Labour unveils 'tool' to drop dollar

David Parker.
David Parker.
Finance Minister Bill English says Labour's plan to overhaul the rules on compulsory Kiwisaver contributions is "nothing new".

However, employers have backed the plan, saying it "has merit" and warrants "careful consideration".

Labour finance spokesman David Parker announced this morning that a Labour-led government will require the Reserve Bank to use changes to the rate of people's compulsory KiwiSaver contributions rather than interest rates to control inflation while taking pressure off the over-valued kiwi dollar.

Mr English said the variable savings rate idea was "nothing new".

"You can increase the KiwiSaver contribution rate and we did just 12 months ago. If you want to dampen consumption you can also put up tax rates or the Government can spend less."

Mr English said Labour and the Greens were fighting the perception that in Government they would tax and spend more which would push up interest rates.

"So they've floated something they might investigate which they say would fix everything but the end result is you have to save more. It will hit low and middle income households particularly hard. He's not committing the Government to saving more and it would allow a Labour Greens Government to spend a lot more if it worked."

However he was sceptical it would work.

"KiwiSaver is a long term scheme where people need as much certainty and security as you can get... monetary policy focuses on the price of credit. They are both designed for their own specific purpose both have been successful. They both create challenges but there's no evidence that mixing the two of them up is going to somehow give us a magic pudding we've never seen before."

Plan has merit - employers

However the Employers and Manufacturers Assocation said Labour's proposals "have merit and warrant careful consideration, particularly as the Reserve Bank's independence would be preserved".

"Apart from our investment in housing, we're constantly told we're poor savers, and our exporters certainly deserve a better priced dollar - this policy prescription addresses both of these fundamental issues," EMA chief executive Kim Campbell said.

"What's more, New Zealanders would keep their added savings rather than see them disappear when interest rates rise. It could work out well in the longer term."

But while the variable savings rate was a good idea, "it would not be a good idea to allow politicians to determine what it should be".

Furthermore, Mr Campbell said the proposal rested on KiwiSaver being made compulsory, "an idea whose costs may fall unfairly on small businesses".

Labour unveils Kiwisaver plan

Parker unveiled the policy at an Auckland breakfast briefing this morning.

"Instead of paying more interest on your mortgage, under the new rules a similar amount of extra savings would go into your KiwiSaver," he said.

"Overall interest rates will be lower and so will our exchange rate" through use of the Variable Savings Rate(VSR), which a policy paper published this morning says will be "investigated" and from which low income earners may be exempted.

"The policy targets agreement will request that the Reserve Bank use this once in a lifetime opportunity to attempt to get underlying (as opposed to cyclical) New Zealand interest rates back to the lower levels charged in our competitor countries," said Parker.

"The PTA would state whether or not it was the government's expectation that over the economic cycle the Reserve Bank variations to the KiwiSaver rate would be neutral."

Labour would also shift the RBNZ's inflation targeting to include achieving current account surpluses to reverse 40 years of the country living beyond its means.

"If New Zealand is to decrease its net international liabilities and do better in growing per capita incomes (particularly for low and middle deciles), greater priority will need to be given to achieving growth in its foreign exchange earnings or saving sectors."

Parker said "nowhere currently" used a VSR system, but that moving all New Zealanders into compulsory KiwiSaver at an increased rate of contribution would reduce inflationary pressure during the transition phase anyway.

"This is the perfect time to do this," he said.

Labour would raise the current 6 per cent contribution rate to 9 per cent (paid 50/50 by employee and employer) over time. The rates at which a VSR might be set are not discussed, although limits to the extent of variation in savings rates might be part of the PTA.

The RBNZ would not have the ability to deploy the VSR unilaterally. It would have to recommend its use to the government and require agreement on a case by case basis.

"Higher interest rate payments are lost to the lender, with much of it heading overseas, whereas savings would belong to the saver," Parker said.

To reflect a new emphasis on improving the country's external accounts, the Reserve Bank Act would be amended to "maintain stability in the general level of prices in a manner which best assists in achieving a positive external balance over the economic cycle."

 

April Fools

David Parker's little trick was to tell us that interest paid to banks is kept by banks. The average Labour voter and the average journalist seem to believe this and don't understand that most of the interest that banks collect from borrowers gets paid to the lenders. The banks keep only a small portion, and many New Zealand lenders depend on the interest on their deposits to survive financially.

Both the compulsory KiwiSaver and the Variable Savings Rate (VSR) would be bad for the poor. Many already struggle to pay their rent or mortgage and would be hit hard by having 9% of their income removed. Many would like to save for their retirement, but can't afford to. The VSR seems very unpleasant for all those households that need to plan their finances: the VSR could be changed several times a year, at the whim of a bunch of politicians. This means that, at times and without warning, everyone will be forced to increase their KiwiSaver contribution and will suffer an unexpected decrease in income. The benefits of this seem negligible, but the detrimental effects on the poor seem significant.

A bit of a wash

Skinhat: listening to the radio today I think that for most workers it would be a wash - after all the money they'd be forced to put into kiwisaver would still be theirs, and their employer would also be putting in more. The alternative is that interest rates go up and as a result mortgages and rent go up. They end up with less in their hands once their bills are paid either way - and if the interest rates go up the money gets shifted to Aussie banks who move it out of the country. I think it's better for us to keep that capital in NZ invested in NZ companies and creating jobs here rather than being used to prop up the standard of living of Aussie retirees.

On the other hand, I think that employers would be the ones  who lose out the most, and as we see above they see there is largely an upside for them.

Reducing take home pay unfair to workers

Doesn't seem fair that workers bear the burden of containing inflation since basically Labour wants to reduce workers' pay (money would go to Kiwisaver instead) to reduce spending and possibly reduce inflation and therefore reduce the NZ dollar. With higher interest rates, at least businesses also bear the burden of containing inflation since they will have to spend more on interest.

Businesses contribute a lot to inflation (eg the Christchurch build), so just taking away pay from workers may not have a big impact on inflation. Having a high NZ dollar does give more parity with Australian pay so may reduce the number of New Zealanders leaving New Zealand. Also businesses that use a lot of imports will pay less. A high NZ dollar has its positives and negatives.

The article also mentions that Labour is unhappy that interest is lost to the lender. Is this bad? If you put your money in the bank, getting interest on your money is good for the saver. Currently with interest rates so low you might as well put your savings under a mattress.

Also, I think workers will feel uneasy that their take home pay will vary a lot depending on inflation. The article doesnt mention any threshold of how much pay Labour would be prepared to take out. Would they be prepared to take out 20%? 

 

Variable KiwiSaver

There is only one way Kiwisaver contributions would be variable under Parker's scheme. Upwards, and that's harsh on those who have no mortgage or have paid their mortgage off. Less disposable income and higher prices of nearly everything because  of a lowered exchange rate is hardly going to help the average earner. And how high would contributions have to be set befgore the economy cooled enough to allow interest rates to be retained at current levels? Certainly more than the equivalent percentage interest rates need to rise, because businesses pay interest but do not pay into kiwisaver, if in fact interest could be contained. This proposal is fraught with unknown and unintended consequences. Nothing wrong with a compulsory savings scheme, but the rate needs to be fixed and not linked to the OCR.

A good thing

As an exporter anything that deals with the exchange rate misery that our wold-leading interest rates cause is a good thing. This one has the double whammy of freeing more money to be invested in local business, something that will pay off for all of us in the long term.

The one downside I see is that I don't think this is a knob that can be turned quickly to tweak the economy, it's more of a long term thing because it will take months for a change to be implemented in employer's payroll systems - like a change in the income tax rates, it would likely require at least 2 month's notice and take a month or two longer for the economic effects to actually kick in. I'd expect the Reserve Bank to continue to use monthly interest rate tweaks, but over time to trade off long term bulk rises into kiwisaver to ameliorate the downsides of the current economic tweaking.

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