Brian Fallow: Time for a real savings culture

The time is ripe, over-ripe even, to do something serious about boosting asset ownership and inculcating a savings culture.

The New Zealand Institute is right about that.

Baby-boomers are in their peak earning years. The Government is running fiscal surpluses that are healthy or obese, depending on your point of view.

And 10 years of job-rich economic growth has brought unemployment down to the lowest level in a generation.

That is not to say that it would be painless to engineer the kind of major shift in saving and spending that the institute advocates. You can't have your cake and eat it.

It is talking about diverting up to $4 billion a year of Government revenue into individual savings accounts, plus up to another $2 billion of voluntary contributions from households.

That amounts to about $1500 a person.

Clearly this is a greedy little piglet it hopes to attach to the fiscal sow, but institute chief executive David Skilling argues that the cost is affordable.

Budget forecasts published by the Government last December allocated between $2.1 billion and $2.3 billion a year for new spending over the next four years, a cumulative total of $9.4 billion.

Clearly the Government thinks that is consistent with its self-imposed definition of fiscal rectitude - a sinking lid on Crown debt as a share of GDP.

If the institute's proposal was phased in over four years, the cost to the public purse, including the Clayton's tax cut, would be less than half of that.

Put another way, it would be about twice the cost of the Cullen fund, which was phased in over four years as well.

The bottom line is that it would crowd out $4 billion a year worth of public spending or tax relief.

"We know there is an opportunity cost," Skilling says, "But the issue is not the availability of funds. It's a question of priorities."

It is less than the United States federal budget allocates for measures to encourage home ownership and retirement savings, largely through tax concessions. They cost US$320 billion, or about US$1000 ($1400) for each American.

Lifting the national savings rate by up to 4 per cent of GDP would also take some of the pressure off the current account deficit, which can be seen as a measure of the gap between domestic investment and domestic savings.

Last year, even with strong prices for our major export commodities, we had to borrow another $9.4 billion, or 6.4 per cent of GDP, from the rest of the world.

Our international net debt is $123 billion, or 84 per cent of GDP, a high level for a developed country.

This is risky, and expensive. It is one of the reasons our interest rates are consistently higher than other countries'.

It is the failing grade on our economic report card. If this is not the time to do something about that, when will be?