Kiwisaver and 'growth'

Kiwisaver has been sold as being good for savers (on which the jury is still out, and likely to be so for some time), and it's also been sold as being (somehow) good for the economy. People like the Herald's John Boy Armstrong, whose economic acumen is clearly as lacking as his political, leaped into print earlier this month suggesting this whole farrago will be good for the New Zealand economy.

KiwiSaver should reinforce Labour's economic management credentials [says Armstrong, stretching his own]. The boost in household savings and the surge in investment capital should drive the kind of growth needed to substantially lift personal incomes – and, in the process, lift New Zealand up those dismal OECD rankings with which National currently flays Labour.

The best one-word response to this drivel comes from Roger Kerr: "Really?" Wherefrom this newfound "surge" in investment capital of which Armstrong speaks, and Cullen presumably expects? As Roger Kerr points out in 'Will KiwiSaver Boost Economic Growth?', "Mr Armstrong is clearly thinking of a link between domestic savings, investment and growth," but New Zealand already has access to a whole "vast international pool of capital for investment at a price that is set in world markets."

KiwiSaver cannot stimulate investment by reducing the world cost of capital. If it increased domestic savings, firms would simply use less foreign savings.

Moreover, much of any additional saving would not be invested in New Zealand. In the interests of prudent diversification, fund managers are likely to place more than 50 percent of the inflows offshore, as the New Zealand Superannuation Fund does. Domestically, they will have to put most of their equity funds into listed companies. The diversion of savings from other vehicles into KiwiSaver might reduce local funding for sectors like small business and farming. These are amongst the most innovative and productive in the economy....

Even if the funds going into KiwiSaver translated fully into additional investment and were manna from heaven, the impact on GDP would be small... The contribution of KiwiSaver to GDP is thus looking very small at best, and could easily be negative, having regard to deadweight losses and distortionary effects on savings and investment decisions. Its contribution is clearly negative compared with equivalent tax reductions.

So not for the first time, both Cullen and Armstrong emerge looking less than credible. And again, and not for the first time, it's necessary to make the point that all the government programmes in the world can't boost productivity -- the only thing they can do help is to get the hell out of the way.

And on the issue of encouraging savings, the basic point to make is this: if you truly want NZers to save, then stop taking so much of their hard-earned money.