The Government and its political allies have gone on the attack over Labour's ground-breaking interest rates and savings policy, after signs the plan was getting traction with commentators and the public.

Widely regarded as perhaps Labour's strongest policy package in some time, the Government was initially dismissive, but chose not to engage on the specifics of the plan to vary employees' KiwiSaver contributions within a band of about 8 to 10 per cent, as a substitute for some Reserve Bank interest rate movements when fighting inflation.

Labour argues increasing KiwiSaver contributions to fight inflation would cool the economy by diverting a portion of households' cash into savings rather than into higher interest payments.

Avoiding some interest rate hikes when fighting inflation would help prevent the dollar rising to levels that damaged export earnings and jobs.


But Economic Development Minister Steven Joyce, one of National's key political strategists, this morning suggested the policy was no more than half baked and it would take massive increases in contributions to have a meaningful effect on interest rates.

Mr Joyce said Labour's finance spokesman David Parker had been unable this morning to this morning to "answer a simple question today on how much KiwiSaver contributions would have to go up for wage and salary earners in order to stop a 1 per cent rise in interest rates".

"Surely you must be able to answer that question. If you can't, it's not a policy, it's not even an idea, it's just a David Parker thought bubble.

"It's simply not thought through," Mr Joyce said.

Mr Joyce said Mr Parker had indicated a 1 per cent increase in KiwiSaver contributions would generate about $400 million of net new savings.

"My estimate is it would take roughly $2.5 billion in extra savings to keep the OCR 1 per cent lower. Labour would need to take another 6 per cent of people's pay packets off them and put it into KiwiSaver to avoid a 1 per cent increase in interest rates. Given they already want people to save 9 per cent, that would whack it through to 15 per cent," Mr Joyce says.

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Conservative Leader Colin Craig also joined in, saying that a central plank in Labour's plan - making KiwiSaver compulsory - was flawed.


"The problem here is that Labour has missed the obvious - the best form of saving that any individual can make on average is to reduce their borrowing, and in most cases this means paying off credit cards, and then their mortgage as soon as possible."

Making KiwiSaver compulsory would force "many New Zealanders to make a less than optimal financial choice".

"Government should not dictate the types of investment New Zealanders hold, particularly when they dictate a sub optimal choice," Mr Craig said.

Given KiwiSaver was not government guaranteed, Labour would be forcing financial risk on New Zealanders and had also overlooked the fact many New Zealanders simply couldn't afford to save, he said.

"If those struggling financially are forced into Kiwisaver they are most likely to take on borrowing, and often at a punitive interest rate. Labour's policy will be putting these New Zealanders in an impossible position, and in most cases increasing their personal indebtedness."

Addressing party faithful at National's Northern regional conference this morning, Finance Minister Bill English also attacked Labour's policy, saying people preferred simple rules they could understand and everyone knew what happened when interest rates went up.

KiwiSaver was a completely different thing.

"KiwiSaver is long-term retirement policy that is designed for stability over 30 to 50 years.

"You do not want the Minister of Finance messing around with that every six weeks like the Reserve Bank does with interest rates.''

But the Labour Party's policy has gained some support from Former Reserve Bank Governor Don Brash.

Dr Brash told TVNZ's Q+A show he saw "some merit'' in the scheme.

"Labour has recognised that there's a need for another instrument to get some pressure off the exchange rate and I think it's a sensible thing to do. Will it work? I'm not sure.''

But Dr Brash said he did not support Labour's proposal to make KiwiSaver compulsory.

"I don't favour compulsory saving for retirement - there is very little evidence that it's increased savings in Australia, KiwiSaver has not increased our savings rate here at all.''

Labour Leader David Cunliffe told Q+A the move to a compulsory savings rate of 9 per cent would be slow and gradual.

"The movement into compulsory KiwiSaver and the gradual increase in the contribution rate will be very gradual, very slow, half a percent to one percent a year. We do not want to see people's real incomes going backwards.''

He said KiwiSaver would not be guaranteed by the Government.

"But people will have the choice to put them in very low or very moderate risk investments, and because this is broad based across the economy and there will be a large number of institutions involved, we think that risk will be extremely low.''

He said the new monetary tool would benefit all New Zealanders.

"Lower income New Zealanders will benefit from having lower rents. Those who have their own homes will have lower mortgages, they'll also have higher wages starting with an immediate increase in the minimum wage to $15 and then a second increase during our first year in government.

"Many will find themselves at least on the living wage across the state sector.''

- Additional reporting APNZ