The Reserve Bank assistant governor John McDermott in NBR Lifting national savings rate best way to drive down kiwi, says we have an over-valued kiwi dollar because we don’t save enough.
The argument is that the persistent gap between savings and investment, means foreigners savings must flow in to fund the gap and that flow pushes up interest rates and the exchange rate. To tackle “our reliance on foreign savings to finance our consumption and investment,”
McDermott also said: “Addressing the residential investment needs of a growing population and increasing the incentives for private sector savings, such as the tax treatment of investment income and issues around the long-term design of public and private pension systems, are the sorts of issues that need to be debated to see what would work best in New Zealand.”
The answer for McDermott seems to lie in treating income from saving preferentially.
There is another reading of our situation. Much of the foreign money flowing into New Zealand is not funding the savings gap or helping increase real investment, but is driving up the costs of existing housing and keeping the exchange rate artificially high. This inflow is the result of inadequate domestic policies on purchase of homes and generous tax treatment of holding property.
In this environment, subsidising the returns to particular forms of financial saving is pointless and likely to make things worse. Tax revenue and government saving will fall, and eventually private saving will fall as people spend their subsidised saving.
If saving more is the answer, the way to close the gap is for the state to save on our behalf by, for example, reducing debt, building infrastructure or improving our education system with higher taxes. In this way no increased private claims on resources are created.
But saving more, whether private or public, may be dangerous in a less than fully employed economy. There needs to be a better deployment of resources. The New Zealand ‘free for all’ housing market needs urgent reform. Then, speculative money may exit New Zealand and the exchange rate will adjust downwards encouraging sustainable exports and discouraging imports. Interest rates can be higher than they otherwise would be, helping dampen the housing market.
McDermott’s suggestion to lower the tax rate on income from saving would actually intensify already worrying levels of inequality. This is both because tax breaks are greatest for those with the highest savings, and because the gains for high wealth individuals compound over time. It would also reinforce the damaging message that passive activity such as holding a KiwiSaver account is of more value than getting income from working. We might not have much to thank the Rogernomics revolution for, but an important legacy is the ideal of comprehensive income taxation, where income from whatever source is treated the same for tax purposes.