Is New Zealand’s lack of saving an issue?

According to the Westpac publication “Economic Overview” it is debateable as to what is the saving issue New Zealand is trying to address:
* a lack of saving that limits growth
* a lack of saving that impacts on external debt
* a lack of saving that impacts on those reaching retirement age
* a lack of saving that affects domestic capital markets
* a lack of saving that affects the government budget especially with an ageing population

Although our saving rate is low compared to other OECD countries – 22nd out of 28 countries – saving is not a reliable indicator of economic growth. For instance look at the following examples:
Japan has had a high rate of saving and low economic growth
USA is a rich developed nation but has a poor savings record
Developing countries tend to have good savings rates.

Even our low saving rates hasn’t impacted greatly on investment as there has been open access to capital markets worldwide and NZ’s gross investment has averaged close to the OECD mean (22.5% of GDP). What has been the issue is the poor quality of investment – we have high residential and government investment, but relatively low business investment.

Poor quality invesment and significant foreign debt does leave NZ exposed to an external funding shock. But the best defence in this situation is a floating exchange rate (unlike the Euro zone countries). If NZ looks a dodgey investment the interest we pay will go up but the subsequent drop in the exchange rate will make our exports more competitive. According to Niall Fergusson (author of Ascent of Money and a Harvard Professor) a funding crisis is caused by:

1. Excessive debt
2. Excessive interest payments
3. Excessive reliance on foreign capital
4. Low GDP and investment
5. Political – government deficits
6. Irrational exuberance

How does a country get out of an extreme debt situation? As stated in the ‘Economic Overview’ there are a few options:
1. Cut spending to fit income
2. Lower interest rates
3. Bailout
4. Print money and deflate debt
5. Default
6. Generate a higher growth rate of GDP

For NZ the options are cut or go for growth. However policies that focus on higher savings are at high risk of failure. Better to have greater emphais on quality investment that can generate income and hopefully saving. However, our debt is mainly private rather than government which is the only redeeming quality.

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