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Brash would back a mandatory savings scheme

Reserve Bank governor Don Brash supports the idea of a mandatory savings scheme.

Monday, August 13th 2001, 3:50PM

Before concluding, let me talk briefly about the role which increased national savings might play in helping us to increase New Zealand's economic growth rate.

Briefly because I am not at all sure what role national savings play in economic growth in a world where capital is free to move from country to country.

We know that Japan has one of the highest savings rates in the world, but has had one of the worst growth records in the developed world for more than a decade.

We know that the United States and Australia have had rather low national savings rates in recent years, but both countries have grown strongly.

We certainly know that savings which are channelled into investments which yield little or no growth are of no benefit.

On the face of it, our own national savings performance has been poor over several decades, and that has been reflected in persistent balance of payments deficits over more than a quarter of a century - and very high private sector levels of indebtedness to foreign savers as a result.

We know that, because of our heavy dependence on the savings of others, a significant fraction of the total output produced within New Zealand now accrues to those foreign savers.

We know too that we probably all pay somewhat higher interest rates than would otherwise be the case because of the risk premium which foreign lenders charge as a result of our heavy dependence on the savings of others.

But even if we were sure that improving our savings performance was a vitally important ingredient in improving our growth performance, or our standards of living more generally, nobody knows for sure how best to do that.

In recent years, successive governments have sought to contribute to an improved national savings performance by running fiscal surpluses, though there is no certainty that that increases national savings in total - the possibility is that increased public sector savings may be offset by reduced private sector savings, perhaps because of enhanced public confidence that taxpayer-funded retirement income is assured.

What about special tax incentives for retirement saving? Alas, there is little evidence that such incentives have any significant effect on national savings - to the (limited) extent that they increase private sector savings, they may well simply produce an offsetting reduction in public sector savings (because of the reduction in tax revenue required to provide the incentives). They also tend to be quite regressive, in that most of the benefit of the incentives goes to those on the highest incomes, who might well be savers even without the incentives.

It is possible that some form of mandatory savings scheme might produce an increase in national savings.

It is hard to avoid the conclusion that Singapore's breath-taking savings performance over several decades is related to the very high level of mandatory savings required by that country's Central Provident Fund. But on the other hand, it is not yet entirely clear that Australia's more modest mandatory savings scheme is having a marked effect on Australia's savings performance, although it is clearly having an effect on developing a pool of institutional savings.

On balance, I would probably be a supporter of some kind of mandatory savings scheme as one contribution to improving our growth performance.

But the case is not yet conclusively proven, and I would prefer to see more informed debate on the subject (as distinct from the substantially ill-informed debate of the kind we saw when this matter was last on the public agenda in 1997).

One thing is clear however: we can not afford to lament the extent of foreign investment in New Zealand, and more generally the extent of our dependence on the thrift of foreign savers, unless we are also willing to save more ourselves. Our high level of dependence on foreign capital, year after year, is simply the other side of our lousy savings performance.

This is an extract from a speech Reserve Bank governor Don Brash gave to the Knowledge Wave conference. His comments are personal views and not necessarily those of the Bank.

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AMP Home Loans 7.24 5.79 6.39 6.65
AMP Home Loans $200k+ 7.14 5.69 6.29 6.55
AMP Home Loans LVR <80% - - 5.85 6.29
ANZ 6.74 6.15 6.49 6.49
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ANZ Special - 5.75 5.99 -
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BNZ - GlobalPlus 6.74 5.99 6.39 6.59
BNZ - Mortgage One 7.15 - - -
BNZ - Rapid Repay 6.74 - - -
BNZ - Std, FlyBuys 6.74 5.99 6.39 6.59
BNZ - TotalMoney 6.74 - - -
Credit Union Auckland 6.70 - - -
Credit Union Baywide 6.45 5.90 6.50 -
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Credit Union South 5.75 - - -
eMortgage 6.04 6.15 6.69 7.19
Finance Direct 6.10 6.45 6.69 7.10
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General Finance 5.95 6.25 6.50 7.10
HBS Bank 6.15 5.85 5.99 6.19
HBS Special - - - 5.89
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Heretaunga Building Society 6.70 6.00 6.50 -
Housing NZ Corp 6.74 5.99 6.39 6.59
HSBC Premier 6.84 5.95 5.95 6.39
HSBC Premier LVR > 80% - 5.75 5.75 5.75
HSBC Special - - - -
ICBC 6.75 5.99 6.39 -
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Kiwibank 6.65 5.79 6.39 6.65
Kiwibank - Capped 5.65 6.50 - -
Kiwibank - Offset 6.55 - - -
Kiwibank LVR > 80% - - 5.89 6.19
Liberty - - - -
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SBS Bank 6.15 5.85 5.99 6.19
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SBS Bank Special - - - 5.89
Silver Fern 5.95 6.10 6.55 7.05
Sovereign 6.85 6.09 6.40 6.65
Sovereign Special - - - 6.19
The Co-operative Bank 6.70 5.95 5.99 6.19
TSB Bank 6.74 5.95 6.19 6.30
TSB Special - - 5.79 -
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