any foreign capital tapped to finance it - whether in the form of debt, new equity, or retained earnings - will create no problems. in fact, corporate balance sheets in new zealand have generally remained healthy after the stresses of the late 1980s and early 1990s. but much of the demand for borrowed funds in recent years has come from the household sector, and has been secured by that favourite new zealand financial instrument, the house mortgage. this borrowing has taken the ratio of household debt to household disposable income from a relatively low 42 per cent as recently as mid - 1990 to almost 90 per cent currently ( graph 1 ) - from a level which was relatively low by international standards to around the levels of indebtedness seen in places like the united states. it has also taken the share of loans extended to the household sector from 31 per cent of total bank loans to 52 per cent of the total over the same period, an increase in the dollar amount from $ 16 billion to $ 50 billion in just seven years. as graph 2 illustrates, lending by major financial institutions to the household sector has been growing markedly more quickly than nominal gdp throughout most of this decade. some of the borrowing by the household sector has been undertaken as a relatively cheap and efficient way of funding small businesses owned by the household sector, and to that degree is ‘ mislabelled ’ as household sector borrowing. but for the most part, the rapid growth in household indebtedness appears to have helped make possible the rapid rise in house prices seen in much of the country in recent years and, as employment, incomes, and wealth have risen, strong consumption growth. obviously, this sort of strong growth in lending to households cannot continue indefinitely, but while it does there is likely to be pressure on our external accounts. credit, after all, is designed to allow us to increase our investment without sacrificing current consumption, or alternatively to increase consumption now in the expectation of higher income in the future. both of these mean enjoying now a level of consumption beyond what is produced locally : and in simplified terms, that is what a current account deficit is. other things being equal, a strong demand to borrow tends to push up interest rates. it is those pressures which then draw in foreign capital. the capital inflow in turn tends to check the extent to which interest rates rise in response to the strong borrowing demand. the willingness of foreign investors to provide capital allows us, as a nation, much greater flexibility in making our own

much better performance than that of virtually any other developed country ( the exception, as to so much else, is singapore ), but it is a markedly smaller contribution to national saving than the public sector was making in, say, 1995 / 96. in that year public sector saving amounted to 3. 7 per cent of gdp. so in the last couple of years the trend in public sector saving has been unhelpful in terms of the balance - of - payments deficit, a reflection of a strong increase in public sector spending over the last two years and a reduction in tax rates. one way of reducing the balance - of - payments deficit might be to increase the public sector surplus again, although nobody should under - estimate the difficulties of doing that in a country where pressure to increase government expenditure is relentless. new zealand ’ s record of household sector savings seems to have been relatively poor for many years. there have doubtless been many reasons for this. in the high inflation 1970s and early 1980s, when many interest rates were controlled at artificially low levels, the after - tax real return on savings invested in fixed interest securities was strongly negative, creating a strong disincentive to save. this situation changed markedly in the mid - 1980s, with positive after - tax real interest rates, but at about the same time financial sector liberalisation greatly increased the ability of many households to borrow ; this too almost certainly discouraged net saving. and of course for most of the last half century new zealanders have been encouraged to believe that the things for which people save up in many other countries - education, medical care, and retirement - would largely be taken care of by government. we were effectively told : you don ’ t need to save and, by the way, if you do, you ’ re a fool, because government - sourced inflation will steal a large chunk of what you save anyway. i ’ m frankly not sure how this culture of low household - sector saving can be changed. clearly there is a significant section of the community that has no surplus income at all. to suggest that a solo parent living on benefit has scope for increased saving is absurd, and would be presumptuous in the extreme coming from me. but it is also true that too many new zealanders on higher incomes still have attitudes to their personal finances that only made sense in the high inflation 1970s and early - 1980s. the mind - set was that only a fool had personal savings, and the quick and the clever were in