Bollard wants to see more saving but is it the answer?

Yesterday on Morning Report (Radio New Zealand) Reserve Bank Governor Alan Bollard urged for greater saving amongst the population. Three reasons for this:

1. it would reduce interest rates and boost economic growth
2. lessen New Zealand’s vulnerabilty to global finaincial shocks such as a financial crisis
3. take the pressure off the NZ$ and promote export growth

Furthermore our high level of external debt was the main reason behind the Standrad & Poors warning of a downgrade in NZ’s credit rating. The Government expects to return to surplus by 2016, but speeding that up would be one of the most important measures to improve the level of savings. He suggested the Government should also think about moving towards a Nordic-type tax system where income on capital is taxed at a lower rate than labour income.

In the year to March 2010, New Zealand’s gross savings rate increased to 16.9% of GDP from 14.8%. However in OECD terms this is quite low but one needs to be cautious about coming to conclusions that high savings rates are paramont for economic growth. In recent years Australia has maintained a savings rate of 22% compared to New Zealand’s 16.9% but if you look at Ireland over the last ten years its savings rate exceeded that of Australia (see chart below) – we all know what happened to Ireland in the last few days.

Likewise, the United States’ gross savings rate has for the most part has been below that of New Zealand and Japan’s has been well beyond both countries. It’s difficult to argue these two major economies are chalk and cheese in their present economic predicament or outlook. We also note that while the German economy has been a shining light through the global recession its gross savings rate has fallen noticeably over the last couple of years.

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