Correct Change


Economic Outlook and the Savings Challenge

When you go in for a job interview I think a good thing to ask is if they ever press charges.

Plainly Put


What we are seeing is an economy with considerable underlying strength:

bulletSince 2000 economic activity has increased by a quarter.
bulletOver the economic cycle we have been growing faster than the average of developed countries.
bulletWe have come a long way towards building a stronger, fairer economy.
bulletMore Kiwis than ever before - 2.1 million of us - are in jobs and our unemployment rate is the lowest in a generation.
bulletLast week unemployment benefit numbers fell to 28,845, 82% down from 1999, Maori unemployment fell below 10,000 (9,902).
bulletOur public finances are sound and counting the New Zealand Superannuation Fund we no longer carry any net debt at all.
bulletOur business sector has particularly prospered.  Profit growth has averaged over 20% a year in recent years.  And that's been good for business investment.

Looking at the year ahead: a strong labour market and house price increases will continue to underpin domestic demand.  However, the strength returning to the domestic economy is the reason the Reserve Bank increased interest rates when it last set the official cash rate.

World commodity prices are strong, helping the dairy sector in particular, which will also fuel demand in some regions.  But there are stern challenges for the export sector from the persisting high dollar.  Current account figures published at the end of March show we spent $14.4 billion more than we earned in 2006.  That is a deficit of 9% of our GDP.  Though the deficit was down slightly on a year ago, there is little room to be complacent.  In the last quarter of last year our exports fell by 2.7% and imports rose 1.4%.

That tells us in fairly stark terms that our growth is still excessively dominated by domestic demand.  Exports as a percent of GDP have barely moved in the last 30 years despite all the economic reforms.  Another way of looking at it is that the large deficit underlines our excessive reliance on foreign savings to finance consumption and investment in New Zealand.  If we save more domestically, we are less reliant on foreigners to finance consumption and business expansion here.  Foreigners end up owning fewer of our assets and we become less vulnerable to rising interest rates if international sentiment towards New Zealand changes.

In a nutshell we are neither saving enough nor exporting enough.  We must do much better at producing the high value products the rest of the world wants to buy.


Statistics New Zealand figures show that last year the typical New Zealand household spent $1.15 for every dollar earned.  And our savings record might be getting worse, not better.  Take the single example of credit cards.  Reserve Bank figures show we owed nearly $4.6 billion dollars on our credit cards in January.  Two years ago we owed less than four billion.  The credit card debt has increased by over half a billion dollars in just two years.  That's despite an average interest rate of 18.6% on three billion dollars of the debt.  That is an awful lot of debt on short-term, high interest rates.  And bear in mind servicing debt is costly.  It is forgoing money that could be saved.

We have an appetite for debt when we should be hungry for savings.  Savings build the wealth of New Zealanders and help build the pool of assets needed for business investment.  If we want to make sure we own more of our own businesses, we need to save more.  If we want to have a better standard of living in retirement than NZ Superannuation alone, we need to save more.  If we want to have deeper capital markets that provide the oil for a well-functioning business sector, we need to save more.  If we save more the current account deficit will shrink because we will import relatively less to consume.  We will rely less on foreign savings to finance our lifestyle and therefore we pay less by way of interest and dividends to overseas investors.

If we can increase our savings we will reduce inflationary pressure in the economy, and take pressure off interest rates.  Lower interest rates in turn helps to take pressure off the dollar, helping to increase our exports and reduce imports.  So increasing the level of household savings is a priority for the health of our businesses.  It's also a priority for the long-term health of households - and particularly for families on low and middle incomes.

The 2001 Household Savings Survey showed that only 15% of individuals and 17% of couples in the $15 - $50,000 income bracket had superannuation assets.  We are seeing a wide and increasing gap between a few households who have enough to provide for their retirement - and the rest.  Statistics New Zealand recently released figures showing the top 10% of us own half of all New Zealand's wealth.  The bottom 50% own just 5% of our wealth.


Increasing the level of household savings will make a substantial difference.  It will particularly make a difference in retirement where inequalities in lifetime earnings have the greatest visible effect on the standard of living New Zealanders enjoy.  Those low and middle income families with no financial assets - that, is most of them - know they need to save if they are to have something to look forward to in their retirement.  They are paying off a home, which is a good thing.  Owning our own home gives us a sense of security and a stake in our community, as well as security in retirement.  But for most householders the family home won't be enough to enjoy a standard of living in retirement comparable to that during your working life. You can't eat your home.  A Treasury study released in March showed you probably still need some financial assets for your retirement as well.

Yet 75% of household wealth is tied up in housing and less than 10% in life, superannuation and managed funds.  Household net assets have tripled since 1990, while the household saving rate has been decreasing.  When Treasury looked at this situation its conclusion was clear: Your house should not be relied upon to replace other saving.  The report finds that the effect of selling down your house is "modest; it is only noticeable when households halve the size of their home."

Equity withdrawals once retired "should not be viewed as a substitute for adequate levels of retirement saving."

Source: 17 April 2007

The following article was written by a Canadian, but the problems seem widely relevant...

The Indebted Generation

by Adrian Brijbassi

The weight of debt doesn’t only plague the bank account, it burdens the psyche.  Owing money — especially large amounts of it — spawns shame, rage, seemingly endless frustration and a level of anxiety that shouldn’t be felt in rich nations.  When scores of people add up their net worth and come up with a total of less than zero, crisis looms.  For the young who’ve had to contend with the consequences of tuition and cost-of-living increases, the debt load they live with can often be soul shattering.

“The worst thing about being in debt is having the creditors call and lecture me to the point of tears when I miss a Visa payment,” says Kristine All, a 27-year-old student who will possess a Bachelor of Laws degree in one month but has yet to land a job to pay off the cost of her education.  “Being in debt and still being a student means that I have no income, so it’s really unnerving not knowing if I can even afford groceries for the next week.”  All says she paid $10,000 in tuition for this final year at the University of British Columbia, more than double the cost from what the school charged just 4 years ago.  She estimates that the bulk of her $82,000 of debt can be accounted for by the cost of tuition ($30,000) and housing ($25,000) while attending school.

Hers is not an uncommon plight.  Twenty- and thirty something-year-olds are so saddled with bills and interest payments that the forecasts for their prosperity can seem as antiquated a dream as the notion of peace in our time.  “We’ve seen a change, a real shift over the past generation from a system where less than half of students left with debt and now two-thirds leave with debt,” Robert Shireman, director of the Project on Student Debt, told the San Jose Mercury News.  “Now, it’s become the norm to leave with debt — and often with a lot of debt.”

Making debt vanish is no easy feat in a world of rising costs, and for everyone overburdened by their bills, the pursuit of wealth is an elusive chase.  According to a recently released survey by the US Federal Reserve, 11.7% of families whose top earners are aged 35 to 44 were past due on more than two months of payments in 2004; more than double the percentage from the 2001 survey.

While the alarms that sound the debt problem have been cranked up in the United States by the Project on Student Debt and the notoriety gained by Anya Kamenetz, the 25-year-old author of Generation Debt, government intervention has been slow while tuition hikes have remained steady.  According to national statistics for both Canada and the US, the average student who graduates with a bachelor’s degree owes approximately $19,000 (in each country’s respective currency).  Considering the cost of housing, the increased price of living expenses and the relative stagnation of wages, young professionals have little hopes for relief and plenty of need for a strict budget.  As well, people are taking on debt they can’t pay off, pushing themselves to occupy spaces in social strata their finances dictate they shouldn’t be in, and living on the razor’s edge of insolvency.

“My financial plan for the future includes finding, or staying in, the least expensive rental accommodation that I can find, working full time, and paying off as much of my debt as possible as quickly as possible,” says All, who has been a university student for 9 years and intends to remain in Vancouver, where the average monthly rent for a bachelor suite is over $700.  “The sooner my debt is gone, the sooner more of my salary can go to saving for a down payment to own my own property.”


A Good Overview Is What's Needed?


Economic Outlook at the Last Bus Stop on Earth

I'd rather be rich than stupid.

- more Deep Thoughts by Jack Handey

by Craig Howie

New Zealand's economic reforms could have been better managed, but the economy would be in a worse state had they never taken place, according to The Economist magazine.  Suggestions that New Zealand economic reforms have failed and that the country would have been better off without them are nonsense, British magazine The Economist argues in its latest edition.  "And the country's relatively disappointing export performance should not be seen as a verdict on free-market economics or justification for a fundamental change in economic direction, it says, adding: "Doing nothing was not an option."

The magazine acknowledges that rewards from the reforms have failed to live up to many expectations - New Zealand's per capita economic growth since 1984 has been the slowest in the developed world.  As an embarrassing aside, Australia, which was lambasted by commentators for not pursuing reforms with the same vigour, has posted much faster economic growth in the past decade.  But this is misleading.  Since 1992, New Zealand's economy has grown by an average of 3% per year, slightly ahead of the Organisation for Economic Cooperation and Development average, and New Zealand's per capita income has stopped sliding compared to other countries'.

Widespread disappointment with dividends from the reforms is due partly to the way they were structured, The Economist argues.  "The biggest mistake may have been that the reforms were done in the wrong order," it says.  "The exchange rate and the financial markets were set free before the budget deficit and inflation had been brought under control, and before market and labour markets had been deregulated."

A failure to eliminate the government's enormous budget deficit early in the process meant interest rates had to be pushed much higher in the late 1980s to hold down inflation.  As foreign money flooded in after capital controls were removed, the dollar appreciated and savaged many industries that might otherwise have benefitted from the reforms, and also discouraged investments in new industries.

"Increased competition certainly drove out inefficient producers, but few new industries sprang up to take their place," The Economist says.  "Worse, because the labour market was not yet deregulated and wages, set by a national system, continued to rise rapidly, unemployment soared, deepening the recession of the late 1980s and early 1990s."  The overvalued New Zealand dollar during that time largely explains New Zealand's poor performance - export volumes have increased at only half the rate of Australia's since the early 1900s.

Many economists believe the situation was aggravated by a "serious policy error" by the Reserve Bank during the Asian economic crisis three years ago.  The central bank raised rates sharply as the dollar fell in response to the problems in Asia, at the same time that demand was being squeezed by the slump in exports to Asia.  In contrast, the Australian Reserve Bank left interest rates unchanged despite its currency falling; unlike Australia, New Zealand dipped into recession in 1998.  However, as the "last bus stop on the planet,"  New Zealand also suffers from its geographic isolation from large markets compared to other small economies, The Economist says.

So it is debatable how much economic policy is to blame for the recession.

A circle with a radius of 2,200 kilometres centred on Wellington encompasses only 3.8 million people and a lot of seagulls.  A circle of the same size centred on Helsinki would capture well over 300 million people.

Turning to the performance of the Coalition Government and Finance Minister Michael Cullen, The Economist says they risk taking New Zealand in the wrong direction with more interventionist policies.  Latest reports from the International Monetary Fund and the OECD outlined the dangers of raising the top income tax rate and regulating labour markets.

New Zealand's small size and remoteness mattered less before the 1970s, when it produced mainly for the British market and when people had less choice about where to work and invest.  But in today's more integrated world, it is a serious handicap, requiring New Zealand to have better economic policies than other countries to offset its natural disadvantages.

"The reforms could have been better managed with better results, but the economy would have been in a worse state had they never taken place.  It is alarming, therefore, that the Government believes that some reforms need to be reversed,"  The Economist says, "If anything, New Zealand should do the reverse: press on with reform, as most other economies around the world are now doing."

Source: The Dominion Friday 8 December 2000

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