Labour details KiwiSaver variable savings plan

HAMISH RUTHERFORD
Last updated 10:36 27/08/2014
David Parker
JOHN HAWKINS/Fairfax NZ
DAVID PARKER: Labour's finance spokesman.

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Labour claims its plan to use KiwiSaver contributions to keep down mortgage rates will have about half the impact of interest rate movements, a much greater impact than its critics claim. 

For the first time the party has given its estimate of how effective the variable savings rate policy will be, claiming a one cent in the dollar hike in KiwiSaver contributions would have about the same effect as a 0.5 per cent rise in interest rates. 

In April, Labour announced plans to give the Reserve Bank an additional tool to fight inflation, currently limited to the official cash rate.

Finance spokesman David Parker said at the time a variable savings rate (VSR) could raise the level of compulsory savings for all wage and salary earners, to take money out of an overheating economy.

"Instead of paying more interest on your mortgage, a similar amount of extra savings would go into your KiwiSaver," Parker said at the time.

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But until now Labour has refused to say what it believes the impact of raising contributions would be.

National associate finance spokesman Steven Joyce said this meant Labour could not claim the idea was policy, but was just a "thought bubble".

In May, Joyce said he had conducted "back of a cigarette packet" calculations which suggested that to replicate a 1 per cent increase in the cash rate, KiwiSaver rates would have to be jacked up 6 cents in the dollar.

This meant "heavy lifting" would be done by wage and salary earners on behalf of farmers and homeowners who would enjoy cheaper borrowing costs, Joyce said.

But speaking in Queenstown yesterday, finance spokesman Parker said that a 1 cent in the dollar hike in contributions could have the same effect on the economy as an 0.5 per cent rise in interest rates.

Parker admitted there was no way to perfectly model the impact of the policy, because it was unclear how much increased KiwiSaver contributions would lead to Kiwis saving elsewhere.

However its calculations were that to have the same impact as a 1 per cent rise in the official cash rate (OCR) - the level of increases so far this year - contributions would have to be lifted by 2-3 per cent.

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"A half per cent increase in interest rates would be like a 1 per cent increase in savings rates," Parker said.

While the decision on using the VSR in the future would be made by the future Governor of the Reserve Bank, Parker said the an increase in savings might be preferable to interest rates because it increased savings while not having the impact on the currency that interest rates have.

Any use of the VSR would not come in the short term, with Labour planning to slowly increase KiwiSaver contributions over six years.

Parker was speaking ahead of the ASB Finance Leaders debate in Queenstown, where he will share the stage with Finance Minister Bill English, Green Party co-leader Dr Russel Norman, ACT leader Dr Jamie Whyte and Conservative leader Colin Craig.

- Stuff

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