Measuring Saving Rates in New Zealand: An Update (WP 13/04)

Abstract#

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This paper reviews the flow approach (income less consumption) to measuring saving and the associated trends in sectoral saving rates for New Zealand, as derived from the national accounts. It also presents estimates for the household sector, of the stock measure of savings (changes in net wealth). The latter estimates are found to be consistently greater than the flow measures of household savings. Finally a series of adjustments are made to the flow measures of household and national saving rates. These include adjustment to the boundary between consumption and investment, the impact of inflation and the role of the New Zealand Superannuation Fund. As a result the adjusted measure of net national saving is found, on average to be some 10 percentage points of GDP higher than the raw measure. The associated estimate of the level of adjusted net foreign liabilities is on average 2 percent of GDP lower than the raw data.

Acknowledgements#

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The authors are grateful to Andrew Coleman for extensive suggestions which have improved an earlier draft. Valuable comments were made by Adolf Stroombergen, Jeff Cope and Malcolm Menzies, together with participants at a seminar held in the Treasury. Chase O’Brien and Malcolm Gray of Statistics New Zealand provided valuable support in clarifying revisions to the data.

Disclaimer#

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The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

Executive Summary#

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Saving rates in New Zealand, both at the household and national level, are generally well below those of other OECD countries. This has given rise to long-standing concerns about the level of savings, and successive governments have introduced a range of measures to foster greater savings, both public and private.

A necessary condition for introducing sound policies towards savings that will be genuinely welfare enhancing, is to have a solid base of evidence. The starting point for that evidence lies with the measurement of savings. However, the measurement of saving is fraught with both conceptual and practical issues. An understanding of the implications of these issues is critical when using evidence on the savings record of households, firms and the government as a basis for policy decisions.

The most widely quoted measure of saving in New Zealand is the household saving ratio published by Statistics New Zealand. It is important to understand the issues of measurement and classification which inevitably arise in savings measurement, and how these could cloud the genuine underlying changes in household saving behaviour. Misperceptions about the level of saving, and the implications thereof, could potentially lead to policy interventions that reduce, rather than enhance economic welfare.

This paper documents the standard measures of saving from the national accounts. In the case of the household sector it contrasts these with estimates of saving rates derived from changes in the stock of household wealth. While the two are conceptually identical, a full reconciliation must await the development of more comprehensive data. However the results suggest that the long run average saving rates by households have in fact been considerably higher than the measure derived from the national accounts.

A second contribution of this paper is to present a series of adjustments to savings rates to reflect the impact of inflation, to reflect the boundary between consumption and investment, to consider the role of the hidden economy, and assess the impact of the New Zealand Superannuation Fund for household and national savings. Many items in the national accounts are treated as current consumption (including expenditure on health, education, consumer durables) with a result that savings are under stated. The impact of adjustments to investment and allowing for inflation is to raise the estimate of the average net household saving rate from -4.1% to 0.3% of disposable incomes between 1996 and 2011. Likewise, the estimate of the average net national saving rate is increased by those same adjustments from 2.8% to 11.8% of GDP over the same period.

Finally, when allowance is made for inflation, the measured net international investment position appears to be overstated. This has the consequence that the current account deficit is correspondingly overstated. This difference is about 2 percentage points of GDP. Once the adjustment is made for inflation the long run average level of net external liabilities (excluding equities) falls from 66.0% to 64.3% of GDP over the period of 1989 and 2011.

A potentially significant adjustment arises from the stock of wealth that has accumulated in the New Zealand Superannuation Fund. To the extent that this is viewed as funds contributed by households through taxation for the provision of retirement income in future, it represents savings by households. On average the stock measure of savings is some 2.1 percentage points of household disposable income higher between 2002 and 2011, when allowance is made for the net wealth accumulated in the NZSF.

Statistics New Zealand is constantly seeking improvement in the collection and coverage of the data it publishes. Important revisions have been made to the household saving rates. The consequence of these is that some of the very extreme levels of household dissaving seen between 2004 and 2009 have been revised such that the current estimates of negative saving by households from the household income and outlay account are very much more modest. Over this period the annual average change was an improvement in the saving rate of households of over 7 percentage points of disposable income. These revisions underscore the importance for the policy debate to be grounded in solid evidence, and for full cognizance of the limitations of the underlying data.

Overall the results presented here suggest that broader measures of saving might well be considered as complements to the official series when analysing the saving behaviour of firms and households, and the net saving of the nation as a whole.

Glossary#

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3YMA: Three year moving average

CAB: Current account balance

CPI: Consumer price index

GDP: Gross domestic product

GFCF: Gross fixed capital formation

HDI: Household disposable income

HES: Household economic survey

HIOA: Household income and outlay account

HPI: House price index

ISA: Institutional sector accounts

NFL: Net foreign liabilities

NIIP: Net international investment position

NNS: Net national savings

NZSF: New Zealand Superannuation Fund

OECD: Organisation for Economic Cooperation and Development

R&D: Research and development

RBNZ: Reserve Bank of New Zealand

SNA: System of national accounts

SNZ: Statistics New Zealand

SoFIE: Survey of Family Income and Employment

1 Introduction#

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“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind”

Sir William Thomson (Lord Kelvin)

The purpose of this paper is to review and update the measurement of savings in New Zealand. There have been long-standing concerns about the level of savings, and successive governments have introduced a range of measures to foster greater savings, both public and private. New Zealand is far from unique in this regard; many countries have pursued pro-saving policies to counter a perceived savings gap.

These concerns about the level of saving arise at a number of levels. First, if the level of domestic saving is by some measure inadequate, this may lead to less investment and higher interest rates, resulting in lower rates of capital accumulation. The growth of productivity and incomes could then be constrained as a result of being “capital shallow”. Second, if some individuals fail to save adequately they may be less able to meet the costs of health, education and retirement. Finally, low levels of domestic saving may be countered by heavier reliance on foreign savers; this manifests itself in greater capital inflows to fund current account deficits[1], leading to a greater stock of external liabilities. These in turn may expose the economy to greater vulnerability of unanticipated shocks. For example in the case of the USA:

“The declining saving rate has spawned much concern among economists and policymakers about the consequences of such low saving, which, in the view of some, include reliance on unsustainable levels of external financing for the Nation's investment needs and increased exposure of domestic financial markets to external factors.”

Marshall B. Reinsdorf (2005)

Clearly, a necessary condition for an adequate understanding of the savings “problem” is reliable evidence. That evidence must be built on the measurement of savings. The most widely quoted measure of saving in New Zealand is the household saving ratio published by Statistics New Zealand.[2] However given the manner in which this is constructed, it may well reflect issues of measurement and classification as much as genuine underlying changes in household saving behaviour. Misperceptions about the level of saving could potentially lead to policy interventions that reduce, rather than enhance economic welfare.

Generating appropriate policy responses in the absence of an accurate assessment of the actual level of savings becomes a task fraught with pitfalls. However in attempting to measure savings, the analyst is faced with a series of both conceptual and practical challenges. This paper attempts to clarify and illustrate some of these issues. Specifically it addresses the impact of inflation, the hidden economy and the distinction between consumption and investment.

It does not attempt to form a judgement about whether savings either at the individual or national level are adequate. Rather, it focuses on the different measures of saving, and provides a range of illustrative adjustments to the commonly cited measures. The results suggest that broader measures of saving might well be considered as complements to the official series when analysing the saving behaviour of firms and households, and the net saving of the nation as a whole.

The Treasury has undertaken an extensive series of studies relating to savings and continues to monitor closely current developments. The current paper is an extension of earlier work on measuring savings (Claus and Scobie, 2002). Other papers that address saving in New Zealand include: the theory and evidence on household saving (Coleman, 1998); savings and portfolio allocation (Joint Working Group, 1999); an empirical analysis of individual household saving behaviour (Gibson and Scobie, 2001); a discussion of saving and growth in an open economy (Claus, Haugh, Scobie and Törnquist, 2001); an international comparison of household net wealth (Claus and Scobie, 2001); an analysis of foreign investment (Haugh, 2001) and the current account (Kim, Hall and Buckle, 2001); financing superannuation (McCulloch and Frances, 2001); population ageing and the optimal national saving rate (Guest, Bryant and Scobie 2003; and Guest, Scobie and Bryant, 2003); saving for retirement (Scobie, Gibson and Le, 2004; and Gibson, Le and Scobie, 2004); household wealth (Scobie, Gibson and Le, 2005) housing and retirement savings (Scobie, Le and Gibson, 2006); savings in the context of financial markets (Cameron et al. 2007); an estimate of household saving rates based on net wealth data (Scobie and Henderson, 2009); an evaluation of saving incentive options (The Treasury, 2010); and the contribution of KiwiSaver to retirement saving (Law, Meehan and Scobie, 2011). In addition a major study of savings was contained in a report to the Minister of Finance by the Savings Working Group (2011).

This paper proceeds as follows. In the next section (Section 2), we set out the fundamental approaches to the measurement of saving, followed by an overview of the available New Zealand data for savings measurement. Measures of long term trends in savings for households, businesses and the government are presented in Section 3. We then introduce a series of adjustments and derive adjusted estimates of both household and national saving rates (Section 4). These adjustments address the impact of inflation, the boundary between consumption and investment, the so-called “hidden economy” and the role of the New Zealand Superannuation Fund. Conclusions are drawn in Section 5, and the paper presents an extensive series of appendices which document the data and the derivation of the adjustments.

2 Methods and data#

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“There is no one single 'correct' definition of saving. The definition of saving used is that which is most appropriate to the issue under investigation”

Crossley and O'Dea (2010), p.37.

In this section we briefly outline three different approaches to the measurement of saving, and review the sources of data.[3]

2.1  The flow measure#

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Savings can be measured as a flow, defined as the difference between income and consumption.

    S_F = Y − C (1)

where:

     S_F = saving as measured by the flow measure

     Y = disposable income

     C = final consumption

Challenges arise in deciding exactly what should be included in the measures of income and consumption. These are addressed in Section 4.

2.2  The stock measure#

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A pure economic view of savings is the change in the stock of net wealth. The development of this approach is attributed to Haig (1921) and Simons (1938). Conceptually this can be applied at any level: to households, governments or nations. In practice the limitations of existing data systems means that estimates are typically restricted to households. The stock measure[4] is defined

    S_s = ΔNW = S_F + revaluation + other (2)

where:

    S_s = saving as measured by the stock measure

    ΔNW = change in net wealth

    revaluations = the revaluation of real and financial assets

    other = other changes in net wealth, such as transfers from other sectors, loss or destruction and discovery.

The flow and stock measures are conceptually equivalent after removing the effects of revaluations in real and financial assets, and other changes in net wealth arising from transfers from other sectors, discovery and destruction. In practice, data limitations mean it is very difficult to fully reconcile these two approaches. However, the net wealth approach remains a useful alternative to the flow measure.

2.3  An equity injection approach#

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Hodgetts, Briggs and Smith (2006) draw on an approach used by the Federal Reserve Board of Governors in the USA for estimating detailed flow of funds accounts. Saving can be derived from the net flows into and out of household assets and liabilities. They use aggregate data net acquisitions of financial assets (eg, currency, bank deposits, unit trusts, superannuation funds, direct purchases of equities) and net investment in tangible assets (eg residential fixed investment and land) to derive total net investment by households. From this they subtract net increases in financial liabilities (mortgages and other loans) as well as the consumption of fixed capital (depreciation) and net capital transfers.[5]

2.4  Data sources#

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In this section we review the available sources of data for measuring savingin New Zealand; Table 1 sets out those sources.

2.5  Flow measures of saving#

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There are three sources of data available for constructing a flow measure of savings:

1. the System of National Accounts (SNA)
2. the Institutional Sector Accounts (ISA) (a sectoral disaggregation of the national accounts), and
3. the Household Economic Survey (HES).

The ISA disaggregate the national accounts into economic 'sectors' of similar agents. These sectors are non-financial corporations (producer enterprises), financial corporations, government, non-profit institutions serving households, households, and the rest of the world.

In a fully developed set of accounts, each sector has a self balancing accounting system that consists of:[6]

• A production account
• An income and outlay account
• A capital account
• A financial account
• A reconciliation account
• A balance sheet.

Each of these accounts are linked in order to achieve overall internal consistency. For example, from the production account can be obtained a measure of the operating surplus of firms in the economy. This in turn enters the income and outlay account as a source of income, which after including interest income and subtracting final consumption expenditures yields a measure of savings. Savings then enter the capital account as a key element which, along with the savings of foreigners (represented by net capital transfers) finance investment in the economy. National saving would then be calculated as the sum of each sector's saving, derived from the income and outlay accounts[7].

The sector accounts currently available consist of sectoral production accounts; income and outlay accounts and capital accounts, such that measures of saving are available for each sector.

The ISA spanning the period 1987 to 1988 were labelled 'experimental' by Statistics New Zealand, owing to data quality being inadequate for an 'official' release. The 1999 to 2009 release of the institutional sector accounts has incorporated various advances, including improved Annual Enterprise Survey data, taxation statistics, balance of payments and interest rate data. This more recent series is termed 'official'.

Claus and Scobie (2002) derived sectoral measures of saving (household, business and government) in two ways, one primarily using the aggregate SNA data, and the other relying on the institutional sector accounts.

The first method involves deriving business saving as a residual, the difference between national saving and government saving, where government saving is represented by the government's net cash flows from operations. Sectoral saving derived by this method will be termed 'aggregate' sectoral saving henceforth.

Saving can also be obtained entirely from the sum of sector savings, from the Institutional Sector Accounts (henceforth, 'Institutional Sector Saving').

The flow measure of national saving used in this paper calculated from the ISA is defined as:

     S_F = S_P + S_G (3)

where:

     S_P = S_h + S_B

     S_B = S_nfi + S_f + S_np

and:

     S_P = saving by the private sector

     S_G = saving by government

     S_h = saving by the household sector

     S_nfi = saving by non-financial corporations (producer enterprises)

     S_f = saving by financial intermediaries

     S_np = saving by non-profits entities

     S_B = saving by the 'business sector'

Finally, the Household Economic Survey (HES) is often used to approximate a flow measure of the household saving rate. The HES is an income and expenditure survey of New Zealand resident households. The complete HES, collecting both income and expenditure data, was conducted annually from 1974 to 1998, and subsequently triennially. It has been used to estimate household saving rates in New Zealand, and for a range of other economic analyses, due to its rich set of data on household characteristics; see for example Gibson and Scobie (2001).

However the HES was not designed specifically to measure savings rates, and Statistics New Zealand emphasises that its results must be interpreted with caution, for a number of reasons as outlined in Bascand et al., (2006). The HES underestimates a substantial amount of expenditure, particularly on durables, and goods such as tobacco. However, the Household Outlay and Income Account (HOIA) is also not free of measurement issues, and is thought to underestimate various forms of income, notably trust income and foreign investment income and transfers (see Bascand et al., 2006 for an analysis of the differences in coverage and measurement).

Table 2 summarises the various available data sources for constructing measures of sectoral saving in New Zealand.

3  Trends in saving rates#

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This section provides flow estimates for saving by sectors and stock estimates for the household sector.

3.1  The saving and investment identity#

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The saving, investment and current account in an economy are linked by construction.[8] Table 3 sets out the relation between the components of saving and total investment and provides a numerical estimate of each element. By construction total saving in the economy must be equal to net investment - in practice there is an adjusting element (referred to as a statistical discrepancy) which reflects the fact that there difficulties with measurement.

Saving by the private sector (households and business) plus saving by the government (the budget surplus or deficit) together comprise national savings. When allowance is made for consumption of fixed capital, saving within the domestic economy can be expressed as net national saving. The extent to which net national saving is greater or less than total investment is reflected in the current account balance.

In the upper part of Table 3 net national saving in 1981 was less than total investment; the difference was made up by an inflow on the external capital account in the form of borrowing or direct equity investment by foreign savers. Foreign savings were some 45% of total saving; in other words domestic savings covered about one half of New Zealand's net investment needs.

By 2012, the dependence on foreign savings had increased substantially; approximately 85% of net investment in New Zealand was covered by foreign savings. A fall in domestic savings in the absence of a commensurate change in investment implies greater reliance on foreign savings and a rise in external liabilities.

New Zealand's total net external liabilities (termed the Net International Investment Position, NIIP) was 70% of GDP in 1992, and 71% in 2012, having reached a peak of 86% in 1998 (see Appendix Table G.1).

Sources: Statistics New Zealand and authors' estimates.

3.2  Flow measures of saving[9]#

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The following discussion of the flow measure of saving is based on the difference between disposable income and current consumption. An alternative approach is to define saving as the sum of net investment and the current account balance. As shown in Figure 1, the two are practically identical, this internal consistency giving some degree of confidence in the estimate of national saving. “Implied national saving” here is equal to net investment plus the current account balance.

Figure 1 - Two alternative constructions of national saving

 

Figure 1 - Two alternative constructions of national saving.

We use saving defined as the difference between income and consumption in this paper. As noted in Sections 2.3 and 2.4, there are two methods we consider in constructing sectoral saving estimates from the national accounts: The first is entirely based upon the Institutional Sector Accounts (ISA); these are available from 1987 to 2009, with the years from 1987 to 1998 denoted as “experimental.” In contrast, the “aggregate” measure using Crown accounts data for government saving rather than the ISA measure can be derived for a longer period, namely 1972 to 2012. Using this approach requires that an estimate of business savings be derived as a residual. Figure 2 presents three year moving averages of nominal government and business savings using the two approaches.

Figure 2 - A comparison of ISA and 'aggregate' sectoral saving (3YMA)

 

It is apparent that the two approaches give very similar results. Given closeness of the series, it was decided to use the aggregate sectoral estimates which are available for a much longer period. The three key sectoral saving components, namely household, business and government are shown in Figure 3 as a fraction of GDP.

Figure 3 - Sectoral saving rates: 1972-2012

 

Source: 

Household saving rates remained relatively stable from 1972 to 1992. This was followed by over a decade of decline. In 2011 household savings were positive for the first time since 2000, and then became negative again in 2012.

The boundary between the savings of households and businesses is blurred, as the household sector includes unincorporated businesses. Furthermore, households are “owners” of a significant share of the businesses (along with foreign investors). So when a firm invests retained earnings, these are arguably savings of households. For these reasons, it is appropriate for some purposes to combine the household and business sectors to form an estimate of private saving.

A further blurring occurs related to household income and net assets. With the rapid rise in income from trusts, it is possible that household income is under-reported. Bollard and Barrow (2012) note “...the use of trusts impacted quite significantly on the data sources used to estimate New Zealand's household saving rate” (p.7). Briggs (2006) notes that both the assets and income of households may be under-reported as a result of the extent of family trusts.

Three year moving averages of private and government savings rates are shown in Figure 4. It is evident that these rates tend to be quite strongly inversely correlated. In part this arises over the course of the business cycle. A strongly growing economy tends to generate additional revenues for the government while instilling a sense of confidence amongst households who tend to reduce their saving rate in the face of growing incomes. A fall in government surpluses in a recessionary period is associated with the tendency of households to reduce their liabilities in the face of uncertainty leading to a rise in household saving rates.[10]

Figure 4 - Government and private saving rates: 1972-2012 (3YMA)

 

In commenting on the swing in the US government's net position from a user to a supplier of savings between 1980 and 1998, Hall (1999, p.216) notes:

Government-federal, state, and local-went from being a user of saving in the aggregate to being a contributor of saving. Private saving fell to offset this change in the government's role in credit flows. Almost any reasonable general-equilibrium macroeconomic model would have predicted this offset, even if it did not imply full Ricardian neutrality.

Additionally, sluggish adjustment of household consumption to increased income taxation may be reflected in higher saving rates. Consumption patterns may adjust slowly due to habit persistence, either as a psychological phenomenon, or due to real constraints such has long term contracting arrangements.

Gross saving rates are substantially higher than the net saving rate. Net saving is equal to gross saving after subtracting consumption of fixed capital. Consumption of fixed capital is the decline over the accounting period in the present value of the remaining capital services, or in other words, it is the decline in value of the net stock of assets used in production. Consumption of fixed capital represents a substantial proportion of gross investment, as shown in Figure 5 below.

Figure 5 - Consumption of fixed capital as a proportion of gross investment: 1972-2012

 

Gross saving rates are often used for international comparison owing to differences in methods of calculating consumption of fixed capital. Figure 6 shows both gross and net saving rates for New Zealand.

Figure 6 - Net and gross national saving trends: 1972-2012

 

3.3  Revisions to the household savings measure#

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The household saving data used in Section 3.2 was based on the latest estimates from the national accounts. The full time series is given in Column (2) of Appendix Table B.1. It is important to note that these data have been significantly revised in recent years. The importance of this arises from the fact that the policy debate for a time was dominated by concerns of extremely low rates of household saving. For example the saving rate in 2005 based on estimates at that time was -14.8%, making New Zealand an outlier in international comparisons. By 2012, the revised estimate of the 2005 rate was -6.2%.

To illustrate the significance of these revisions, Table 4 has been constructed. It shows the estimate of the saving rate initially made and compares that with the latest published estimates for 2012 (the latter having been used in this paper). Over the period 1987 to 2012 the current (2012) estimate exceeds the initial estimate on average by 2.5 percentage points of household disposable income. Over the period 2004 to 2009, the difference was on average +7.1 percentage points.

Notes:

¹ Percentage point change

A complete history of the estimates of the household saving rate made each year from 1987 to 2012 is given in Appendix D, together with a synthesis of major recent revisions. A selection of these is illustrated in Figure 7. For example, in 2009, the estimate of the household saving rate for that year was -13.7%. By 2012 however, following significant revisions, the estimate for 2009 revised to -4.1%. These findings underscore the need for the policy debate to be grounded in solid evidence, and to be cognizant of any limitations of the data that underpins that evidence.

Figure 7 - Revisions to the estimates of the household saving rate: selected years
(Household saving rate as a % of Household disposable income)

 

Adapted from Bollard and Barrow (2012) based on data supplied by Statistics New Zealand.

3.4 Stock measure of savings#

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The 'stock' measure of saving as calculated here comprises changes in real household net wealth as a proportion of real household disposable income.

The total change in net wealth can be viewed as comprising two components: these are sometimes referred to as 'active' and 'passive'. Active saving refers to increases made following a conscious decision by an individual or household, and could take a range of forms including for example term deposits, retirement accounts or investments in shares. The critical issue is that they imply foregone consumption spending.

In contrast, passive saving occurs when there are changes in net wealth arising from the revaluation of assets held by the household. Predominant among these is housing. A rise or fall in house prices will lead to a change in measured net wealth of saving due to real changes in net wealth.

The estimates of stock saving used in this paper are derived from the Reserve Bank's Household financial assets, liabilities and housing values data.[11] In order to estimate the active component of savings it is necessary to remove the effect of asset revaluations from total savings. Ideally this would be done for all assets and liabilities. In reality, data limitations are such that the estimate is restricted to housing, which, in 2011, represented almost 75% of total household assets. The likely consequence of restricting adjustments to asset prices to housing alone is that the 'active' component of saving may be overstated, and the 'passive' component understated by an equivalent amount, however the total would be unaffected.

The following describes the approach adopted. It reflects the fact that housing mortgages may or may not be applied solely to housing but can be used to provide funds for other investments, unincorporated businesses or consumption. Whether the relevant index to indicate purchasing power of mortgage liabilities is the CPI or the HPI depends on the purpose of the mortgage. Two approaches are possible; these are referred to as gross and net.

Measure 1 (gross): V_h/HPI + (A_f - L_h - L_o/CPI (4)

Measure 2 (net): (V_h - L_h)/HPI + (A_f - L_o/CPI (5)

where:

V_h = gross value of housing

L_h = mortgage liabilities

A_f = non-housing (financial) assets

L_o = non-housing liabilities

HPI, CPI = house price index and consumer price index

In the first case, gross housing wealth is deflated by the index of house prices; while in the second net housing wealth is deflated by the index of house prices.[12]The critical difference is that in the first case, mortgage liabilities are deflated by the Consumer Price Index; this case is denoted as “gross”. It is applicable where the house serves as collateral for a mortgage some or all of which can be used for consumption. In the second case the mortgage is viewed as solely tied to the investment in the house, and is denoted as “net”.[13]

Note that the “gross” and “net” adjusted series will tend to diverge if house prices and consumer prices grow at different rates. When the HPI is higher than the CPI, the gross-adjusted series will tend to be below the net-adjusted series. This is because the “real” mortgage will be larger when it is deflated by the CPI (gross adjustment) than when it is deflated by the HPI (net adjustment).

The two measures follow each other closely until the mid 1990's, when they begin to separate as the HPI and the CPI start to diverge with the HPI rising more sharply than the CPI. The purchasing power of saving in terms of the real housing stock has decreased, relative to the real basket of general goods one could purchase.

Each of these measures of housing wealth can be combined with other net assets to form two real net wealth series for the household sector which show the 'active' component of saving. This together with the total real net wealth is depicted in Figure 8.

Figure 8 – Measures of household net wealth: 1978-2011 (constant 1978 dollars)

 

Source:  RBNZ, QV and authors' estimates

Unsurprisingly, a large proportion of the variation in household net wealth is explained by changes in house prices; this is shown by the passive component of saving. Figure 9 translates these net wealth data into implied household saving rates (using equation (2)). The long run trends in household saving rates using the two measures of housing wealth are shown in Figure 10.

In the most recent two decades, the gross measure of saving has decreased relatively more so than the net measure. This is because house price inflation has tended to exceed CPI inflation, resulting in the real size of mortgage liabilities being larger in the gross calculation.

Figure 9 - Household saving rates based on changes in net wealth (3YMA)

 

Figure 10 - Household saving after adjusting for changes in house prices (3YMA)

 

Source:  Source: RBNZ, QV and author's estimates

Asset revaluations (in this case those associated with housing) are a major factor contributing to the difference between flow and stock measures. After excluding the effects of housing revaluations, the stock saving trend appears more similar to the flow measure, albeit with still a less marked downward trend (see Figure 11).

The comparisons between the stock measures based on aggregate data and the flow measures are summarised in Table 5. The results reinforce the finding that stock measures of saving (adjusted for housing revaluations) are substantially higher than the standard flow measure, although they display a similar declining trend.

In their work based on the equity injection method, Hodgetts, Briggs and Smith (2006). estimated implied household saving using an asset and liability acquisitions approach. They concluded that over the period 1987 to 2004, their alternative measure of savings exceeded the HIOA flow measure by an annual average of almost 8 percentage points of household disposable income. In the present study, we find that over the same period the stock measure (adjusted for house prices on a net basis) exceed the average flow measure by 5 percentage points. Both estimates indicate that there is a substantial increase in the estimates of the long run saving rate when a measure based on assets and liabilities is used in contrast to the flow measure.

Figure 11 - Household saving: flow, real stock excluding housing revaluation effects (gross adjustment (A) and net adjustment (B), 3YMA)

 

Sources: See Appendix F.

a The terms net and gross refer to the system of adjustment for housing price revaluations. See equations (4) and (5).

Delbrück (2012) has updated these estimates and finds that in 2009 the alternative measure of the household saving rates was 8% compared to the household income and outlay measure of -4.1%, or more than 12 percentage points of household disposable income higher.

The results pertaining to the stock measures have, to this point, been based on the aggregate household sector data on assets and liabilities from the Reserve Bank. However as indicated in Table 1, stock measures of saving rates can also be obtained from “micro” data - ie details of assets and liabilities collected from household surveys. The Survey of Family Income and Employment (SoFIE), a longitudinal household survey conducted by Statistics New Zealand, provides extensive coverage of assets and liabilities in every other wave. Estimates of net wealth from this source provide the basis for computing saving rates. Table 6 summaries the results based on SoFIE, the RBNZ aggregate sector data and the flow measures from the Institutional Sector Accounts.

The estimates from SoFIE and the RBNZ, two totally independent sources, are strikingly similar, both for the overall saving rate and the 'active' component which removes the house price revaluations from the overall rate. Further corroboration of these results comes from Le, Gibson and Stillman (2010) who report an estimate 23% for the active component of the saving rate for these years based on SoFIE.[14]

Notes:

1. From Scobie and Henderson (2009), Table 5, p.24. As noted in Scobie and Henderson (2009), the RBNZ data was adjusted to be comparable with the SoFIE estimates. For example the data is converted from December to March years, and the denominator in the saving rate is gross income receivable subtracting imputed rents form the HIOA, as it is gross income which is available in SoFIE. The flow measure here is as a proportion of disposabe income.
2. From Appendix Table C.
3. The overall saving rate is is defined as the change in real net wealth between 2004 and 2006 (in March 2006 prices) divided by the average of 2004 and 2006 real income, divided by 2 to convert to an annual rate.
4. In this comparison of stock measures, business assets (farms, orchards, commercial property) and durables have been excluded from the SoFIE estimates to make then comparable with the RBNZ data which do not include these items.

na: not applicable

A second important conclusion from Table 5 is that again, the stock measure of the household saving rate based in this case on independent survey evidence (SoFIE) is significantly greater than the flow measure from the Household Income and Outlay Account.

A further indication that stock measures provide a different perspective on household saving is summarised in Figure 12. Net household wealth as implied by the flow measure of household saving was estimated, by starting in 1978 with a given stock of net wealth and adding each year the flow of savings. For example if net wealth at the start of the year was say $50bn and savings were $5bn, then the implied net wealth at year end would be $55bn. The results are plotted in Figure 12 together with the actual net wealth series from the Reserve Bank (excluding the effect of house price changes). The flow measure of household saving was apparently negative from 1994 to 2010 (with one exception in 2000).[15]

As a consequence, starting in 1994, the implied stock of net wealth declined every year (bar 2000), to the point that it would now be negative. In other words, the negative saving rates based on the Household Income and Outlay Account imply that households would have completely drawn down their stock of net wealth. However, this is inconsistent with the evidence from both the aggregate sector data on household wealth published by the Reserve Bank, and the micro stock data from SoFIE.[16]

Measures of saving based on net wealth for other similar countries typically yield a “paradoxically” higher and increasing implied stock saving rate than the flow measure, which tends to be declining (see Goh, 2005, and Penner, 2008).

Figure 12 - A stock measure of net wealth compared with net wealth implied by the flow measure of saving

 

3.5 Augmenting the household balance sheet#

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The Reserve Bank of New Zealand publishes annual estimates of the assets and liabilities of households.[17] These formed the basis of estimates presented in Section 3.4. However, as noted in Table 6, not all assets are included. The Bank has an on-going project to augment the household balance sheets with a series of elements not currently included. A progress report provides a preliminary augmented balance sheet for the household sector (Briggs, 2012).

To date, the following items have been added to the existing data on household assets: equity held in unincorporated businesses and in unlisted incorporated businesses. This adds about $170 billion to previously published estimates of household assets. It is important to note that these are labelled 'experimental” at this stage, although it is expected that ultimately they will be formally incorporated in the Bank's published tables of assets and liabilities.

In addition, the augmented estimates of assets include currency (notes and coins) held by households and unfunded superannuation claims. The latter refer to “entitlements not covered in full by the amounts that are held in superannuation funds. These unfunded claims largely relate to defined benefit schemes” (Briggs, 2012, p.33). At this stage they relate only to public sector schemes.

In the current context the question which arises is: would these revisions to the household balance sheet have implications for the implied stock measure of the household saving rate? Briggs (2012) notes that incorporation of equity held in unincorporated businesses and in unlisted incorporated businesses into the assets of households will not necessarily result in an implied saving rate that are higher than those based on the existing data. Briggs presents the augmented estimates for the years 2007 to 2011. Using the existing data, the implied annual average household saving rate over this period was 2.7%. When this is recomputed using the augmented balance sheet data, the implied saving rate is 5.5% (noting that there are large swings in both cases associated with the impact of the global financial crisis). This is a very preliminary snapshot based on a short period; however it does suggest that the revisions to the household balance sheets may well have implications for the implied stock measure of the household saving rate.

3.6 A comparison with other OECD countries#

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In this section we compare the saving outcomes at a national level for selected OECD countries. Appendix K plots the current account, net and gross national saving rates and investment all as a percentage of GDP for 12 OECD countries:Australia, Canada, Finland, Germany, Ireland, Japan, Korea, New Zealand, Norway, Sweden, the United Kingdom and the United States. The data are plotted for 1972 to 2010 where available.

Source: OECD; Statistics New Zealand.

Net national saving rates have been both volatile and display a long term declining trend in most countries. Norway and Ireland were exceptions to this. An overall picture can be obtained by taking the long term average savings rates. These are shown in Table 7. There is a great deal of variation across countries. However, New Zealand has the lowest long term average savings rates, both for net national and household saving. Our gross national saving figure is more similar to other countries, and is possibly a better comparator, as methods of calculating depreciation can differ across countries, and rely on relatively arbitrary assumptions. The United Kingdom, Ireland and Finland are the only countries with similarly low household saving rates; however their long term average rates are all positive in contrast to the negative value for New Zealand.

4 Adjusted measures of saving#

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This section initially outlines a range of conceptual and measurement issues involved in the derivation of savings rates.[18] This is followed by a discussion and estimates of four sets of adjustments.[19] The first is an allowance for the impact on inflation on measured saving rates (Section 4.2). The second discussion discusses the role of the hidden economy in savings measurement (Section 4.3). The third series of adjustments are incorporated to reflect the fact that some elements of both private and public consumption expenditures may more appropriately be treated as investment (Section 4.4). Finally the implications of the New Zealand Superannuation Fund (NZSF) for national and household saving are explored (Section 4.5).

4.1  Conceptual and measurement issues#

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An underlying issue which arises with many macroeconomic balances is that of being calculated as a residual of two large flows. In the case of savings, the flow measure is found as the difference between income and consumption. The consequence is that the estimate of savings can become very sensitive to any errors in the measurement of income and consumption. To illustrate: suppose income was 100 units and consumption 95, then measured savings would be 100 - 95 = 5. Suppose however that both income and consumption are measured with error of say 1%, such that income was actually 101 and consumption 94 implying savings, the difference, would be 7. In other words a 1% measurement error in the underlying aggregates could potentially lead to overstating savings by 40%.

Secondly, the boundary between different sectors is not always clear. In the context of savings this arises in the case of the business and household sectors. An example is the treatment of income from small scale proprietorships. In the system of national accounts applied by Statistics New Zealand, entrepreneurial income from owner-operated businesses is credited as an income in the household income and outlay account. This effectively means that any income that is retained in the unincorporated business is not recorded in the business sector saving. While this difference nets out when estimating total national savings it does mean household saving would be overstated relative to business saving. This is in no sense “wrong”: it simply reflects a different underlying concept of the household - one that may incorporate that which would normally be thought of as business activities.

The system of national accounts excludes capital gains/losses associated with holding or trading capital and financial assets. For example, any increase in the value of a house owned by a household will not be included in the income and outlay account. This results in the gains/losses from such assets to be excluded in the flow measure of saving, and is a major source of the difference between flow and stock measures. Gains and losses due to exchange rate movements on assets denominated in foreign currencies are also not included. The underlying rationale for the exclusion of capital gains and losses is that unrealised capital gains provide no investable funds, and neither do realised gains. In the latter case the funds that seller of the asset gains are offset by the funds that a buyer must apply to the purchase (Reinsdorf, 2005).

4.2 Adjusting for inflation#

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In this section we address three separate adjustments to measured savings that arise as a result of inflation. Net lenders become relatively worse off in inflationary conditions, as inflation acts as a tax on their holdings. In contrast, net debtors tend to become better off, as inflation reduces their real debt. Each of the three adjustments we make reflects this impact of inflation. The distortionary effects of inflation on saving and other national statistics have also been recognised by previous authors in New Zealand (eg. White, 1980; Clements, 1984; Coleman; 2006).

4.2.1  New Zealand as a net foreign borrower

In the presence of inflation, real holding losses are incurred by lenders on financial assets. Lenders commonly demand higher nominal interest rates to compensate for inflation. As such, nominal interest rates can be decomposed into two components, real interest, and a component to offset the impact of inflation. This second component represents repayment of the real principal, rather than a real return. The consequence is that this amount should be recorded separately as a capital transfer, rather than as income for the lender or expense for the debtor.[20]

The national accounts and derived measures, however, are presented in nominal terms: Nominal interest receipts are entered as current income and nominal interest payments as current expenditure. Consequently, the income of lender is overstated, and the saving of borrowers is understated, as the nominal rate of interest includes an implicit capital repayment to the lender. The essence of the following adjustments lies in recognising the fact that inflation erodes the real value of financial assets.

The following clearly state the problem for measurement of savings in the presence of inflation:

As conceptually, the inflation component of the interest payments represents a repayment of capital in real terms, it should not be regarded as income when received or an expense when paid (The Australian Treasury, p.32).

It is well known that, in times of inflation, the nominal interest rate consists of two components - the real interest rate and an inflation component. From the viewpoint of borrowers, the inflation component of interest payments is, in effect, equivalent to the repayment of real principal because the real value of the principal outstanding falls by the same amount. In other words, the inflation component represents a flow of savings or an accumulation of wealth on the part of the borrower. Similarly, from the view point of the lenders, the inflation component of interest receipts is equivalent to receiving back part of the principal lent because the real value of the principal has declined by the same amount. In other words, the inflation component of interest receipts does not represent true economic income. (O'Mara and Walshaw, 1992, p. 51).

In an inflationary environment for a country with net external liabilities, the real value of the burden of these foreign obligations denominated in home currency falls at a rate equal to the domestic inflation rate and, consistent with the Fisher real interest rate effect, part of the annual interest payments effectively compensates lenders for the erosion in the value of their principal. Hence the inflation segment of interest received is not really additional income earned by creditors. Yet under existing external accounting procedures, all interest actually paid to foreigners appears in the current account when that part attributable to inflation should in fact be recorded in the capital account. (Makin, 1995, p.59).

The consequence for the measurement of savings is as follows: in the case of borrowers, interest expenses are overstated as the inflation component is in fact saving; reducing expenses for any given income level will lead to a higher estimate of saving. Likewise for lenders, their income will be overstated by the inflation component of their interest receipts, so that for any given level of expenses reducing income will lead to a lower estimate of saving.

In nations with a limited net foreign debt position, these effects offset each other in aggregate, and only the sectoral composition of income and savings is affected. However, New Zealand is a net borrower with the rest of the world, so the effects of inflation impact our position in aggregate. Our net external investment position represents claims on our economy by foreigners.[21]

Adjusting our net international investment position (excluding equity) (henceforth, net foreign liabilities) for inflation[22] results in a reduction in the level of net foreign liabilities and a commensurate increasein our net national savings rate. In making this adjustment we rely on the fact that the majority of overseas debt is either denominated in New Zealand dollars or hedged, and that the inflation rates in creditor countries have been broadly similar in the last two decades.

The following two figures summarise the results. Figure 13 shows the level of net foreign liabilities with and without the inflation adjustment. In 2012, the inflation adjusted level of liabilities is some 3.6 percentage points of GDP lower than the observed level.

This is an approximation, as the net international investment position is also affected by the currency in which debt is denominated as well as price levels, and hence exchange rate fluctuations, which are not taken into account here. A substantial part of New Zealand's foreign liabilities is denoted in New Zealand dollars, and of the remaining amount, much is hedged. This tends to minimise the problem of multiple currencies.

Based on the estimates of the inflation effect we can now adjust net national saving; the results are shown in Figure 14. The long run average (1989 to 2012) net national saving rate increases from 2.5% to 4.3% after incorporating the adjustment for inflation.

Figure 13 – Net foreign liabilities adjusted for effects of inflation: 1989-2012

 

Figure 14 – Net national saving adjusted for the effects of inflation on net foreign liabilities: 1989-2012

 

Source: Statistics New Zealand and author's estimates

The finding that on average the national saving rate is understated due to the impact of inflation by some 1.7 percentage points of GDP corresponds closely to a similar finding by the Reserve Bank (2010) which estimated the under estimation was up to 2 percentage points. The Bank noted that as a result of this correction for inflation, there are implications for international comparisons. Specifically debtor countries will have a higher adjusted saving rate, and by the same reasoning, the national saving rate of creditor countries would be reduced. This would have the effect of reducing the apparent gap between the national saving rate of New Zealand and the average of the OECD countries.

Inflation can distort the measurement and interpretation of national savings across time and across countries. A portion of any interest payment is simply compensation for the reduction in the purchasing power of the underlying financial instrument because of inflation. The full extent of nominal interest payments is recorded as an expense, but the inflation compensation component is better thought of as a repayment of principal. Although inflation rates among the countries we typically compare ourselves with are now quite similar over time, New Zealand's high net dependence on external debt means that this issue still affects the cross-country interpretation of our savings data. For a country with no net dependence on foreign debt, all the interest payments and receipts are (net) between residents, and net out for the purposes of national savings statistics. But New Zealand has net foreign debt of just over 80 per cent of GDP and survey measures of expected medium-term inflation are around 2.5 per cent. That combination means that the real national savings rate for New Zealand is understated by up to 2 percentage points. The inflation distortion works in the other direction for countries with large net foreign assets (such as Switzerland or Norway or Singapore). Correcting for this factor tends to narrow international differences in reported national savings rates a little. Reserve Bank (2010, p.4)

 

4.2.2 Adjusting household savings for inflation

Recognising that households engage in borrowing and lending activity, a similar adjustment can be made for the effects of inflation. Part of the nominal interest charged on outstanding mortgage (and other financial) liabilities is an implicit capital repayment to the lender. A reduction in debt is simply the equivalent of a rise in net wealth (in real terms), and is equivalent to additional saving of an equivalent amount; and vice versa, part of the interest earned on assets is recompense for inflation rather than real economic income (Hill and OECD, 1996).

Adjusting households' net debt position for the effects of inflation results in an adjusted household saving rate below the measured rate in times where households were net lenders, and there was high inflation (Figure 15). For example, in the ten years following 1977, annual inflation rates were in double digits; the adjusted saving rates for the household sector were some 2 percentage points of HDI lower than the measured rate.

With lower inflation subsequently, the gap narrowed through the 1990s. More recently, as the household sector has become a net debtor, this effect has reversed and the adjusted saving rate is in excess of the measured rate. With higher inflation rates and increased mortgage borrowing from 2004, the gap averaged almost two percentage points of HDI in excess of the measured rate. Considering the adjusted saving rate, it is not so apparent that there has been a long-term decline in household saving.

Berry, Williams and Waldron (2009) estimate the effect of inflation on the measurement of household savings in the UK. They find that the inflation adjusted level of savings was below the actual level, but rose strongly in the 1980s. They suggest that it is possible that the decline observed from the mid 1990s may in effect have been a return to a more “normal” long run inflation adjusted household saving rate.

Figure 15 – Household saving adjusted for the effects of inflation: 1978-2011

 

Source: Statistics New Zealand and author's estimates

The redistributive effects of inflation are also relevant when considering saving and investment behaviour over the lifecycle. Younger people tend to have less savings, earn more wage income, are more likely be paying off a mortgage than older people; overall they are more likely to be net debtors. Older people are more likely to have more savings and earn less wage income; they are more likely to be in the position of net lender. This implies an age related redistributive impact of inflation, in addition to the aggregate redistribution between net debtors and lenders over time.[23]

4.2.3 Adjusting for the inflation tax on liabilities of the government held by the public

In the previous two subsections, the impact of inflation of the net lending position of the national and the household sectors were examined. We can also consider the impact of inflation on private sector assets (and implicitly the positive effect on government liabilities), and the contribution this would make the private sector saving rate. When the private sector is a net lender, inflation will reduce the value of its assets, resulting in a downward adjustment to measured savings.

Figure 16 illustrates the extent of the overstatement in private saving as a result of the domestic public holding of government debt in the form of notes and coins and bonds.[24]

Figure 16 – Contribution of inflation adjustment to private saving: 1973-2011

 

4.3 The hidden economy#

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The hidden, or underground, economy is difficult to measure; however complete coverage of economic production is important for exhaustive estimates of GDP. Economic activity which isn't directly observed or measured is often also referred to as the non-observed economy, comprising: underground production (for purposes of tax evasion); informal activity (eg, unincorporated household enterprises); household production for own final use; and the production and distribution of illegal goods.

The size of hidden economy in New Zealand has been estimated using currency demand models to average approximately 9% of GDP over the period of 1972 to 1994 (Giles, 1999)[25] and more recently averaging approximately 12% over the period from 1999 to 2006 (Schneider, 2010).

The impact on national saving of the non-observed economy is however, unclear. Illegal activity is not excluded from the production boundary; however these are not currently measured in the New Zealand national accounts. With regard to the trade of illegal goods, given these are not measured on both the income and consumption side, ultimately leading to offsetting effects on national saving. The decline in measured consumption by the consumer is offset by the increase in measured consumption by the producer, and measured production remains the same.

The unrecorded production or maintenance of household durable goods, or small improvements to a home or farm is likely to have a positive impact on national saving. Substantial repairs by tenants or landlords are recorded as gross fixed capital formation, however smaller do-it-yourself type repairs are not recorded. This may increase the value of residential dwellings or farms, or produce durable goods, leading to an associated increase in saving which is not captured in the national accounts. This may be a particularly salient omission in New Zealand, where do-it-yourself activity and informal trade in home improvement are likely to be relatively prevalent. In conclusion, we have not attempted to estimate the impact on the saving rate of the hidden economy; any such attempt would likely be speculative. However we can conclude that measured saving rates are probably understated as a result of the hidden economy.

4.4 Adjusting measures of saving for investment goods#

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A critical issue is that of the distinction between consumption and investment. For example, consumer durables such as automobiles or kitchen appliances are typically treated as current expenditure rather than investment. The consequence is the flow measures of savings for any given level of income are reduced due to the higher expenditure levels. What we would ideally like to measure is consumption, rather than expenditure. Thus when consumption of a good is spread over multiple years, it suggests that allocating the full amount of the expenditure to one year is not appropriate. And indeed it can be argued that from the household's perspective, it is this expected consumption of service flows over time which is factored into their saving and borrowing decisions. The implication is that durable goods should be treated as an investment, where the purchase expenditure is classified as a capital expenditure, rather than a current expense in the income and outlay account.

This issue of classification arises also in the case of public expenditures. For example, spending by the state on education is counted as current consumption spending by government in the system of national accounts. To the extent that education confers benefits that flow to an individual over an extended period (arguably a lifetime), a legitimate case can be made to classify most of educational expenses as investments.[26]

Similarly, large lumpy items of defence expenditure (eg, a new frigate) represent an investment in the nation's defence capacity whose services can be expected to flow over many years. To count these items as current “consumption” may significantly reduce the estimate of national saving.

Intangible investments, and particularly intellectual property, are a further example. For example research and development expenditure, is currently treated as current consumption; yet successful research and development can generate long term returns. Indeed, the 2008 System of National Accounts (SNA2008, p.122) suggests:

“Research and development is treated as capital formation except in any cases where it is clear that the activity does not entail any economic benefit for its owner in which case it is treated as intermediate consumption”.

Other components of intellectual property which potentially should be capitalised include mineral exploration, computer software and databases (already included as intangible assets), and entertainment, literary or artistic originals which are more difficult to quantify. Statistics New Zealand is currently working on implementing the SNA2008 framework in the national accounts, including the capitalisation of research and development expenditure. Indeed the Australian Bureau of Statistics has now implemented the SNA 2008 in their national accounts (ABS, 2009).

While human capital is not a part of the SNA2008 framework, it is of interest from an economic perspective, and has implications for the measurement of savings. Education is a key component of human capital, and as discussed above, represents an investment in the future productive capacity of the economy (in addition to other positive externalities). A valid case exists for education expenditure to be treated as capital formation rather than a current expense.[27]

Similarly, good health can conceptually be considered as a component of human capital. This was posited by Grossman (1972), who derived a theoretical model for the demand for good health, in which individuals are endowed with a predetermined stock of health capital at birth. While this stock depreciates with age similar to any other form of capital, it can be augmented by inputs such as expenditure on medical care or sporting activities. The stock of health capital then contributes to the number of healthy days available to produce work or leisure outputs. In this framework, health is a key component of human capital which provides an extended flow of services to both the individual and society. Again treating some of health expenditures as investments in the stock of health capital has implications for the measurement of savings[28].

As expenditure on education and health have been increasing over time, reflecting increased enrolments in tertiary education and changing population demographics, this is likely to have been a contributing factor in declining measured saving rates. This has been noted by Gokhale et al., (1996) for the US, who argued that increasing medical consumption through in-kind health care transfers, particularly by the elderly, explained a large proportion of the decline in post-war aggregate saving. These structural trends, some of which are surely contributing to the productive capacity of the economy, are likely to explain some proportion of New Zealand's (and potentially other countries') declining aggregate saving rates. Figure 17shows the unadjusted household saving rate augmented by various adjustments discussed above: reclassifying education, health and consumer durables as investment, and subtracting the associated depreciation expenses.[29] These adjustments result in an upward adjustment to the household saving rate, of 3 percentage points on average over the sample period, and of 2 percentage points in 2011.

Figure 18 augments the net national saving rate in a similar fashion. Expenditure in health, education, consumer durables and research and development are now classified as investments. The average adjustment is 7 percentage points, with a 7 percentage point difference in 2011.[30]

Figure 17 – Net household saving rate adjusted for investment items: 1996-2011

 

Figure 18 – Net national saving rate adjusted for investment items: 1996-2011

 

4.5 Adjusting for NZ Superannuation Fund#

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Since 2002, public contributions have been made to a fund denoted the New Zealand Superannuation Fund.[31] These have been invested by the Fund with a view to meeting the rising costs of universal superannuation as the population ages. As these funds have been raised from households (or businesses as owners of households), and as households are the intended beneficiaries when the funds are distributed through the system of superannuation, then it is legitimate to view these funds as being in effect part of household saving. They are fundamentally equivalent to those funds set aside by households in private retirement schemes (although arguably one might want to apply a discount factor to reflect the possibility that as long as the funds remain under Crown control, future governments may want to divert the funds to another purpose).

Data were obtained for the opening annual balances of the fund, and these were used to derive the annual net increases after taxes and expenses. This amount was taken as an addition to household wealth, equivalent to an increase in the annual saving rate of households.[32] Over the period 2002 to 2011, this has the effect of raising the estimate of household saving by an annual average of 2.1 percentage points of household disposable income.

4.6 An overview of the adjustments to saving rates#

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We conclude this section with a brief discussion of adjustments made for other countries. Various international estimates of the impact of capitalisation of durables on the household saving ratio are available. A moderate impact on household saving ratios has been found in the Euro Area, being between 1.0 and 1.8 percentage points (Jalava and Kavionus, 2007), which the authors note is slightly smaller than effects found in the US in other studies (up to 3 percentage points). Estimates for Australia have been found to be approximately 1 percentage point (Doss, 2000).

Table 8 summarises the impact in 2011 of the illustrative adjustments for inflation and investment made in the above sections of the paper (4.2 and 4.4). In addition, includes the adjustment for the saving effect of the NZ Superannuation Fund (discussed in Section 4.5). Full details for all years for which data are available are set out in Appendices F to I.

It is evident that the adjustments raise both the national and household flow measures of savings from the national accounts by an appreciable margin. In 2011, the unadjusted net national saving rate was 1.4% of GDP. Once the flow adjustments are included the net national saving rate is estimated to have been 9.7%. And if allowance is made for the NZ Superannuation Fund, this increases to 11.2% of GDP in marked contrast to the unadjusted value of 1.4%. The time series of both the adjusted and unadjusted rates for 1996 to 2011 are plotted in Figure 19 which shows the composition of the adjustments.[33]

We conclude this section with a brief discussion of adjustments made for other countries. Various international estimates of the impact of capitalisation of durables on the household saving ratio are available. A moderate impact on household saving ratios has been found in the Euro Area, being between 1.0 and 1.8 percentage points (Jalava and Kavionus, 2007), which the authors note is slightly smaller than effects found in the US in other studies (up to 3 percentage points). Estimates for Australia have been found to be approximately 1 percentage point (Doss, 2000).

Notes:

1. The national data to this point includes that derived from central government spending. The total adds in the household spending effect.
2. Derived from Appendix J.

The impact of research and development on national saving have been found to be around 2 percentage points in the US (Fraumeni and Okubi, 2002), and between 1 to 2 percentage points for the UK (Galindo-Rueda, 2007). New Zealand has relatively low expenditure on research and development, suggesting a contribution of half a percentage point to be a reasonable estimate.[34]

Figure 19 – Summary of adjustments to national (A) and household (B) saving rates

Figure 19 – Summary of adjustments to national (A) saving rates

 

Figure 19 – Summary of adjustments to household (B) saving rates

 

5 Summary and Conclusions#

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“No one saving rate measure is the answer to all the questions one might pose about saving and wealth accumulation”

Boskin (1988), p.31

It has long been recognised that saving rates in New Zealand are low, and below those of most other OECD countries. From a macroeconomic perspective, a dearth of saving raises concerns of over reliance on the possibly fickle supply of foreign saving. If national savings are not sufficient to meet the desired level of investment, foreign savings in the form of capital inflows will be required to make up the shortfall. In 2012 some 85% of New Zealand's net investment was met by foreign rather than national savings.

Low levels of domestic saving may have implications for the level of investment. Too little capital investment can be associated with lower labour productivity and a slower growth of real incomes than might otherwise be the case. From a micro perspective, retirement income adequacy and unsustainable household debt are often aired as concerns.

Successive governments have introduced a range of pro-saving policies. Similar approaches have been adopted by other countries. A necessary condition for ensuring such interventions are truly welfare enhancing is that evidence base on which they rest is solid. This paper contributes to that goal by examining the measurement of saving. It builds on a number of existing pieces published by the Treasury.

The paper makes three significant contributions. First it documents the existing measures of savings from the national accounts from 1972 to 2012. Second it summarises the evidence on the level and trends of both flow and stock measures of saving. Third, it makes a series of adjustments which illuminate important conceptual issues in the measurement of saving. Throughout the focus is on the measurement of savings; no attempt is made to address the question of adequacy.

The long run average national saving rates are 17.7% of GDP (gross) and 3.4% (net). For the household sector the average long run rate is -0.1%. As the boundary between households and business in not one that is clearly defined in practice, it is sometimes preferable to look at the combined household and business sectors, denoted the private sector. Here the long run average rate is 2.4% of GDP.

Changes in net wealth are a useful alternative for estimating savings rates. Such changes however embody both and active and passive component of saving, the latter arising from asset revaluations. In applying the stock measure to aggregate household sector data on assets and liabilities we find the long run average annual saving rate was 16.1% of household disposable income (from 1979 to 2011). After stripping out the effect of house price revaluations (the passive component) which amounted to an annual average of 8.9% we are left with an estimate of the active annual average household saving rate of 7.1%. In contrast, over the same period the flow measure of the average annual household saving rate as measured by the national accounts was -0.7% of household disposable income.

A completely independent approach to measuring household saving rates from net wealth data can be applied to household survey data. Over the years 2004 to 2006, the annual average saving rate derived from the Survey of Family Income and Employment was 19%, which was virtually identical to the saving ratio from the aggregate Reserve Bank of 18% (adjusted to be comparable with the SoFIE calculations), suggesting these estimates are reasonably robust. In contrast, over the same period the flow measure of the average annual household saving rate as measured by the national accounts was -7.3% of household disposable income.

Regarding changes in wealth, it is useful to note that changes in wealth may occur for a variety of reasons, including permanent changes in the future earning potential of the asset, as well as changes in the way these earnings are valued. A fruitful avenue for future work may be an examination of the extent to which asset revaluations reflect increases in earning potential, and therefore may reduce the need for future saving, as opposed to transitory changes in the way in which these earnings are discounted (eg, Lettau and Ludvigson, 2004).

This study finds that when the flow measures of both household and national saving rates are adjusted for spending which may more appropriately be defined as investment and the impact of inflation, estimated saving rates are significantly increased. The unadjusted rate for household saving was -4.1% of household disposable income between 1996 and 2011; for the same period the net national saving rate was 2.8% of GDP. After incorporating the adjustments the estimated saving rates were 0.3% and 11.8% respectively.

Similar findings have emerged from other countries. For example, in the case of the USA, Boskin (1998, pp.30-31) observes:

While the United States has a saving rate which is low by historical and international standards, that saving rate is substantially higher when more comprehensive measures of saving are developed. While there are substantial difficulties in developing such augmented measures of national saving, various data sources and estimation methodologies all conclude that adjustments for net saving in durables, government capital, capital gains and losses, revaluations, etc. are all substantial.

A potentially significant adjustment arises from the stock of wealth that has accumulated in the New Zealand Superannuation Fund. To the extent that this is viewed as funds contributed by households through taxation for the provision of retirement income in future, it represents savings by households. On average the stock measure of savings is some 2.1 percentage points of household disposable income higher between 2002 and 2011, when allowance is made for the net wealth accumulated in the NZSF.

Statistics New Zealand is constantly seeking improvement in the collection and coverage of the data it publishes. Important revisions have been made to the household saving rates. The consequence of these is that some of the very extreme levels of household dissaving seen between 2004 and 2009 have been revised such that the current estimates of negative saving by households from the household income and outlay account are very much more modest. Over this period the annual average change was an improvement in the saving rate of households of over 7 percentage points of disposable income. These revisions underscore the importance for the policy debate to be grounded in solid evidence, and for full cognizance of the limitations of the underlying data.

The finding that existing flow measures may not be capturing the full extent of savings in all likelihood does little to alter the relative position of New Zealand in international comparisons. Arguably, were similar adjustments made to other countries a largely comparable ranking would remain. The exception is when New Zealand (a significant debtor country) is compared with significant creditor countries (eg Norway, China, Hong Kong). In this case adjusting for the impact of inflation is likely to lead to a closing of the apparent gap in national saving rates by as much as 4 percentage points of GDP.

In short, this paper concludes that the actual level of the saving rate may not be quite as low as the standard estimates imply. It is not that they are in any sense “wrong:” It is simply that they may not necessarily capture the full richness of saving behaviour.

Bollard and Barrow (2012) review a number on measurement issues relating to national income. They conclude that potential revisions could add as much as 10 percent to New Zealand's official GDP (p.15). Other things equal this would imply a significant change in the estimated rate of national saving.[35]

This is not to imply that the augmented measures presented here are a complete picture of saving rates. Conceptual and practical issues remain, whether they be in aggregation across heterogeneous households, the impact of changes in the age distribution and the composition of households, the role of bequests, the measurement of all forms of physical, natural, human and social capital, the choice of appropriate deflators or the comprehensive revaluation of all forms of assets and liabilities. Judgement calls are still needed to deal with many of these issues.

Overall, however the results presented here suggest that broader measures of saving might well be considered as complements to the official series when analysing the saving behaviour of firms and households, and the net saving of the nation as a whole.

References#

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Arrow, Kenneth J. et al. (2011). “Sustainability and the Measurement of Wealth.” National Bureau of Economic Research. Working Paper No. 16599

Australian Bureau of Statistics (2009). Information Paper: Implementation of new international statistical standards in ABS National and International Accounts.

Australian Treasury (1999). “The Measurement of Saving in Australia.” Economic Roundup, Spring Edition.http://archive.treasury.gov.au/contentitem.asp?ContentID=195

Australian Treasury (2000). “Australian Net Private Wealth”.Economic Roundup, Summer Edition.http://www.treasury.gov.au/contentitem.asp?pageId=016&ContentID=116

Bascand, Geoff, Jeff Cope and Diane Ramsay (2006). “Selected Issues in the Measurement of New Zealand's Saving(s).” Paper presented at the Reserve Bank of New Zealand Workshop on Saving. http://www.rbnz.govt.nz/research/workshops/14nov06/2895712.pdf

Berry, Stuart, Richard Williams and Matthew Waldron (2009) “Household saving.” Bank of England Quarterly Bulletin 2009 Q3:191-201.

Bollard, Alan and Rochelle Barrow (2012) “Could we be better off than we think?” Reserve Bank of New Zealand: Speech toa meeting of the Trans Tasman Business Circle in Auckland, 17 February. http://www.rbnz.govt.nz/speeches/4683849.html

Boskin, Michael J. (1988) “Issues in the measurement and interpretation of saving and wealth.” National Bureau of Economic Research. Working Paper No. 2633.

Briggs, Phil (2006) “Family trusts: ownership, size, and their impact on measures of wealth and home ownership.” Reserve Bank of New Zealand. Discussion Paper DP2006/06, July. http://www.rbnz.govt.nz/research/discusspapers/dp2006.html#P29_2861

Briggs, Phil (2012) “Financial accounts and flow of funds.” Reserve Bank of New Zealand: Bulletin 75(4):26-35.

Breusch, Trevor (2005) “The Canadian underground economy: An examination of Giles and Tedds.” Canadian Tax Journal 53(2):367-391.

Browning, Martin and Annamaria Lusardi (1996) “Household saving: micro theories and micro facts.” Journal of Economic Literature 34:1797-1855

Cameron, L. et al. (2007) “New Zealand financial markets, saving and investment.” The Treasury, New Zealand Policy Perspectives Paper 07/01. http://www.treasury.govt.nz/publications/research-policy/ppp/2007/07-01/

Claus, I. and Grant M. Scobie (2002) “Saving in New Zealand Measurement and Trends.” New Zealand Treasury Working Paper 02/02. http://www.treasury.govt.nz/publications/research-policy/wp/2002/02-02/

Clements, Robin (1984). “Uses of Savings in New Zealand”. Reserve Bank of New Zealand Bulletin, 47(6):291-296.

Coleman, Andrew (1998) “Household Savings: A Survey of Recent Microeconomic Theory and Evidence.” New Zealand Treasury Working Paper 98/08. http://www.treasury.govt.nz/publications/research-policy/wp/1998/98-08/

Coleman, Andrew (2006) “The life-cycle model, savings and growth.” Paper presented at the Reserve Bank of New Zealand Workshop on Housing, Saving and the Household Balance Sheet. November 14. http://www.rbnz.govt.nz/research/workshops/14nov06/2895712.pdf

Crossley, Thomas F. and Cormac O'Dea (2010) The wealth and saving of UK families on the eve of the crisis. The Institute for Fiscal Studies, London.

Delbrück, Felix (2012) “Save us! How much are New Zealanders really saving?” Westpac Institutional Bank. http://www.westpac.co.nz/wib/resources/

Doss, Tanuja (2003). “Alternative measures of income and saving.”Paper presented at the 32^nd Annual Conference of Economists. Available at www.abs.gov.au.

Fraumeni, Barbara and Sumiye Okubo (2005). “R&D in the National Income and Product Accounts: A First Look at its Effect on GDP.” Chapter in NBER book Measuring Capital in the New Economy, eds. Carol Corrado, John Haltiwanger and Dan Sichel. 275-322. University of Chicago Press. http://www.nber.org/chapters/c10624.pdf

Gibson, John and Grant Scobie (2001). “A cohort analysis of household income, consumption and saving”. New Zealand Economic Papers, 35(2), 196-217.

Gibson, John, Trinh Le, Grant Scobie (2004) “Women's Retirement Incomes in New Zealand: A Household Bargaining Approach.” New Zealand Treasury Working Paper 04/22. http://www.treasury.govt.nz/publications/research-policy/wp/2004/04-22.

Giles, David (1999). “Modelling the Hidden Economy and the Tax-Gap in New Zealand”. Empirical Economics. 24:621-640.

Goh, Khoon (2005). “Saving and the household balance sheet”. RBNZ Bulletin, 68(2).

Gokhale, Jagadeesh, Laurence J. Kotlikoff and John Sabelhaus (1996). “Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis”. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1): 315-407.

Grossman, Michael (1972), "On the Concept of Health Capital and the Demand for Health",Journal of Political Economy, 80 (2): 223–255.

Galindo-Rueda, Fernando (2007) “Developing an R&D Satellite Account for the UK: a Preliminary Analysis”. ONS Economic and Labour Market Review 12(1).

Guest, Ross, John Bryant and Grant Scobie (2003) “Population Ageing In New Zealand: Implications for Living Standards and the Optimal Rate of Saving.” Treasury Working Paper WP03/10. http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-10

Guest, Ross, Grant Scobie and John Bryant (2003) “Population Ageing In New Zealand: The Impact on Living Standards and the Optimal Rate of Saving with a Flexible Real Exchange Rate Treasury Working Paper WP03/34. http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-34

Guidolin, Massimo, and Elizabeth A. La Jeunesse (2007) “The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?” Federal Reserve Bank of St. Louis Review 89(6):491-514.

Haig, Robert M. (1921). "The Concept of Income - Economic and Legal Aspects." The Federal Income Tax. New York: Columbia University Press. pp. 1-28.

Hall, Robert E. (1999) Comment on “Perspectives on the household saving rate” by Gale and Sabelhaus. Brookings Papers on Economic Activity No. 1:215-220.

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Hodgetts, Bernard, Phil Briggs and Mark Smith (2006) “Household saving and wealth.” Paper presented at the Reserve Bank of New Zealand Workshop on Housing, Saving and the Household Balance Sheet. November 14. http://www.rbnz.govt.nz/research/workshops/14nov06/2895712.pdf

Jalava, Jukka and Ilja Kavionus (2007). “Durable Goods and their Effect on Household Saving Ratios in the Euro Area.” ECB Working Paper Series, no. 755.

Joint Working Group (1999) “Saving Rates and Portfolio Allocation in New Zealand.” New Zealand Treasury Working Paper 99/09.http://www.treasury.govt.nz/publications/research-policy/wp/1999/99-09/

Law, David, Lisa Meehan and Grant M Scobie (2011) “KiwiSaver: An initial evaluation of the impact on retirement saving.”Treasury Working Paper WP11/04. http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-04/

Le, Trinh, John Gibson and Les Oxley (2003).”Cost- and Income-Based Measures of Human Capital”. Journal of Economic Surveys 17(3):271-307.

Le, Trinh (2007) Does New Zealand have a household savings crisis? New Zealand Institute of Economic Research. Working Paper 2007/01. http://nzier.org.nz/publications/does-new-zealand-have-a-household-savings-crisis

Le, Trinh and Bryce Wilkinson (2008) “Is poor household saving the cause of New Zealand's high current account deficit?” New Zealand Institute of Economic Research. Working Paper 2008/01. http://nzier.org.nz/publications/is-poor-household-saving-the-cause-of-new-zealands-high-current-account-deficit

Le, Trinh, John Gibson and Steven Stillman (2010) “Wealth and saving in New Zealand: Evidence from the Longitudinal Survey of Family, Income and Employment” New Zealand Economic Papers, 46(2):93-118.

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McCulloch, Brian and Jane Frances (2001) “Financing New Zealand superannuation”. Treasury Working Paper WP11/04. http://www.treasury.govt.nz/publications/research-policy/wp/2001/01-20/

Nordhaus, William (2000). “New Directions in National Economic Accounting”. The American Economic Review, 90(2):259-263.

O'Brien, Chase (2012) “Institutional Sector Accounts and the Residential Property Boom”. Paper presented at NZAE Conference, Palmerston North, New Zealand, 27 June. http://www.stats.govt.nz/surveys_and_methods/methods/research-papers/nzae/nzae-2012/~/media/Statistics/surveys-and-methods/methods/research-papers/NZAE/2012/obrien-2012-residential-boom.pdf

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Reinsdorf, Marshall B. (2007) “Alternative measures of personal saving” Washington, DC: Bureau of Economic Analysis.

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Savage, John (1999) Savings in New Zealand: A Background Paper. Wellington: NZ Institute of Economic Research (Inc).

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Scobie, Grant M. and Katherine Henderson. (2009) “Saving rates of New Zealanders: A net wealth approach.” Treasury Working Paper WP09/04.http://www.treasury.govt.nz/publications/research-policy/wp/2009/09-04/

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White, R. (1980) “The Use of a Constant Value Unit of Account in Business Accounts”. Reserve Bank of New Zealand Bulletin. 43(4):139-145.

Appendix A: The system of national accounts#

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The following table sets out the elements of the system of national accounts. These make up what would constitute a “complete” set of accounts. These accounts are what make up a complete system of accounts. In reality, not all of the accounts are available for New Zealand at this stage. The first three accounts are prepared in New Zealand and the income and outlay account is also prepared at an institutional level for the household and government sector.

Appendix Table A.1 - The system of national accounts#

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Source: Savage (1999).

 

Appendix B: Basic data: flow measures#

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(1) 1972-2012: Statistics New Zealand: SNDA.SG00NAC00B08

(2) 1972-1977: Authors' estimates by splicing SNBA.S1AM and SNCA.S2NB000E
1978-2012: Statistics New Zealand: ISAA.S2NB8000S5000

(3) 1972-2012: The Treasury: net cash flows from operations

(4) 1972-2012: Authors' estimates: (1)-(2)-(3)

(5) 1972-1986: Authors' estimates by splicing SNBA.S1AM and SNCA.S2NB000E

1987-2012: Statistics New Zealand: ISAA.S2NB8000S5000

(6) 1988-2009: Statistics New Zealand: ISAA.S2NB8000S3000

(7) 1988-2009: Statistics New Zealand: ISAA.S2NB8000S2000+ISAA.S2NB8000S1000+ISAA.S2NB8000S4000

(8) 1972-2012: Statistics New Zealand: SNDA.SG00NAC00B15

(9) 1972-2012: Statistics New Zealand: ISAA.S2NB6100S5000

(10) 1972-2012: Statistics New Zealand: SNDA.SG04NAC00B22

(11) 1972-2012: Statistics New Zealand: SNDA.SG06NAC00B12

(12) 1972-2012: Statistics New Zealand: SNDA.SG02NAC01P51T4

(13) 1972-2012: Statistics New Zealand: SNDA.SG02NAC01K10T4

(14) 1972-2012: Statistics New Zealand: SNDA.SG05NAC00P52

(15) 1972-2012: Authors' estimates: (12)-(13)+(14)

(16) 1972-2012: Authors' estimates: (1)+(12)

(17) 1972-2012: Authors' estimates: (2)+(4)

 

Appendix C: Summary of saving rates: flow measures#

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(1) 1972-2012: (2)/(8) from Appendix B.

(2) 1972-2012: (2)/(9) from Appendix B.

(3) 1972-2012: (3)/(8) from Appendix B.

(4) 1972-2012: (17)/(8) from Appendix B.

(5) 1972-2012: (1)/(8) from Appendix B.

(6) 1972-2012: (16)/(8) from Appendix B.

Appendix D: Revisions to household saving rates#

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Notes on the major recent revisions to the estimates of the household saving rate[36]#

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2006

The main revision in 2006 was a change in methodology regarding trusts, due to additional data.

Updated estimates of household saving have been introduced following a review of income accruing to trusts. In recent years, trusts have become an increasingly popular means of holding capital and financial assets. Family trusts, as the owners of 'household' assets, are classified to the household sector, and income earned by the trusts is classified as household income.

However, the sector of ownership and the different forms of financial and capital ownership are complex, as are the ways in which the relevant trust's income flows might be captured in the existing survey platforms used to compile New Zealand's National Accounts. An analysis was conducted where Inland Revenue tax data was confronted with the Statistics New Zealand Business Frame. This analysis identified a number of improvements that could be made to the measurement of income accruing to trusts. As a result, these improvements have been incorporated within the experimental household income and outlay account.

For further discussion see:http://www.stats.govt.nz/~/media/Statistics/Browse%20for%20stats/NationalAccounts/ previous-releases/national-accounts-yemar06-hotp-revised.pdf

2009

The main revision in 2009 reflected the incorporation of Census data on new dwellings into the National Accounts. This flowed through into the household accounts in two ways. Firstly additional imputed rents increased the Gross operating surplus for owner occupied dwellings. Second, Household consumption expenditure was increased by higher actual and imputed rents, with the net effect being a decrease in household saving rate from -11.0 to -13.7 as a percentage of revised estimates of household disposable income. The revisions section in the link below refers to these changes:

http://www.stats.govt.nz/browse_for_stats/economic_indicators/NationalAccounts/ NationalAccounts_HOTPyemar09/Commentary.aspx

2010

The main revisions in 2010 were related to Interest paid and Entrepreneurial income.

A higher proportion of the household mortgage interest is now allocated to entrepreneurial income. The result is a decrease in interest paid by households, and an offsetting lower entrepreneurial income for residential landlords. , As the household sector is now paying lower mortgage interest than previously, and this is only partially offset by lower entrepreneurial income, the estimated household saving increases from -4.5% in 2009 to -2.2% in 2012. There is a discussion on this change in methodology in O'Brien (2012).

http://www.stats.govt.nz/surveys_and_methods/methods/research-papers/nzae/nzae-2012/~/media/Statistics/surveys-and-methods/methods/research-papers/NZAE/2012/obrien-2012-residential-boom.pdf

Details of the implications of a range of revisions to the household income and outlay account are given in:http://www.stats.govt.nz/browse_for_stats/economic_indicators/NationalAccounts/InstitutionalSectorAccounts_HOTP99-08/Commentary.aspx

Investment income from the rest of the world

New IRD data on 'overseas income' resulted in a revision to the Balance of Payments release that has flowed through into the household accounts. Further details of this revision can be found at: http://www.stats.govt.nz/browse_for_stats/economic_indicators/balance_of_payments/improvements-to-income-in-bop-stats.aspx

Appendix E: Household saving rates: stock measures#

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(1) 1978-2011: RBNZ: Household financial assets and liabilities

(2) 1978-2011: RBNZ: Household financial assets and liabilities

(3) 1978-2011: RBNZ: Household financial assets and liabilities

(4) 1978-2011: RBNZ: Household financial assets and liabilities

(5) 1978-2011: RBNZ: Household financial assets and liabilities (1)-(2)-(3)+(4)

(6) 1978-2011: (6)=(5) adjusted to 1978Q2 dollars.

(7) 1978-2011: (7)=(5) gross housing wealth adjusted by HPI.

(8) 1978-2011: (8)=(5) net housing value adjusted by HPI.

(9) 1978-2011: Change in (6)

(10) 1978-2011: Change in (7)

(11) 1978-2011: Change in (8)

(12) 1978-2011: (9)/(9) from Appendix B converted to constant real 1978 $

(13) 1978-2011: (10)/(9) from Appendix B converted to constant real 1978 $

(14) 1978-2011: (11)/(9) from Appendix B converted to constant real 1978 $

Appendix F: Summary of flow and stock saving measures#

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(1) Column 12, Appendix E

(2) Column 13, Appendix E

(3) (1)-(2)

(4) Column 12, Appendix E

(5) Column 14, Appendix E

(6) (4)-(5)

(7) Column 2, Appendix E

(8) Column 6 , Appendix I.2

Appendix G: Adjusting the current account and the external debt for inflation[37]#

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Consider the national accounting identity:

Y = C + I + (X - M) (F1)

where Y is national income, C includes both private and public consumption, I is total investment and X and M are exports and imports respectively.

Let S be measured savings and be offshore interest payments on the external debt so that:

C = Y - S - Rⁿ (F2)

Substituting (D2) into (D1) and rearranging yields:

S - I = X - M - Rⁿ (F3)

Now the nominal interest payment comprises a real and an inflation component so that:

Rⁿ = R^r + Rⁱ (F4)

Substituting (D4) into (D3) yields:

S = X - M - R^r - Rⁱ + I (F5)

Consider the case in which inflation is zero, so that there is no capital repayment term Rⁱ; then:

S^* = X - M - R^r + I (F6)

It follows that the difference in savings with and without inflation is

S^* - S = Rⁱ (F7)

We now turn to the impact of inflation on the measured net external liabilities (NIIP).

The standard identity for the current account balance is:

CAB = S - I (F8)

Substituting (D5) for S yields:

CAB = X - M - R^r - Rⁱ (F9)

which in the absence of inflation becomes

CAB^* = X - M - R^r (F10)

so that the difference becomes

CAB^* - CAB = Rⁱ (F11)

Finally starting from the following identity for the stock of foreign liabilities:

NIIP_t = NIIP_t-1 + CAB_t-1 (F12)

Substituting (D9) into (D12) yields

NIIP_t = NIIP_t-1 +(X - M - R^r) _t-1 - Rⁱ_t-1 (F13)

So that

NIIP_t = NIIP_t-1 - Rⁱ_t-1 + CAB^*_t-1 (F14)

In other words the observed level of net foreign liabilities will overstated by an amount equal to the implicit capital repayment (the inflationary component) of Rⁱ_t-1.

(1) 1992-2012: Statistics New Zealand:IIPA.S5AAA
1989-1991: Statistics New Zealand:IIPA.S4AD1

(2) 1992-2012: Statistics New Zealand:IIPA.S4AD1A1
1989-1991: Statistics New Zealand:IIPA.S4AD1

(3) 1992-2012: Statistics New Zealand:IIPA.S5AAA21
1989-1991: Statistics New Zealand:IIPA.S4AD1B1

(4) 1992-2012: Statistics New Zealand:IIPA.S5ALA
1989-1991: Statistics New Zealand:IIPA.S4AC1

(5) 1992-2012: Statistics New Zealand:IIPA.S5ALA11
1989-1991: Statistics New Zealand:IIPA.S4AC1A1

(6) 1992-2012: Statistics New Zealand:IIPA.S5ALA21
1989-1991: Statistics New Zealand:IIPA.S4AC1B1

(7) 1992-2012: (1)-(4)

(8) 1989-2012: (7)/(8) from Appendix B

(9) 1989-2012: [(1)-((2)+(3))]-[(4)-((5)+(6))]

(1) 1989-2012: Statistics New Zealand, authors' estimate.

(2) 1989-2012: Statistics New Zealand: CPI All groups CPI009AA

(3) 1989-2012: (3)=(2)[t-1]*(1)

(4) 1989-2012: (4)=(1)-(3)

(5) 1989-2012: Statistics New Zealand: SNDA.SG00NAC00B08

(6) 1989-2012: Statistics New Zealand

(7) 1989-2012: (6)+(3)

(8) 1989-2012: (7)/(8) from Appendix B

(1) 1978-2011: RBNZ Household assets and liabilities; authors' calculations
Deposits less housing and consumer loans

(2) 1978-2011: Inflation[t-1]*(3)

(3) 1978-2011: Statistics New Zealand: SNDA.SG00NAC00B08

(4) 1978-2011: (5)+(4)

(5) 1978-2011: (6)/(8) from Appendix B.

Appendix H: Adjusting for the inflationary tax on liabilities of the government held by the public#

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(1) 1972-2011: RBNZ

(2) 1972-2011: Treasury fiscal time series

(3) 1972-2011: RBNZ

(4) 1972-2011: (2)-(3)

(5) 1972-2011: Statistics New Zealand: CPI All groups CPI009AA.

(6) 1972-2011: (4)*(5)[t-1]

(7) 1972-2011: Statistics New Zealand: authors' estimates.

(8) 1972-2011: (7)+(6)

(9) 1972-2011: Statistics New Zealand: SNDA.SG00NAC00B15

(10) 1972-2011: (7)/(9)

(11) 1972-2011: (8)/(9)

Appendix I: Adjusting saving for investment items#

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Certain items of expenditure may provide a stream of benefits over time, therefore maybe be more appropriately classified as an asset rather than an expense. This involves removing the expenditure item from current consumption, and reclassifying it as an asset. Thus gross saving is increased. Net saving is different from gross saving, in that depreciation is subtracted. Subtracting cumulative depreciation, or equivalently entering this as an expense, distributed over the useful life of the asset, results in a net measure of saving. Now the expense is incurred in the period in which the economic benefit may be thought to be received. This flow of services is often assumed to be either constant or declining in an exponential fashion until the asset is depleted. We have used a double-declining balance method. Net measures of saving tend to be substantially lower than the associated gross saving rate, owing to this subtraction of depreciation. For example, the net investment in durables is relative small; however the gross impact on saving in 2011 as calculated here would be approximately 8 percentage points.

(1) 1996-2011: Statistics New Zealand: SNDA.SG00NAC00B08

(2) 1996-2011: NZ Treasury: Fiscal time series

(3) 1996-2011: NZ Treasury: Fiscal time series

(4) 1996-2008: Ministry of Health: Expenditure and Trends, Appendix 3 (HES)
2010: HES.

(5) 2001, 2007, 2010:HES, authors' estimates.

(6) 1996-2011: Statistics New Zealand:

(7) 1996-2011: (bi-annually), GERD: Research and Development survey

Note: Values in time periods where no data was available have been estimated.

Sources: see previous page, and Appendix B.

Appendix J: Adjusting for NZ Superannuation Fund#

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(1) From Fiscal Time Series: Historical Fiscal Indicators http://www.treasury.govt.nz/government/data

(2) This corresponds to the Crown contributions: Source as for (1)

(3) Fund revenue + Gains/losses - (Taxes + other expenses): Source as for (1)

(4) (2) + (3)

(5) Column (12) from Appendix E.1 and expressed as a % of Household Disposable Income

(6) (5) adjusted for the total change in net wealth from (4) and expressed as a % of Household Disposable Income

(7) (6) - (5)

Appendix K: International Comparisons#

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Current account, net and gross national saving, investment (% GDP)