In terms of economic strategy, the emphasis this year is likely to be on two major areas of ongoing weakness in an otherwise very strong game. These are:
There has been an ongoing debate over the relationship between domestic savings rates and economic growth.
The neo-classical position argues that so long as you can readily access someone else’s savings it does not matter how much you save yourself. Not surprisingly, this argument has held sway in the United States, which has never had any problems dipping into the savings of others, whether the Japanese or the Chinese or the Arabs or the European pension funds.
The opposing argument is that the US experience cannot be automatically replicated elsewhere.
It points out that growing economies other than the US, such as much of Western Europe, China and Japan, tend to have higher rates of domestic savings.
Indeed the US is starting to realise that there is a limit to how long foreign investors will continue to fund their deficits.
Hence the Bush administration’s suite of initiatives to support an ‘ownership society’. Even they seem to be learning that tax cuts are not self-financing.
Partly this is a matter of increasing the size and depth of the domestic capital market.
But it is also about the positive side-effects of having a larger proportion of the population with stake in the market, and a stake that extends beyond the housing market.
As David Skilling of the New Zealand Institute has put it: Asset ownership is increasingly important for meaningful participation in society and the economy.
Ownership enhances the ability of people to access opportunities and to invest in the future – by buying a house, financing education and so on – and allows people to cope with shocks.
Assets provide greater security, control and independence. A broad distribution of ownership also generates enhanced social cohesion at a national level, and ensures that more New Zealanders obtain the benefits of economic growth.
If we just look narrowly at the Australian experience of compulsory workplace superannuation, there is now a greater level of financial literacy amongst the Australian population, and arguably a greater appreciation of the skills needed to create and manage wealth.
The jury is still out on exactly how all the causal links work: what type of economy is most likely to benefit from domestic savings; how saving for a first home or for an education links into retirement savings, and so on.
So what might we see in the budget regarding savings?
In general we will see a savings package that is designed to facilitate rather than to coerce and to “be there” through the individual’s full life cycle: through the years in education and training; through the establishment of a family and the acquisition of a first home and, finally, through retirement.
But the resources available to support these aims will be limited. A number of things have already been signalled, and the budget will provide more detail:
Outside of the budget, as many of you will be aware, the Taskforce on the Regulation of Financial Intermediaries is due to report mid year. This will address many of the concerns raised about the retail savings industry such as problems of conflicts of interest through commission-driven agents, transparency around fees and around the roll up of savings products with insurance products.
Clarifying the situation and taking action if necessary is an important priority, since a corollary of encouraging New Zealanders to save more is ensuring that we have a high quality retail savings industry.
That means an industry that provides a range of products suited to local conditions, that operates transparently and applies a high level of expertise while charging competitive fees.
This is an extract from a speech Finance Minister Michael Cullen made to Chen and Palmer on February 21.
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