Front up on jack up

Labour’s David Parker needs to front up on how much he would squeeze wage and salary earners with his KiwiSaver jack up plan, Associate Finance Minister Steven Joyce says.

Mr Parker couldn’t answer a simple question today on how much KiwiSaver contributions would have to go up for wage and salary earners in order to stop a 1% rise in interest rates.

“Surely you must be able to answer that question. If you can’t, it’s not a policy, it’s not even an idea, it’s just a David Parker thought bubble.

“It’s simply not thought through,” Mr Joyce says.

Mr Joyce says a 1 per cent increase in KiwiSaver contributions is only likely to generate about $400 million of net new savings.

“My estimate is it would take roughly $2.5 billion in extra savings to keep the OCR 1 per cent lower. Labour would need to take another 6 per cent of people’s pay packets off them and put it into KiwiSaver to avoid a 1 per cent increase in interest rates. Given they already want people to save 9 per cent, that would whack it through to 15 per cent,” Mr Joyce says.

“But it’s not my estimate that’s important on this one, it’s David Parker’s. Where are his numbers? What are his calculations? All he’s done so far is mumble about how complicated it is.

Mr Joyce says Parker’s KiwiSaver interest rate jack-up idea would simply force all KiwiSavers to spend a lot less of their own money just to avoid putting up interest rates for other borrowers.

“Housing is less than half of New Zealanders’ debt. The rest is companies, credit card holders, farmers, councils, government agencies and so on. Effectively he’d be telling businesses and councils to carry on borrowing and spending regardless because wage and salary earners will do all the belt-tightening for them,” Mr Joyce says.

Let’s not forget central government spending which put so much pressure on interest rates last time Labour was in government.

“The strength of using interest rates to control inflation is that it affects all borrowers equally and encourages all savers equally. Under the Parker Plan, wage and salary earners would be completely squeezed and everyone else would continue on regardless. The Reserve Bank Governor would end up putting interest rates up anyway.

“And that’s not all. Respected economists have this week said that if this idea does anything it would increase bank profits, increase house prices faster, and force people to buy overpriced shares with their savings.

“New Zealanders know the New Zealand economy is currently one of the best performing in the western world. And it’s National’s consistent and sensible economic policies that are helping achieve that.”

David Farrar has worked out how much people’s take home pay would drop if they were compelled to save more:

. . . So what does that means if you are on say $60,000 a year. It means your take home pay will drop by $3,600 a year or a massive $70 a week to stop interest rates rising by 1%.

A drop of $70 a week would put considerable strain on most people’s budgets.

Now you may not even have a mortgage. Most people do not. Everyone who does not currently have a mortgage will have their take home pay slashed.

But what if you do have a mortgage. Say you have $300,000 owing on it. Let’s say the VSR means your interest rate is at 6% instead of 7%. What difference does that make to your weekly repayments? At 7% a $300,000 20 year mortgage costs you $536 a week. At 6% it is $495 a week so that saves you just $41 a week.

If you’re very wealthy, you’ll benefit from this policy. If your mortgage is say $1 million you’ll save $136 a week and your KiwiSaver contributions won’t increase as you’re self-employed.

If this policy worked, and there’s strong doubts about that, it would help wealthy people with mortgages and other loans at the expense of those without them.

It would make budgeting difficult for middle income wage earners and harder still for the poor.

It’s hard enough dealing with cost increases, having to cope with income decreases at the same time would be the last straw for many.

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