Speech – New Zealand Labour Party
New Zealand’s structural economic problems will not fix themselves. Structural problems need structural solutions. Change nothing and nothing changes. [Full speech with charts: David_Parker_speech.pdf]
Associate Finance Spokesperson
Thursday 27 October, 2011 SPEECH
New Zealand’s structural economic problems will not fix themselves. Structural problems need structural solutions.
Change nothing and nothing changes.
Labour has already announced significant changes to monetary policy and to the tax system to drive investment capital into productive exports and jobs.
Today’s announcement will help build the private savings we need to secure our future.
Europe has a government debt crisis. New Zealand doesn’t, because the last Labour government ran surpluses in the good years (which National opposed). It is salutary to reflect on where NZ would be had we done what the governments of the UK, USA, Japan and much of Europe did – run deficits in the boom years.
Labour was fiscally responsible.
But New Zealand’s long term trend of rising private indebtedness and asset sales requires action. We do have a serious private debt problem, which the global financial crisis has laid bare.
For decades we have imported more than we export.
The hole has been plugged by borrowing from overseas and selling NZ assets to overseas buyers.
Private debt has soared and New Zealand ownership of our assets declined. It’s set to get worse.
There have been only short periods during the last two and a half decades when private overseas debt has decreased. The longer term trend cannot be denied.
If we change nothing, nothing will change.
The current account deficit and the negative net investment position projections in the pre-election fiscal update prove this.
We know, from the government’s own predictions, that under present settings our current account deficit remains negative and each year New Zealand will borrow more money, sell more assets and get poorer.
Even before the recent credit downgrades, New Zealanders already paid persistently higher interest rates than are the norm in many other countries. These higher interest rates impose significant costs on our economy. New Zealand exporters are at a disadvantage against overseas competitors who can fund their activities at a lower cost. New Zealanders also pay higher interest rates on their mortgages and credit cards.
Foreign investors with access to cheaper capital have a distinct advantage over any New Zealand party forced to borrow at higher rates when bidding for New Zealand business. Other factors being equal, the overseas purchaser can afford to pay more than a New Zealand buyer sourcing its funds from New Zealand lenders. This is not in our national interest.
To reverse the trend of rising private debt and higher interest rates New Zealand needs to increase private savings.
Sometimes we over complicate issues. Put simply, New Zealand needs more people saving more.
In the last three years the wage gap with Australia has grown ever larger. Month after month record numbers of New Zealanders are heading to Australia. Why? To seek jobs and higher incomes.
So what is it that those clever Australians are doing better than us? It’s not the rugby. These days it’s not even really the cricket.
A significant part of the answers lies in savings, and the investment capital that Australian owned businesses can access at affordable rates.
Higher levels of savings in Australia have resulted in higher levels of investment in Australian businesses.
Not only has Australian per capita GDP risen to far higher levels than in NZ, but their net investment position as a percentage of GDP is markedly better (as at June 2011 NZ’s is negative 70% of GDP compared with Australia negative 56% of GDP. Ours is set to decline further. There’s isn’t.).
For those who doubt that Australia is better placed because of their savings record, reflect on the fact that Australia owns their own banks – plus ours. In recent years the profits of those top 4 banks in New Zealand have exceeded the total profits of the rest of the NZX50.
The simple fact is that Australia and the Asian tigers save more than we do in NZ.
This graph shows how since 1992, when Australia introduced compulsory savings, Australia has consistently saved more than NZ.
Annual household savings as a percentage of household net disposable income in Australia and New Zealand (Source – Source – Australian Bureau of Statistics and Statistics New Zealand)
Long term problems need long term solutions
The rate of increase in savings needs to be moderate.
The 0.5% per annum increase proposed is how savings were improved in Australia.
This allows real incomes, after savings are deducted, to increase even while the savings build.
The gradual increase avoids cost of living pressures for savers, and also avoids the wider recessionary effect a sudden increase to the rate of savings could cause.
Universality becomes more important as the rate of work place savings increases. Having everyone in avoids creating an incentive amongst employers to avoid employer contributions by preferring to employ people who are not savers.
I will say only one thing about the age of eligibility for superannuation. Any government or party that pretends to deal with government spending or welfare reform without addressing the age of eligibility for NZ Superannuation is deliberately ignoring the most important point, and should be judged accordingly.
The projected annual increases in private savings, once the universal KiwiSaver reaches maturity, are very substantial. Using the approach adopted by the savings working group, New Zealand’s net international investment position improves by 17% of GDP after 20 years.
With more capital available for investment, productivity, profits and wages will increase. NZIER have estimated wages will increase by an additional 7% over 15 years if private savings substantially improve.
The effect on annual savings is impossible to predict with precision. If we use the assumptions*** used by the Savings Working Group, by 2025 total net savings from Universal KiwiSaver are estimated to be $4.4 billion per annum compared with under a billion per annum under current settings.
Labour is willing to pull the levers to improve our economy that only a government can. This is how structural change occurs.
Combined with changes to monetary policy, the R&D tax credit, and our capital gains tax, Labour’s policies will grow our export economy and secure the future for current and future generations.
Otherwise, New Zealand gets poorer.
*** The assumptions used by the Savings Working Group are that 37% of the members contributions are additional (i.e. not a substitute for other forms of savings) and 33% of the employer and government contributions are additional.
[Full speech with charts: David_Parker_speech.pdf]