The Government's Savings Work Group has taken aim at "distortions" in the tax system that fuelled the recent housing boom at the expense of other forms of saving and investment that would have promoted healthy economic growth.
The group, set up last year to address New Zealand's savings and debt problems, has released its final report, including a series of recommendations that were signalled in its interim findings late last year.
The final report again contains stern warnings that New Zealand's indebtedness to the rest of the world - currently at 85 per cent of gross domestic product (GDP) - places the country at dire risk of a Greek or Irish style financial crisis.
Headed by former BNZ Bank chairman Kerry McDonald, the group said decisive steps were now required to increase national savings, both in the state and public sector, above current levels and also to increase net exports to allow the country to better pay its way in the world.
"If New Zealand fails to act credibly and effectively it increases the risk that many of the required adjustments will be imposed by market forces, probably in an abrupt and damaging way."
Mr McDonald said one of the key aspects of the group's work was around tax, particularly settings which favoured investment in bricks and mortar over savings such as bank deposits which could fund investment in businesses and other productive assets.
"Why would you tax income from savings at an effective marginal tax rate of 50 per cent and an investment in rental housing at 25 per cent?" Mr McDonald asked.
Mr McDonald said the group's analysis suggested those tax distortions were responsible for up to half on the increase in house prices over the last ten years.
That bubble, fuelled by easy access to credit much of which came from overseas "had a major impact on net foreign liabilities". said Mr McDonald.
"The last decade was absolutely unsustainable it was a pattern of behaviour and economic activity that simply couldn't be sustained and New Zealand isn't the only economy that has suffered from that."
The group made a number of recommendations for tax changes more favourable to savers.
They included indexing savings tax rates to inflation and reducing the tax rate on portfolio investment entities like KiwiSaver schemes so they are up to 10 percentage points below savers' marginal tax rates.
The group also favoured continuing the present Government's switch from income taxes to consumption taxes including a further increase in the GST to 17.5 per cent.
The report contained a recommendation to consider new regulations to vary the amount of capital banks must hold in reserve depending on economic conditions "in order to help prevent unsustainable economic booms".
However, as a first step to address New Zealand's debt problems, the Government should act immediately to stabilise the country's net foreign debt at below 90 per cent, and over the next decade work to reduce "to a more manageable 60 per cent to 70 per cent" the report said.
The fastest way to do that was to return the Government's finances to surplus sooner than currently forecast.
It set a target of returning the Government's books to surplus by 2016.
A key part of that plan was to sharply increase government sector productivity and performance.
That would give governments more options to avoid a decline in spending and services and in theory allow some growth.
While the group found retirement savings appeared high enough among people over 45 to avoid an increase in poverty among the elderly, there was "much room for improvement" and at least some that could come from changes to KiwiSaver.
The group recommended increasing membership of the savings scheme but said it should not be made compulsory, "at this time".
"Many of the gains should be achievable by other means."
Its recommendations around the scheme included auto enrolment of all employees aged 18 and over or possibly even 16.
The group also suggested spreading the $1000 state funded kick start over five years rather than contributing at the time of enrolment.
It also suggested increasing the default employee's contribution rate from 2 per cent to 4 per cent but keeping the minimum contribution at 2 per cent.
The group also said costs around the scheme such as fees and other expenses should be reduced while disclosure of fees and scheme performance should be clearer.
The group also recommended resumption of payments into New Zealand Superannuation Fund to help meet future superannuation requirements but suggested changing the funding method, "for instance through the introduction of a dedicated social security tax offset by a reduction in ordinary income tax".
Other recommendations included measures to increase financial literacy, a prompt review of the effect of net migration on national savings.