Mixed reaction to monetary policy

David Parker.
David Parker.
Labour finance spokesman David Parker yesterday released a monetary policy upgrade aimed at alleviating New Zealand's low savings rate, current account deficits, high interest rates and an overvalued dollar.

The main parts of the policy were making KiwiSaver universal for all paid employees, starting at the current 6% (3% for both employees and employers) with an annual increase in contribution rates until it reached 9%.

The scheme remained optional for self-employed.

The Reserve Bank will be granted an additional tool, the ''variable savings rate'' (VSR) where it can vary - or request the government to vary - KiwiSaver contribution rates over the cycle.

The VSR could be used instead of interest rates to increase or decrease domestic consumption.

Dunedin financial consultant Peter Smith, of the Kepler Group, said there was no doubt New Zealand's savings rates were low compared with other countries, such as Singapore, where workers must pay 20% of their gross monthly income to the government scheme which was topped up by 16% from employers.

Other countries such as Chile required as much as 10% of gross wages and Australia was moving to 12% from the current 9.25% by 2020.

''It would help savings in New Zealand if KiwiSaver could be made compulsory but actually making the savings rate variable would be a nightmare for contributors, employers, the IRD and KiwiSaver providers.

''I would expect most contributors would be more confused they they are now.

''Many people do not know what scheme they are in and what they are actually contributing.''

The ''Kiwi dream'' was owning a home and it would seem no matter what the cost, many people were still aiming for that goal, he said.

The dream had been a barrier to people joining KiwiSaver as home ownership for many had been a higher priority than saving for retirement.

''The fact they still have a choice is probably in their favour, as repayment of debt as fast as possible is still the best investment you can make,'' Mr Smith said.

ANZ chief economist Cameron Bagrie liked some of Labour's proposals, including a capital gains tax on second properties and the ring-fencing of property investment losses.

The policies also ''hit the right notes'' in preserving the Reserve Bank's independence and running fiscal surpluses.

The ANZ also supported making KiwiSaver universal, although the evidence in regard to compulsory savings schemes was mixed in regard to aggregate savings performance.

Australia still ran current account deficits.

''There are problems galore with using KiwiSaver contribution rates as a monetary policy tool, with politics being number one.

"If it were practical for the Reserve Bank to control KiwiSaver, why not give them the New Zealand super fund too? That doesn't pass the smell test.''

The Reserve Bank could be a ''supporting actor'' but not the lead role in regard to lifting savings and economic performance across the economy, Mr Bagrie said.

New Zealand's poor external position was far from solely a result of New Zealand's high currency and low savings rate, he said.

Mr Parker said Labour's policy would lead to lower interest rates, a more competitive dollar and better jobs with higher wages.

Governments around the world had changed how they operated monetary policy since the global financial crisis.

New Zealanders had a dollar overvalued by up to 15%, a weakened export sector and mortgage rates that were among the highest in the developed world, he said.

Forsyth Barr broker Peter Young said the time lag between increased savings and the impact on the economy was quite long - much longer than changes to the official cash rate. There would be confusion on how the policy would work.

Australia had had a compulsory super scheme for 30 years but it had not stopped the Australian dollar appreciating, the Reserve Bank of Australia raising interest rates and savings being diverted from other areas.

Recent house price gains in Australia were in part driven by self-managed super funds investing more in property and there was no reason why the same would not happen in New Zealand, he said.

A lower dollar might help some exporters but it would hurt the economy overall with higher import prices and higher interest rates, Mr Young said.



At a glance

• The Reserve Bank Act would be changed.

• KiwiSaver to be universal.

• A variable savings rate, which the Reserve Bank could use to vary the KiwiSaver contribution rates as an alternative to the official cash rate.

• Capital gains taxes on property other than the family home would be introduced and tax losses on property investment would be ring-fenced.

• Non-resident foreigners would be banned from buying existing New Zealand housing and farmland.


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