Is poor household saving the cause of New Zealand's high current account deficit?


The current account deficit in the balance of payments has frequently surfaced in public policy debate, with many commentators asserting that low household saving is a major cause of these deficits. Yet, in standard macroeconomic theory, both the current account balance and household saving are endogenous, so one can not ‘cause’ the other. For any country in any given period, they may be positively or negatively correlated, or uncorrelated, depending on what causative factors were dominant at the time. Moreover, the current account balance is identical to the difference between national saving and investment. There is no general reason to expect it to move in lock step with the level of household saving. Consistently, pooled cross-country and time-series data indicate that simple correlations between the two variables are randomly scattered around zero. In the absence of proper analysis, unsubstantiated assertions about the role of household saving mislead public debate and invite the adoption of welfare-reducing policies, which may not even ‘improve’ the balance of payments. The case for diverting attention from policies to lift economic growth to policies to ‘improve’ the balance of payments seems to be not so much unproven as unexamined.Balance of payments, household savings rate, deficit, New Zealand

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This paper was published in Research Papers in Economics.

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