New Zealand
Selected Issues Paper
Author: International Monetary Fund
Publication Date:
09 May 2011
eISBN:
9781455274512
Language:
English
Keywords:
ISCR; CR; Australia; saving; GDP; national saving; New Zealand government; GDP decline; saving in New Zealand; government saving; saving in Australia; Social protection spending; Aging; Domestic credit; Australia and New Zealand
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The Savings Working Group in New Zealand presented recommendations in February 2011, and suggested raising national saving by 2–3 percent of GDP. The increase in net public saving in the country explains part of the reason for lower net private saving in New Zealand. Net public saving of the country is about 3 percent of GDP above the average of advanced countries for the past 15 years. Financial liberalization also appears to have played a role in saving behavior.

Abstract

The Savings Working Group in New Zealand presented recommendations in February 2011, and suggested raising national saving by 2–3 percent of GDP. The increase in net public saving in the country explains part of the reason for lower net private saving in New Zealand. Net public saving of the country is about 3 percent of GDP above the average of advanced countries for the past 15 years. Financial liberalization also appears to have played a role in saving behavior.

I. How Well Do Standard Models Explain Australian and New Zealand Saving Behavior?1

A. Introduction

1. Net national saving in New Zealand has been much lower than in most other advanced countries over the past 15 years while net national saving in Australia has been just below average. This has contributed to persistent and sizable current account deficits and a buildup in net foreign liabilities to relatively high levels, especially in New Zealand. The vulnerability stemming from high net foreign liabilities and low national saving led the New Zealand government to establish a Savings Working Group in 2010 to recommend ways to raise national saving.

2. This paper assesses how well standard models explain Australian and New Zealand private saving behavior, in an effort to draw some policy implications. The models suggest that a rise in the old age dependency ratio together with an increase in public saving and household wealth are associated with the fall in the private saving rate in New Zealand over the past 20 years. For Australia, the same factors influenced saving, but an important difference with New Zealand is that the large increase in the terms of trade in recent years is positively associated with a rise in the private saving rate.

3. The Savings Working Group in New Zealand presented recommendations in February 2011, and suggested raising national saving by 2–3 percent of GDP, primarily through an increase in public saving and tax policy changes. The policy implications of the models presented in this paper are consistent with the key recommendation of the Working Group and suggest that the surest way of increasing national saving would be to raise public saving. An increase in public saving of 1 percent of GDP is associated with a rise in national saving of about ⅓–½ percent of GDP in Australia and ½–⅔ percent of GDP in New Zealand. In addition, there is also some evidence that higher government spending on social protection and health care, which have increased substantially in New Zealand in the past five years, are associated with lower private saving.

4. The cross-country models suggest that higher real GDP growth per capita is associated with higher saving. This implies that policy efforts to raise productivity in Australia and New Zealand may help raise national saving.

5. Other policy options to influence saving behavior, including tax reforms, government incentives to save, or compulsory schemes, are not assessed in this paper because of the difficulty of modeling these factors across countries.

6. The aging of the population over coming years in Australia and New Zealand, as in most advanced countries, will put downward pressure on the private saving rate, as a growing share of the population begins to draw on their savings to fund retirement. This implies that a sizable increase in public saving may be needed to raise national saving.

B. Australia and New Zealand Saving Compared with Other Advanced Countries

7. Net national saving in New Zealand was about 5 percent of GDP below the average for advanced countries over the past 15 years, while Australia’s net national saving was just 2⅓ percent of GDP below the advanced country average for the same period (Figure I.1). Net national saving has fallen since the late 1980s in New Zealand. This reflects a fall in private saving over time, offset in part by a rise in government saving (until recently). By 2009, New Zealand’s net private saving was below the average of the late 1980s, while Australia’s net private saving had recovered to be above the average for the late 1980s. Net public saving was consistently higher in Australia and New Zealand than in most other advanced countries.

Figure I.1.
Figure I.1.

National and Private Saving

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

Source: OECD and IMF Staff Estimates

C. Regression Estimates

8. To analyze the factors influencing private saving in Australia and New Zealand, we estimate panel regressions for 19 advanced countries over the period 1980–2009. The empirical models follow numerous earlier studies (including three recent IMF studies summarized in Appendix I.1) that specify saving as a function of the old-age dependency ratio, the young-age dependency ratio and life expectancy (to assess the impact of demographics); public saving (to assess the extent of the “Ricardian offset”); real stock and real house prices (to assess wealth effects); domestic credit (to assess the impact of financial liberalization); and other factors such as the real interest rate, real GDP growth per capita and the terms of trade.

9. Pooled least squares and generalized method of moments (GMM) estimates are presented for the net private saving rate in Table I.1. The results are broadly consistent with the earlier IMF studies, despite narrower country coverage in these regressions:

Table I.1.

Regression Results for 20 Advanced Countries

article image

Significant at 10 percent level.

Significant at 5 percent level.

Significant at 1 percent level.

Cross country and period fixed effects

Lagged one year in the pooled equations to reduce endogeneity.

  • A 1 percent of GDP increase in government saving is associated with a ⅓–½ percent of GDP decline in private saving, implying a less than full Ricardian offset.2 This is consistent with other studies summarized in Röhn (2010) that suggest the Ricardian offset is around 0.3–0.9.

  • Demographic variables have a significant impact on saving. A 1 percentage point increase in the old-age dependency ratio is associated with a ⅓–⅔ percentage point decline in the saving rate. An increase in life expectancy is also associated with a rise in net private saving in the GMM model. The young-age dependency ratio is statistically insignificant.

  • An increase in the terms of trade is associated with a rise in the saving rate, suggesting that the private sector views part of any change in the terms of trade as temporary and does not adjust spending fully to the change in income.

  • A rise in domestic credit is associated with a small fall in the saving rate, although this was only significant in the pooled model. Including the change rather than the level of domestic credit is not significant.

  • Faster growth in real GDP per capita is associated with higher saving rates.

  • Higher inflation is related to higher net private saving in the pooled model only.

  • Proxies for wealth, such as real stock prices and real house prices are not statistically significant in level or change terms. In addition, the real deposit interest rate is not statistically significant.

  • Including the output gap to control for the economic cycle is not statistically significant.

  • Finally, an alternative model including government spending on social protection, health care and education suggests a negative link between spending in some of these areas and private saving. Higher spending on social protection and health care are negatively correlated with private saving, while spending on education is not statistically significant in the model (third column of Table I.1).3, 4

D. How Well Does the Model Fit Australia and New Zealand?

10. According to the pooled model above, the main factors influencing net private saving in Australia and New Zealand over the past two decades are the old-age dependency rate, the terms of trade, domestic credit, and net public saving (Table I.2). The rise in the old-age dependency ratio is associated with a 1½–2 percent of GDP fall in the net private saving rate over the period 1990–2009, as a greater share of the population began to draw on their savings to fund retirement. For Australia, the old-age dependency rate rose slightly faster than for New Zealand, reaching almost 20 percent of the working age population by 2009, compared with just over 19 percent in New Zealand.

Table I.2.

Australia and New Zealand: Decomposition of Change in Net Private Saving Rate, 1990-2009

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Source: IMF staff estimates.

Using coefficients from the pooled model in Table 1.

11. Demographics, however, do not explain why private saving in New Zealand was lower than elsewhere given that New Zealand has a lower elderly dependency ratio than most other advanced countries (Figure I.2). Also, life expectancy, which showed up as significant only in the GMM model, is around the average for advanced economies (Figure I.3).

Figure I.2.
Figure I.2.

Elderly Dependency Ratio, 2008

(In percent of working-age population)

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

Figure I.3.
Figure I.3.

Life Expectancy, 2008

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

12. The improvement in the net public saving rate in New Zealand is another factor associated with the decline in the net private saving rate. The increase in net public saving in New Zealand, to a higher level than in most advanced countries, explains part of the reason for lower net private saving in New Zealand. Net public saving in New Zealand was about 3 percent of GDP above the average of advanced countries for the past 15 years. Assuming a Ricardian offset of 0.45, New Zealand’s higher public saving may explain about 1½ percentage points of the 8 percentage point gap between the net private saving rate in New Zealand and the average for advanced countries over the past 15 years.

13. Financial liberalization also appears to have been played a role in saving behavior. The increase in credit to the private sector by about 70–75 percent of GDP over the past two decades in both countries is related to a fall in the net private saving rate by about 1¾ percent of GDP. Domestic credit to the private sector in 2009 stood at just over 150 percent of GDP in both countries. While this was slightly above the average for advanced countries of about 145 percent of GDP, the difference is not large enough to explain the lower saving in New Zealand.

14. For Australia, the model suggests that a 2½ percent of GDP increase in the net private saving rate from 1990–2009 was related to the rise in the terms of trade. The terms of trade rose much less in New Zealand and the model suggests it contributed only a ½ percent of GDP increase in private saving.

15. While the cross-country analysis gives some insight into the factors affecting saving over time in Australia and New Zealand, the equations do not provide a very good fit, especially for New Zealand during the housing boom of 2003–07 (Figure I.4). Moreover, the country fixed effects in the pooled model show a large negative fixed effect for New Zealand of about 8 percent of GDP, suggesting the model does not explain well the reasons for private saving being lower than the average for other advanced countries. The period fixed effect also shows a large contribution to the change over the period 1990–2009, as this fixed effect jumped in 2009 indicating that the model does not explain well the increase in saving in many countries in that year.

Figure I.4.
Figure I.4.

Australia and New Zealand: Fitted and Actual Values from Panel Regression

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

Source: IMF Staff Estimates

16. The alternative model that includes spending on social protection and health care also provides a poor fit to the New Zealand data. Given the negative link between social spending and saving in the model, the lower-than-average spending on social protection and health care as a share of GDP in New Zealand cannot explain New Zealand’s lower saving rate. (Figure I.5, upper panels). Nonetheless, social protection and health care spending have risen more in the past five years than in most other countries and the model implies that this growth weighed on private saving (Figure I.5, lower panels).

Figure I.5.
Figure I.5.

Government Spending on Social Protection and Health Care

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

Source: OECD and IMF Staff Estimates

17. The models above do not take account of the impact on private saving of tax policy, saving incentives, an increase in the age of eligibility for pensions, or compulsory saving schemes. For Australia, there is some evidence from micro data that the superannuation guarantee scheme increased household saving and wealth (Connolly 2007), while in New Zealand changes to the tax treatment of pensions and superannuation in 1988 and an increase in the eligibility age for New Zealand superannuation may have impacted saving behavior.

E. Single Equation Estimates for Australia and New Zealand

18. In an attempt to better explain the factors behind the fall and subsequent recovery in the private saving rate in Australia and New Zealand, we estimate single equation models for private saving. The results of the ordinary least squares (OLS) and error correction models (ECM) are presented in Tables I.3 and I.4 and support some of the findings from the cross-country regressions. The variables are nonstationary over the sample period, so we estimated the equation in levels and tested for co-integration.5 The null hypothesis of no co-integration is rejected for all the OLS equations shown. A caveat to the results is that they are based on just over 20 observations, because of constraints on data availability. The main findings are:

Table I.3.

OLS Regression Results for Australia and New Zealand

article image
Standard errors in parathensis

Significant at 10 percent level.

Significant at 5 percent level.

Significant at 1 percent level.

Table I.4.

Private Saving Error Correction Regression Results for Australia and New Zealand

article image

Significant at 10 percent level.

Significant at 5 percent level.

Significant at 1 percent level.

  • The coefficients on net public saving are around negative ½–⅔ for the OLS and ECM equations for Australia and about negative ⅓–½ for New Zealand, which is close to the coefficients found for the 19 advanced countries above. The ECM shows a short run coefficient of about negative ½ for both countries.

  • The coefficient on the terms of trade is larger for Australia than for the 19 advanced countries estimated in the cross-country equations and is significant, whereas it is not significant for New Zealand. For Australia, the model suggests that the 62 percent rise in the terms of trade from 2000–2009 was associated with a 3¾ percent of GDP rise in the net private saving rate.

  • Household net worth is negatively associated with private saving in Australia and New Zealand.6 In the ECM for Australia, the change in net worth rather than the level was statistically significant. The results of the OLS equation show that the 50 percent rise in household’s perceived net wealth in New Zealand from 1990 to 2009 is associated with a 5 percentage point fall in the net private saving rate, while in Australia the 43 percent rise in household net wealth over the same period is linked to a 3 percentage point fall in the net private saving rate.

  • Demographic variables are not significant in the regressions. Typically, demographic variables show up as significant over longer periods and in cross country models.

  • GDP growth rates, domestic credit (in level and difference form) and government spending on social protection, health and education are not statistically significant.

19. The simple OLS models provide a better fit for Australia and New Zealand than the cross-country model (Figure I.6). In particular, the residuals for the New Zealand equation are much smaller than for the cross-country model, which is likely because of the inclusion of household net wealth in the OLS model which is clearly negatively correlated with saving (Figure I.7). The sharp jump in net private saving in Australia and New Zealand in 2009 is not fully captured by the OLS models and may relate to increased uncertainty stemming from the global financial crisis. However, the inclusion of measures of uncertainty, such as the Chicago Board Options Exchange Market Volatility Index (VIX) and the unemployment rate, is not statistically significant.

Figure I.6.
Figure I.6.

Australia and New Zealand Private Saving Fitted Values from OLS Equations

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

Source: IMF staff estimates.
Figure I.7.
Figure I.7.

Australia and New Zealand: Private and Public Saving, Wealth, and Terms of Trade

Citation: IMF Staff Country Reports 2011, 103; 10.5089/9781455274512.002.A001

Source: OECD and IMF staff estimates.

F. Policy Implications

20. The models presented above suggest that if the public policy goal is to raise national saving, the surest way of achieving this goal would be to increase public saving. An increase in public saving of 1 percent of GDP would likely raise national saving by ½–⅔ percent of GDP in New Zealand and about ⅓–½ percent of GDP in Australia (based on the Ricardian offset coefficients estimated in the OLS and ECMs). The negative link between spending on social protection in the cross-country model implies that reversing the rise in social protection spending in New Zealand since 2004 by better targeting transfers to households could raise both private and public saving. In addition, the positive link between real GDP growth per capita and saving in the cross-country models suggests that structural reforms to raise productivity may help increase national saving.

21. Demographic projections imply that fiscal policy may need to work harder in coming years to raise national saving. The aging of the population in Australia and New Zealand, as in most advanced countries, will put downward pressure on the private saving rate over time, as a growing share of the population begins to draw on their savings to fund retirement. This may be offset in part by a rise in life expectancy that will encourage greater saving for retirement. Overall, however, the demographic influences imply that a sizable increase in public saving would be needed to raise national saving, as illustrated by the projected change in national saving based on IMF staff estimates, demographic trends and an assumption of no change in household net wealth in Table I.5.

Table I.5.

Illustrative Projection of National Saving

(Change 2009 to 2016, in percent of GDP)

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Source: IMF staff estimates.

22. The terms of trade and household wealth in Australia and New Zealand in coming years may not evolve as in the above projection, with implications for the goal of raising national saving. For instance, the models imply that a 10 percent decline in the terms of trade in Australia could lead to a fall in private saving by around ¾ percent of GDP. However, a fall in household net wealth by 10 percent could lead to a rise in private saving by 1 percent of GDP in Australia and 1½ percent of GDP in New Zealand. The fall in household wealth could come from a decline in house prices that appear moderately overvalued in both countries (see Tumbarello and Wang, 2010).

Appendix I.1. Summary of Recent IMF Cross-Country Studies of Saving

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Significant at 10 percent level.

Significant at 5 percent level.

Significant at 1 percent level.

Log of initial GDP per capita.

Volatility of inflation.

Panel consists of four 5-year periods for 24 countries.

Change in terms of trade.

Data Appendix

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References

  • Baldacci and others, 2010, “Public Expenditures on Social Programs and Household Consumption in China,” IMF Working Paper No. 10/69.

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  • Callen, Tim and Christian Thimann, 1997, “Empirical Determinants of Household Saving: Evidence from OECD Countries,” IMF Working Paper No. 97/181.

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  • Connolly, Ellis, 2007, “The Effect of the Australian Superannuation Guarantee on Household Saving Behaviour,” Reserve Bank of Australia Discussion Paper.

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  • Guo, Kai and Papa N’Diaye, 2010, “Determinants of China’s Private Consumption: An International Perspective,” IMF Working Paper No. 10/93.

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  • Karasulu, Meral, 2010, “Are Korean Households Saving Too Little?,” Republic of Korea Selected Issues Paper, IMF Country Report No. 10/271.

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  • Röhn, Oliver, 2010, “New Evidence on the Private Saving Offset and Ricardian Equivalence,” OECD Working Paper No. 762.

  • Tumbarello, Patrizia and Shengzu Wang, 2010, “What Drives House Prices in Australia? A Cross-Country Approach,” IMF Working Paper No. 10/291.

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1

Prepared by Ray Brooks, with research assistance from Kessia De Leo and Mousa Shamouilian. The author is grateful to Roberto Guimarães, Meral Karasulu, and Papa N’Diaye for sharing cross-country databases prepared for earlier studies. The paper also benefited from comments by the Australian and New Zealand authorities.

2

A similar result is found if the general government structural balance is used rather than the net public saving rate (not reported here).

3

Baldacci and others (2010) found similar results for household saving, see Appendix I.1.

4

Data on government spending is only available from the mid-1990s for most advanced countries.

5

Tests for unit roots in the data suggest that the net private saving rate, net public saving rate, terms of trade, household net wealth and demographic variables are nonstationary, implying that a co-integration approach is appropriate. We would not expect saving rates or the terms of trade to be non-stationary over the longer run. To take account of this, we estimated an alternative specification with household net wealth in difference form and the saving and terms of trade terms in levels. However, the net wealth term is not statistically significant, and the equation provided a poorer fit to the data.

6

Household net worth data is not available for a wide range of advanced countries so was not used in the analysis for the 19 advanced countries above.

References

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  • Becker C. and M. Davies, 2002, “Developments in the Trade-Weighted Index,” Reserve Bank of Australia Bulletin, October, pp. 1–6.

  • Bordo, M.D., D. Hargreaves, and M. Kida, 2009, “Global Shocks, Economic Growth, and Financial Crises: 120 Years of New Zealand Experience,” Reserve Bank of New Zealand, Discussion Paper 2009/17.

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  • Buckle, R. K., Kim, H. Kirkham, N. McLellan, and J. Sharma, 2007, “A Structural VAR Business Cycle Model for a Volatile Small Open Economy,” Economic Modeling, Vol. 24, pp. 990–1017.

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  • Gillmore, D. and P. Briggs, 2010, “World Trade Interdependencies: a New Zealand Perspective,” Reserve Bank of New Zealand Bulletin, Vol. 73, No. 2, pp. 35–46.

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  • Hunt, B., 2010, “Emerging Asia’s Impact on Australian Growth: Some Insights from GEM,” IMF Working Paper No. 10/262.

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  • Liu, P., 2010, “The Effects of International Shocks on Australia’s Business Cycle,” Economic Record, Vol. 86, pp. 486-503.

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  • Zhang, V., 2009, “The Evolution of New Zealand’s Trade Flows,” Reserve Bank of New Zealand Bulletin, Vol. 72, No.4, pp. 42–46.

7

Prepared by Yan Sun. The author would like to thank Sam Ouliaris for helpful discussions and comments and Andy Swiston for generously sharing his work. The paper also benefited from comments by Chris Becker, Ray Brooks, Patrick Conway, Mario di Maio, David Galt, Tim Hampton, Philip Liu, Simon McLoughlin, Oscar Parkyn, Reserve Bank of Australia, and participants at the seminars in New Zealand Treasury. Mousa Shamouilian and Kessia De Leo provided excellent assistance. All errors are the author’s.

8

See C. Becker and M. Davies (2002) and V. Zhang (2009) for discussions on the changing trade patterns of Australia and New Zealand.

9

These countries are Latin America (Brazil, Chile, Mexico, Colombia, and Peru), Argentina, Bulgaria, Canada, Denmark, Estonia, Israel, Norway, Russia, South Africa, Sweden, Switzerland, Turkey, and Venezuela.

10

Using equal weights does not affect much of the paper’s results. Furthermore, limiting the coverage of ROW to a few small industrial countries, as done in Bayoumi and Swiston (2007), yields similar results. These results are available upon request.

11

They are (1) USA, EAS, ROW; (2) USA, ROW, EAS; (3) EAS, USA, ROW, (4) EAS, ROW, USA; (5) ROW, USA, EAS; and (6) ROW, EAS, USA.

12

This could be a natural result of the decomposition and ordering method.

13

Owing to the lag effects of Australia and New Zealand on emerging Asia, the U.S., and ROW, our analysis could potentially over-estimate the spillovers. However, these over-valuation effects should be minor as we already control for the source of contemporaneous shocks and the lag effects are small.

14

Results are available upon request.

15

Even when Australia is excluded from the VAR, shocks from emerging Asia are not found to have much of an impact on New Zealand.

16

Using a time-series analysis of New Zealand growth over 120 years, Bordo and others (2009) found that global factors such as shocks to U.S. real GDP and shocks to the terms of trade have significant impact on New Zealand’s medium-term growth.

17

P. Liu (2010) found that international factors contribute to over half of the output forecast errors for Australia. Other studies show a wide range of estimates from 5 percent to over 50 percent.

18

Results are available upon request.

19

This paper closely follows Bayoumi and Swiston (2009), where detailed discussions of this approach can be found.

20

While the possible collinearity among various channels tends to overstate the total spillover, the results can be seen as a gauge of the relative importance of each channel.

21

Both trade and financial aggregates for emerging Asia are calculated using PPP-based GDP as weights.

22

See Nimark (2007) for a structural model on Australia.

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Cover IMF Staff Country Reports
New Zealand: Selected Issues Paper
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 103
Publisher:
International Monetary Fund
ISBN:
9781455274512
ISSN:
1934-7685
Pages:
40
DOI:
https://doi.org/10.5089/9781455274512.002

National and Private Saving

Elderly Dependency Ratio, 2008

(In percent of working-age population)

Life Expectancy, 2008

Australia and New Zealand: Fitted and Actual Values from Panel Regression

Government Spending on Social Protection and Health Care

Australia and New Zealand Private Saving Fitted Values from OLS Equations

Australia and New Zealand: Private and Public Saving, Wealth, and Terms of Trade