What if recent economic trends were to continue?

25 July 2012

A “What if Wednesday” speech by Don Brash at the University of Canterbury

Vice Chancellor Dr Rod Carr, Ladies and gentlemen:

Thank you for your invitation to take part in the University’s “What if Wednesday?” lecture series.  As a graduate of this university, I’m delighted to take part.

I want to talk this evening about four main economic trends:

  • New Zealand’s trend productivity growth;
  • The trend in the government’s fiscal position;
  • The trend in our dependence on the savings of foreigners;
  • And the trend in house prices relative to household incomes.

I want to talk about what’s implied if those trends continue.

And finally I want to talk about what we should be doing to change the trends if change is in fact what we want.

Productivity Growth

Let’s talk first about New Zealand’s trend growth in productivity. 

Productivity of course is a measure of output per unit of input.  It can be measured as output per unit of labour input – labour productivity – or as output per unit of all inputs – total factor productivity.  But whichever way we look at it, the trend has been the same for a considerable period. 

With the exception of a brief period after the reforms of the late eighties and early nineties, productivity growth has for many years been markedly slower in New Zealand than in most other developed countries.  And of course, as a result, incomes in New Zealand have grown markedly more slowly than incomes in many other countries.  It’s common to compare our incomes with those in Australia, but our incomes have gradually drifted below those in most other developed countries in recent decades.   As the graph illustrates, in the early seventies incomes in New Zealand were, on average, only slightly below those in Australia, on a par with those in Norway, and above those in the United Kingdom.  Now our incomes are clearly below those in all three countries and have fallen well below the mid-point of OECD countries.

 GDP/capita US dollars, constant prices, PPPs (reference year 2000)

Source: OECD

If anything, the situation is getting worse.  According to figures released by Statistics New Zealand two months ago, production per hour worked last year (2011) was just 1.3% higher than it was in 2005, implying average growth in productivity of just 0.2% per annum over that period – that’s the sort of productivity growth which Portugal and Italy achieved in the decade prior to the GFC, and far behind productivity growth in, say, the US over that period.

The Government’s Budget in May projected that economic growth will peak at about 3.4% in the year to March 2014, drifting off to “around 3%” thereafter.  But that was on the assumption that labour productivity growth will average 1.4% annually.  If achieved, that would almost certainly put us among the faster growing developed countries over the next few years, given the economic mayhem in Europe and the US at the moment.  But the Budget assumption of productivity growth of 1.4% annually looks wildly optimistic in the light of recent productivity growth of just 0.2%.

Last month, the Reserve Bank issued its latest Monetary Policy Statement and that suggested that New Zealand’s potential growth rate is now not 3%, not 2% but just 1.2% annually as a result of slow growth in the workforce, a low level of business investment, and very low productivity growth.  Astonishingly, I have seen no media discussion on this dismal figure.

So what if this trend continues?   The obvious consequence is that real incomes will grow very slowly in New Zealand, and almost certainly more slowly than real incomes in other economies.  That in turn will lead to a continuing exodus of New Zealanders in search of higher incomes abroad, most obviously in Australia.  In the last 12 months, roughly 1,000 New Zealanders went to Australia every single week and while some of that was the direct result of non-economic factors, of which you in Christchurch are only too well aware, much of it was due to the large and growing gap between incomes here and those across the Tasman.

For many years, successive governments have promised faster economic growth – certainly Jenny Shipley’s Government did, while Helen Clark’s Government promised to lift New Zealand incomes into the top half of the OECD within a decade.  John Key promised to have New Zealand incomes match those in Australia by 2025 when he was elected in 2008.  He set up the 2025 Taskforce to monitor the size of the gap in incomes between New Zealand and Australia, and I was privileged to chair that Taskforce. We found that, after adjusting for cost of living differences, Australian incomes were at least 35% higher than New Zealand incomes in 2008, and the gap now is probably nearer 40%.  Looking at recent productivity growth, there’s not the slightest sign that that gap will close any time soon, and indeed it’s much more likely to continue widening.

So if current very slow growth in productivity continues – and with it very slow growth in average incomes – we must expect to see the gap between living standards in New Zealand and those in other developed countries continue to widen.  We won’t be able to afford the quality of healthcare which people in wealthier countries will take for granted.  We won’t be able to afford the quality of tertiary education which people in wealthier countries will take for granted.  We will probably see a more unequal distribution of income in New Zealand as we strive to hang onto those with the most internationally marketable skills.  We will see more and more New Zealanders leaving for greener pastures, with visits to see the grandchildren inevitably involving international travel.  If the trend continues indefinitely, we would become a quiet backwater – to the rest of the world a bit like Taihape is to New Zealand.

Government debt

What about the trend in the government’s fiscal position?  The government’s fiscal position is, of course, subject to political decisions, so can be made quite quickly better or worse by a change in policy.  New Zealand starts from a relatively favourable position, with core Crown debt (that is, not including the debt of the SOEs) just 40% of GDP.  Taking off the core Crown debt held by official agencies, such as the Reserve Bank, the net core Crown debt is even lower at 25% of GDP, and is projected to remain below 30% of GDP over the next few years.

That is a vastly better position than the gross government debt of almost all other developed countries – with the UK and Germany having government debt above 80% of GDP, the US above 100%, Greece on 160%, and Japan on 230%.  Only a handful of countries have lower official government debt than New Zealand does, including Australia on 23%.1

But the longer term outlook is much more worrying.  A recent OECD survey suggested that New Zealand has a bigger challenge to keep its government debt below 50% of GDP by 2050 than any other OECD country than Japan.   According to the OECD, the challenge we face is substantially greater than that faced by countries such as Italy, Greece and Spain, and somewhat greater than the challenge facing the UK and the US – driven largely by the strong projected increase in pension costs, healthcare costs, and costs related to the care of the very elderly.2

I would have thought that was rather implausible had I not read the 40 year fiscal projection done by our own Treasury in 2009.   That suggests that by 2050 government’s financial liabilities will exceed 220% of GDP on the basis of policies at the time that projection was done, three years ago.  Many things have happened since that time, some making the situation worse (such as the Christchurch earthquakes) and some making the situation better (such as the moderate restraint shown by the Government over the last year or so).  The Treasury will be issuing another long-term projection early next year.

But the OECD assessment as recently as last April, which I’ve just referred to, doesn’t suggest that the situation is getting any better.  If this trend were to continue, we would find ourselves in the situation that Greece is in now – with the interest rates on government borrowing rising rapidly, default being a realistic possibility, and a future government faced with taking some extremely unpopular measures, both to increase taxes and to cut government spending – almost certainly on New Zealand Superannuation, benefits, healthcare and education.  Why those four?  Because already those four areas of government spending make up nearly 70% of the total of core government spending, and that percentage will certainly grow on current trends.  Buying less expensive ministerial cars, or merging a few government departments, or reducing the number of MPs, simply won’t make any significant impact on the problem.

Dependence on the savings of foreigners

What about the trend in our dependence on the savings of foreigners?   From the very earliest years of New Zealand history, New Zealand has borrowed from foreigners.  Every school-boy knows about the borrowing of Premier Julius Vogel in the London market back in the 1870s.  And we’ve also seen lots of foreign direct investment in New Zealand: banks from Australia were early investors in New Zealand, as were British meat companies.   So there’s nothing new about our using the savings of foreigners to supplement our own savings.

But in recent decades we have leant heavily on foreigners to supplement our incomes.  The last time we earned more from exports of goods and services than we paid for imports of goods and services was 1973.   In other words, in every single year since 1973 we have tapped the savings of foreigners to supplement our incomes.

And of course, the inevitable result is that our net international indebtedness is now over 70% of GDP.   Collectively, we own some assets offshore – shares in Australian companies, property on the Gold Coast, overseas subsidiaries of Fletcher Building and Fonterra, the foreign exchange reserves of the Reserve Bank, and so on.   But the amount we own offshore is dwarfed by what we collectively owe offshore – either in the form of debt or in the form of equity.  Some of our equity obligations are represented by foreign direct investment in New Zealand – most of the banks, most of the oil companies, most of the insurance companies, and a great many other companies are owned abroad.  Some of our debt obligations are owed by the government – whenever the government issues bonds, large chunks of these are bought by overseas institutions, and so constitute part of our international debt.  But the biggest single part of our international debt is money owed by the banks to overseas creditors, reflecting the fact that for many years New Zealanders have been lousy savers and among the world’s most enthusiastic borrowers.  The banks simply haven’t been able to raise enough money in the form of deposits from domestic savers to satisfy the almost insatiable demand from domestic borrowers, so they’ve filled the gap by borrowing abroad.   As of 31 March 2012, overseas borrowing by the banks amounted to almost $140 billion.

Our net external liabilities are now among the highest in the world, relative to the size of our economy, right up there with Ireland, Greece, and Spain. 

Source: IMF, for various years 2009 to 2011.  The New Zealand figure is for 2009, before the Christchurch earthquakes.

Paradoxically, our net international indebtedness, relative to GDP, is today a bit better than it was two or three years ago, when it peaked at close to 90% of GDP, but that’s only because Statistics New Zealand counts among our international assets the amounts owed to us by international insurance companies to cover the disaster here in this city.  As international insurance companies pay the amounts they will need to pay to help rebuild Christchurch, those assets will be run down, and our net international indebtedness will increase again.

Two months ago, I received an email from First New Zealand Capital showing how Credit Suisse is looking at country risk at the moment.  This is what it looked like:

Credit Suisse’s Country Risk Table, based on current account balance, Budget balance, government debt, net external assets, potential GDP growth, CDS spreads and credit rating

Most risky








Least risky






















New Zealand














Hong Kong










Provided by First New Zealand Capital, 17 May 2012

I may not agree with that classification – in fact, I don’t – but it should be seriously worrying that that’s the way a major international bank sees things.

Two months ago also, the Budget projections suggested that the balance of payments deficit bottomed out at about 2½% of GDP in 2009 and is now heading back up again – towards 7% of GDP by 2015/16.  Imports were projected to grow faster than exports in each of the four years to March 2015. 

And of course that projection was done before the sharp fall in international dairy prices in the middle of May.  In fact, the Budget projections suggested that the current account deficit would be 4.2% of GDP in the year to last March, whereas the figures released a month ago showed that the actual deficit for the 12 months to March was already up to 4.8% of GDP, even higher than the Budget projection (of 4.6%) for the March 2013 year.  The BNZ is now projecting that the deficit will exceed 8% of GDP as early as next year.

It’s sobering that, with some of the best export prices in a generation for virtually all our major exports, and with an economy barely growing (and so not consuming too many imports), we still didn’t achieve a balance of payments surplus in the last few years.  Even more sobering is that the current account deficit is already pushing up against the 5% of GDP level, which many commentators see as the point where financial markets begin to get very twitchy.

Once again, if the current trend continues, and we get further and further into hock to other countries, disaster beckons. 

I haven’t always felt that way.  Some years ago, it became unfashionable to worry about balance of payments deficits.  Milton Friedman was only the best known of a number of economists who argued that, provided that the government budget was in surplus and the exchange rate was floating, it should be of no concern to policy-makers if a country was running a balance of payments deficit.  And I can understand the force of that argument.  By definition, if the government is in surplus and the country is running a deficit, it must be the private sector running a deficit – and Friedman argued that that should be no concern of the government.  If private individuals felt able to take on more debt, and foreign creditors were happy to lend to them, that should be fine.  Eventually, Friedman argued, either borrowers would decide they had taken on enough debt and would stop borrowing, or creditors would make that decision for them and would stop lending.  The exchange rate would fall, the balance of payments would move from deficit to surplus, and we would no longer need to borrow from foreign creditors.  End of problem.

Of course, today the New Zealand government is not running a surplus; it’s running a very large deficit.  But even if the government were running a surplus, I think we would still have a problem.  As we’ve seen in the last few years, sentiment in international capital markets can turn very sour very quickly.  As New Zealand’s dependence on the savings of foreigners gets greater and greater, there may well come a time when sentiment does turn very quickly; when quite suddenly neither the banks nor the government can borrow additional amounts; when overseas creditors decide not to reinvest maturing debt.  At that point, at least we know that, with a floating exchange rate, we would move relatively quickly into balance of payments surplus.  We would no longer need to borrow overseas; we would start repaying some of the debt.

But we also know – and were reminded of it during the Asian crisis of the late nineties – that that adjustment process can cause enormous economic and social disruption.  Yes, exporters start making good profits, and so do those producing import substitutes.  But those involved only in the domestic market find themselves buffeted by sharply increased interest rates and sharply reduced demand – a fall in the exchange rate, after all, improves the competitiveness of exporters and those competing with imports by sharply reducing the real wages of New Zealand workers.  Construction work stops in its tracks.   Half-built buildings become derelict wrecks.  Bankruptcies rise.  House prices fall sharply.  Mortgagee sales rise sharply.  Yes, the balance of payments deficit is gone, but at enormous cost.

So I worry about this ever increasing dependence on the savings of foreigners.

House prices

And what about the upward trend in house prices relative to household incomes?  Once upon a time, house prices in New Zealand averaged something like three times average household income.  But over the middle part of the last decade, house prices increased hugely, roughly doubling in real terms.

Real House Price Index

That’s an interesting graph.   The early seventies saw a strong increase in inflation-adjusted house prices, but this was completely reversed in the second half of the decade.  Then from about 1980 to around 2002, a period of 22 years, real house prices rose by about 60% (from about 500 to about 800 on the graph).  But then from 2002 to around the end of 2007 real house prices almost doubled in just five years.  Yes, they’ve come off a bit in the last two or three years but the annual surveys conducted by Demographia – run by Wendell Cox in the US and Hugh Pavletich here in Christchurch – have shown that today the median house price in most major New Zealand cities is over five times the median household income – and in both Christchurch and Auckland over six times.3

In my view, this huge increase in real house prices has been an almost unmitigated disaster.  No, not a disaster for those lucky enough to own residential property over the last decade, but a disaster from every other point of view. 

First, the enormous increase in house prices relative to incomes means that it’s become very hard for young adults to afford a home of their own unless they can get financial assistance from parents – which is fine for the children of the already-affluent, but a disaster for those without affluent parents and therefore a disaster for social mobility. 

Secondly, the fact that a large part of middle New Zealand has felt wealthier and wealthier as their homes have increased in value has meant that a great many New Zealanders spent well ahead of their incomes for years, building up a very substantial level of household sector debt, the counterpart of the huge overseas liability incurred by the banks.

Were this to continue, it would be bad news indeed, both for social mobility and for our external indebtedness.  Recent increases in average house prices, greeted with enthusiasm by the real estate industry and, no doubt, by all those owning residential property, suggest that we're about to get back on this escalator.  

But this is one trend which I suspect will not continue – or at least, it won’t continue for long, because I suspect that as house prices rise higher and higher relative to incomes there’ll come a point where the number of people who can afford to buy them reduces rather sharply.   That point could well occur when mortgage interest rates return to more normal levels.  And at that point there could be a rather nasty adjustment.

What we should do

Well, if we don’t like these trends – falling incomes relative to the rest of the world, rising government debt, rising dependence on the savings of foreigners and rising house prices – what should be done about it?

The 2025 Taskforce wrote two 150 page reports dealing with many of these issues, and I won’t try to summarise those in a few hundred words, but let me give you my own view of the priorities.  


To me, we need to make six fundamental policy changes.

First, we need to tighten fiscal policy – both in the short-term and in the longer-term. 

I don’t want to under-estimate the political difficulty of doing this.  The problem which the National-led Government has is that in the last few years of the Labour Government, that Government went mad with the cheque book – interest-free student loans, KiwiSaver subsidies, Working for Families, and all the rest.  And, despite criticising most of those programmes in Opposition, National has left them all largely untouched.  So between 2007/08 and 2010/11, while nominal GDP went up by $17 billion, core government spending went up by over $13 billion – absorbing nearly 80% of the increase in GDP.  And almost none of that increase related to the Christchurch earthquake!

It’s worth noting that, despite what the Government calls tight restraint on government spending, over the last five years New Zealand has had one of the very worst reversals in its structural fiscal position, from surplus to deficit, of any developed country.

So now the Government is left saving five million here and 10 million there – chicken feed in the overall scheme of things, given core government spending is expected to be almost $74 billion this year.  Indeed, despite May’s Budget being described as a “zero Budget”, core government expenses were projected to rise from $69.6 billion in the financial year just ended to $73.7 billion in the current year, an increase of almost 6%, driven by the higher cost of New Zealand Superannuation, higher finance costs, and a transfer of some earthquake costs from last year to this.

Let’s be grateful for small mercies.  Core government spending is projected to gradually reduce relative to the size of the economy over the next few years – from 33.8% of GDP this financial year to 30.2% in the 2015/16 year – and in principle that should leave a bit more room for the private sector to grow.

But there’s no sign that the Government is willing to tackle the longer-term fiscal issues.  Indeed, the Prime Minister continues to repeat his promise not to deal with these issues, certainly if it involves any change at all in the structure of New Zealand Superannuation.   It seems a tragedy that Parliament can’t reach a broad consensus on this issue, especially now that the Labour Party has recognised the inevitability of increasing the age of eligibility.


Second, we need to radically reform both the RMA and the Local Government Act.   

I know there are some very dedicated and hard-working people working throughout the local government sector, but I get anecdotes all the time about petty, interfering, bureaucratic little dictators, wanting to be involved in far too many aspects of life. 

Most Aucklanders know the story of the woman who’s been arguing with the Auckland Council for over a year because the Council wants to compel her to paint her white villa over-looking the Kaipara Harbour black or brown. 

I’ve recently encountered a similar story of bureaucratic absurdity myself: I wanted to replace a pot-belly stove in a small house on my kiwifruit orchard in Pukekohe with a modern, efficient, clean-burning, wood-burner.  I was told I needed to apply for a building permit, and that that required me to submit a complete plan of the house, showing doors and windows, along with elevation drawings.

From what I’ve heard, the citizens of Christchurch have many similar problems – indeed, I gather you’re not even allowed to have a wood-burner installed in your new home, no matter how clean-burning it may be.

Yes, taken in isolation these are minor anecdotes, but they reflect an attitude of mind, an attitude which says we in local government have the right to tell you how to deal with your own property, even where your actions have absolutely minimal effect on others.  And by the way, we have no intention of compensating you for that loss of your property rights.  It’s surely significant that the New Zealand Bill of Rights provides absolutely no reference to property rights, and I don’t doubt that that has a chilling effect on investment.


Third, we need to urgently overhaul our policy towards foreign investment.

Some years ago, we were known as a country which had a welcoming attitude to foreign investment.  No more.  That’s not entirely this Government’s fault – blame can be shared with Labour, Winston Peters, and the Greens.  But the OECD now ranks us as one of the least welcoming countries towards foreign investment in the world.  In their latest survey, we were seen as less friendly towards foreign investment than all of the countries in their survey except China, Iceland, Russia, Indonesia and Mexico.  We were ranked as more hostile to foreign direct investment than either India or Japan!  And that survey was taken before the nonsense about whether we should allow a Chinese company to buy some run-down farms from a bankrupt farmer. 

Our current policies in this area are marked by uncertainty and delay, with the strong suspicion that the Government will be more interested in placating ill-informed, if well-intentioned, film stars than doing what is best for New Zealand.


Fourth, we need to liberalise policy towards genetic modification. 

Unfortunately, we’ve created an environment in New Zealand which is actively hostile to many forms of research, particularly any research which might carry even a hint of genetic modification. 

Over the last 10 or 15 years, genetically engineered plants have become widespread around the world.  They are currently grown on more than 2 billion acres in more than 20 countries.  More than 80% of the soybean, corn and cotton acreage in the US in 2009 used genetically engineered crops, and any product that has beet sugar, soybean, or cane sugar in it in the US has an 85-95% chance of having some genetically modified content. 

In New Zealand, we have world class plant scientists, but our regulations around genetic modification are driving high value research in this area offshore.  The 2025 Taskforce was told of many examples of New Zealand scientists paying for research to be undertaken in Australia, Europe and the US because doing that is so much cheaper than meeting the regulatory requirements in New Zealand – including the cost of the delays caused by the need for almost interminable consultation. 

If we want to make the best use of our productive land, and our world-class scientists, we need to get the regulation of science substantially stream-lined and modernised.


Fifth, we need to look at a substantial reduction in the corporate tax rate.  And indeed, a substantial reduction of taxes on capital, and potentially their total removal, is now increasingly recognised in the economics literature as highly desirable if increased economic growth and employment is an important objective.  

Yes, the Government reduced the headline corporate tax rate from 30% to 28% in the 2010 Budget, but that Budget made a number of other changes affecting the tax paid by the corporate sector, so that the overall effect of the changes was, according to Treasury, equivalent to a 1% increase in the corporate tax rate.   Countries all over the world are cutting the tax applied to corporate profits.  We are no longer highly competitive on that front. 

(Incidentally, Treasury calculated that the overall effect of the tax changes in the 2010 Budget was likely to be an increase in the level of GDP of just 0.9% after seven years – equivalent to an increase in the growth rate of about 0.1% per annum!)


And sixth, we need to free up the supply of land in and around our major cities.   The recent report of the Productivity Commission noted that the land zoning policies of far too many local authorities not only hugely inflate the price of housing by pushing up the price of residential land but also make it more difficult for builders to get the economies of scale which easier access to land would permit. 4

And if confirmation of this effect of local authority zoning were needed, it was surely provided by Arthur Grimes and Yun Liang in their study of land prices in Auckland, published in 2007.  This quite remarkable study looked at the influence on the price of land of the Metropolitan Urban Limit imposed by the Auckland Regional Council.  This Limit required new residential subdivisions to be undertaken within an area defined by the ARC.  What Grimes and Liang found, after controlling for all sorts of other influences on the price of land, is that the price of land just inside the Metropolitan Urban Limit was between eight and 13 times the price of land immediately outside the Limit.5  And of course, the price of land just outside the Metropolitan Urban Limit is itself pushed up by speculation that, eventually, the Auckland Regional Council will be obliged to extend the Limit beyond its current boundaries, taking in land which is at present just outside the Limit.6

But, some will argue, won’t freeing up the availability of land lead to vast areas of urban sprawl?   Well, it would almost certainly lead to more new suburbs being built near our major cities because umpteen surveys have shown that New Zealanders – especially young New Zealanders with children – want to live in detached homes with a small area of garden.  But at the moment only some 0.7% of New Zealand’s land area is urbanised.   If we assume that our total population increases by 50,000 per annum for the next 50 years (and on present trends that seems unlikely), and they all lived in cities with the average population density of Christchurch before the earthquake, the total additional urbanised area would be less than 0.5% of our area.

It’s surely a tragedy, both socially and economically, that in one of the least densely populated countries in the world, people are being asked to pay upwards of $200,000 for tiny sections on the fringes of our major cities – equivalent to some $4 million per hectare.  (And we thought good quality dairy land at $50,000 per hectare was expensive!)

Compulsory saving needed?

I can almost hear people thinking “why doesn’t Don Brash talk about the need to encourage saving?   Surely, we need a compulsory saving scheme like Australia has?  How else can we reduce our dependence on the savings of foreigners and fund the additional investment which faster productivity growth will require? ”  

Well, certainly the balance of payments deficit is by definition the difference between what we save and what we invest.  A greater propensity to save would almost certainly help to reduce the balance of payments deficit, and so reduce our dependence on the savings of foreigners.

And successive governments have made timid steps to encourage more private savings.   The introduction of the PIE regime was one such step.  Perhaps Dr Cullen saw the introduction of the KiwiSaver scheme as another.  The increase in the rate of GST was a third.  But they have been timid steps, and at least in the case of KiwiSaver almost certainly not a contributor to national savings at all, with any small increase in private sector savings being fully offset by a reduction in government savings as a result of the subsidies.

Offsetting these moves have been policies such as the encouragement for students to borrow, by the waiving of interest on student loans, first while they were actually in study and then completely for students staying in New Zealand.  There’s plenty of anecdotal evidence pointing to this leading to less saving than would have otherwise been the case.

And again, the tight restriction on the availability of residential land, with the resultant enormous escalation in the price of housing over the last 20 years, has almost certainly had a highly negative effect on attitudes to saving, as I’ve already mentioned: why save, when you’re becoming rapidly wealthier by simply buying as much property as possible with borrowed money? 

Certainly, the latest data show no appreciable increase in national saving, as a share of GDP, in recent years.  The saving ratio remains significantly below its level in the first half of the last decade.

So do we need a compulsory savings scheme, as the Labour Party – and of course every funds management company – are advocating? 

I don’t support compulsory saving.  For me, that’s partly a question of principle: I believe in allowing people as much freedom as possible to do what they wish with their own lives.

It’s also entirely unclear what is bought at the price of compulsion.  “More saving” is what the supporters of compulsion argue.  But that’s by no means clear.  

For some years after the introduction of the Australian compulsory scheme in the early nineties, the Reserve Bank of Australia was not persuaded that the scheme was having any significant effect on saving, with money going into the scheme being diverted from other forms of saving.  There now seems to be a growing consensus that the Australian scheme has in fact had some positive effect on the household saving rate, but it’s salutary to note that the 2010 Australian Budget, which increased the employer contribution to their compulsory superannuation scheme from 9% to 12%, estimated that the effect of this quite major change would be to increase national saving by a mere 0.4% of GDP by 2035, suggesting that the overall effect of the compulsory scheme might be to have boosted national savings by no more than perhaps 1.5% of GDP.7

It is also worth noting that Australia has a much higher proportion of its elderly population living in poverty than New Zealand does.  Indeed, only 2% of New Zealand’s population over the age of 65 is classed as living in relative poverty by the OECD (the lowest fraction in the OECD), whereas the equivalent figure in Australia is 26% (the fourth highest fraction in the OECD).8

For most people, by far the most sensible way of saving is paying off the mortgage.  I know of no fund manager who can consistently generate a post-tax, post-fees, return equal to the interest rate on the average home mortgage.

So let’s not go the compulsion route.


I believe the six policy measures I’ve proposed would go a very long way towards changing the four trends which are leading us to disaster.

  • Productivity growth would be encouraged by all of the measures I’ve proposed – smaller government providing more space for the private sector to grow; reformation of the RMA and Local Government Act removing the bureaucratic obstacles which stifle so much investment now; a more welcoming environment for foreign investment and a much  lower corporate tax rate leading to more investment; a modern approach to research in the biosciences enabling us to capitalise on our productive land and world-class scientists; and a freeing up of supply constraints on the availability of land leading to both a reduced price of land and a redirection of saving from property speculation towards more directly productive investment.
  • Our serious long-term fiscal prospect would be substantially alleviated if Government were to make a commitment to deal with the implications of our gradually ageing population – and of course, some of our future debt problem would be helped by faster economic growth (though not the increasing cost of New Zealand Superannuation, because NZ Super payments rise with increasing incomes).
  • Our steadily increasing dependence on the savings of foreigners would be helped by both fiscal restraint and the freeing up of the availability of residential land.  

Fiscal restraint would reduce our dependence on foreign savings in two ways – one with quite immediate effect and the other with longer term effect. 

If fiscal policy were significantly tighter than it is now, inflationary pressures would be less than they are and the Reserve Bank would be able – actually, the Reserve Bank would be obliged – to cut the OCR.  Yes, at 2.5% the OCR is already the lowest in our history, but it’s also the second highest in the developed world (Australia’s OCR is higher of course).  If the OCR were at, say, 1% instead of 2.5%, there can’t be much doubt that the exchange rate would be lower than it now is, with consequential improvement in the balance of payments deficit.

And if the Government were to make a credible commitment to solve the long-term fiscal challenge, it would be clear that New Zealanders would need to start saving more to provide for themselves – for the tertiary education of their children, for their retirement, and potentially even for their own healthcare.  That too would assist the balance of payments, and lead to a reduction in our dependence on the savings of foreigners.

  • Freeing up the supply of land in our major cities would have many social advantages and would contribute mightily both to a reduction in our dependence on the savings of foreigners as I’ve mentioned (because we’d no longer be able to keep spending well beyond our income, in the belief that we didn’t need to save because of the increase in the value of our largest asset) and to improved productivity growth to the extent that more of our savings would be channelled into more directly productive investments.

I suspect that the Minister of Finance, at least, understands these issues very well.

So why doesn’t he do something about it?  The problem, of course, is entirely political.  And tragically for all of us, the political problem stems in significant part from widespread public ignorance fostered by petty politics, and by media driven as much by selling advertising space as by any desire to inform.

The public debate on the sale of the Crafar farms was extraordinarily depressing, displaying not only crude racism but also profound ignorance of the benefits of foreign investment.

Likewise, the debate over the partial sale of four SOEs.  Some of you may have seen the leader of a small political party interviewed on TV a couple of months ago.  He was arguing against the sale of shares in SOEs because, he said, some of them made a return on equity of 22%, whereas government could borrow money at 4%.  Why would the government voluntarily give away 22% when they can borrow at 4%?

I would have been shocked by that argument – rather than just depressed – had I not heard the same argument made at an all-day seminar hosted by one of the Big Four accounting firms shortly before the election, not by one of the very small political parties but by the finance spokesman for one of the largest parties in Parliament.   When it was my turn to speak, I pointed out that the argument was totally flawed, because of course the Government is not going to sell its shares to yield an investor 22%.  They’ll sell them to yield, say, 4%, so there’s no sense in which the Government is giving away 18%.  I thought that that was so obvious that it needed no elaboration, so I was dismayed to be phoned by a journalist in the evening – and he’s a very sophisticated journalist who’s been around Parliament for many years – with a request to explain that to him more fully.

Ladies and gentlemen, if New Zealand is to have any future as a prosperous country, a country to which our children and grandchildren will want to return after they’ve seen the world, you, and people like you, have a responsibility to explain some of the facts of life not just to your professional colleagues, but also to your family, your friends, your barber, and indeed everybody else you come in contact with!   If we fail to do that, we should not be surprised if our grandchildren grow up cheering for the Wallabies.

1 IMF estimates for 2011, from World Economic Outlook, April 2012.

2 Fiscal consolidation: How much, how fast and by what means?, an OECD Economic Outlook Report, April 2012, page 10.

3 8th Annual Demographia International Housing Affordability Survey: 2012, data from third quarter 2011.

4 Housing Affordability Inquiry, March 2012, Productivity Commission.

5 Spatial Determinants of Land Prices: Does the Metropolitan Urban Limit Have an Effect?, Motu Economic and Public Policy Research, August 2007.

6 The Productivity Commission compared the price of land 2 km within the Auckland MUL to the price of land 2 km outside that Limit, and found the multiple of inside to outside prices was nearly nine in 2010.  Op. cit.

 7 A recent Australian study concluded that “despite the introduction of a compulsory savings regime through the super guarantee,  … Australians are saving less than their global counterparts.  In 2007 Australians fell behind most OECD nations with a debt to income ratio of 158 per cent.  Only the United Kingdom was worse off at 186 per cent.”  Saving Tomorrow: the saving and spending patterns of Australians, AMP.NATSEM Income and Wealth Report, April 2010.

8 Pensions at a Glance 2009op. cit., page 64.

25 July 2012.
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