THE MANAGEMENT INTERVIEW David Skilling – Making saving sexy

Every day in host of media ways, we are exhorted to spend – on new houses, cars, garden goodies, bodily beautifiers, whatever – because we can. We have the means: ready access to more debt. Consumption is what keeps the wheels of commerce turning and has played its part in maintaining this country’s economic buoyancy through global downturn – too bad if our galloping embrace of it is taking long-term toll on this country’s economy.
Because that’s what is happening, according to David Skilling, chief executive of the six-month-old, privately funded thinktank, The New Zealand Institute.
The problem is that our individual overspend delivers collective clout to the country’s current deficit. In proportion to our size, we’ve managed to accumulate one of the highest levels of external debt in the OECD. As result we export around five percent of our GDP to foreign savers as the return on their New Zealand investments.
Not that we’re alone in this – America needs to borrow more than US$600 billion year to bridge the yawning chasm in its current accounts; Australia is ‘angsting’ about deficit now totting up to about seven percent of its GDP and the United Kingdom is also concerned its citizens are living beyond their means.
Where New Zealand differs is that we’ve done nothing to offset the spending frenzy in the way of encouraging savings, says Skilling.
“There’s nothing unusual in New Zealand in terms of how householders access credit and the environment is set up to encourage debt accumulation as it is in Australia, the US and the UK. But those countries have also set up savings incentives – they provide ways to make it easier or, like Australia have made it compulsory. But we’ve done nothing like that and outcomes you observe here reflect that environment.”
Amongst those outcomes: New Zealand is one of the only developed countries where household financial wealth has dropped – from 112 percent of disposable income in 1993 to 44 percent in 2003.
“Our holding of financial assets has almost flatlined over the past decade,” says Skilling. “In other countries the savings increases pretty much offset the extra borrowing because of the range of tax advantages or various incentives.
“In New Zealand we’ve just assumed that people are broadly rational and will make appropriate decisions based on circumstances. No other country sees that as recipe for good outcomes. We’ve now had 10-15 years to evaluate the evidence of hands-off approach and our outcomes don’t look that great.”
Sure, the big spend up has helped drive growth in the domestic economy and if we borrow less and save more, there’ll be some initial negative impact, agrees Skilling.
“My view on that is that countries can’t spend their way to prosperity. You can’t indefinitely prop up an economy and get high rates of growth on the back of debt and consumption spending. At some stage consumption will have to tail off.”
So if you’re only thinking short-term then you might be bit worried that increased savings will depress spending and therefore growth. Longer term, that approach just isn’t sustainable.
“The only way New Zealand can increase productivity and income growth in the medium and longer term is to start investing and we need domestic savings to support that investment. Propping up growth rates by borrowing and consuming is no way to increase productivity or wages.”
Skilling’s is convincing voice for the savings cause. Armed with PhD in public policy from Harvard where he was teaching fellow before working for the OECD, McKinsey, Deloitte and, most recently, as principal adviser at the New Zealand Treasury, he brings both intellectual grunt and an international perspective to his arguments.
And while turning around the cultural imperative to consume might seem as hopeful as placing redirection signpost in front of charging elephant, he reckons the Institute’s message is already gaining traction in the public arena.
“Our track record to date suggests there is an appetite out there for new ideas and new thinking – so the ownership society work we kicked off with has been pretty rapidly picked up in media coverage. Plus the Prime Minister’s speech at the opening of Parliament used lot of language we have been using.”
Although the Institute is largely funded by business (its executive board includes folk like International Paper’s Chris Liddell, Mainfreight’s Bruce Plested, The Warehouse’s Stephen Tindall, Westpac’s Ann Sherry and Ports of Auckland’s Geoff Vazey), it is not just business lobby. Education and community groups have been in there from the start, says Skilling.
“And we’re expanding that group to ensure we’re not just bunch of suits sitting around agreeing with each other.”
While lot of time is spent discussing and analysing the thinktank’s proposed output, final editorial responsibility is his.
“It’s not report by committee. I put up ideas and get them tested. That’s very valuable for me because I get chance to bounce those ideas across very experienced group of people from range of different sectors and obviously there is broad range of opinion on most issues. It’s not an homogenous group.
“While I’ve never polled the group on this, my guess is that there is also fairly wide distribution of political viewpoints. So it gives me bit more confidence when putting ideas out in the public domain that they have been tested and gaps filled in along the way.”
The Institute also fills what its membership had seen as gap in this country’s public debate – shortage of international-style thinktanks.
“We have lot of groups that make policy commentary – mainly these are lobby groups that represent the interests of their members,” notes Skilling.
New Zealanders who have spent lot of time overseas are, he says, often struck by the absence of quality public debate here.
“Not that it doesn’t exist but there’s not the vibrancy of debate you would hope for given the variety of challenges that New Zealand faces.”
Addressing those challenges was very much the motive behind establishing The New Zealand Institute.
“New Zealand has fantastic potential but we share the sense that there are substantial economic and social challenges we have to address if we are to achieve that potential. To do that, we have to move the debate forward to where this country is going over the next 20 years. There’s sense we’re not really grappling with the big ideas.
“What is best international practice? How can we apply the best ideas in New Zealand’s context? These conversations are happening but they’re not being put in the public domain in way that engages with mass media, with politicians. We really want much broader level of constructive conversation around these issues.”
There’s the student debt conversation, for instance. User pays tertiary education was introduced for sound reasons (funding additional student capacity and extending access) and is probably here to stay – but have its long-term implications been properly addressed or any steps taken to mitigate them?
Investing in your future career may be good thing but the growing student debt means young people find it harder to put financial stake into New Zealand’s economy. First home ownership is declining and those choosing not to put their money into housing don’t appear to be using the spare dosh to invest in anything else. And if young people are not putting money into financial assets, they’re not gong to be able to repeat the wealth accumulation pattern of their parents’ generation, says Skilling.
Then there are the non-financial issues such as the implications of youngsters gaining an early debt habit.
“I don’t want to challenge the fundamental premise of student loans,” says Skilling. “But it seems to me we dropped the ball in terms of putting in place programmes, policies or institutions around the loan scheme that would make it far more manageable.”
There are lot of simple, pragmatic and fiscally insignificant things that could