Savings matter

One of the reasons the government is determined to get back into surplus quickly is the risk  to the economy from an over reliance on foreign borrowings.

This is one of the factors sited by Moody’s for its decision to downgrade the credit ratings of four major banks

The bank was concerned about a lack of domestic savings and high debt levels:

Moody’s analyst Marina Ip says an over-reliance on foreign borrowings was also a negative for the banks.

She says funding loans from overseas increases the risks banks face of a credit crunch if the world economy worsens.

Part of the government’s strategy to return to surplus is reducing its contribution to Kiwisaver. The reason it’s done that is simple – borrowing by the government to give people money to save isn’t really saving because the money eventually has to be paid back.

The public contribution to Kiwisaver is still very generous – $1000 when a Kiwisaver account is opened and on-going contributions. This is the easiest money most of us will ever get.

The tax credit will be halved  and the tax-free status of employer contributions will go if  National is returned to power but we’re still getting something for nothing more than deferring a small proportion of our own spending.

We’re being asked to contribute more of our own money – 3% rather than the current 2% but that’s what saving should be – setting aside some of our current earnings to secure a better income in the future. There’s no virtue in saving other people’s money, especially if it’s borrowed.

Employers’ contributions will rise to match those of employees and some are concerned about what that will cost. The answer to that is to build the employer contribution into the salary package. That reinforces the message that savings require the deferral of expenditure , having less now so we’ve got more later.

Savings matter to individuals and the country. The more we save ourselves the more we have to lend. For too many years we haven’t saved enough so individuals, businesses and governments have had to borrow from overseas.

The institutions we borrow money from also lend to the economic PIGS – Portugal, Ireland, Greece and Spain. The less we have to rely on them the more secure our economy is.

But real savings use our own money not that borrowed from other people.

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