English has cause to be miffed if – as he says – Standard & Poor’s did not raise its concerns about New Zealand’s position in their meeting with him three weeks ago. He also expressed puzzlement about the agency’s announcement because he reckons New Zealand is in better position than 12 months ago, when the outlook rating was lifted.
Perhaps English should revisit his Budget speech, earlier this year in which he neatly summed up our economic plight: what little growth we have enjoyed over the past five years has been fuelled by mix of rising household debt and ballooning government expenditure (up 50 percent in the five years to 2009) while output from exporters and import competing industries had been in decline since 2005.
The economy has spent more than it earned and borrowed to make up the difference. And so to quote the Finance Minister: “New Zealand’s largest single vulnerability is now its large and growing net external liabilities – New Zealand owes the world $168 billion, or around 90 percent of GDP.
“Private sector debt to foreign lenders has grown steadily over the last decade and our vulnerability will be increased by growth in government debt to foreign lenders over the next five years.”
The dangers of too much debt – English warned – were well illustrated by number of European nations which at that time were undergoing painful changes, involving increasing taxes, cutting public services, or both. It’s hardy puzzling, therefore, that Standards & Poor’s has picked up this theme.
The Government is committed to policies that will reduce our vulnerabilities by tilting our economy away from debt and consumption toward savings, investment and exports we are told. But even English has conceded this rebalancing will take time.
And whether the Government is doing enough to promote savings is moot point. Labour is critical of English for cutting back KiwiSaver obligations and cancelling contributions to the New Zealand Superannuation Fund. Finance spokesman David Cunliffe moreover says he took too long to set up the Savings Working Group, chaired by Kerry McDonald, to examine savings issues.
There is school of thought in favour of compulsory savings. However, the Savings Working Group is unlikely to recommend that. McDonald has said: “We’ve had real discussion about compulsion. It’s not finished, but on what we’ve seen so far it doesn’t look as though there is any justification of compulsion for savings.”
A more critical question is whether the Government should be trying to crank up savings and whether it is not for each individual to decide how much they should spend now on consumption and how much they should put aside for consumption in the future.
Business Roundtable chief executive Roger Kerr is one who questions whether it’s the Government’s business to try to bias that decision one way or another. government should certainly try to ensure the settings are neutral, so people’s decisions aren’t influenced by policy distortions. But it shouldn’t go in for social engineering.
How much saving is good for the economy is another good question. English this week said there had been significant improvement in New Zealand’s savings rate. He also alluded to this slowing down our growth. “New Zealanders are saving considerably more than they were several years ago and they are spending less. In fact, that is one of the reasons why the economic recovery has been more moderate than many people expected.”
It’s fine balance – 100 percent success in persuading us to save rather than spend would bring the economy to its knees.
