Cracks appearing in Labour’s new monetary policy

When Labour’s new monetary policy tool – using a Variable Savings Rate (VSR) to alter the rate at which workers must contribute to Kiwisaver  – I stated:

It’s a fascinating idea, although I’d need to see some fairly detailed modelling to have any idea whether it would actually work.

Well, since the policy has been announced, the majority of financial commentators seem to view it as a useful additional tool for the Reserve Bank, but don’t believe that it will be able to be used as a substitute to the OCR.

A major pitfall is the rate at which a VSR could be altered. The OCR can be adjusted every six weeks, providing a regular ability to adapt to the latest financial figures. However, a VSR would be something that could only be altered infrequently, given the complications for employers in adjusting accounting software for employer Kiwisaver contributions every time the VSR changes.

That means that the OCR would have to remain as the primary tool for curbing inflation, with a VSR making sporadic appearances. That’s not to say that interest rates would not be lower than they otherwise would – however, they, certainly wouldn’t be sitting at the stable low levels that Labour promises with their policy.

Perhaps the biggest problem for Labour is the numbers on what effect a VSR could actually have on inflation. Fran O’Sullivan threw some interesting figures out in the NZ Herald:

But the more interesting comparison is the size of the lever that Wheeler can pull. At February 2014, the residential mortgage pool was $191.8 billion. $75 billion was at floating rates with a further $64.9 billion on one-year rates.

This means it doesn’t take too many rate hikes to suck a few billion dollars out of homeowners’ pockets and reduce demand.

Increasing KiwiSaver contribution rates is not going to have the same blunt – and well-understood – effect.

At June 30, 2013 2.15 million people were enrolled in KiwiSaver – 53 per cent of the eligible population. Labour’s plan to make KiwiSaver compulsory will increase overall saving and is well overdue.

But it’s not a “net net” by any means.

That’s because KiwiSaver contributors are at this stage putting only about $1.5 billion into the scheme each year (2013 figures).

So, what is the relative strength of Labour’s proposed VSR lever, against that of the existing OCR? Here’s where Labour needs to work fast, because the only figures hitting the headlines are those supplied by National, and they’re not good. From

National had conducted “back of the envelope sums” which suggested that to prevent interest rates going up by 1 per cent, KiwiSaver rates would have to be lifted by 6 cents in the dollar.

Asked about the calculations, Joyce said that raising the OCR by 1 per cent took around $2.5 billion a year from the economy, while a 1 cent increase in KiwiSaver contributions created an additional $400 million, partly because other savings were undermined.

David Parker can argue all he likes that National’s figures are wrong, but it’s those figures that will stick in people’s minds, regardless of Steven Joyce making it clear that he has no idea whether they’re correct:

The figures were developed “in a couple of hours with the help of a couple of boffins” and so were not authoritative, he said. “My point is not so much that that’s the right number…my point is that Labour should have a number.”

And that’s the problem for problem. Without a figure of their own, Labour leaves itself open to scaremongering like this from David Farrar at Kiwiblog:

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%.

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.

Now I don’t have the foggiest idea about how close or otherwise Steven Joyce’s figures are, but I certainly can’t make much of an evaluation until Labour provides a counter-figure. It’s an attack that Labour should have seen coming, and Parker should have had some numbers on hand. Otherwise Labour risks this becoming a 2014 version of 2011s “show me the money moment.


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