Working Papers

Government versus Private Saving

David Uren highlights the private sector offset to increased public sector saving:

there is a good body of academic research showing that savings decisions by government and individuals are inversely related—that increases in government surpluses are financed, at least in part, by consumers running down their savings.

The superannuation industry, which has doubled its contribution to tax revenue to $10 billion in the past five years, has always argued that the Government’s surpluses are based upon sequestering the savings of households.

Research conducted by the OECD shows that for Australia, every additional dollar saved by the public sector results in a fall in private savings of about 50c. This is in line with the international average.

The OECD study looked at the savings performance of government and individuals in 21 countries, including Australia, over a 30-year period.

It suggested that the trade-off between individual and public sector saving would be greatest at times when public sector debt was low and private sector debt was high, as is the case now in Australia.

I review similar evidence here.  This is just one of the reasons why budget surpluses don’t put downward pressure on interest rates, because dissaving by the private sector offsets the government contribution to national saving.  In any event, the domestic saving-investment balance does not determine domestic interest rates given an open capital account.

posted on 12 May 2008 by skirchner in Economics, Financial Markets

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...increases in government surpluses are financed, at least in part, by consumers running down their savings.

So, explain to me why its a bad idea to introduce a tax break on savings (something like the CGT discount) and/or further tax breaks on super.

Seems to me that would reduce the budget surplus, hand the money back to taxpayers, but ensure that most of it was saved not spent.

Posted by .(JavaScript must be enabled to view this email address)  on  05/13  at  10:48 AM

Have no problem with reducing CGT, which is just a form of double-taxation of saving. 

There is some substitution between super and other types of private saving, but so long as the substitution were not complete, you might increase private saving through further super tax concessions.

Posted by skirchner  on  05/13  at  01:28 PM

Ok, but why not a tax break on interest earned in the bank?  Why would we tax cap. gains at half the marginal rate (or less) but tax interest at the full marginal rate?

I asked this question last week and was jumped on (by Rajat I think) telling me it was “complex” and high interest rates were doing the job of encouraging saving anyway.  That’s all well and good when interest rates are high, but they fall again, won’t we just go on another unsustainable debt binge and run down our savings?

Posted by .(JavaScript must be enabled to view this email address)  on  05/13  at  01:38 PM

If you want to encourage saving, then lowering taxes on the returns to saving is the way to do it, whether it be interest income or capital gains.  But ideally, this is something addressed in a broader setting.  Piecemeal change is what turns tax systems into a complex mess.

Posted by skirchner  on  05/13  at  01:43 PM

So surely taxing interest income and capital gains at the same rate makes the tax system less messy than widening the gap between CGT and the tax on interest.

Here’s hoping Malcolm T. (once he assumes the leadership) will announce sweeping new tax reforms (Fightback II?) including aligning the corporate and personal income tax rates at 30%,
a negative income tax to fix those high EMTRs, zero tax on CG and interest, all funded by a thumping great carbon tax.

A libertarian fantasy, except for that last bit maybe.

Posted by .(JavaScript must be enabled to view this email address)  on  05/13  at  02:19 PM

You can send your suggestions directly to Malcolm here:


Posted by skirchner  on  05/13  at  03:18 PM

I think there is a difference between taxing income (eg interest on savings, company profits and rent) and taxing capital gains. The value of an asset is the present value of its future cashflows. Therefore, if you tax income, this should be reflected in the (capital) value of the asset. Hence, taxing capital gains is effectively taxing an asset’s returns twice. Therefore, as far as I can see, there is no necessary link between reducing CGT and reducing taxes on income - the former does not imply the need for the latter. Having said that, I remember from studying tax law that people in the ‘70s had invented ingenious ways of converting income into capital gains.
My point last week was that if the current purpose of stabilisation policy is to slow the economy, higher interest rates will achieve this by encouraging saving and discouraging spending without the need for any tax breaks on saving. In an open economy, I don’t see the point in promoting savings for its own sake.
The government could choose to assist exporting firms that were suffering due to a high exchange rate, but why? Why not assist firms that suffer when the currency falls (eg retailers) or oil prices rise (eg car manufacturers)?
Unfortunately, commentators and politicians have perpetuated the merchantist idea that there is something special about exports. There isn’t - a dollar of value added is a dollar.

Posted by .(JavaScript must be enabled to view this email address)  on  05/13  at  05:36 PM

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