BusinessSense: Bollard Hits Nail On Head

You can count on Reserve Bank Governor Alan Bollard to hit the nail on the head.

His warning over NZ’s level of private debt, funded mostly from banks which borrow overseas, is a wake-up call after the Global Financial Crisis. But warning, and scaring people is one thing – the other side of the coin is incentives.

People have heard these warnings about savings before. But with the pitiful return they get, which is then ruthlessly taxed, there is little incentive to put money away.

The NZ stock market is more akin to a roulette wheel, and people have realised if they don’t save very much, the world is not going to come to an end. What NZers need is an incentive to save. In Aust half the interest earned from savings accounts is now tax free (with conditions), and their superannuation scheme, to which all employees contribute 9% of earnings is taxed at 15% and with imputation credits can be as low as 6.5%

While NZ savings interest is being hit with marginal rates of tax, it will not be attractive. The Main Report Business www.mainreport.co.nz looked at Bollard’s call for more savings.

“NZers Must Save More, Borrow Less Reserve Bank Governor Alan Bollard says more household belt-tightening and a stronger switch by banks away from unproductive personal credit growth are necessary if NZ's ongoing risk of economic shocks caused by the country's high foreign indebtedness is to improve.

Bollard says there is a lot which can be and is being done to improve the situation, like designing fiscal and tax policy to reduce vulnerabilities, putting in place cautious bank regulation, and improving access to a range of investment opportunities. "Ultimately, however, it is up to NZers to improve the quantity and quality of household savings.”

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But he says one of NZ’s prime problems is low savings rates, with very limited financial savings and stocks and shares. Overwhelmingly, household assets are invested in housing and other property.

He warns in the end either the markets will penalise us by requiring a larger premium for its continued funding, and/or the sheer size of servicing our obligations will become an intolerable burden to the country. "Rather than await such painful punishments, we should be looking to improve the situation."

It is clear Bollard is right. There is too little saving and productive investment in NZ, but people must be given positive reasons to save. Scare stories won’t work.

Many people are struggling to get by on what they earn. Unless there is a real reason to save or invest in NZ shares, they will choose not to do it.

Compulsion is an option, but surely it would not be needed if people could see clear advantages to putting money in the bank. At the moment, there really aren’t any, and this is the problem.

- Max Bowden Publisher/Editor In Chief The Main Report Group
mbowden@themainreport.co.nz

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