Friday Graph: Household and Government Savings: An Inverse Relationship

This Friday’s graph uses Statistics New Zealand’s newly released statistics on household savings in 2011 to plot annual general government savings between 1987 and 2011 against household savings.

The striking feature of the chart is the ‘scissor-like’ tendency for household savings to be low when general government savings are high and vice versa.  Intuitively, this makes sense.  Governments can lift their own savings by taxing households more heavily.  With less money to spend, households cut back on both spending and saving.

Click to enlarge

The same intuition applies in other countries of course.  A colleague has drawn our attention to a similarly striking graph here in respect of the United Kingdom. (See the fifth graph from the left.)

Another colleague has remarked that a large body of formal research internationally confirms the inverse relationship, and noted that estimates of the magnitude of the effect tend to cluster around 0.5, meaning that an increase of $1 in the government deficit (and therefore in private sector claims on government) tends to be associated with a 50 cent rise in private savings.

Bryce Wilkinson
Acting executive director