Measurement Issues and policy – The IIP, current account and saving.

Measurement Issues
and policy – The IIP,
current account and
saving.
Stephen Toplis, Head of Research
RBNZ Workshop June 13 2011
Conclusions
• The aggregate data look meaningful and accurately
reflect New Zealand’s indebtedness to the rest of the
world
• Consistency is strong
• Improvements possible but not critical
• The failure is in understanding the detail
• A requisite for policy makers
2
New Zealand’s Number One Problem
Net International Investment Position
% of GDP
-70
-75
-80
-85
-90
-95
01
02
Source: Statistics NZ, BNZ
3
03
04
05
06
Quarterly
07
08
09
10
A Growing Problem
% of GDP
Net Foreign Assets
0
-10
-20
-30
-40
-50
Lane & Milesi-Ferretti
-60
Statistics NZ
-70
-80
-90
-100
-110
-120
70
72
74
76
78
80
82
84
86
88
90
Annual
Source: Lane et al, Statistics New Zealand, SWG, BNZ
4
92
94
96
98
00
02
04
06
08
10
A Bad Choice Of Friends
Government Debt and Net Foreign Asset Position, 2009
5
Accumulated Deficits
Current Account Balance
% of GDP
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
72
74
76
78
80
Source: SWG, BNZ, Statistics New Zealand
6
82
84
86
88
90
Annual
92
94
96
98
00
02
04
06
08
10
The Necessary Response
• Increased household savings
• Less household spending
• Decreased government spending
• Less economic stimulus
7
The Three Part Solution
• Government
• Household
• Business
8
Government-Private Split Understood
% of GDP
Savings
10
8
6
4
2
0
-2
-4
National saving
Government saving
-6
Private saving
-8
88
89
90
91
92
93
Source: Statistics New Zealand, SWG, BNZ
9
94
95
96
97
98
99
Annual
00
01
02
03
04
05
06
07
08
09
10
Government – Private Sector Split Good
• Fiscal data good
• The balance sheet approach that the Government has
started via its investment statement is a welcome
development
10
Household-Business Split Not So
% of national
disposable income
Private Sector Savings Rates
(Three year average)
8
Household saving
6
Business saving
4
2
0
-2
-4
-6
88
89
90
91
92
93
Source: Statistics New Zealand, BNZ, SWG
11
94
95
96
97
98
99
Annual
00
01
02
03
04
05
06
07
08
09
10
Household
• We seem to have good measures of private sector saving. It is not
clear that we have the split effectively covered.
o The retained earnings of closely-held companies – the majority of
companies in New Zealand – are correctly recorded in the
business sector, and any distributions to the owning shareholders
are restricted to declared dividends. However, the retained
earnings are effectively at the shareholders’ disposal and may be
accessed through other distributions such as drawings and loans.
These “income” sources are not recorded in household income.
o Similar distributional issues may apply to trading trusts.
o Issues around expensing of household costs into business
accounts.
• The role of trusts
12
Household
• We need better data on the shape and form of household
savings
• A clear breakdown of managed funds, bank deposits,
share holdings, direct investment in business
• Household investment in business is a critical
understanding – we seem to have a very high level of
ownership of business via agriculture and small business.
If poor investment decisions in these sectors are to blame
then we may be looking at the “wrong” policy solutions to
fix our problem.
13
Household
• Need to know the impact of kiwisaver on saving. Can identify whether
kiwisaver is rising or not, can’t necessarily tell if this is coming at the
expense of other saving.
• Better understanding as to what proportion of “alleged” lending to
households is actually a business loan. (Problem of inappropriate
investment).
• “The wealth level (and the average saving rate) of a society will
depend not only on the saving rates of people in different stages of
their lives but the fraction of the society in each of these stages and
the growth rate of the economy”. It would be useful to have better
data on savings rates by age.
14
Household
• Differentiate between savings adequacy for an individual cf savings
adequacy for a nation state. Adequacy conclusions are problematic
as
o They don’t address how current young people might fare but rather
how existing old people are placed
o Will the current young have asset price appreciation? Will they
have debt at retirement age?
o They assume NZ Super stays in its current form
15
Saving vs Savings
Saving
• Income not spent
• Y–C
• A flow measure
Savings
• A stock of wealth
• Previous savings + saving + asset revaluations
16
The Dichotomy
• In many cases it can be shown that savings are okay
(provided asset values are sustained) but household
saving (to the extent that it impacts national saving) is
not so
• Savings growth has been driven by capital appreciation –
threat of illusion and correction.
17
18
Change in net wealth
Saving rate
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
100
80
8
60
6
40
4
20
2
0
0
-20
-2
-40
-4
-60
-6
-80
-8
-100
-10
Saving rate (% of household disposable income,
3-year moving average)
1987
Change in net wealth (% of household disposable income, 3year moving average)
Household Saving & Change in Net Wealth
10
19
Saving
Revaluations
Change in net wealth
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
Contributions to change in net wealth ($ billions)
Contributions to Changes in Net Wealth
100
90
80
70
60
50
40
30
20
10
0
-10
Alternative Savings Measures
• Household income and outlay account
• HES as a saving measure
o HES has not been designed to derive either household or
individual saving and extreme caution is needed when attempting
to derive a saving residual from the data. There appear to be major
asymmetries in the HES recording of incomes and expenditures
which have a major effect on any saving residual.
• SOFIE
o May suffer from similar problems. Tends also to measure savings
on a change in net wealth basis. Not appropriate. But depth of
information has been valuable in determining household
behaviours. Would be worth continuing.
20
Business
• Better data needed on returns to investment – especially
for smaller businesses; our problem may be that we are
investing poorly rather than we are saving insufficiently.
• Improved productivity measures for service industries.
21
Business – Household Separation
Historically NZ business savings ratios have been relatively
high by OECD comparison whereas household savings
have been very low.
This seems somewhat counter-intuitive especially given the
relative performance of corporate
New Zealand relative to others as revealed in equity
markets results.
This adds support to our view that there are serious
measurement issues between household and business.
22
A Closer Look at Business Needed
Business recommendations by SWG too soft.
Lack of understanding as to how business
saving\profitability may in fact drive household and
government saving.
A data issue here perhaps?
Role of productivity.
23
SWG Recommendations
• Increase national saving
• Government surpluses
• Effective tax treatment
• Kiwisaver
• NZ Super
• Annuities
• Et al
24
Stats Recommendations
• Full set of sectoral SNA accounts
• Better integration of micro and macro statistics
• Greater detail on household net worth – aggregate and
disaggregated
• New longitudinal survey to replace SoFIE
25
Other Measurement Issues
• Net saving = saving after depreciation. The best measure as it reflects the savings
available to expand the capital stock rather than just replace depreciated capital. Not
so good for international comparison as there seem to be significant differences in the
way depreciation is measured.
• A national balance sheet might be a nice addition
o Changes in household net wealth are proxied by RBNZ data on household financial
assets and liabilities including the value of the housing stock. However, this is not a
full balance sheet and omits: equity in unincorporated businesses (trading trusts),
shares in unlisted companies, direct ownership of assets such as forests, and
certain overseas owned assets and liabilities such as personal loans from privately
controlled businesses.
• Overspend on housing? Or simply a lack of information?
• Study of migrants. View that they have a net negative impact on saving (borrow first
spend later) but insufficient evidence of this.
• The role of rural land in the measurement of wealth and savings seems blurred to me.
26
And More
• Who really owns the debt?
o Even DMO admits it doesn’t even know who are the “real” owners of NZ
Govt debt
• Still not convinced that we know enough about the size of the stock of
overseas assets and liabilities.
• Known gaps in the coverage of New Zealand’s stock of international assets
and liabilities. These include: overseas assets directly held by unmeasured
New Zealand resident units such as individuals, smaller sized companies
and other small business type entities (e.g. small managed funds, trusts,
estates and partnerships). And the equivalent liabilities. Assets believed to
be greater than liabilities. Flows probably picked up via IRD data but
questions over stock. Small IIP impact. IRD data probably underestimates
flows too for a number of reasons. Trivial impact.
27
And Then There’s The Housing Market
• Rents
• Amount of housing stock that is investment property
• Amount of bank lending that is investment property
• Amount of bank lending that uses housing as collateral
• Housing vacancy rates
28
Conclusions
• The aggregate data look meaningful and accurately
reflect New Zealand’s indebtedness to the rest of the
world
• Consistency is strong
• Improvements possible but not critical
• The failure is in understanding the detail
• A requisite for policy makers
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