Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity

Transcription

1 Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity Chart Pack 1 February 211 Savings Working Group Final Report Chart Pack 1

2 Net foreign liabilities Decades of foreign borrowing and inward foreign investment have added to New Zealand s net foreign liabilities position, which peaked at 9% of GDP, but has now moved closer to 85%. -2 Net foreign assets (% of GDP) Lane & Milesi-Ferretti Statistics NZ Source: Statistics New Zealand; Lane & Milesi-Ferretti (26) New Zealand has been running current account deficits over the last few decades, which reflects the gap between investment and saving. 4 2 Current account balance (% of GDP Source: Statistics NZ Savings Working Group Final Report Chart Pack 2

3 New Zealand has funded investment increasingly from foreign borrowing since 24. 2, 17,5 15, 12,5 $ million 1, 7,5 5, 2,5-2, National saving (incl. statistical discrepancy) Foreign saving (= current account deficit) Source: Statistics New Zealand Countries with similarly large NFL (Portugal, Spain, Greece, Ireland) are showing signs of serious difficulty. General government gross financial liabilities 29 (% of GDP) Portugal Ireland Greece Spain New Zealand Australia USA UK Italy France Austria Canada Sweden Korea Japan Belgium Germany Netherlands Norway Luxembourg Switzerland Source: OECD; IMF; Statistics NZ Net foreign assets 29 (% of GDP) Savings Working Group Final Report Chart Pack 3

4 The composition of our foreign liabilities increases our vulnerability to sudden changes in sentiment. New Zealand s international liabilities are largely comprised of debt rather than equity, and Composition of international liabilities (% of GDP) Borrowing Equity liabilities Source: Statistics New Zealand Note: 2 to 29 are December years, while 21 is a September year.... New Zealand relies heavily on short-term offshore borrowing Maturity of overseas debt (% of GDP) Source: Statistics NZ <1 year 2 to 5 years >5 years Unspecified Note: 2 to 29 are December years; 21 is a September year. 4 Savings Working Group Final Report Chart Pack

5 A large component of the current account deficit, and an important driver of rising NFL to GDP, is New Zealand s large negative external investment income balance. 6 4 Current account balances (% of GDP) Source: Statistics NZ Goods Services Investment income Transfers Total Savings Working Group Final Report Chart Pack 5

6 National saving National saving has fallen since 23 because a decline in private saving overwhelmed government saving. 1 8 National and sector saving rates (% of national disposable income, 3-year average) National saving Government saving Private saving Source: Statistics NZ Household saving has been negative since the mid-199s. 8 6 Private sector saving rates (% of national disposable income, 3-year average) Household saving Business saving Source: Statistics NZ 6 Savings Working Group Final Report Chart Pack

7 New Zealand s gross saving is at low end of OECD. 4 % of gross national disposable income, average for Greece United States United Kingdom Portugal New Zealand Hungary Israel France Italy Germany Spain Australia Estonia Canada Chile Denmark Czech Republic Sweden Belgium Austria Japan Ireland Finland Netherlands Korea Norway Source: OECD Internationally, household gross saving rates have trended down, but New Zealand s rate is low Household gross saving rates (% of household gross disposable income, 3-year moving average) Australia Canada Denmark Japan Korea NZ UK USA Source: OECD; Statistics NZ; Statistics Denmark; Statistics Bureau, Ministry of International Affairs and Communication, Japan; Office for National Statistics, UK Note: New Zealand, UK and Japan: Household sector only. All other countries: Household sector plus NPI serving households Savings Working Group Final Report Chart Pack 7

8 Are recent improvements in household saving cyclical or structural? Data suggest that there has not been much rebalancing at the aggregate level. 1 5 Real GDP growth by component (% change Dec 27 to Sept Private consumption Govt Consumption Private Investment Govt Investment Exports Imports GDP Source: Statistics NZ 8 Savings Working Group Final Report Chart Pack

9 New Zealand s economic decline New Zealand s economic growth performance has been poor, and over the last four decades, it has slipped steadily down the OECD GDP per capita rankings GDP per capita (% of the OECD mean, US dollars, current prices and PPPs) Source: OECD Factbook 21 New Zealand Australia Denmark Korea, Rep. of UK USA New Zealand s GDP per capita is now well below the OECD average. 9, 8, GDP per capita 29 (US dollars, current prices and PPPs) 7, 6, 5, 4, 3, 2, 1, Source: OECD Factbook 21 Luxembourg Norway United States Switzerland Netherlands Ireland Australia Austria Canada Sweden Iceland Denmark United Kingdom Germany Belgium Finland OECD mean France Spain Japan Italy New Zealand Greece Korea, Rep. of Czech Republic Portugal Slovak Republic Hungary Poland Turkey Mexico Savings Working Group Final Report Chart Pack 9

10 New Zealand s poor economic performance reflects weak productivity growth over several decades with a downward trend in labour productivity growth rate since 199. This has undermined competitiveness, incomes and living standards. The gap between New Zealand and the richest OECD countries is largely in labour productivity since New Zealand s labour utilisation is significantly above most OECD countries. This indicates a lot of hours worked but not very productively, and for modest reward NOR LUX GDP per hour worked 28 ( US dollars and current prices) Increasing GDP per capita FRA BEL DEU NDL IRE USA SWEAUT AUS DNK CAN GBR FIN OECD median ESP ITA JPN GRC SVK NZL PRT HUN POL MEX CHE CZE ISL KOR Lines of constant GDP per capita Hours worked per capita per week 28 (labour utilisation) Source: OECD country profile 21, OECD productivity database There has been a decline in the growth of labour productivity... 7 Annual percentage change in NZ's labour productivity Source: Statistics New Zealand Savings Working Group Final Report Chart Pack

11 ...growth in GDP per hour worked has been lower than in Australia GDP per hour worked index (base 1987=1) Australia (June year) Source: Statistics New Zealand and Australian Bureau of Statistics New Zealand (March year)... labour productivity in selected service industries has declined in New Zealand, but risen in Australia Labour productivity index (base 1987= Australia (June year) Source: Statistics New Zealand and Australian Bureau of Statistics New Zealand (March year) 1 These industries include: property and business services, government administration and defence, education, health and community services, personal and other community services. There are no official productivity measures for these industries. The data are published by Statistics NZ as unofficial statistics owing to their approximate nature. Savings Working Group Final Report Chart Pack 11

12 ... and productivity growth has been constrained by a low capital stock. 16 Capital intensity levels for selected OECD countries 22 (index US=1) Germany Netherlands Italy France Denmark Japan Luxembourg Swtizerland Finland United States Sweden Australia Spain Canada Iceland Ireland United Kingdom New Zealand Portugal Mexico Treasury/MED 25 estimates Source: OECD; Economic Development Indicators 25 Schreyer (22) Estimates New Zealand s high NFL has meant that our growth has been driven by the wrong things. High private and government consumption has led to higher interest rates, and this in turn, pushed up the exchange rate. 4 Real short term interest rates, average 2 to 29 (%, per annum) New Zealand Mexico 3 Greece UK Norway Australia 2 Korea Sweden Canada 1 USA Switzerland Japan Linear trend line Net foreign assets 29 (% of GDP) Source: OECD, IMF, SWG calculations Note: Annual average nominal interest rates less average annual consumer prices. 12 Savings Working Group Final Report Chart Pack

13 The overvalued exchange rate has encouraged expansion in the non-tradables sector of the economy and discouraged activity in the tradables part of the economy. Since the tradables part of the economy tends to have higher productivity growth than the non-tradables part, overall productivity growth in the economy is lower. 15 Tradables and non-tradables index (incl. tourism) (base = Source: Statistics NZ Tradables Tradables + Tourism GDP Non-tradables (excl. Tourism) Low saving and wealth accumulation through property investment has diverted resources and resulted in the under-development of New Zealand s capital markets. 25 Share market capitalisation (% of GDP) New Zealand Australia Korea, Rep. of United Kingdom United States Source: World Federation of Stock Exchanges, OECD Stats Extracts Savings Working Group Final Report Chart Pack 13

14 Over the past two decades, the income growth, after inflation, of many New Zealanders has been low. Market income fell between 1988 and 27 for the first five disposable income deciles. $2, $175, $15, Average market income ($27) $125, $1, $75, $5, $25, $ -$25, Average Equivalised disposable income deciles 87/88 97/98 6/7 After tax and transfer payments, income for the first four deciles was still largely static between 1988 and 27 $15, Average disposable income ($27) $125, $1, $75, $5, $25, $ Average Equivalised disposable income deciles 87/88 97/98 6/7 Source: The Treasury; Statistics NZ, Household Economic Survey 14 Savings Working Group Final Report Chart Pack

15 Taxes and house prices The favourable tax treatment of property investment accounted for about 5% of house price increases from 21 to 27. Marginal investor Residential property investor Owner-occupier Actual gain in real house prices 88% 88% Gain in house prices under neutral tax treatment 47% 41% Gain in prices due to tax concession 42% 47% % of price growth due to concessionary tax 47% 53% Differences in the tax treatment of different asset classes, as well as inflation, leads to vastly different real effective tax rates for different classes of assets. The large differences distort the way people hold their savings. 35 Marginal rate 17.5% 6 Marginal rate 33% Real effective tax rate (%) Real effective tax rate (%) Debt instruments Owner-occupied housing Rental housing Domestic shares Foreign shares (FDR) Debt instruments Owner-occupied housing Rental housing Domestic shares Foreign shares (FDR) Source: The Treasury (21) Savings Working Group Final Report Chart Pack 15

16 Wealth The challenge is to increase New Zealand wealth and the stock of assets located in New Zealand, but without increasing New Zealand s NFL, which would increase the country s vulnerability. C NZ-owned foreign assets A Foreignowned NZ located assets B NZ-owned and NZ located assets A+B = New Zealand located assets B+C = New Zealand wealth C-A = New Zealand net foreign assets A-C = New Zealand net foreign liabilities National assets have almost tripled, but even higher growth in national liabilities has knocked back net wealth growth since $ billion National Assets National Liabilities National Wealth Source: Statistics NZ 16 Savings Working Group Final Report Chart Pack

17 The key driver of national wealth growth since has been asset revaluations and not saving National net wealth, $ billion as at 31 March Chang ein national net wealth, $ billion as at 31 March Source: Statistics NZ Change due to saving and capital transfers (RH axis) Net wealth Change due to revaluations (RH axis) Net wealth excluding revaluations Australian households tend to hold more of their wealth in superannuation funds. New Zealanders hold a higher proportion in business and farm assets, often through private companies. Household asset types as percentages of net household assets New Zealand Australia Residential property 46% 5% Pensions and superannuation funds 2% 19% Business and farm assets 22% 9% Shares, investment funds, etc 9% 8% Bank deposits 5% 5% Vehicles 3% 4% Other assets 14% 6% Liabilities 14% 14% Savings Working Group Final Report Chart Pack 17

18 The RBNZ household balance sheet shows household net wealth broken down into different assets and liabilities. Almost all of the increase in net wealth is due to property revaluations. ($ billion) as at December Assets Deposits with financial institutions Other fixed interest assets Life, superannuation and managed funds Direct holdings of equities Total household financial assets Housing value Total assets Loans from banks and non-bank lending institutions All other loans Total liabilities Household net wealth Source: Reserve Bank of NZ Property revaluations explain nearly all changes in household net wealth since $ billion Source: Hodgetts, Briggs et al (26) Saving Revaluations Change in net wealth 18 Savings Working Group Final Report Chart Pack

19 Debt New Zealand s private-sector debt at 3 June 21 was $315 billion and 166% of GDP. Table 1: Private-sector debt as at 3 June 21 Sector Household debt Housing loans Consumer loans Total Amount ($ billion) % of GDP Student loans 11 6% Business loans 73 39% Agricultural loans 49 26% Total private debt % Net foreign liability % Source: Reserve Bank of NZ; Ministry of Education Student Loan Annual Report Note: These figures do not include debt issued by directly by non-financial business organisations, e.g., corporate bonds. 9% 6% 96% All the main components of private-sector debt, except consumer credit, have been rising as a percentage of GDP Private sector debt (% of GDP) Source: Reserve Bank of NZ Housing Consumer Student Business Agricultural Savings Working Group Final Report Chart Pack 19

20 Migration Higher net migration flows are associated with higher house prices. Annual change in house prices (%) Net migration per 1 inhabitants 1963Q2 1965Q2 1967Q2 1969Q2 1971Q2 1973Q2 1975Q2 1977Q2 1979Q2 1981Q2 1983Q2 1985Q2 1987Q2 1989Q2 1991Q2 1993Q2 1995Q2 1997Q2 Q2 21Q2 23Q2 25Q2 27Q2 29Q2 Real house prices Net migration Source: Coleman & Landon-Lane (27); Reserve Bank of NZ; Statistics NZ Changes in migration policy in the early 199s encouraged a much more rapid pace of inward migration: the net number of non-nz migrants has been trending upwards strongly since. 8, 7, Number of migrants (September year) 6, 5, 4, 3, 2, 1, -1, Source: Statistics NZ Non-NZ arrivals Non-NZ departures Net non-nz migration 2 Savings Working Group Final Report Chart Pack

21 New Zealand has a higher than average net migration rate relative to other OECD countries and, importantly, New Zealand s migration rate is more volatile. It is plausible that the sharp change in migration policy since the early 199s materially increased debt/gdp ratios Average Estonia Poland Japan Netherlands Slovak Republic Hungary Germany France Finland Denmark Israel Greece United States Czech Republic Slovenia New Zealand Belgium Sweden Austria Norway Italy Australia Average net migration rate (per 1 inhabitants) Canada Switzerland Spain Source: OECD 1 9 Net migration rate range (per 1 inhabitants) Average Greece France Poland Japan United States Slovak Republic Belgium Canada Hungary Finland Estonia Germany Sweden Austria Denmark Israel Australia Netherlands Spain Norway Switzerland Slovenia Italy New Zealand Czech Republic Source: OECD Savings Working Group Final Report Chart Pack 21

22 Fiscal situation Fiscal surpluses from to 28 parallel the period of strong government saving. Crown operating balance and general government saving (% of GDP) General government saving Adjusted financial balance Total Crown operating balance Source: Statistics New Zealand; Treasury Core crown revenue trended up as a share of GDP from 2 to 28, dragging up core spending. 5 4 Core crown balance (% of GDP) Source: The Treasury Expenses Revenue Core Crown balance 22 Savings Working Group Final Report Chart Pack

23 Government operating balance went into structural deficit in 29 with a return to surplus forecast only in Government operating balance (% of GDP) Forecast Operating balance (before gains and losses) Source: The Treasury, Half-Year Economic and Fiscal Update 21 Cyclically-adjusted balance New Zealand's change in structural balance is at the large end of the OECD. 6 Change in structural balance 27 to 211 (% of GDP) Hungary Greece Italy Sweden Portugal Austria Belgium Czech Republic Switzerland France Germany United Kingdom Netherlands Australia Total OECD Canada Iceland Finland Japan Poland United States Ireland Denmark Spain Norway New Zealand Source: OECD; The Treasury Change in cyclically-adjusted balance, 27 to 211 Cyclically-adjusted balance, 211 Savings Working Group Final Report Chart Pack 23

24 Pressures on the government s saving position are projected to grow. Core operating balance tips back into deficit in the late 22s Core operating balance projections (% of GDP) Source: The Treasury (Historic trends projection based on Half-Year Economic and Fiscal Update 21) Spending on NZ Superannuation and health is forecast to rise, while spending on benefits and education fall Spending projections (% of GDP) NZ Super Benefits Health Education Other Finance Source: Treasury (Historic trends projection based on Half-Year Economic and Fiscal Update 21) 24 Savings Working Group Final Report Chart Pack

25 If public sector productivity increased by 2% per year for five years and 1% per year thereafter, there would be no period of contraction in public services and growth in the supply of public services would be faster than the historic trend growth rate. Real public services per capita (cumulative % growth) Source: The Treasury Historic trends,.3% productivity growth,.8% real per capita demand and growth Sustainable debt,.3% productivity growth Sustainable debt,.6% productivity growth Sustainable debt, 1% productivity growth Sustainable debt, 2% productivity growth to 219, 1% growth from 22 onwards Productivity increases would also improve the net core Crown debt position Net core Crown debt (% of GDP) Source: The Treasury Historic trends,.3% labour productivity growth Historic trends,.6% labour productivity growth Historic trends, 1% labour productivity growth Historic trends, 2% labour productivity growth to 219, 1% growth from 22 onwards Savings Working Group Final Report Chart Pack 25

26 NZIER modelling Increased saving: decreases debt servicing costs, reduces the cost of capital and increases the capital stock. In scenario 1 the national saving rate is increased by 3% of Gross National Disposable Income (GNDI) and the cost of capital is assumed to decline over a decade by 1 percent relative to the baseline. In scenario 2 the national saving rate is increased by 8% of GNDI for a decade and then falls back by 4% of GNDI, and the cost of capital is assumed to decline over the decade by 22 percent relative to the baseline Cost of capital (% change from baseline) Source: NZIER Scenario 1 Scenario 2 3 Capital stock (% change from baseline) Scenario 1 Scenario 2 Source: NZIER 26 Savings Working Group Final Report Chart Pack

27 Increased saving reduces the exchange rate, so net exports rise (scenario 1) Trade volumes - scenario 1 (% changes from baseline) Import volumes Export volumes Source: NZIER GDP and GNDI initially drop but then grow strongly (scenario 2). GDP, income and consumption (% changes from baseline) Source: NZIER GDP GNDI Consumption Savings Working Group Final Report Chart Pack 27

28 The economy re-balances as tradable industries expand and non-tradable ones contract (scenario 1). Food and Beverage Manufacturing Non-Metal Minerals Manufactured Products Mining Commodities and Basic Metals Wood, Paper and Printing Materials Textiles and Clothing Transport and Logistics Agricultural Products Non-Tradable Food and Agricultural Products Fisheries and Forestry Products Petroleum, Chemical, and Rubber Products Business Services Wholesale Services Non-Tradable Services Government Services Retail Services Source: NZIER Decomposition of industry output shift in scenario 1 (% change from baseline) Local Market Domestic Share Export 28 Savings Working Group Final Report Chart Pack

29 KiwiSaver SWG estimated the impact of KiwiSaver on national saving. Assuming employee contributions remain at 2% and the KiwiSaver membership rate increases to 6% of employed people (scenario A), it is estimated that national saving could rise by.2% of GDP. Under compulsion, with 1% membership of the employed and 2% employee contributions, this national saving effect increases to.4% of GDP (scenario B). Under compulsion with 4% employee contributions, national saving is estimated to rise by.8% of GDP (scenario C). Unless stated otherwise, all figures are % of GDP A B C Main assumptions: KiwiSaver membership, % of total employed 6% 1% 1% Employees' contribution rate, % of wages 2% 2% 4% Results: Total household contributions Additional household contributions Impact on net foreign assets after 1 years Impact on net foreign assets after 2 years Memo items: Government's contributions via tax credit Tax concession on employer contributions Total cost to government Alternative calculation of additional saving Source: SWG Secretariat The SWG recommends a single default scheme. The figure below gives an example of the KiwiSaver industry structure with one default scheme and age-appropriate funds. Investment mix One default scheme (comprising 5 funds) Index Equity* Index Bonds* MANAGER e.g. similar to Guardians of NZSF Investors: default by age (OR investor elected) 2-29yrs 3-39yrs 4-49yrs 5-59yrs 6+ yrs * Investment managed by 5-7 private sector managers Savings Working Group Final Report Chart Pack 29