Saving is decisively trumping spending in New Zealand, strongly reinforced by the May 20 Budget's squarely aiming to curb debt-fuelled consumption.
The Treasury expects a bit of a consumer spend-up, especially on durable goods, ahead of the Oct. 1 increase in GST to 15%. But that's unlikely to be an enduring pattern. There are plenty more reasons to save than spend in the wake of the Budget and our lucky escape from the worst of the global financial crisis.
One downside: inflation will need to be watched like a hawk.
The GST hike will follow the introduction of the Emissions Trading Scheme in July, imposing a levy on transport and electricity, adding fuel to an expected spike in inflation to 5.9% in the first quarter of 2011.
Reserve Bank Governor Alan Bollard can afford to ignore those parts of the increase that are one-offs created by changes in tax policy this year, but cannot be complacent. If wage expectations or pricing intentions are stoked in a recovering economy by rising "headline" inflation, there will be a case for worrying about inflation.
For now, though, both the Treasury and the Reserve Bank are forecasting inflation to remain within the RBNZ's 1%-to-3% target range over the next four years. The pattern will be near-term stimulus followed by a more benign track for inflation.
As Bollard noted in his April 29 review of interest rates, the next tightening cycle will be milder than previous ones, partly reflecting a wider gap between the official cash rate and lending that will make his hikes more effective.
So spending is set to come at a greater cost while savings are about to get 'cheaper.'
The Budget also saw Finance Minister Bill English heed calls to encourage saving by cutting tax on investment vehicles, including Portfolio Investment Entities (PIEs), to 28% from 30%.
The lower rate also applies to superannuation funds, unit trusts, group investment funds and life insurance.
Taken together with new banking regulations that require lenders to source more money domestically than in the past, it is reasonable to expect an increased inflow into a variety of savings vehicles.
Greater demand is likely to ease the pressure on the finance sector to offer higher yields, which has been squeezing margins for lenders.
The net effect is likely to narrow the gap between the OCR and lending rates.
With property investment and consumption discouraged by the Budget, it's also reasonable to expect some of the extra cash from tax cuts will be looking for a new home after October, as well.
The tailwind of tax changes follows a sea-change in households, who lost their appetite for continued debt-fuelled binge spending as the worst recession in 18 years drove up unemployment and pared the value of their homes.
Incentives to save should help to entrench that pattern, which is essential if New Zealand is to start dealing with its remaining major economic imbalance. That is, very high, mainly private external debt and a current account deficit stuck at around 7% of GDP, at a time when global financial markets still look fragile.
In fact, the world economy remains the elephant in the room.
Europe's debt crisis is still undermining financial markets, while China is starting to cool its economy. New Zealand is ready for a recovery, but how ready is everyone else?