The New Zealand Institute
| Grade | NZ Rank | Trend | Latest Value | 2015 Target | |
|---|---|---|---|---|---|
| D | 24th of 34 | Good | 17.7% GNS rate | 22 | More saving and reallocation of wealth needed for productive investment |
Wealth is the net worth of a person, household, or country, calculated as the value of all assets owned less all liabilities owed at a point in time. Income, consumption, savings and wealth are closely related because income is the flow that, when not consumed, is saved and accumulates to form wealth.
Savings can be converted into forms of wealth such as assets like houses or valuable art, or it can be invested in productive assets such as businesses. Wealth changes when the value of assets change, and it can be consumed by spending in excess of income.
The average household wealth of a country represents the share that the average household has in the total capital in that country. It is calculated as total national wealth divided by the number of households.
Total assets and liabilities are made up of private and public components. Private assets are in the form of housing value, financial assets and other non-financial assets, and public assets include property, plant and equipment (PPE), and financial assets, and are largely funded from tax. Private and public liabilities are in the form of debt which incurs interest, and other obligations such as creditors.
The total wealth of a country represents the capability of that country to invest in infrastructure and productive assets, and it also indicates the reserve that can be drawn on in adverse times to provide economic resilience. However not all wealth is available for drawing from immediately, for example wealth in the form of housing would need to be sold or borrowed against before being accessible.
Savings invested productively now will have a greater value in the future. One of the benefits from building wealth today is to provide higher incomes in the future and an increased ability to generate further wealth.
The net income an individual receives is the funds they can choose to consume or save. The amount of that income is affected by the rate of public consumption which is largely funded through tax. New Zealand is ranked 6th lowest of 31 OECD countries with 35% total public expenditure as a percentage of GDP for 2008 (OECD, 2011, p.59).
As discussed further in the NZahead measure GDP per capita, New Zealand’s average income is lower than for most other OECD countries. Figure 1 shows the rate of consumption is slightly above the OECD average. That means New Zealanders have less to save and invest. Low capital intensity reduces New Zealand’s capacity for investing in productive assets to drive economic growth, which in turn contributes to lower incomes, less savings and low investment.
Figure 2 shows New Zealand’s public and private sector savings rate has been consistently below the OECD average since 2004. In 2009 the gap between New Zealand and the OECD halved from the previous year, due to both an increase in New Zealand’s saving rate and a decrease in OECD savings. The latest data, for 2010, shows that New Zealand’s saving rate has increased further, in line with an increase in the OECD average.
Changes in the value of assets already owned also affect wealth. Figure 3 shows the household value of housing, financial assets and financial liabilities since 1991. There was a marked increase in the net value of these components from 2002 to 2007, mainly from an increase in housing value.
Most commentary on household wealth says that New Zealand holds about 75% of its household assets in non-financial assets such as housing, compared to the unweighted average for the OECD of 50%. However this is disputed by some due to the exclusion of significant components such as investments in overseas assets, unincorporated businesses and unlisted incorporated businesses.
We have not been able to find any definitive data on these components for New Zealand or international comparisons, so are unable to determine if the importance of the excluded components varies materially between New Zealand and other OECD countries.
Holding a high portion of household wealth in housing is not as effective in generating future income for the country as investments in business or infrastructure. In their final report, the Savings Working Group concluded that low saving and wealth accumulation through property investment have diverted resources from productive investment and resulted in under-development of New Zealand’s capital markets.
The New Zealand Government’s net wealth per household has been declining since 2008 as shown in Figure 4. Although total assets have been increasing, liabilities have been added at a faster rate by Government’s responses to the recent global recession and Christchurch earthquakes.
In September 2011 New Zealand’s credit rating was downgraded from AA+ to AA by Fitch and Standard & Poor’s. Fitch stated “New Zealand’s high level of net external debt is an outlier among rated peers - a key vulnerability that is likely to persist as the current account deficit is projected to widen again”.
The Savings Working Group stated that New Zealand has borrowed too much overseas, and that Net Foreign Liabilities are 85% of GDP, a similar level to the debt-troubled countries of Europe. However, New Zealand’s debt is mainly private and New Zealand’s gross general government debt as a percentage of GDP was ranked 6th lowest out of 34 OECD countries for 2010 (World Economic Forum, 2011, Global Competitiveness Report, p.426).
There are several efforts underway to lift productivity and income, discussed in more detail in the NZahead measure Labour productivity. If these efforts are successful, New Zealanders will have more income, which they can choose to spend, pay down debt or save to accumulate wealth.
Unlike many other countries, New Zealand policy does not include tax incentives for savings, and saving is not compulsory. Australia has 9% compulsory retirement savings which is gradually increasing to reach 12% by 2020. This is creating a pool of capital and changing attitudes so that Australians are now much more engaged in wealth creation decisions and activities.
In 2007 KiwiSaver was introduced in New Zealand. KiwiSaver is a voluntary work-based savings scheme made up of contributions from individuals, their employers and Government. The New Zealand Institute has been a supporter of KiwiSaver since before its implementation, advocating for its introduction. The initial take-up rate of KiwiSaver was higher than expected. By August 2011 there were 1.8 million members and payments to providers reached $1.2 billion for the year. In October 2011 Government announced that a one-off automatic KiwiSaver enrolment campaign, with the ability to opt-out, will take place in 2014/15 subject to a budget surplus. From April 2013 the minimum individual contribution and the employer contribution will rise from 2% to 3%.
The Savings Working Group considered how New Zealand can improve its national savings. As New Zealand’s debt is so high, the Working Group recommended urgent action to further increase national savings by 2-3% of GDP. Increasing national savings will reduce the vulnerability of New Zealand’s economy and contribute to sustainable economic growth.
The theme of Budget 2011 was building savings and investment. Government acknowledged New Zealand needs to save more, spend a bit less, and reduce the heavy reliance on foreign debt. It is considering the recommendations from the Savings Working Group.
New Zealand’s household consumption as a percent of GDP is higher than the OECD average and gross national savings have been below the OECD average from 2004 to 2010. Viewing this in conjunction with a relatively low GDP per capita indicates New Zealand has less ability to save and invest in productive assets to grow wealth than countries we compete with.
New Zealand’s total net foreign liabilities are high and Government net worth by household has declined for the last three years. Furthermore, New Zealand has not yet adopted strong policies to encourage more investment in productive assets to further increase wealth accumulation.
Although savings issues are now being identified and discussed, it is too soon to tell if enough is being done to lift New Zealand’s household wealth so the grade remains at D.
The target is to increase New Zealand’s gross national savings from 17.7% to 22% of GDP.
The target is higher than the Savings Working Group’s recommendation to lift the national savings rate by 2-3% of GDP. Although that is a worthwhile immediate goal, New Zealand’s rate would still be lower than the OECD average national savings rate seen over the five years to 2010 of 21.2% of GDP.
As New Zealand’s gross national savings rate has consistently been below the OECD average, it is likely less wealth has been accumulated than in other OECD countries. To improve wealth relative to the average for OECD countries New Zealand should therefore aim to lift the gross national savings rate above the OECD average to build stocks at a faster rate.
Assuming no material increase in the OECD average savings rate to 2015, increasing New Zealand’s gross national savings to 22% of GDP would indicate an improvement in the country’s capability to lift its relative wealth position.
The target should be achieved by increasing GDP per capita and raising the percentage saved.
NZahead figures from earlier releases showed international comparisons of household wealth components. These have been removed due to a lack of complete and reliable data. We will continue to try to get comparative data to provide a thorough assessment of New Zealand’s household wealth position, and welcome contact from anyone who can assist with information.
Aggregate national savings as defined in the Global Competitiveness Report is the public and private sector savings as a percentage of nominal GDP. National savings equals gross domestic investment plus the current account balance.
Figure 1: OECD (2010). National Accounts at a Glance: Figure 10.1. Household final and actual individual consumption, retrieved 24 August 2011 from http://www.oecd.org/document/25/0,3746, en_2649_34259_44200345_1_1_1_1,00.html.
Household final consumption expenditure covers all purchases made by resident households (home or abroad) to meet their everyday needs: food, clothing, housing services (rents), energy, transport, durable goods (notably cars), spending on health, on leisure and on miscellaneous services.
Figure 2: World Economic Forum (2005, 2006, 2007, 2008, 2009, 2010, 2011) The Global Competitiveness Report, retrieved 11 October 2011 from http://www.weforum.org/issues/global-competitiveness.
Figure 3: Reserve Bank of New Zealand (2011). Household financial assets and liabilities, housing value and net wealth: 1978 to 2010, retrieved 8 August 2011 from http://www.rbnz.govt.nz; Statistics New Zealand (2011). Infoshare database, Estimated Households in Private Occupied Dwellings, as at December quarter, retrieved 6 October 2011 from http://www.stats.govt.nz/.
Figure 4: The Treasury (2011). Financial Statements of the Government of New Zealand for the Year Ended 30 June 2010, retrieved 11 October 2011 from http://treasury.govt.nz/government/financial statements/yearend/jun11.
Further information links for household wealth
OECD (2011) Education at a Glance 2011: Highlights available at http://www.oecd.org/document/2/0,3746,en_2649_39263238_48634114_1_1_1_1,00.html.
Discussion papers produced by The New Zealand Institute for the Ownership Society project that promote the importance of asset ownership for enhancing the ability of people to access opportunities and investment in the future: http://www.nzinstitute.org/index.php/ownershipsociety/.
Final Report to the Minister of Finance from the Savings Working Group, January 2011: http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup.
Numerous documents on wealth including arguments against the common belief that New Zealand holds too much wealth in housing: http://www.pensionreforms.com/Sort.aspx.
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