We're spending more than we earn, but not by much

Photo / APN

New statistics indicate households' spending has been exceeding their income by much less than was previously thought.

Statistics NZ yesterday released a more comprehensive and refined set of income and outlay accounts. They show a track for the household savings rate since 1999 which, while still negative, is about 7 percentage points less so than the previous estimates.

On average over the past five years they show households spending $1.06 for every $1 of income. That compares with $1.13 for every dollar on previous estimates.

The latest numbers incorporate much more detailed information on interest rates and have also reallocated more of the mortgage interest paid to landlords, who are treated as businesses, rather than owner-occupiers, who are in the household sector.

In the year to March the household dis-saving rate was 2.2 per cent, down from 4.9 per cent in 2009 and 8.9 per cent in 2007.

The latest decline reflected the impact of tax cuts on incomes, Statistics NZ said. The flipside of that is a turnaround in the Government's savings rate from 12.9 per cent positive in the year to March 2009, to 3.9 per cent negative a year later.

But the chairman of the savings working group, Kerry McDonald, said the latest numbers would not change the group's view.

"It's very good but it is not clear that it is a long-term structural change. It may be more a reflection of a weaker economy."

Releasing the working group's interim report McDonald said it would call for a reduction in consumption of around 3 per cent of gross domestic product. In today's dollars that would be $6 billion a year.

"We would be looking at the government sector first," he said.

The payoff would be a lower interest rate paid to foreigners, which would encourage private investment, and it should also lower the exchange rate, encouraging exports.

While such an adjustment would be spread over several years, the benefit in terms of financial markets' view of New Zealand would tend to be front-loaded - provided the policy changes were credible, he said.

The group expects to recommend a further shift, over time, towards taxing expenditure more (through GST) and incomes less.

It also calls for a reduction in the distortions from the wide range of effective marginal tax rates on various forms of saving.

The working group favours at least some inflation-indexation of taxes on savings, and an extension of the 28 per cent rate paid by portfolio investment entities (PIEs). But its recommendations are constrained by the need to be, on a net basis, revenue-neutral.

The group's final report, due at the end of January, is also expected to focus on the gains to be had from lifting productivity in the public sector. It points to long-term Treasury projections of the extent to which a debt-constrained Government would have to cut public services in real per capita terms. Those cuts can be shallower and briefer with higher rates of productivity growth in the public sector.

The savings working group also echoes calls from the Treasury, the Reserve Bank and by implication Standard & Poor's, for the Government to return to surplus faster than the 2015/16 timeframe signalled in the Budget.

"The cost pressures from the ageing population and rising health spending are growing, the window for changing policy settings is closing and the no-change option is not viable."