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FINANCE

Wide brief for expert group on savings options
Tuesday 24 August 2010, 12:13PM
By Bill English
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An independent Savings Working Group announced today by the Government has a wide brief to consider how New Zealand can improve its national savings, Finance Minister Bill English says.

 

"Improving the level of national savings is the next step in the Government's programme for tilting the economy towards savings and exports.

 

"We have deliberately set wide terms of reference for the Working Group. The only exclusions are New Zealand Superannuation, which this Government will not change, and broad taxation of capital gains or land, which we have previously said we will not introduce.

 

"Otherwise, we are not ruling anything in or out," Mr English says.

 

The Savings Working Group will not focus solely on options for retirement savings: it will canvass a range of options for improving New Zealand's overall savings performance, including government savings.

 

"The Government has an open mind about what might be required and we don't want to prejudge the outcome," Mr English says. "We also hope this exercise stimulates constructive public debate and discussion along the way.

 

"Increasing our national savings and investment levels is a critical issue for New Zealand, because of our heavy reliance on foreign capital. This has produced high and rising debt to the rest of the world, which cannot continue."

 

New Zealand's challenges around savings and investment are stark, Mr English says. They include:

 

  • Running a current account deficit every year since 1973, implying that investment in New Zealand has continuously exceeded national savings. The difference has been funded mostly by borrowing offshore.

 

  • Net debt to the world - across government, households and business - jumping from about $100 billion in 2000 to almost $180 billion currently, and forecast to be almost $250 billion by 2014.

 

"So we have a big task to turn around this economy and rebalance it towards savings and growth," Mr English says.

 

The Savings Working Group, which will develop a practical menu of options for ministers by January 2011, will consider all areas of importance to national savings. This will include:

 

Fiscal policy: The role of Government savings as part of the national savings picture, including long-term savings/debt targets and any offset between government and private savings.

 

Taxation: The impact of the tax system, particularly taxation of income from savings and investment, on the level and composition of national savings and investment decisions. This will include:

 

  • The case for moving to a dual income tax system, where labour and income from savings and investment might be taxed at separate rates.

 

  • Indexation/part-indexation of the tax system so that real, rather than nominal, income from savings and investment is taxed.

 

KiwiSaver: The role of KiwiSaver in improving national savings, such as:

 

  • Improving the operation and outcomes of KiwiSaver - including options where KiwiSaver is either voluntary or compulsory.

 

  • The fairness and effectiveness of current KiwiSaver subsidies.

 

The Savings Working Group will be chaired by experienced company director and consultant Kerry McDonald. Other Working Group members are:

 

  • Dr Craig Ansley - Capital Markets Research director.
  • Dr Andrew Coleman - Motu Economic and Public Policy Research senior fellow.
  • Mary Holm - financial columnist, Auckland University senior lecturer.
  • Dr John McDermott - Reserve Bank assistant governor.
  • Paul Mersi - PricewaterhouseCoopers partner.
  • Stephen Toplis - Bank of New Zealand head of research.

 

The Working Group will be supported by Treasury, which will shortly publish a discussion paper setting out savings and investment issues and trends.

 

Working Group members will be paid about $70,000 in total. This and all operating costs will be met from within Treasury's existing budget, with staff support from the Reserve Bank, Inland Revenue and Statistics New Zealand.

 

Working Group website (including Terms of Reference):

 

www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup

 

SAVINGS WORKING GROUP - MEDIA Qs AND As

 

  1. Why is the Government using another working group?

 

The challenge of increasing New Zealand's national savings is important, requiring consideration of a number of issues and potential options. The Government wants this process to be open and transparent - and to encourage constructive public debate. Working Groups have fulfilled this role well in other areas such as taxation, social housing and welfare.

 

  1. What is the Working Group's brief?

 

The Savings Work Group has been asked to report to the Minister of Finance with advice on options for improved national savings in New Zealand.

 

The Group's scope will include:

 

  • The role of Government savings as part of New Zealand's overall savings picture, including long-term savings/debt targets.
  • The impact of the tax system on the level and composition of national savings and investment decisions.
  • The role of KiwiSaver in improving national savings.

 

  1. What problem is the Working Group looking to fix?

 

Savings and capital formation are essential parts of any economy.  Over the next four years, New Zealand's net debt (private and public sector) is projected to grow to more than our income. New Zealand has produced current account deficits every year since 1973, which implies that national investment has continuously exceeded national savings across both the private public sectors.

 

  1. How do New Zealand savings rates compare with other countries?

 

There are a number of ways of measuring this - and this is something the Working Group will look at in detail. On at least two measures, our challenges are stark: New Zealand's net debt to the rest of the world has increased to almost $180 billion and the country has run a current account deficit every year since 1973.

 

  1. Is the Government committed to changing savings policies after the Working Group reports back?

 

The Government will consider the Working Group's advice when it receives its final report. At this stage, we are not ruling anything in or out - apart from confirming that we will not change entitlements to New Zealand Superannuation and that we will not introduce a broad taxation of capital gains or land.

 

 

 

6.  What timeframe is the Government working to - when will the Working Group report back and will there be changes announced in the Budget next year?

 

The Working Group will hold its first meeting this month. It plans a series of six meetings, before a final working session in December 2010, with interim papers to be made public along the way. The Working Group is scheduled to report to the Minister of Finance in January 2011.

 

  1. Will this lead to compulsory retirement savings?

 

The issue of compulsory retirement savings is just a small part of New Zealand's overall national savings picture. The Government is focused first and foremost on comprehensively understanding the wide range of savings and investment issues facing New Zealand. At this stage, we are not commenting on specific ideas that might come out of this debate.

 

  1. What will this mean for taxpayer-funded New Zealand Superannuation?

 

There will be no changes to either the age of entitlement or payment levels of New Zealand Superannuation. The Government has already committed to keeping existing arrangements in place.

 

  1. Could further tax changes be part of any savings package?

 

We have asked the Working Group to look at the impact of the tax system, particularly the taxation of income from savings and investment on the level and composition of national savings and investment decisions. In particular, the Group will consider the case for moving to a dual income tax system, where labour and savings and investment income might be taxed at different rates. It will also look at indexation or part indexation of the tax system so that real, rather than nominal, savings and investment income is taxed.

 

  1. Will the Working Group exercise influence Government decisions around contributions to the New Zealand Superannuation Fund?

 

No - this exercise is about increasing national savings. As we've said, borrowing to invest in the Super Fund does not increase national savings - it simply changes the mix of the Crown's balance sheet. Contributions to the Superannuation Fund will resume when budget surpluses permit. 

 

  1. How much will the Working Group cost?

 

The cost of members' fees will be about $70,000 and there will be additional operating and salary costs of the secretariat supporting the Working Group. All of these costs will be met from within the existing budget baselines of Treasury, with staff contributed from the Reserve Bank, Inland Revenue Department and Statistics New Zealand."






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