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?