PM Luxon has made "economic growth" his sole objective in 2025, having spent his first year in office arguing about how he supports, and doesn't support, at the same time, ACT's Treaty Principles Bill. How is he going to increase economic growth? It all comes down to more investment, according to Luxon & Finance Minister Willis. NZ desperately lacks capital - whether it be for business start-ups, infrastructure, hospitals - and practically everything. It needs to be more "capital intensive", according to the PM and Willis. I agree. When there is abundant capital compared to labour, wages are high. The mark of a poor country is the opposite - tons of people and scarce investment.
The only thing is, although National is talking big, the talk is not backed up with practical economic solutions that actually may work. The National Accounts tell us that investment in a nation must be financed by savings. To be more precise, there is a famous "accounting identity" which must always be satisfied. It goes like the following:
Private Domestic Savings + Foreign Savings = Investment + Government Deficit
This may be a technical Blog, but its important. It proves the PM and Willis are all talk. Why? NZ has one of the lowest domestic household savings rates in the developed world. Of the foreign savings that are currently being pumped into NZ due to our trade deficit, most are going into buying government debt to finance the huge fiscal deficit, which is bigger now than the last couple of years of the previous Labour government. Consequently, given low private domestic savings, and foreign savings going into funding the deficit, there's little left over to fund domestic investments. That is a fact as per the above equation. It explains why plummeting investment has been driving NZ's stagnant economy. I remember as an academic adviser to Finance Minister Bill English how dismissive he was about Kiwi Saver. Luxon's Economic adviser, Matt Burgess, who was English's Chief of Staff, and National Party Think Tank, the NZ Initiative, both loathe Kiwi Saver. National stopped contributions to the Super ("Cullen") Savings Fund when Key was PM. National & ACT have no interest in supporting the savings needed to fund investments in NZ. Where do they hope the money will come from? Foreign investors. Their position is to rely on foreign savings, not our own.
Will the PM be successful in solving NZ's lack of capital investment? Can they increase productivity by relying on foreign savings? No way. Should Luxon or Willis care to do some economics, rather than personnel management, they should read, "Foreign savings: No gain, some pain", by Berkeley economist Barry Eichengreen, which states "Foreign finance does not appear to be the cure for countries with low domestic savings". For 10 years, former Finance Minister Sir Roger Douglas and I wrote articles that we handed to National and ACT on how to increase domestic savings in NZ. The articles touted mandatory savings schemes like the ones in Australia (for superannuation) and Singapore (for health-care and super). To say the Nats and ACT spat on those articles is an understatement. Now the PM says he wants NZ to be like Singapore, with tons of investment. But the entire Singapore model is built on mandatory savings accounts, which both Luxon and Willis personally hate.
National's leader and Finance Minister have become hot air, all talk, no delivery and shallow slogans. None of their proposals have been worked through. None add up. What were they both doing for six years in Opposition? Why didn't they implement a plan to put the economy on a more solid footing back in 2023 when they won the election?