Subsidising the rich to save New Zealand is voodoo economics.



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.

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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.


  1. “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” – this is completely wrong! Reducing government debt actually decreases private sector savings.

    • “Reducing government debt actually decreases private sector savings.”
      Would you explain why you think this is the case? Thanks.

      • I puzzled over this comment too. It may or may not be true, but where’s the argument; what is the the case to be made?

      • I think what they’re getting at is that, for the government to reduce debt, they must be running a budget surplus. If the government is running a budget surplus, they’re pulling more money out of the NZ economy than they’re putting back in. This decreases the money in circulation, hence decreases the amount that can be saved.

        Of course, the whole thing is much more complicated than that. It depends where government is taking money from and putting it back in, and of course in the post-Rogernomics error, overseas ‘investment’ has a huge impact as well. But I assume that’s the just of it…

  2. I really wonder about the competency of some of the senior civil servants at times. I think they are also inclined to not tell the government things they think the government does not want to hear. It may not entirely be their fault if the government has created the wrong environment but sometimes it is fear.

  3. In a country where 97% of the money in circulation exists purely as a function of bank lending, any increase in savings would decrease the money supply and cause job losses, recession etc. These (so called) public servants have been educated into a system that has already failed and the only reason they cannot see a plan B is that they have been told it does not exist. They need to go.

  4. Interest rate on savings – from below one percent to around four or five percent. Lowest level of tax snatch – 10.5%. Punished for prudence and putting money out to work.

    Tax rebates for those not deserving of WFF and not in biz? A bit of fairness? ‘Rewards’ for being Good Citizens? Zilch.

    Minimum amount for making a term deposit? No less than $2000. And low interest rates while nourishing the nest egg to investable size. Barely worth it.

    On a benefit and saving? Idiot! Your prudence will be punished if you ‘earn’ over a miserable amount in pre-tax interest. Even if you didn’t mean to, or expect to.

    And the fools bang on about ‘saving for your retirement’, ‘spending not saving – naughty!’

    The same species that includes Dear Rodney Hide who claimed that people who put their money into Bridgecorp to get half a percent higher than the banks were offering were Greedy!

    ‘Diversify! Manage your money!’ but no one managed the entitled ones running the scams – and hundreds of people went into poverty after decades of scrimp and save to ‘take care of retirement’.

    (Who lost? Often people who preceded the dreaded Baby Boomers. You know, the ones who survived the Depression of the 30s and the Second World War. They’re the ones who lost their little nest eggs – through being ‘prudent’ and ‘independent’.)

    The state can’t save on our behalf. Their ‘debt’ isn’t excessive. The private sector’s is. But they can use their tax take a lot more prudently and make it a great deal easier for private citizens to keep their few and hard-won gains.

    • ANDREA: Quoted from your comment:
      “The state can’t save on our behalf. Their ‘debt’ isn’t excessive. The private sector’s is. But they can use their tax take a lot more prudently and make it a great deal easier for private citizens to keep their few and hard-won gains.”

      This “private” debt is not necessarily the “business” and “corporate” sector debt that is the biggest share of national private debt. See this link and info, whether you like to read it or not:

      Also of interest to note is:

      “Migration and house prices”

      “The history of house price increases and net migration flows in New Zealand is shown in Figure 4.3.

      The relationship between migration flows and housing prices has been analysed by Coleman and Landon-Lane (2007). They found that a net immigration flow equal to 1% of the population (10 per 1000 inhabitants) is associated with an approximately 10% increase in house prices. This relationship has existed since the 1960s. Limiting immigration swings could therefore lead to a substantial reduction in future house prices and housing debt.”

      So we have a situation where New Zealanders borrow at higher than international average interest rates from mostly overseas owned banks, to pay for their roofs over their heads!

      And even a slight growth in migration can have a big impact on housing also. New Zealand is also one country that is very liberal towards off-shore buyers, who are not citizens, residents or live here, to be able to “invest” in property here!

      Property investment is the preferred “retirement investment” for many here, so this money (invested often by high interest credit) is used for little “nest eggs” by some, who can get the cash together for a deposit, and that money does not go into the productive economy.

      That means New Zealand needs to borrow yet more from overseas, to get the money for other investments apart from housing. The National led government has an interest also to look after those small time, and only in some cases larger scale property investors, as they are their most likely voters. Keeping the dream of owning your home PLUS an extra investment alive, that keeps people working, borrowing and investing, paying heaps, and then still voting National.

      It is again “stupid” economics, and it is time that New Zealanders realise, it would be cheaper to have the state launch a large scale housing program, for more affordable, good and secure state housing for those that cannot afford any homes, and also help middle class persons to get more affordable homes. This would reduce the debt burden and make available earnings and savings to go into productive activities.

      But as some middle class “nest egg holders” may lose a bit of value on their existing homes, National want none of it, as this would cost them votes.

      It is insane what goes on in New Zealand. People borrow highly to be housed, and if they cannot afford it, they pay huge rents (higher than in many other countries) to landlords, to afford them returns on their already subsidised investments, and a nice retirement.

      Migration adds to all, as stated, and it is time, to stop non resident buying, and to perhaps even expect new migrants with wealth or substantial savings, to pay a levy towards a housing scheme, if they want to buy their own home here, say within the first five years.

      It is up to people to decide, but too many seem to not understand, and vote accordingly, maintaining a catch22 scenario. So far many of you are paying heaps and extra, to simply reward foreign owned banks, for the homes you try to buy with ever rising house prices.

  5. Again, all this talk of interest rates, e.g. should they be low or high, inexplicably completely ignores the elephant in the room, which is that the ENTIRE economy is, by definition, a balance sheet. When interest rates are cut, INTEREST is lost. The lost interest is NOT spent into the economy because it was never collected by the savers. None of the chicanery that the central banks undertake have, over the long term, any effect whatsoever. All the Government and central banks can do is shuffle production/money around, either physically (via taxes and QE) or with time (via deficit spending, low interest rates). However they can not, no matter how much you wish they could, CREATE wealth out of thin air. Not with QE, not with taxes, not with low interest rates, and not with deficit spending. It is a ZERO SUM GAME. Mathematically is HAS to be so.

  6. Ok . Here goes .

    The reason our economy is bewildering and the reason we have child poverty and the reason we have a vast , festering , gaping wound of debt between the indebted rich and the cash strapped poor is because of an epic swindle .

    The farmer has been politely parasitized by a select few to such an extent it’d make your eyes water to know the Truth .

    As Farmers struggle under a system so cunning you could pin a tail on it and call it brilliant , the perpetrators have to borrow money off shore to keep the vast majority of us non farming people quiet , non questioning and under control .

    Our entire financial system , our entire political system , our entire legal system and our entire Urban culture is a lie .

    There , I think that about covers it .

    Any questions ?

  7. The core issue is “dumb economics”, run by “dumb governments”, or rather governments that are narrow mindedly focused, same like the privately educated careerist following the ideology taught her or him, that is supposed to deliver the biggest rewards for the individual making decisions. “Me” first, and stuff the rest is the motto. Use the rest to make MYSELF rich and successful, is the recipe that has been followed and applied.

    There was this crazy debate in the early 1990s about New Zealand’s “competitive advantage”. The debate was dominated by the neo-liberal oriented, the pro privatisation, pro overseas investment, pro asset sales and “laissez faire” believers, adhering to the “free market will fix all” ideology. They were largely known as the “Chicago Boys” from the economic school of thought at that University in Chicago, and their followers.

    The then National government wanted to take the ride further than Roger Douglas had anticipated, and Ruth Richardson, Shipley and others were the pace setters, led by one Bolger, who was as “smart” as a potato with short legs and a tiny head.

    It was another socio economic experiment tried here, in the socio-economic lab called “Niu Zilliland”.

    What came out of it was: Focus on more cows, more sheep, more lambs, more milk powder, more cheese, more butter, more meat, wool, more raw logs, more fruit, more wine, more raw fish and so forth, to be exported, for others to do more with it. They also recommended expansion of tourism and gradually training and teaching foreign students here, to take their skills overseas to do stuff with.

    So we had New Zealand train and educate their own, and those temporary students from abroad, to do the smart things elsewhere. Yes, doctors, nurses, teachers, engineers and scientists have over the years left New Zealand, as other countries followed “smarter” economics and paid more and did more with the work force.

    New Zealand has stuck to mainly primary production and exporting, and it competes with many other countries doing the same. Of course NZ Inc is good at it, but it has not helped lifting wages and incomes that much, and working conditions have deteriorated, leading to deaths in forests, mines, on farms and building sites, that should not happen. There was the creation of the multi billion costing “leaky building” crisis, there was a sell off of companies, shares and other assets, of land and real estate and it continues til today.

    We are told the “brighter future” demands a more of the same approach, for us to blossom, but few now are convinced of this.

    All this had filled the pockets and expensive wine cellars of a few, but left too many struggling. Most drive second hand Japanese cars that are not allowed anymore on Japanese roads, due to poor technical and emmission standards that are long outdated. We have issues with healthcare, and welfare gets hammered with reforms and planned cuts, by pressuring sick and disabled to look for jobs, same as sole parents with little support.

    The income gap has grown, many struggle to pay bills and rent, or the mortgage, despite of comparatively low interest.

    Savings from what, I ask? The problem is the country has been sold out, and thrown into a pit of disowned slaves, to work and pay their way out of it, which is impossible now. Hence the dependence on overseas finance or investment and the resulting high dollar.

    It requires government intervention, not more bullshit economics, as leaving it to the global market will see this country be sold out totally soon. Regulations, capital gains and a higher income tax rate, development of a value added domestic economy, keeping skills here, and producing products and services that earn a better living, that is needed, before anything else.

    It is up to you voters in 2014, to bring the change!

    • You seem to be advocating something along the lines of what Zimbabwe and now Venezuela has been trying (also a variation of the policies France has been following). Worked a treat in those countries. If you wish to debate alternatives be willing to defend the negative consequences of the policies you advocate.

      • Gosman – you cannot be taken serious, has New Zealand been economically boycotted to its knees yet? No the credit is handed out willingly, as those handing it out, they know they will gain, and win, and get more of returns in interest and dividends, and they will otherwise also have the chance to sell homes, land and whatever, to others, if a mortgage holder fails to keep up.

        Banks rarely lose, and they can force countries into bondage and also bankruptcy, through boycotts by governments looking after them, and following political and economic agendas.

        Tell me, please, when New Zealand will be boycotted by Australia, the US, the UK, Japan and so forth, so then we may be able to discuss economics along the lines where Zimbabwe ended up in, long ago.

        • This is where certain members of the hard core left tend to go when discussing the failure of their policies in places like Venezuela and Zimbabwe. The problems in these countries are always attributed to external forces and not the policies themselves. You are parroting the same line that both Zanu-PF and Chavista’s use. The trouble is it is an incoherent argument. Essentially it is stating that hard core leftists require the support of neo-liberal economies to survive. How pathetic is that.

          • Gosman –

            Maybe this will enlighten you, although I doubt it! You will of course not like the source



            I do not agree with all that Chavez and now Maduro have done, but there is more to it, than you will like.

            Also you tend to throw in silly, unsupported arguments in your comment, without actually addressing any points raised by me or others!

            That makes you rather a ‘trollish” kind of commenter, I must say.

            Get onto the subject, perhaps, and then we can discuss!

              • Gosman –

                Do not use smoke and mirror tactics by only picking one newspaper item from a few weeks ago, tell the people the truth and give them a wider background of information!

                Venezuela has been in difficult times before, and much worse times. Few will know the former president Caldera now, who stuffed up the country under his rule:


                Aug. 7, 1997: “FIFTEEN months of IMF-endorsed austerity provoked weary Venezuelans to protest this week. A one-day general strike gave the administration of President Rafael Caldera its greatest challenge in three years. But, though the strike may have cost businessmen the $300m they predicted, it seemed unlikely to drive him off course.

                “The strike was called by the main trade-union confederation, and joined by other unions, including those of the powerful oil workers and of the 1.3m civil servants. Ostensibly it was directed against last month’s 23% increase in petrol prices and for higher wages.”


                Venezuela’s public debt is equivalent to 26 percent of its Gross Domestic Product (GDP), and its fixed interest rate is not linked to financial institutions like the World Bank or International Monetary Fund (IMF), as under previous administrations, said Congressman and Finance Committee member Andrés Eloy Méndez.

                ““Venezuela doesn’t owe a single Bolívar [unit of local currency] to the IMF or the World Bank… because we said goodbye to a type of debt that went along with lack of investment in society and in human beings,” Méndez said in an interview Wednesday on Venezolana de Televisión.”


                “The World Bank has joined the “doom and gloom” chorus on Venezuela’s economy. And in Haiti, the Washington-based institution again appears overly optimistic.”



                I have inserted some other links also, to give a range of information sources.

                Venezuela did years ago leave the IMF and World Bank, is following an independent finance, investment and economic policy, which included some nationalisation of petroleum and other industries. This did not go down well in the “investment” sector, that also dominates the world.

                Consequently the IMF, banks, the rating agencies and other institutions punish Venezuela for doing what it dared to do, to step out of line!

                The US itself does not need to get its hands dirty, they have the IMF, World Bank (within which they hold a lot of power), the WTO and so forth, do the dirty work for them.

                As much capital that used to be invested in Venezuela is also based in the US, there are strong powers at work, that not even the US government controls. Actually those “powers” have a lot of power over the US president, congress and the senate. Just look at how they run elections. It is the money trail behind it, and that FINANCE is all controlled by the ones who “own” it.

                • I have seen this before in terms of Zimbabwe’s economic problems and it drives me batty.

                  Simple question for you – Pray tell how does the IMF, World Bank, and WTO impact negatively on Venezuela if the country is not utilising them?

                  Remember the IMF only offers financing with conditions attached. If you don’t use the financing then you don’t need to follow the conditions.

                  • Are you for real, or just pretending this ignorance?

                    Hey, possibly, because Venezuela still needs to trade and deal with countries that are members of and work with the IMF, World Bank and WTO?!

                    IMF and World Bank get “funds” or “finance” from member states, and the larger they are, the more they do provide. But that also gives those countries more political and other power and influence on the fund and bank. They lend it out under terms set by the more powerful members.

                    So when other countries bend over backwards, to please IMF and Worldbank, because they are desperate for financial help or investment, this kind of sets “standards”.

                    Any country opting out will face difficulties having it’s currency accepted and traded fairly, for instance, hence the exchange issues that Venezuela has.

                    It is the same like individual employment contracts. Once that is introduced, supported and thus pushed by a government by changes in labour laws (as in NZ), it becomes the norm, and individuals are too afraid to stand up and ask for fairer conditions.

                    It is divide and rule, and competition in traded currencies, for investment and so forth works the same way.

                    The powerful pull the strings, and the rest have to dance to the tunes. Few countries managed to “work” their way out of economic dependence without any help.

                    Colonialism the old way may have gone, but in effect, it was never truly abolished, as “servant” and dependent nations continue to be in that role, no matter how hard they work.

                    But you love that system, as we know.

            • I am merely pointing out the parallels between certain leftist thinking in NZ and the reality when these policies are implemented in real life in countries like, Zimbabwe, Venezuela, Cuba, and even France. If you don’t like dealing with real life examples of the failures of socialism then that is your problem not mine.

              • Gosh, man!

                Parallels between “leftist thinking in NZ” and policies implemented in Zimbabwe, Venezuela, Cuba and even France?

                You have a very simplistic mindset, I must say! Simplistic and outright “bizarre”!!!

  8. I have sometimes wondered why we do not just pass money from person to person in a big circle to increase GDP/growth.

    • I think they kinda do that already in the GDP calculation. The “velocity” (which is passing money around) of money contributes to GDP, given that:
      where P is the nominal gross domestic product (GDP)
      M is the Money supply (which is why QE apparently “increases” GDP in non-inflation adjusted terms, and why sans-QE the US is actually STILL in recession!)
      and V is the Velocity of money

      e.g. When a hairdresser cuts your hair for $30, then spends that money by getting his/her lawn mowed, and the lawn mower guy/gal spends it on his/her phone bill, I’m pretty sure (although anyone feel free to correct me if I’m wrong) there has been $90 worth of GDP “created” from the same initial $30. That is why services are now 70% of GDP in the US – since GDP starts with actual production (e.g. farming, mining and manufacturing), has a shit ton of services in the middle, and finally ends with consumption.

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