Labour's KiwiSaver plan 'hits low earners'
Labour's plan to vary the amount people have to pay into KiwiSaver will hit the lowest paid, the Government says.
The Labour Party today announced a new monetary policy tool for the Reserve Bank - a variable savings rate (VSR) that would allow contribution rates to KiwiSaver to be adjusted as an alternative to raising the official cash rate.
Labour would make KiwiSaver compulsory if it won this year's election.
Labour finance spokesman David Parker also announced plans to broaden the bank's objectives to target the current account (which would promote jobs and growth) in addition to the traditional focus on stable prices.
The moves were among a raft of big changes to monetary policy Labour proposed to lower interest rates and tackle New Zealand's high dollar.
However, Finance Minister Bill English said the party's plans were confusing.
Under Labour, KiwiSaver contributions would go up to 9 per cent and Labour would "investigate" whether to allow the Reserve Bank to use the new tool of increasing the contribution rate, he said.
The policy would hit the lowest paid the hardest, English said.
Many could not afford to be in KiwiSaver, which would be compulsory under Labour, because they "were up to their ears in mortgages and other commitments".
The policy mixed up two things that worked well now - a long-term retirement savings scheme with the certainty of knowing what you were contributing and what you would get at the end, with monetary policy, he said.
People now were not put in a position where they thought they were saving enough for their retirement and then had the Reserve Bank cut their contribution rate.
"There is no evidence this policy would have any impact on so-called reining in the dollar," English said.
Even if it did work in lowering the exchange rate it would raise the cost of living on imports such as petrol and books for school and children's clothes, and that would also hit lower-paid people hardest.
Parker said when interest rates rise the money went to foreign lenders, and savers would prefer to keep the money themselves.
However English claimed most of the benefits of higher interest rates actually went to New Zealand savers.
"I think it's better that people save a bit more, than send higher interest payments to an overseas bank."
English claimed this was "economic nonsense" with Kiwis largely benefiting from higher interest rates.
"When interest rates go up savers get more interest, and our banks are 75 per cent New Zealand funded, so higher interest rates largely go to either domestic savers or overseas savers. That claim [of Parker] is just rubbish, and that's the core political message."
The Government is also claiming that it was impossible to calculate what impact Labour's policy would have.
English said while it was relatively easy to calculate what impact interest rate increases had on particular households, especially given the length of time it had been used as a tool to control the economy. This was not the case with KiwiSaver contribution, which although they had been in impact for almost seven years, were widely debated in terms of the impact on the economy.
"There's actually 25 years of experience on the impact of [interest rates on] the broader economy and on inflation. We're still uncertain about the impact of KiwiSaver contributions on the economy. Some people argue it makes no difference, some people argue 30 per cent of it counts as new saving, some people can manoeuvre around it, some people can't. We simply don't know," English said.
"You might have to make very large changes to KiwiSaver contributions to have the kind of impact he [Parker] is talking about."
In a speech in Auckland today, Parker said New Zealand had not had a current account surplus for 40 years and would have a deficit this year despite "fantastic" terms of trade.
"Forty years of living on the national credit card. Forty years of spending more than we earn. Forty years of borrowing and hoping it will all come right in the end, somehow," he said.
Parker said New Zealand's monetary-policy regime had resulted in the country paying higher interest rates than its competitor countries.
It had also caused New Zealand's dollar to be overvalued relative to other countries, hurting the export sector.
"Despite recent drops in export prices, and with higher interest rates, the exchange rate is now going up even further," he said.
The Government's target of exports making up 40 per cent of GDP by 2020 was impossible under present settings, Parker said.
Major trading partners such as Australia and the United States already had policy targets that included employment and economic goals.
Nevertheless, Labour would maintain the Reserve Bank's independence.
The VSR would allow changes in the contribution rate as an alternative to changes in interest rates, which mostly went to foreign lenders, Parker said.
"Instead of paying more interest on your mortgage, a similar amount of extra savings would go into your KiwiSaver," he said.
Labour remained committed to controlling inflation and the existing inflation target, to a floating currency, and to free capital movement.
"But that does not mean we are blind to the limitations of current arrangements, and we are willing to act to improve them," Parker said.
Since National came into power its biggest move had been to cut income tax for high earners and put up GST.
The accompanying documents released by Labour said the "overvalued dollar and high interest rates" meant businesses found themselves less able to compete abroad by being "undercut by imports at home".
"Our high interest rates also draw in foreign money, which fuels the housing market," he said.
"We have low general price inflation, a housing market which is inflating at rapid rates, while our tradeable sector is in deflation."
Alongside a capital gains tax, Labour's KiwiBuild housing policy, universal KiwiSaver and reduced costs to businesses through NZ Power, Labour was offering an alternative that would help New Zealand families by creating "better jobs and higher wages".
"Governments around the world have changed how they operate monetary policy since the global financial crisis," he said.
"New Zealanders have a dollar overvalued by up to 15 per cent, a weakened export sector and mortgage rates that are among the highest in the developed world."
Parker said widening the Reserve Bank's mandate wouldn't give the central bank more power.
"It's about giving them more tools, giving them a broader objective, more than just inflation targeting," he said.
"It should be about the health of the economy rather than just inflation. Inflation control is a means to an end, not an end in itself."