“Savings” problem doesn’t mean “investment” problem per see

One issue I have with the constant discussion on savings, current account deficits, and consumption in NZ is how people look at it – they keep thinking that we are “consuming” to much and have needed to “borrow”.  That is how we’ve been told to look at it – especially with all the talk of “spending too much on big screen TV’s”.

So all this leads to statements like this from John Key:

“We are rebalancing the economy away from debt-fuelled consumption and government spending and towards savings, investment and exports” (ht Rates Blog).  Sounds good, but I think it misrepresents the issue.

Lets think about real GDP shares, when thinking about shares of expenditure GDP we are saying that “this much of the nations production is in this category”.  Saying we need to rebalance is like saying that we need to adjust these shares – the consumption one down, the investment and export ones up.

However, what does the data on real GDP says (note the period of “rampant borrowing” was around 2002-2008 … also note that Stats provides this beautiful data for free, much appreciated):


Finally on the note of consumption (note that the gap in % of GDP has been kept the same as the export one – and this is only private, public did trend up):

Furthermore, if we want to be fancy and think about how relative price changes factor in these issues the result goes even further – as we have experienced a sharp rise in export prices, and the relative price of consumption has fallen significantly … implying that we could “sustain” an economy with a lower share of real export volumes and a higher share of real consumption volumes.


I hope the government recognises what has been said by the savings working group (and previously here) – a lot of the borrowing was to fund housing investment.  Tax advantages had been the main cause for concern here, some of which had been closed.  While a few extra things could be done – the government has already moved on these issues, and we should see some response in terms of the “shape” of the NZ economy.

Talking about debt fueled consumption and saying that investment and exports are too low shows a misunderstanding of the fundamental issue here – we have a large current account deficit, and have imported a significant amount, as we have been able to sustain consumption while ramping up investment.

If we have really been borrowing “too much” we need to figure out why – we can’t just say its all consumption and that people are living beyond their means and need to “get real”.

When we think of it this way the appropriate “policy response” seems a little different, no?

7 replies
  1. rauparaha
    rauparaha says:

    Do people refer to housing purchases as investment or consumption in common parlance? Maybe what you’re saying and what newspapers are saying isn’t inconsistent, it’s just a terminology difference. Although the ‘flat screen TVs’ rather militates against my interpretation.

  2. Matt Nolan
    Matt Nolan says:


    The Reserve Bank refers to residential investment as well when discussing private consumption for sure – although to be fair the consumption component of housing is imputed rent, which is already in the consumption stats … and housing investment should provide a stream of consumption over time and so should be treated like investment anyways.

    I mean, if we treat housing investment as consumption, why not just call all other private investment consumption as well – after all, it ultimately just provides a stream of consumption in the future anyways.

    When you break up the data it is residential investment (in terms of building and upgrading houses) that is the factor that seemed to move out of whack – and given the tax status of housing, and the “housing bubble”, an explanation of a rising current account deficit off the back of this is appealing.

    However, this is completely different to the language that the government keeps using – as you say, bemoaning the purchase of flat screen tv’s misses what the underlying point is, and leads to a highly different set of “policy recommendations.

  3. raf
    raf says:

    one issue i have with all this talk about savings is how does one save debt?

    and another one (whilst I am on the subject) is what about investors who are single or childless couples? are only “mum and dad” investors going to share in this brave new investment world?

  4. Matt Nolan
    Matt Nolan says:


    Hi Raf,

    I think in this case, when they talk about savings they are also talking about paying down debt.

    With mum and dad investors, if they are going to remove the tax on the inflation component of debt it will make term deposits more attractive – something that is surely pretty good for people who are a bit nervous about getting involved in the stock market right.

  5. raf
    raf says:

    i think you missed that one 🙂

    “mums and dads” is a very silly not to mention discriminatory term. I cringe every time I hear it.

    and the point i made is that all money is debt so it follows you cannot save it. i do agree though that paying down debt (for individual investors) is likely to be the best return you can get and its guaranteed at the point of “investment”. of course you could pay lots of a nice big salaries to fund managers instead.

  6. Greg
    Greg says:

    OK, I’ve thought about it a bit, with my limited undergraduate knowledge. I think the government’s policy response is appropriate politically, and won’t hurt economically.

    If domestic savings is less than domestic investment, then the difference is made up by foreign investors. This (at least) risks transfer of ownership. Key has previously expressed concern about “Kiwis becoming tenants in their own country”.

    Economically, foreign investors are likely to demand a risk premium (that domestic savers do not). This increases the required marginal productivity of capital, which (per Solow-Swan) decreases the balanced-growth capital-labour ratio, and therefore output and income level. And again politically, there goes Key’s mantra, “catching up to Australia”.

    Further thoughts:

    Your post asserts that people have been talking about a “level of investment” problem. I’ve not heard that; rather, the talk was of a “savings problem” and a “housing bubble” — i.e., investment misallocation.

    I’d agree with both the “savings problem”, as above, and the misallocation.

    On the bubble, ISTM that in advanced economies there has been a structural shift over the last few decades increasing the relative returns to higher education. If this is also the case in NZ, then rational households would be increasing their investment in human capital relative to real estate — unless the investment environment pushed them the other way.

    A second line of argument is reversion to the mean. Tradition has it that the median house is about three times median earnings; it’s now more than eight times. I can see a transient demographic cause for the change (the age of the baby boomers) but not a fundamental one.

  7. Matt Nolan
    Matt Nolan says:


    Hi Greg,

    Thanks for the comment. I promise to respond at some point – I am, however, currently very tied down with urgent work and don’t have the opportunity have the time to respond adequately.

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