New Zealand has long been in relative economic decline. It suffers from stagnating productivity and a weak tradeable sector. It is a relatively low wage economy.
Understanding our persistently high real interest rates provides insights into these problems, and suggests how to deal with them.
High real interest rates discourage capital investment that lifts labour productivity. They are associated with a high real exchange rate. They reduce tradeable sector competitiveness. This means lower per capita incomes.
Low domestic saving and high population growth cause high real interest rates.
New Zealand is one of the few OECD countries that lack compulsory retirement savings. New Zealand’s superannuation policy settings mean people have weak incentives to save. New Zealand has a thin share-market with limited liquidity and investor choice. Many cooperative and private businesses are not open to external investment. New Zealanders therefore have limited opportunities to invest savings domestically.
New Zealanders borrow or seek equity from offshore to make up for their low savings. New Zealand’s net private sector indebtedness is high by international standards, and dominated by home mortgage and farm lending.
New Zealand historically benefited from a high resource to people ratio. While its birth rate is slightly higher than median advanced countries, many New Zealanders move overseas. However, high non-citizen migration means net population growth over the past 25 years has been higher than the OECD median.
Highly skilled and entrepreneurial migrants are assets to the economy and society. However, many non-citizen migrants are modestly-skilled. Population growth draws investment away from the tradeable sector into infrastructure, housing and other non-tradeable sector expenditures. This drives higher real interest rates and real exchange rates that disadvantage our tradeable sector.
The above problems are compounded by lack of a capital gains tax, and restrictions on new housing developments.
New Zealand’s rural land prices are higher than for similar land in countries with capital gains taxes. Capital gains rather than productivity opportunities drive much farmer behaviour.
For example, dairy farm debt to banks grew from $18.8 billion in 2007 to $40.9 billion in October 2017. This equates to around $22 per kg of milk solids. Some debts are equivalent to $30 kg of milk solids. This debt is owed largely to overseas-owned banks, whose profits go offshore.
The overall effect is that scarce domestic savings are misallocated away from productive investment into inflating prices of inelastic farmland and housing assets. Primary industries are left without the investment needed to both boost productivity and address environmental sustainability challenges.
Inflated housing prices harm tenants and aspiring first home owners, and benefit only incumbent owners in the short term. In the longer term these owners can face higher costs of purchasing their next home, and they also suffer from the economy’s overall weaknesses.
New Zealand needs increased domestic savings, and this requires some compulsion. New Zealand should also grow its own banking sector, and retain more profits in New Zealand. A comprehensive capital gains tax is needed to channel savings into productive, tradeable sector businesses. Regulatory restrictions on new housing developments should be reduced.
Capital gains taxes can be implemented incrementally to align behaviour to long-term productivity enhancement and environmental sustainability.
Saving requires short-term sacrifices to support higher future consumption. The burden of increased savings can be shared between employers, employees and government.
The government introduced a compulsory contributory superannuation scheme in 1975. This was designed to lift savings and enhance investment in the economy, as well as to supplement the old age pension. However, the 1975 election result saw compulsory superannuation replaced with a universal non-contributory scheme with age 60 eligibility. This might well be New Zealand’s worse ever economic decision.
Brian Gaynor and others estimate that, had the 1975 scheme been retained, it would now be worth around $500 billion. We would have deeper and more patient capital markets, and a lower real exchange rate. New Zealand might be one of the top five OECD economies. More of our high productivity businesses would be global players, owned and anchored in New Zealand. New Zealanders would have higher incomes, and our retirees would be better off.
The New Zealand Superannuation Fund (NZSF) was established in 2001 to partly pre-finance the state’s superannuation liability. Around $2 billion was invested per annum in the NZSF, until payments were suspended in 2008. The government’s $14 billion contribution is now worth more than $36 billion. The NZSF has returned 10.35% since inception, and 9% per annum over the past 10 years.
In 2007 KiwiSaver was launched. Its funds now total around $43 billion. In total, combined KiwiSaver and NZSF funds total around $79 billion. The building blocks are therefore in place to expand domestic savings and investment, largely linked to retirement policy.
New Zealand’s government investment schemes invest globally, however they contribute disproportionately to our economic development. When terminated after just 37 weeks, all of the 1975 scheme’s $41.3 million in investments were in New Zealand.
KiwiSaver has about 44% of its funds invested in New Zealand. The NZSF has around 15% of its funds invested here, including in tradeable sector and technology-based businesses. ACC has about 8% of its funds invested in New Zealand equities, and is a significant infrastructure investor.
Kiwisaver supplements the NZSF, and can also be drawn on for first home ownership. However, it is not compulsory. Furthermore, existing savings schemes are retirement focused, and no systematic effort is made to encourage savings to underpin investment in children and young people.
Currently, social welfare transfers typically subsidise short-run consumption. This partly reflects policy settings designed to support a low wage economy. These settings create downwards pressure on wages, which in turn reduces business incentives to invest in innovation to lift both productivity and wage rates. Many employers do not pay a living wage, so “working for families” type interventions make up the difference.
Some part of social welfare expenditure could be configured to boost long-term savings and investment, while achieving short-term social objectives.
For example, individual savings accounts could be established for children and young people. These could be tagged for longer-term education and other capability development investment. They could be weighted to enhance social mobility for children and young people from low socio-economic backgrounds. Community groups and families as well as government could contribute.
Policy design would ensure funds were used in young people’s interests, and aligned to key lifecycle points. Part of the social welfare budget could therefore help lift domestic savings, while also fostering social mobility.
The NZSF, compulsory Kiwisaver and capability development savings would make up a “whole of lifecycle” savings and investment package. This would start with government and family contributions to capability funds for children, with a focus on early childhood through to tertiary education. When young people join the workforce, Kiwisaver would cut in, funded through employee and employer contributions. Retirees would have their national superannuation topped up with compulsory Kiwisaver.
All New Zealanders would benefit from higher savings and investment rates lifting productivity and per capita incomes.
Economic analysis is worthless unless policy makers translate it into action. Inclusive, MMP government makes it difficult to take a long-term view and to carry through transformative change. However, it also means when consensus emerges there is enduring multi-partisan commitment.
People do put their children and grandchildren ahead of themselves. Voters who reject short-term tax cuts are willing to support wider, including intergenerational public goods.
The political tension is between those who focus on today, and those concerned with the future. It is between those who accept fragmented individualism, and those who believe society is on a collective journey.
Leaders need courage. They must articulate a narrative where short-term sacrifice leads to greater long-term benefits.
Above all, they must recognise that the future has more rights than the present.
 Acknowledgements to Michael Riddell for his analysis of these issues.
 Acknowledgement to Keith Woodford for this analysis.
 This is bank debt, and excludes some Fonterra loans to farmers.
 ANZ is the major creditor, while Rabobank holds about $10 billion in loans to New Zealand agribusiness as a whole.
 An option to explore is government banking services being transferred to a New Zealand-owned bank.
 The scheme was established through the New Zealand Superannuation Act 1974 and brought into operation in April 1975.
 This scheme was established through the New Zealand Superannuation Act 1974. It was based on individualised and portable accounts. After a short phase-in period, compulsory contributions were 8 per cent of gross income – 4 per cent by employees and 4 per cent by employers. Contributors could take 25% of their contributions when they reached retirement age and the rest as an ongoing income stream.
 Another motivation was to invest government surpluses in the future, and avoid populist pressures to spend today.
 A criticism of Kiwisaver is weak transparency and alleged high fees. Transparency can be enhanced, and the Simplicity Fund provides a low fees option.
 Ngai Tahu’s Whai Rawa savings scheme encourages saving for education and home ownership as well as retirement. Saving schemes can therefore be designed to achieve multiple socio-economic objectives for individuals as well as strengthening the economy as a whole.
 This can include investment in enhanced net worth.
 For example, grandparents could contribute with confidence that the money would benefit their grandchildren and not be misused by parents.
 For example, there is growing support for action on climate change and other long-term sustainability issues.