David Skilling: Much more is needed to develop a strong, competitive economy

Initiatives to encourage personal savings were a centrepiece of yesterday's Budget. The changes to the KiwiSaver scheme represent a significant expansion, making it more likely it will have a material impact on the overall savings performance.

The Government's decision to match voluntary employee contributions up to about $1000 a year, and to require employers to match the voluntary contributions of their employees up to 4 per cent of their income within the next four years, will make participation in KiwiSaver much more likely. Combined with previous Government decisions to provide a more favourable tax treatment of employer contributions to employee savings schemes, this will generate a substantial increase in personal savings.

There was fiscal room to do more. The Government could have announced steeper cuts in the company tax rate, say to 25 per cent or 28 per cent, to compensate employers for the increased wage bill generated by the required matching contributions, and there was fiscal room for personal tax cuts that could have been directed into individual savings accounts.

Nevertheless, the Budget announcements represent a significant commitment to promote individual and national savings. This approach also allows for moderate tax relief to be given in a way that does not generate inflationary concerns.

Encouraging savings will have a range of benefits. For individuals, increased savings will strengthen their financial position as well as providing them with a more significant ownership stake in the economy, helping to ensure a nation of owners not just employees.

Increased savings will also strengthen the business environment. Over time, increased personal savings will strengthen the capital markets and provide a much larger domestic pool of capital to finance company growth.

Goldman Sachs JB Were estimates the expanded KiwiSaver scheme will generate increased funds flow of between about $5 billion and $7 billion a year by 2013.

A larger pool of domestic capital will also reduce the heavy reliance on foreign capital, will place downward pressure on cost of capital and also allow for a larger New Zealand ownership stake in the economy.

However, increased savings on their own are not a silver bullet that will transform the economy. If people do not have profitable opportunities in which to invest these savings, the existence of a larger pool of domestic capital is unlikely to generate a substantial improvement in the growth rate.

Savings are better seen as a prerequisite for stronger economic performance - without a larger pool of domestic capital and vibrant capital markets, New Zealand will not be positioned to capture much of the upside from any future improvement in growth and productivity. It is the interaction of a larger domestic pool of capital and a strengthened productive base that will generate an improved economic performance.

The Budget contains some initiatives that contribute to a stronger economic base such as the reduction in the headline corporate tax rate from 33 per cent to 30 per cent as well as the ongoing increases in infrastructure investment. Similarly, the significant R&D tax concession will assist firms active in developing knowledge and make it easier for this country to attract and retain them.

There is some modest financial assistance for internationally engaged firms in terms of market development assistance. Even more significant are the changes to the international tax regime that provide a much more helpful tax environment for local firms operating internationally.

But, overall, while the significant commitments to savings policy are welcome and will address some major exposures in the economy, there is a real lack of urgency in yesterday's Budget.

New Zealand faces some major economic challenges. Its per capita income is now 22nd out of 30 OECD countries, having just been overtaken by Greece. And its per capita income is about 30 per cent lower than Australia's, with the consequent pressure for people and firms to relocate across the Tasman. The economy is gradually detaching itself from developed world income levels.

New Zealand is operating in an intensely competitive global environment and lifting income levels will require deliberate, sustained effort with a clear strategic focus. Although yesterday's Budget has some positive features, much more is needed to grow a strong, competitive economy.

* David Skilling is the chief executive of the New Zealand Institute, a privately funded, non-partisan think tank.

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