The same old formula has played out again: National appoints an expensive, hand-picked working group (this time, the Savings Working Group). The working group comes up with predictable and disappointing recommendations. National rejects extreme recommendations out of hand, making it appear moderate, and does what it was always planning to do. None of which will help saving.
It seems fairly clear that the Nats intend to put interest back on student loans for graduates and cancel the remaining government contributions to Kiwisaver, while making it compulsory or as good as. On the flipside, they Op remove taxation of interest up to the rate of inflation or some other kind of reduced taxation of interest. I’ve said before that, while that is a good idea in principle, it would primarily benefit the well-off. And that’s not good enough when the money comes from cutting assistance to new graduates and Kiwisavers.
Now, while more savings are good, lets not be fooled into thinking there’s a savings disaster unfolding. The country’s indebtedness to the rest of the world has actually fallen from 93% to 85% of GDP since the recession began. Mortgage borrowing is shrinking. Government debt set to peak in four years and then fall. But more savings are good and if National really wants to raise savings levels, the solutions are in its hands. Here they are:
1) Restore the Kiwisaver rate to 4%, at least raise the employer contribution level to 4% (remember, in Australia, it’s 9% – all from the employer). That wouldn’t cost the government a cent but would dramatically improve the net wealth of Kiwi households. It works for Aussie – aren’t we meant to be catching them? Then why not do what they do.
2) Restore Cullen Fund contributions too. Remember, by suspending contributions, the government isn’t actually avoiding expenditure, just pushing it into the future. The Cullen Fund formula means that if we don’t contribute now we contribute more once contributions resume and, anyway, since the Cullen Fund will start paying out for superannuation in 2030, any money that isn’t in it will just come out of taxation in the future.
Moreover, canceling contributions has been an enormously expensive mistake. If contributions hadn’t been canceled, the Fund would be $135 million larger over and above the cost of borrowing by now. A Treasury leak says the loss will be $8 billion by 2022. By canceling Cullen Fund contributions when assets were going cheap after the global financial crisis, National committed an act of economic vandalism on a scale we haven’t seen since the days of the Neoliberal Revolution.
3) Don’t sell our assets. Selling public assets will only push up our debt as the lost profits exceed the government’s cost of borrowing.
4) Start buying New Zealand back. The biggest driver of international debt is profits going overseas. Foreigners made over $15 billion on their investments in New Zealand last year, while we made less than $5 billion on our investments abroad. The crucial thing is that our return on investment is lower. Foreigners made a 5.2% return on their investments in NZ, we made 3.6% on our investments abroad. That’s because we own lots of foreign government bonds, while they own lots of our most profitable companies.
The government should create a national wealth fund, pooling money from the Cullen Fund, Kiwisaver, SOE dividends, and individual savings accounts through Kiwibank (it would be up to the individual to choose to put their Kiwisaver and other savings in the Fund). The Fund would be mandated to invest in assets of strategic importance to New Zealand, enhancing our economic sovereignty and lessening the flow of profits off-shore.
The private sector is useless at creating good savings/investment opportunities, which is why the rich are so keen to get their mitts on our public assets. Only a government-led initiative like the national wealth fund is going to really drive savings up. And it would be cheap because there’s no extra spending apart from the renewed Cullen Fund contributions (which are making us money anyway) and the diversion of some of the SOE dividends to re-investment. Any funding gap could be easily filled by giving the Emissions Trading Scheme its teeth back and removing the hundred billion dollar subsidy National created for polluters.