PM Luxon has made "economic growth" his sole objective in 2025, having spent his first year in office arguing about how he supports, and at the same time doesn't support, ACT's Treaty Principle's Bill. How is he going to increase economic growth?
It all comes down to more investment, according to Luxon and Finance Minister, Willis. NZ desperately lacks capital - whether it be for business start-ups, infrastructure, hospitals, practically everything. It needs to be more "capital intensive", according to the PM and Willis. I agree. When there is abundant capital compared to labour, wages are high. The mark of a poor country is the opposite - tons of people and scarce investment.
The only thing is, although National is talking big, the talk isn't backed up by the practical economics of the problem. The National Accounts tell us that investment in a nation must be financed by savings. To be more precise, there is a famous "accounting identity" which must always be true and goes like the following:
Private Domestic Savings + Foreign Savings = Investment + Government Deficit
Foreign Savings (& Investment) that flow into a nation are equal to Imports minus Exports. In New Zealand's case, we are running a large trade deficit at present, whereby our imports are much larger than our exports. To make it happen, our trade deficit is being financed by foreign lending & purchases of financial assets by savings of overseas investors.
This may be a technical Blog, but its important. It proves the PM & Willis are all talk. Both care next to nothing about increasing domestic household savings of Kiwis, which are amongst the lowest in the developed world. Consequently, we have next to no savings to fund our domestic investments & build up our local capital. I remember as an academic adviser to Finance Minister English how dismissive he was about Kiwi Saver. The PM's chief economic adviser, Matt Burgess, and National Party Think Tank, the NZ Initiative, loathe Kiwi Saver. National stopped contributions to NZ's Super ("Cullen") Savings Fund when Key was PM. National & ACT have no interest in supporting the savings that are needed to fund investments in NZ. So where will the money come from then? Foreign investors, according to the PM & Willis. Their position is to rely on foreign savings, not our own. Most of those savings, however, are currently going into lending to the NZ government to fund its huge deficit, which is bigger than even the last few years of Labour.
Will the PM be successful in solving NZ's lack of capital investment & increasing productivity by relying on foreign savings? No way. Should Luxon or Willis care to do some economics, rather than personnel management, I'd recommend they read, "Foreign savings: No gain, some pain", by Berkeley economist Eichengreen. It argues, "Foreign finance does not appear to be the cure for countries with low domestic savings". For ten years, former Finance Minister Sir Roger Douglas and I wrote articles that we showed to National and ACT on how to increase domestic savings in NZ. We both like the mandatory savings schemes they have in Australia (for superannuation) and Singapore (for health-care and super). To say the Nats & ACT spat on those articles is an understatement. Now Luxon says he wants NZ to be like Singapore, with tons of investment. But the entire Singapore model is built on mandatory savings, which Luxon personally hates. National's leader has become hot air, talk and no delivery. Its time he stopped the shallow slogans.
Sources https://cepr.org/voxeu/columns/foreign-savings-no-gain-some-pain
The only thing is, although National is talking big, the talk isn't backed up by the practical economics of the problem. The National Accounts tell us that investment in a nation must be financed by savings. To be more precise, there is a famous "accounting identity" which must always be true and goes like the following:
Private Domestic Savings + Foreign Savings = Investment + Government Deficit
Foreign Savings (& Investment) that flow into a nation are equal to Imports minus Exports. In New Zealand's case, we are running a large trade deficit at present, whereby our imports are much larger than our exports. To make it happen, our trade deficit is being financed by foreign lending & purchases of financial assets by savings of overseas investors.
This may be a technical Blog, but its important. It proves the PM & Willis are all talk. Both care next to nothing about increasing domestic household savings of Kiwis, which are amongst the lowest in the developed world. Consequently, we have next to no savings to fund our domestic investments & build up our local capital. I remember as an academic adviser to Finance Minister English how dismissive he was about Kiwi Saver. The PM's chief economic adviser, Matt Burgess, and National Party Think Tank, the NZ Initiative, loathe Kiwi Saver. National stopped contributions to NZ's Super ("Cullen") Savings Fund when Key was PM. National & ACT have no interest in supporting the savings that are needed to fund investments in NZ. So where will the money come from then? Foreign investors, according to the PM & Willis. Their position is to rely on foreign savings, not our own. Most of those savings, however, are currently going into lending to the NZ government to fund its huge deficit, which is bigger than even the last few years of Labour.
Will the PM be successful in solving NZ's lack of capital investment & increasing productivity by relying on foreign savings? No way. Should Luxon or Willis care to do some economics, rather than personnel management, I'd recommend they read, "Foreign savings: No gain, some pain", by Berkeley economist Eichengreen. It argues, "Foreign finance does not appear to be the cure for countries with low domestic savings". For ten years, former Finance Minister Sir Roger Douglas and I wrote articles that we showed to National and ACT on how to increase domestic savings in NZ. We both like the mandatory savings schemes they have in Australia (for superannuation) and Singapore (for health-care and super). To say the Nats & ACT spat on those articles is an understatement. Now Luxon says he wants NZ to be like Singapore, with tons of investment. But the entire Singapore model is built on mandatory savings, which Luxon personally hates. National's leader has become hot air, talk and no delivery. Its time he stopped the shallow slogans.
Sources https://cepr.org/voxeu/columns/foreign-savings-no-gain-some-pain
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
4 comments:
Good article and totally correct.
Without savings you can’t do anything, there’s no room to move.
Labour and National over decades have failed NZ, there still failing.
Another nail in the coffin. He's the wrong man for what our country needs.
Economics can be a real bummer, that rule "no free lunches" keeps on biting. You can send a whole team of highly skilled people overseas to try to get foreign investment but if your tax rates, productivity, support services and basic economic settings are do not support that investment the trip will be a waste of time.
To use an other cliché putting lipstick on a pig maybe relatively easy, Increasing investment. cutting government deficits, improving productivity, balancing overseas trade is hard, but even in New Zealand we eventually have to pay for our own lunch. Reality is a bitch.
I have never completed any course in tikanga, or in economics. So both are a bit of a mystery although I see glaring absurdities in both. What exactly is meant by "savings"? bank savings? or local share investment? I can recall Jenny Shipley advocating. I have had a few thousand in the bank from then and earlier. At one stage in the 60s, despite a wage little above a tradesman, I was paying 67% tax on the interest. Like the long term farmer saver Dob Brash often quotes, the savings have not done the saver much good. Did they contribute to F and P or a myriad other NZ companies all sold and many moved off shore?. Or did the savings finance the chinese ownership of the rubbish disposal industry? Little wonder governments are wary of the likes of Kiwisaver. If it all comes tumbling down as 1929 and as seems poised to repeat, any current governments will incur the wrath of the many destroyed. And be stuck with vast welfare demands.
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