Labour once claimed to be the champion of the poor.
The monetary policy announced by its Finance spokesman David Parker yesterday is further proof that it has strayed far from that because it would hit the poor hardest.
Labour’s plan to use New Zealanders’ retirement savings as a monetary policy tool would hit low and middle-income New Zealanders hardest, and not achieve what Labour thinks it would, Finance Minister Bill English says.
“This idea mixes up people’s own retirement savings – which require certainty over a long period – with the Government’s monetary policy, which the Reserve Bank reviews and can change every six weeks. The two are completely different and should stay that way.
“Labour’s approach will force people to save at least 9 per cent of their wages, plus more when the Government decides to up the contribution rate. This cut in take-home pay would hit hardest those low and middle-income families who are unable to save much, or who are focusing on paying their mortgages.
“Our current monetary policy settings are considered world-best practice. In the last few years we’ve come through a domestic recession and a global financial crisis and now have sustained economic growth, increasing wages and jobs and interest rates are just coming off 50-year lows.
“Labour’s ‘tool’ is a confusing solution looking for a problem. This is wishful thinking and there is no evidence it would actually work. Even if it did it would require Kiwi families to accept a higher cost of living and higher compulsory savings at the same time, which would be a double squeeze on them.
“Labour has a recent history of over-spending in government. It should commit to spending less itself, rather than forcing householders to do the hard work for it.
“Low and middle-income earners would be paying the price for Labour’s lack of discipline,” Mr English says.
Compulsory savings isn’t going to appeal to people who have little or no spare money to save.
Compulsory savings with a variable rate which means you could be forced to save even more of the money you don’t have to spare will have even less appeal.
The idea behind the proposal is to give the Reserve bank and alternative tool to interest rates for fighting inflation.
No-one with borrowed money welcomes interest rate rises but at least most people have some control over how much they borrow and how quickly they repay it.
When interest rates go up they could choose to reduce their debt.
With compulsory savings they would have no choice about how much they pay, and no choice about reducing the amount they had to pay.
Increases in compulsory savings rate will hit everyone but interest rate rises affect a relatively small number of people directly: *
Only 26% of single families and 55% of couples have mortgages.
Then there’s the impact on wages.
Labour’s compulsory scheme would require greater contributions from employers over time.
When working out what they can afford to pay staff it’s the total cost not where the money goes that matters so a greater contribution to KiwiSaver accounts will leave employers with less for wage increases.
Rob Hosking explains why Labour’s big tool won’t work:
. . . The entire policy rests on the assumption a lower interest rate will also lead to a lower exchange rate. This is by no means a given. . .
The second issue is more political.
Forcing people to save more is not a costless move for them. Someone on an average income who suddenly has another chunk of their cashflow taken out of their weekly income is going to feel the pinch. . .
Forcing people to give up something is going to be fraught with political difficulty.
When it to implementation you can expect a wave of applications for exemptions, and this can be expected to lead to an administrative catscradle and a political tangle. . .
BusinessNZ chief executive Phil Oreilly has concerns about the workability of the policy:
. . . The proposed policy would ‘mix the targets’, he said. Instead of a sole focus on inflation, the Reserve Bank would also have to focus on achieving a positive balance of payments, stable economic growth and stable employment. This raises the risk of not achieving some or all targets.
“New Zealand’s external balance is a result of a number of factors, including over-consumption, over-regulation and inefficient government spending. It’s hard to see how the Reserve Bank can be particularly influential in changing these.”
Mr O’Reilly said there was potential for uncertainty and confusion from having different levers over interest rates and KiwiSaver rates.
“While the Reserve Bank would apparently retain control over its existing interest rate lever, it would probably need to go to the Government for the power to use the KiwiSaver savings lever each time it sought to do so. This would not only slow down the Reserve Bank’s decision-making ability, but would undoubtedly introduce politics into the decision making process. All of this would potentially add a great deal of political uncertainty to New Zealand’s macroeconomic settings.
“New Zealand’s current Reserve Bank system is scrupulously apolitical. That is why other countries have followed our lead in monetary policy.
“Labour’s policy brings the risk of a future government politicising what has until now been an apolitical process.
“Can you imagine a future Government agreeing to a Reserve Bank recommendation to raise KiwiSaver rates three months before an election? “ Mr O’Reilly asked.
He said restricting immigration numbers as a way to reduce house prices could have negative consequences, potentially leading to wage inflation and constraints on firms unable to gain the skills they need.
“The policy announced today makes little mention of the key role played by other government policies in reducing house prices and making our economy more competitive. We note for example the recent Productivity Commission report on housing affordability which pointed to the key role played by land supply constriction in increasing house prices. ”
There would also be more uncertainty about incomes as a result of the proposed policy, he said.
“Income earners would be uncertain as to whether or not their KiwiSaver or their mortgage rates might rise, or both. This would have impact on private sector wage setting. . . “
So the policy won’t necessarily achieve it’s aim which is to reduce the exchange rate.
It would threaten the political neutrality of the Reserve Bank.
It would also leave people with less money to spend and it would leave them with no certainty over how much they would have.
Even the best budgeters are used to unexpected expenses but in the normal course of events we can all expect certainty over income.
With Labour’s proposed Variable Savings Rates, we won’t have any certainty.
It would be like being subject to possible changes in tax rates every six weeks and it’s the poorer people whom Labour used to champion who will be hurt most by that.
* Hat tip Lindsay Mitchell