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Urgent action needed over savings: report

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Fuseworks Media
Fuseworks Media

Automatically enrolling all workers in KiwiSaver and raising GST are among recommendations in the Savings Working Group's final report released today.

The Government is considering the recommendations but has ruled out the GST hike.

Prime Minister John Key said the working group correctly identified the need to increase national savings by 2 to 3 percent of GDP.

"They have identified the right issue -- New Zealand's level of foreign indebtedness is unsustainable and makes us vulnerable as a nation," he said.

Ministers would carefully consider the recommendations and decide which were the best options, which were affordable and when they could be implemented.

"We've no intention of raising GST and we don't want to bring in any additional taxes," he said.

The working group's chairman, former BNZ chairman Kerry McDonald, said the report was sobering and reflected an economy that had been deteriorating since the 1970s.

"It's as if New Zealand is standing on the edge of a cliff," he told reporters.

That cliff could collapse or slowly erode depending on what was done.

New Zealand's level of debt was too high with net foreign liabilities at 85 percent of gross domestic product (GDP) which lefts the country vulnerable.

"Sudden events over which we have no control could cause a dramatic and damaging fall to the economy. In the absence of that we simply face a continuing deterioration in the economy and living standards," the group said.

Savings needed to increase by 2 to 3 percent of GDP or $3 billion to $5b a year. Also greater efforts were needed to bring the economy back into surplus faster.

The report makes over 30 main recommendations.

On KiwiSaver, it said while the scheme should remain voluntary all workers over 16 should be automatically enrolled -- the current start age is 18 and only new employees are signed up automatically.

Another change would be to spread the $1000 kick start payment over five years and make it dependent on ongoing contributions. The report said the default contribution rate should be set at 4 percent with workers able to opt to reduce it to 2 percent.

Mr McDonald said compulsion was considered but the group opted against recommending it, concerned that the scheme would be altered to save the Government and business additional costs. He also thought it could see savings pulled from other areas with reduced benefit as the Government would face increased subsidy costs.

The report recommended the NZ Super Fund be continued and suggested a special social security tax to fund it which would be offset against ordinary income tax.

The group argued for higher GST (17.5 percent) rather than income tax and urged for savings to be taxed less. It said distortions in the tax system -- where property owners paid half the tax than someone who put money in a term deposit -- should be fixed.

Mr McDonald accepted there were few incentives for the average income earner or people on lower wages.

"If you are an average New Zealander your income is not going to let you do much saving anyway."

However, those workers should support the changes because their job security was at stake, he said.

The group gave the Government a serve saying it was spending at an unsustainable level and running large deficits, borrowing $300 million a week.

"Looking ahead over the next 20 years or so the Government will face increasing costs from the effects of an ageing population."

Increasing taxes and reducing spending were unattractive options but if the Government made significant inroads in improving performance and productivity they may not be necessary.

"A no change approach to government policy is not viable," the report said.

The report touched on the Government's plans for partial state asset sales. Mr McDonald said long-term effects needed to be considered.

"My view is if it's done properly, if it's done from a higher productivity, higher profitability (approach), that's fine."

Mr McDonald also urged the Government to put some thought into immigration and whether immigrants were more of a drain on the economy than a benefit.

Finance Minister Bill English said the Government had an open mind about what could be done.

"Ministers will carefully look at the working group's report over coming weeks with a view to picking up practical ideas that can feed into the Government's economic programme and budget 2011."

The Government already ruled out changes to NZ Super, a capital gains or land tax and would not be increasing GST again.

It was working to get back to surpluses and reduce borrowing and also saw state asset sales as an option to offset increased costs, he said.

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