Budgeting Service says people who don't have mortgages will be subsidising economy for home owners.

Households struggling to keep on top of their mortgages would be the winners under Labour's proposed interest rate shake-up, but at the expense of those who can't afford to get a foot on the property ladder, a budgeting service warns.

Labour deputy leader David Parker yesterday unveiled his party's "upgrade" of monetary policy, proposing that New Zealanders be forced to save more through higher KiwiSaver contributions to control inflation rather than the Reserve Bank lifting interest rates.

At present when the economy is at risk of overheating and prices are rising too quickly, the Reserve Bank increases interest rates which cools activity by diverting more of households' cash from spending on goods and services and into mortgage repayments.

Read more:
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However, those higher interest rates are attractive to foreign investors who drive the kiwi dollar higher which in turn reduces returns to exporters and hurts economic activity and jobs.

Labour's "variable savings rate" would be a potential circuit breaker that would work with its previously announced policy to make KiwiSaver compulsory and lift combined employee and employer contributions from 6 per cent to 9 per cent. It has not been decided what proportion will be paid by the employee.

The new policy could mean workers have to save more than that if the Reserve Bank recommended increased savings.

Mr Parker told the Herald reaction to the policy had been positive as "people prefer to save more rather than pay more interest to banks, much of which goes overseas and it's all lost to the person who's paying it forever".

But New Zealand Federation of Family Budgeting Services chief executive Raewyn Fox said the policy to keep interest rates low while forcing everyone to save more raised issues of fairness.

"The people who don't have mortgages will be in effect subsidising the economy for the people who are obtaining an asset by buying a house."

She said Labour's plan to make KiwiSaver compulsory would be even tougher on those already struggling. "We see a lot of people now who just can't make ends meet." Many of them were not in KiwiSaver.

"Take another 9 or even 5 per cent away from them, they'll go under."


Mr Parker said Labour would allow those on low incomes who entered the scheme to gradually increase their contributions so they were not forced to contribute 6 per cent immediately.

Labour's background information says "distributional and hardship effects for the lower paid" stemming from the variable savings rate could be addressed by excluding lower income earners.

Prime Minister John Key said the policy was muddled.

"The reality is what Labour would be doing is putting every New Zealander into KiwiSaver whether they wanted it or not, then they would be forcing them to save even more than they might otherwise want to save.

"These could be the very people who don't even own a house so wouldn't be affected when interest rates go up, and on top of all that the Labour Party's somehow claiming the only thing that drives inflation is domestic consumer spending.

"In fact, inflation's quite often caused by rising international commodity prices for things like oil, by business spending and by Government spending."

Chris Douglas, of investment research firm Morningstar, said Labour's policy would help people who wanted to borrow a lot to buy a house.

"But what happens when they reach 65? Will they just have a huge mortgage which they will have to pay off using their savings?"

- Additional reporting: Tamsyn Parker

Labour's KiwiSaver plan upgrade

What would change?

Labour wants the Reserve Bank to be able to adjust KiwiSaver contributions rather than interest rates to control inflation.

How would it work?

To curb rising inflation, money would be removed from the economy by forcing people to save more through higher KiwiSaver contributions. When the economy was sluggish, contributions could be cut, putting more cash into the economy.

How big would the variations be?

Labour says contributions would be varied by 0.5 to 1 percentage point at a time.

What else does Labour have planned for KiwiSaver?

It wants to make the scheme compulsory and lift combined employer-employee contributions from 6 per cent to 9 per cent of employee earnings. The variable savings rate would be on top of this 9 per cent minimum.

Will Labour continue with the first home withdrawal scheme?


Will there still be the option of a contributions holiday?

Yes, but with tighter criteria based on Australian compulsory super settings.

Could you still get the money out in the event of extreme hardship?

Yes, but again with tighter criteria based on the Australian model.