The IMF Report: saving and vulnerability

The IMF released its latest Article IV report on New Zealand yesterday.  There are also some background research papers released with the report, and I might come back to look at them later.

There aren’t material surprises in the IMF’s views in the full report, which builds on the Concluding Statement released at the end of the staff mission here last November.  My comments about that statement (here) were fairly critical, noting both the marked change in the messages from one review to the next, and the fairly limited evidence base for many of the policies the Fund was recommended –  quite a few of which were a considerable distance removed from the core business, or expertise (macroeconomic policy and financial stability) of the International Monetary Fund.

Today I wanted to focus just on the Fund’s claim that there is a major policy problem as it affects savings in New Zealand, a proposition on which much of the rest of the report rests.  The Fund talks of a “chronically low national saving” rate, and worries about the vulnerability that allegedly results from a net international investment position (NIIP) of around -65 per cent of GDP.  In the Fund’s Board discussion, we read that “Directors agreed that raising national, and in particular private, saving is critical to reducing external vulnerabilities from the still heavy reliance of offshore funding”.  Note the strong words:  action is “critical”.

I’ve shown a version of the following chart before.  It is common to present charts of net national savings as a per cent of GDP, but to do so involves two errors: first, the numerator is net but the denominator is gross (the difference is depreciation), and second, the numerator refers to savings of New Zealanders and the denominator refers to economic activity occurring within New Zealand, whether owned by foreigners or New Zealanders.  A more conceptually meaningful approach is to do as I do here: compare the net savings of New Zealanders with the net national income of New Zealanders.  Here it is shown all the way back to 1970.

net savings to nni feb 2016

Savings of New Zealanders (public and private combined) as a share of income have been consistently lower than the median of the whole group of OECD countries.  But there is a very diverse range of experiences, and cultures, within the OECD group.  I’ve also shown the comparison with the median of the five other, probably more culturally similar, Anglo countries (US, UK, Canada, Australia, and Ireland).  Over the 45 year period, mostly we don’t look much different from the Anglo median –  we did worse in the years of very large fiscal deficits in the late 70s and early 80s, but other than the experiences are pretty similar on average.     Where is the evidence of a chronic savings problem?  And it is no defence simply to focus on private, or (worse) household savings: first, the boundaries between household and business savings are blurred, and second, the private sector takes account (typically implicitly) the savings behavior of governments over time.  New Zealand governments have done less badly than most for some decades.

The IMF makes no systematic effort to identify reasons why national savings rates might have been as they are.  Instead, they mostly repeat old lines that don’t have much basis to them.  For example, they assert that an overwhelming proportion of household assets are in the form of housing, even though new Reserve Bank estimates –  published almost a year ago –  make clear that that claim was never justified.  After all, relative to population, there is now a consensus that we have too few houses not too many.  The Fund also asserts that there is something wrong with the tax treatment of housing, but appears to make no effort to illustrate, whether in a cross-country or time series context, how that has contributed to national savings behavior.  They urge changes to Kiwisaver and the NZS, but again make little effort to illustrate how policy parameters in these areas explain savings behaviour.  All in all, it seems like a rather weak basis on which to rest quite strong policy recommendations.

The other aspect of this issue which they just seem to take for granted is the alleged vulnerability that the NIIP position gives rise too.  Buried deep in an Annex to the report, they do produce a chart making clear that there has been no worsening trend in the NIIP position for over 25 years –  the negative position tends to widen in boom times and narrow in downturns, but has fluctuated around a pretty stable trend level.  At present, the negative NIIP position is actually below (less negative) than the average since 1988.

The report has no analysis of the nature of the vulnerability that this NIIP position gives rise to –  even though addressing this vulnerability is considered “critical” by staff and Board.  And it gives no example of any country, anywhere, ever,  in which a stable (but quite high) negative NIIP position over 25-30 years has been (causally) followed by a crisis.  I’m pretty sure there are none –  and remind that IMF that for most of its first 100 years, New Zealand’s negative NIIP position was materially larger than it has been over the last 25 years, again without ending in crisis.  There are plenty of cases where a rapid worsening in the NIIP position over a few years led to trouble –  Spain, Ireland, and Greece are three recent advanced country examples –  but that is a very different situation from the New Zealand situation in recent decades.  As has been the case for many years, the IMF simply seems to struggle to come to grips with New Zealand.

Most of the negative NIIP position is represented by (net) banking system borrowing from abroad.  But that creates serious macroeconomic risks only if the assets that are financed by the overseas borrowing are of poor quality.  Often that is the case when foreign debt is rising quickly  –  but that hasn’t been the New Zealand story.  Perhaps the Fund believes that the New Zealand banking system is shaky?   But Directors noted that “the banking system is resilient and well-supervised” –  the resilience conclusion is certainly backed by the Reserve Bank’s own stress tests, which I discussed at length last year.

New Zealand deserves better quality analysis and insights from its membership of the IMF than it has had in the main part of this report.

The report also contains brief sections headed “Authorities’ views” –  the wording of which will have been approved by our Treasury and the Reserve Bank.   I was surprised to find that “the authorities agreed that raising national saving was an important policy objective”, going on to state that the authorities would “consider measures to boost private saving….in the future”.  There isn’t much elaboration of the point, but the statement itself was something of a surprise.  Last I had heard, the Minister of Finance was very sceptical that there was a “national saving problem” in New Zealand, and particularly that there was an issue materially amenable to policy remedies.  If one can’t convincingly identify policy distortions that materially lower national saving rates relative to those in other countries, it is hard to see a good case for policy interventions to encourage people to save when, on their own, they would not.    It would be interesting to know what was behind this latest, apparent, change of view.




6 thoughts on “The IMF Report: saving and vulnerability

  1. I accept the point that from the point of view of financial stability, the IMF’s core function, the savings rate doesn’t look like much of an issue. But on the link between savings and incomes, I actually think the IMF makes some good points. In their background research papers, which I actually looked at first, they actually cite with approval your own work on savings and investment imbalance.

    It’s true they don’t “convincingly identify policy distortions that materially lower national saving rates” but it doesn’t mean these don’t exist. For almost every reason for saving, the government intervenes to take away that reason. E.g. retirement provision – the government grants you a very valuable annuity at age 65. Children’s education – the government subsidises education and student loans. Medical emergency – the government subsidises health care. Reinvestment of corporate profits – the government heavily taxes corporate profits. Land development – the government minutely regulates land use. On the spending side, the government appears to disburse something like a third of its revenues on social welfare and another fifth on “general government services” and “other”, to seemingly little effect.

    Not even the Savings Working Group attempted to measure the impact of these interventions on the savings rate. They may all be great policies, but it’s hard to be confident of that unless we’re honest with ourselves about their real effects.


  2. Yes, I had noted the reference to my 2013 paper.

    I don’t have a problem with most of the points you list, but… most countries, the distortions are worse, and a lot of the debate on this issue is about comparing our savings rate with those of others. The IMF themselves note a point I’ve made repeatedly that our NZS is less distorting of middle class savings than those of many other countries.

    I’m totally sure govt could spend a lot less and society would be off it it did – and savings rate might even be higher – but that would be to adopt totally different parameters than most other OECD countries do. THe SWG didn’t look at these measures in detail, but Tsy a couple of years ago attempted to, and they basically came to my conclusion – nothing obvious in policy that would induce NZers to save less than people in others countries.


  3. The IMF is rather contradictory when they push for more savings on one hand and then on the other hand they acknowledge that spending needs to be boosted to get inflation upwards. You can’t save and spend at the same time.


  4. I think the IMF are trying to make a case for compulsory kiwisaver and at a higher contribution rate. I believe we do not compulsory superannuation and individualised. Universal super is not going to work when the 1million kiwis resident overseas decide to retire to NZ and there are many of them that now work in countries that do not have a savings scheme that they can bring back to NZ.
    Also, there is a hole in the company contribution legislation that lawyers have exploited on behalf of Employers. The Employer is allowed to take both the Employer and the Employee contribution from the employee making the scheme now totally unattractive. I am fortunate I get the Employer contribution separate from my wage. But for the newbie employee most are seeking to opt out.


  5. The IMF needs to properly define savings. There are 2 types of savings.

    1. More savings in banks is a liability on banks books and therefore leads to higher lending by banks to make a profit margin.
    2. More savings in Kiwisaver and being fund managed leads to more investment in the productive sector.


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