security contributions paid by households, indicate the amount of transfers financed from general tax revenues.
NEW ZEALAND: GOVERNMENT EXPENDITURE, 1970-961/
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Source: International Monetary Fund, Government Financial Statistics.1/ Years ending June. Data not available in GFS for 1989 and 1990.NEW ZEALAND: GOVERNMENT EXPENDITURE, 1970-961/
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Source: International Monetary Fund, Government Financial Statistics.1/ Years ending June. Data not available in GFS for 1989 and 1990.NEW ZEALAND: GOVERNMENT EXPENDITURE, 1970-961/
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Source: International Monetary Fund, Government Financial Statistics.1/ Years ending June. Data not available in GFS for 1989 and 1990.
NEW ZEALAND: DEMOGRAPHIC TRENDS, 1975-96
(In percent of working population)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Source: United Nations Population Database.NEW ZEALAND: DEMOGRAPHIC TRENDS, 1975-96
(In percent of working population)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Source: United Nations Population Database.NEW ZEALAND: DEMOGRAPHIC TRENDS, 1975-96
(In percent of working population)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Source: United Nations Population Database.15. Callen and Thimann (1997, forthcoming) looked at the determinants of household saving in 21 OECD countries over the period 1975-95 using both cross-section and panel data estimation techniques.10 Their results are reported in Table I.1 (first two columns).
Regression Results for Household Saving
Estimated using the fixed effects model.
Regression Results for Household Saving
| Dependent Variable: | Household Saving/GDP | ||||
|---|---|---|---|---|---|
| Sample: | 21 OECD Countries, 1975-95 | ||||
| Panel1 | Cross-Section | Estimated Contribution to Difference Between New Zealand and OECD Average Household Saving | |||
| General government saving/GDP | -0.37 | ** | -0.90 | ** | -2.10 |
| (-10.4) | (-6.9) | ||||
| Corporate saving/GDP | -0.14 | ** | -0.61 | ** | 1.81 |
| (-3.1) | (-5.0) | ||||
| Income growth | 0.15 | ** | 1.35 | ** | -1.53 |
| (4.0) | (2.7) | ||||
| Income level (relative to the United States) | … | -0.06 | ** | 0.38 | |
| (-2.4) | |||||
| Inflation | 0.16 | ** | … | … | |
| (4.8) | |||||
| Real interest rate | 0.06 | * | … | … | |
| (1.7) | |||||
| Unemployment rate | … | -0.49 | 1.08 | ||
| (-5.0) | |||||
| Old-age dependency ratio | -0.20 | ** | -0.70 | ** | 2.81 |
| (-2.6) | (-5.0) | ||||
| Direct taxes/total taxes | -0.09 | ** | -0.09 | ** | -2.88 |
| (-4.8) | (-2.6) | ||||
| Indirect taxes/total taxes | -0.02 | 0.05 | -0.27 | ||
| (-1.0) | (1.2) | ||||
| Gross transfers to households/GDP | -0.26 | ** | … | … | |
| (-4.2) | |||||
| Net transfers to households/GDP | … | -0.22 | ** | -1.74 | |
| (-2.5) | |||||
| Unexplained | -0.80 | ||||
| Difference between New Zealand and OECD average household saving | … | … | -3.24 | ||
| Number of observations | 424 | 21 | |||
| Adjusted R2 | 0.90 | 0.94 | |||
Estimated using the fixed effects model.
Regression Results for Household Saving
| Dependent Variable: | Household Saving/GDP | ||||
|---|---|---|---|---|---|
| Sample: | 21 OECD Countries, 1975-95 | ||||
| Panel1 | Cross-Section | Estimated Contribution to Difference Between New Zealand and OECD Average Household Saving | |||
| General government saving/GDP | -0.37 | ** | -0.90 | ** | -2.10 |
| (-10.4) | (-6.9) | ||||
| Corporate saving/GDP | -0.14 | ** | -0.61 | ** | 1.81 |
| (-3.1) | (-5.0) | ||||
| Income growth | 0.15 | ** | 1.35 | ** | -1.53 |
| (4.0) | (2.7) | ||||
| Income level (relative to the United States) | … | -0.06 | ** | 0.38 | |
| (-2.4) | |||||
| Inflation | 0.16 | ** | … | … | |
| (4.8) | |||||
| Real interest rate | 0.06 | * | … | … | |
| (1.7) | |||||
| Unemployment rate | … | -0.49 | 1.08 | ||
| (-5.0) | |||||
| Old-age dependency ratio | -0.20 | ** | -0.70 | ** | 2.81 |
| (-2.6) | (-5.0) | ||||
| Direct taxes/total taxes | -0.09 | ** | -0.09 | ** | -2.88 |
| (-4.8) | (-2.6) | ||||
| Indirect taxes/total taxes | -0.02 | 0.05 | -0.27 | ||
| (-1.0) | (1.2) | ||||
| Gross transfers to households/GDP | -0.26 | ** | … | … | |
| (-4.2) | |||||
| Net transfers to households/GDP | … | -0.22 | ** | -1.74 | |
| (-2.5) | |||||
| Unexplained | -0.80 | ||||
| Difference between New Zealand and OECD average household saving | … | … | -3.24 | ||
| Number of observations | 424 | 21 | |||
| Adjusted R2 | 0.90 | 0.94 | |||
Estimated using the fixed effects model.
16. Applying the cross-section results to New Zealand suggests that a number of factors explain the relatively low household saving rate compared to the OECD average (third column of Table I.1): the relatively favorable public saving performance; the poor growth performance; the structure of the tax system, with the much greater reliance on direct taxes; and the size of net transfers to the household sector from the government. However, the relatively low income level compared to the United States and the younger-than-average population should have been positive factors for household saving in New Zealand.
17. The estimated coefficients from the panel regressions (and the estimated fixed effect for New Zealand) can be used to derive estimates of household saving in New Zealand over time (Chart I.10). As would be expected with an equation that effectively averages the experiences of 21 countries, the fit for an individual country is far from perfect. The equation struggles to explain the rise in household saving in the 1970s, but broadly tracks the decline since the early 1980s, although it does not pick-up the extent of the fall over the past three years. This may be because it excludes three factors (due to data limitations) that are likely to have had an important impact on household saving during this period: the increase in household net worth; expectations of higher future lifetime incomes, which may have reduced saving rates within the working population, as the benefits of structural reforms for the economy’s potential growth rate became apparent; and the continuing impact of financial deregulation, which has increased the ability of households to borrow against future income.
NEW ZEALAND: HOUSEHOLD SAVING, 1975-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and Fund staff estimates.NEW ZEALAND: HOUSEHOLD SAVING, 1975-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and Fund staff estimates.NEW ZEALAND: HOUSEHOLD SAVING, 1975-96
(In percent of GDP)
Citation: IMF Staff Country Reports 1998, 003; 10.5089/9781451830149.002.A001
Sources: Statistics New Zealand; and Fund staff estimates.18. The equation suggests that much of the decline in household saving can be accounted for by the impact of positive economic developments on the need for households to save. Particularly:
the large fiscal consolidation is the most significant reason for the decline in household saving. Since 1992, the increase in public saving is estimated to have reduced household saving by 2½ percent of GDP as households have adjusted their saving behavior in anticipation of lower future tax liabilities. Of course, while depressing household saving, the fiscal consolidation has acted to boost national saving.
the decline in inflation and associated economic uncertainty is estimated to have reduced household saving by 1½ percent of GDP since the mid-1980s.
19. Other factors that have had an important influence on household saving are:
the expansion of welfare spending between the mid-1970s and early 1990s which depressed household saving by around 2 percent of GDP. However, the recent reforms have encouraged greater self provision, and have added around ½ percent of GDP to saving since 1993.
the decline in the direct tax burden following the introduction of the GST in the mid-1980s is estimated to have boosted household saving by ½ percent of GDP.
the pickup in growth since the early 1990s has boosted saving by around ½ percent of GDP.
the increase in real interest rates since the mid-1980s has boosted household saving by ¼–½ percent of GDP.
the increase in corporate saving in recent years has reduced household saving by around ¼ percent of GDP.11
D. Saving Outlook
20. Official data on national saving is not yet available for 1997. However, the quarterly investment and current account data suggests that national saving declined during the year, perhaps by around 1½ percent of GDP.12 The public sector is likely to have been the main contributor to this decline, with general government saving declining by 1¼ percent of GDP as the budget surplus narrowed.
21. Looking ahead, the 1997/98 budget projections suggest that government saving will be only slightly higher in 2000 than in 1997. However, some increase in household saving seems likely, given its recent sharp decline. The equation outlined in the previous section suggests that household saving will increase by around 1 percent of GDP by 2000 as households adjust their saving behavior to reflect the recent fall in public saving, and the continued decline in the direct tax burden and government transfers to households (the latter due in large part to continued restraint in superannuation expenditures as the progressive raising of the retirement age to 65 is continued) act to encourage higher saving. Further, the recent flattening off in house prices, and increased uncertainty about future incomes, given recent weakness in the labor market, may also encourage higher saving. Lastly, the recent superannuation referendum has focused attention on the issue of retirement saving, and it is likely to have made people more aware of the need to save for retirement.
E. Conclusions and Policy Implications
22. The economic recovery has resulted in a significant increase in investment in recent years, with beneficial effects on the economy’s longer-term growth potential. However, with national saving failing to improve to the same extent, despite the large increase in public sector saving, the reliance on foreign saving to finance this investment has risen, adding to the existing stock of external liabilities (which are already high by industrial country standards). A higher level of national saving which reduced the reliance on foreign financing would be beneficial. The most direct way of achieving this would be for the government to reverse the deterioration that has occurred in its own saving performance during the past two years. The experience over the period 1992-96 has shown that raising public saving is the surest way of increasing national saving.
23. One area where New Zealand does stand out by international standards is in its low, and sharply declining, household saving rate. This decline has importantly been influenced by favorable economic developments, particularly the strong public saving performance and the decline in inflation. However, this paper has argued that the structure of the tax and social security and welfare system are further factors that help to explain the low level of household saving, and while important reforms have already been undertaken in these areas, more could be done. Particularly, this could entail a further reduction in the current reliance on direct taxation, and further reform of the welfare system to reduce government transfers to households, thereby encouraging greater self provision. By providing expenditure savings, the latter would also contribute to higher public saving. Reform of the ACC scheme would have similar positive benefits. Also, in the longer term, further structural reform that boosts the growth potential of the economy is likely to lead to higher saving although, as has possibly been the case recently, it may initially lead to a reduction in saving as households adjust to the expectations of higher future incomes.
References
Aghevli, B.B., J.M. Boughton, P.J. Montiel, D. Villanueva, and G. Woglom, 1990, The Role of National Saving in the World Economy: Recent Trends and Prospects, IMF Occasional Paper No. 67 (Washington: International Monetary Fund).
Bosworth, B., 1993, Saving and Investment in a Global Economy (Washington: Brookings Institute).
Callen, T., and C. Thimann, 1997, “Empirical Determinants of Household Saving: Evidence from OECD Countries,” IMF Working Paper (forthcoming).
Cook, D., 1996, “Household Saving: Data Sources for Household Saving in New Zealand,” Report for the Office of the Retirement Commissioner, New Zealand Institute of Economic Research.
Elmeskov, J., J. Shater, and W. Tease, 1991, “Savings Trends and Measurement Issues,” Economics and Statistics Department Working Papers No. 105 (Paris: OECD).
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Statistics New Zealand, 1997, New Zealand Institutional Sector Accounts: Issues and Experimental Series 1987-96.
Prepared by Tim Callen.
In this paper, March-year data is used, for example, 1996 refers to the year to March 1996.
Data on the sectoral composition of saving is available for the period 1987-96 in the recently published Institutional Sector Accounts. This data, however, is labeled “experimental” by Statistics New Zealand (SNZ), and its interpretation is hampered by a large unidentified component which SNZ has been unable to allocate to a sector (in recent years, this component has swung from positive 2¼ percent to negative ¾ percent of GDP). It is more plausible that this unidentified component is part of private, rather than public, saving, although in Chart I.3, private saving is shown both including and excluding the unidentified component.
In terms of household net lending, the deterioration has been less pronounced as net capital transfers to the household sector have increased sharply in recent years (reaching 2 percent of GDP in 1996). These transfers have been associated with the strong immigration flows, and are one reason for the strong rise in dwelling investment.
There are a number of issues in the measurement of household saving over time and across countries that may affect the interpretation of this data (see Elmeskov and others (1991) for a detailed discussion).
Despite this reliance on direct taxes, marginal income tax rates in New Zealand are among the lowest in the OECD.
Social security contributions are generally levied as a fixed proportion of income, whereas taxes are progressive, while contributions also generally begin at very low income levels and are capped at high incomes. The generosity of the social security system can be measured by gross transfers (defined as government benefits paid to households through the budget or the social security system), while its financing can be measured by net transfers (defined as gross transfers net of social security contributions paid by households).
Major social expenditure initiatives during this period were the introduction of the domestic purposes benefit in 1973 (for single parents, with the number of recipients increasing from around 7,000 in 1973 to 110,000 currently), the accident compensation (ACC) scheme in 1974, and the national superannuation scheme in 1977. The superannuation scheme was not means-tested, and was available to all those over 60 years of age. The ACC scheme is an earnings-related compensation scheme which was supposed to be self-funded. However, by 1990, expenditure on compensation exceeded $NZ 1 billion, of which over 10 percent was funded from general taxation.
There may also be other features of the New Zealand system that are important in influencing saving incentives, but that are not easy to measure. These include the impact of means-testing benefits, how effectively work tests are enforced, and the duration over which some benefits are available.
In this study, the ratio of direct taxes to total government revenue and the ratio of indirect taxes to total government revenue are used to proxy the structure of the tax system. Gross transfers from the government to households are used as a measure of the generosity of the social security and welfare system, while net transfers are used as a measure of its financing (whether from social security contributions or from tax revenue).
Chart 2 suggests a closer relationship between household and corporate saving in New Zealand than is obtained in the panel regression results. This relationship is facilitated by the close integration of the individual and corporate tax systems. Substantial differences in the integration of the tax system across countries, or in foreign ownership of the corporate sector between countries, would weaken the case for estimating a common coefficient, as in the panel regression.
The current account deficit widened to 4¾ percent of GDP in 1997 from 3¾ percent in 1996, while investment is estimated to have declined by around ½ percent of GDP in 1997. However, there is a significant discrepancy in the quarterly accounts between the production and expenditure measures of GDP in 1997. This may be due to the under recording of expenditure, and it is possible there may be an upward revision to the investment estimates. If so, the fall in saving may not be as great as implied by the quarterly numbers.
