Tone Deaf KiwiSaver And The Circular Flow Of Income

The KiwiSaver policies of both National and Labour are

deeply problematic for a number of reasons. It is Labour

which seems to be more intent on gaslighting and

scapegoating employers; but my critique is also applicable

to National, which is showing tendencies of becoming dirigiste

according to some commentators (eg National

supermarket shock: Why the ‘party of business’ has taken

a hard left turn – Audrey Young, NZ Herald, 17

Labour's policy is particularly tone deaf,

in that it explicitly seeks to mine employers – to extract

revenue from them, especially small and medium size

businesses in hospitality and retail etc – without

acknowledging that that's what they are doing, and

facilitating the flows of New Zealand wealth towards the

darlings of the world's equity markets; such as the Magnificent

Seven. At least regular taxes get recycled back into the

domestic economy, rather than leaving the

National is more of an equal opportunity

miner than Labour; rhetorically seeking to extract more, in

equal proportions from employers and employees. In reality,

the burden of today's financial mining is shared between all

stakeholders in an ordinary business; regardless of the

language used by the policy advocates. Extracting ever more

value from businesses represents additional cost; not relief

during cost crisis. The explicit contract – signed for

us rather than by us when compulsion is present – is

that the extracted revenue will be returned, with compound

interest, to employees decades into the wildly uncertain

It's worse than I have described above. It's a

policy to further drain an already substantially

leaking domestic economy. New Zealanders

desperately need their income, today, for their own

We need to remind ourselves of some very basic

economic principles.

Economy 101 Basics – The

Circular Flow 'valves' which serve as 'policy

When I learned and later taught Economic

Principles, the introductory concept of basic macroeconomics

was the circular

flow of income and spending. Basically the market

economy works as flows of spending, production,

and income. (GDP – gross domestic product –

is computed by measuring these 'flow' measures; indeed we

have statistics for GDP based, separately, on each of these

measures.) Circular flow analysis, while not fashionable

among today's economists, remains a highly valid and

intuitive way for lay people and economists to understand

upturns and downturns.

The economy is in balance when

the spending intentions (especially but not only of

households) match up with production intentions (of business

firms); production for sale, by definition, creates income.

The circular flow is about income being spent, and spending

in turn generating production and income; it’s a feedback

process. It is widely accepted that optimal policy is for

some growth rather than pure balance; principal policy

targets are three percent real economic growth and

two percent inflation, adding up to five percent

nominal annual growth.

In the global economy,

there are two forms of 'leakage' (unspent household income):

saving and taxation. And two forms of 'injection'

(production induced by financial borrowing or asset

liquidation): investment spending by firms, and spending by

governments. In individual countries' economies – national

economies – there is an additional injection (export

sales) and an additional leakage (import purchases). These

six forms of injection and leakage are all normal

flows; issues arise when they change from normal

stable patterns.

Some of these economic 'valves' may

be understood in net terms. Thus consumer borrowing is a

form of dis-saving; of negative saving. And welfare benefit

payments are understood as dis-taxation; ie, as negative

Thus we note that net taxation is tax

revenues minus cash benefits; an increase in benefit

payments is equivalent – in circular flow terms – to a

reduction in taxes. And we note that deficit spending by

governments is an injection, identified in the 1930s by

Keynes as the most powerful of injections into an anaemic

economy; equivalent, in the more extreme cases, to giving a

bleeding patient a blood transfusion or giving a diarrhetic

person electrolyte-laden fluid. We may say that a failing

economy is haemorrhaging; or some other comparable

We may think of the 'body economic' as the

physiological infrastructure through which nutrients flow.

Leakages (of nutrients) weaken (ie shrink) the

economy unless they are balanced by injections. To

sustain a growing economy, injections should slightly

exceed leakages.

These six forms of 'injection' and

'leakage', serving as the valves of the economy, represent

the government's levers to politically manage 'the economy';

just as doctors manage patients through prescriptions of

nutrition, exercise, medicines, or surgery. Some levers can

be pulled or pushed directly by governments. Other policy

levers work indirectly, relying on incentivised responses of

households and business firms. (The Reserve Bank also has

its own very blunt and poorly understood lever; interest

rates, widely believed to represent the price of

Policy Stimulus versus Policy

Constriction

Policy 'doves' have a bias (ie leaning)

towards stimulatory circular-flow political management, and

policy 'hawks' have a bias towards constrictive

circular-flow policy. Economic liberals claim to have a bias

towards zero political management of these levers; which

means they prefer that inflationary booms and recessionary

busts work themselves out, no matter how long it takes.

Hawkish policies also rely to a degree on a process of

eventual self-correction. Hawks and liberals tend to accuse

doves of short-termism.

present New Zealand government is arguably the most hawkish

that this country has ever had; and the economists who

influence policymaking are also unusually hawkish at

present. (Myself, I would be classed as a policy dove;

though that does not mean I'm an advocate of unmitigated

economic growth.) The only contenders for a more hawkish

previous government would be the National Government of 1990

to 1993, and the Reform-United Coalition Government in 1931

Stimulus takes place in a country's economy

when there is an increase in injections or a decrease in

leakages. Constriction – collective austerity – takes

place when there is an overall decrease in injections or

increase in leakages. New Zealand's major economic problem

today is that it is too constricted, too anaemic, meaning

that many people – but not economic liberals – are

arguing for some form of stimulus to revive it. The kinds of

stimulus most favoured by policy hawks are 'tax cuts' and

export incentives.

Let's look at the six valves in

turn; valves which serve as policy levers.

entire last quarter-century, the New Zealand economy has

received a substantial external stimulus through the

export valve. This has impacted on

– and continues to impact on – New Zealand mainly in the

form of rising market prices for the commodities which New

Zealand sells to the rest of the world. This stimulus

represents remarkably good fortune, and is not a result of

any recent cleverness on the part of New Zealand businesses

or New Zealand governments. This accumulated export

stimulus is comparable to the stimulus Norway received from

North Sea oil; New Zealand has indeed been a 'lucky

country', arguably more so than Australia. (Australia may

have managed its luck better.) Some countries' governments

offer export incentives as a stimulus; generally New Zealand

doesn't, although it promotes exports through free-trade

agreements and the like.

An export-based economy does

best when the export revenues take the 'scenic route' though

the body economic (and geographic and demographic), rather

than the direct route from exports to imports; just as the

corporeal body works best when the nutrients take the scenic

route through all the different anatomical bits, and not the

direct route from the mouth to the large bowel.

New Zealand economy has incurred a huge counter-stimulus

from the import valve. Generally,

the humongous import leakage has exceeded the generous

export stimulus. Thus, 'net exports' has been a

counter-stimulus for New Zealand; perhaps more so this year

with higher petrol and diesel prices, though import volume

growth is well down. The main drivers from 1985 to 2025 of

the very high levels of imports have been both an overvalued

New Zealand dollar –caused in large part by the

speculative carry

trade from 1985 to 2020 – and fortuitously rising

export receipts.

We note that the direct restriction

of imports is a valid way to stimulate a country's economy;

though not a fashionable way. Most capitalist countries

recovered in the late 1930s – from the Great Depression

– through import-restricting policies reviving domestic

markets; this is not widely acknowledged by economists

today. New Zealand, however, largely recovered from that

depression before it moved in December 1938 to restrict

imports; though the rationing of imports from 1938 did help

to stimulate New Zealand's post-war infrastructure

New Zealand's recovery in the mid-1930s came

from other sources: essentially currency devaluation in

1933, and the early recovery of the British market

facilitated by Britain's 1931 devaluation and its evolving

system of empire tariff protection. Also from an easy

monetary policy in 1936, following the creation of the

Reserve Bank in 1934, enabling large-scale government and

private investment in housing.

investment valve works mainly

through business confidence, and represents capital

rather than current spending. Increased capital

spending (debt- or equity-funded) is undertaken to generate

future benefits rather than present benefits. In the simple

circular flow description, investment spending is undertaken

by business firms. Government investment on infrastructure

and housing is also an important stimulus, which is covered

in basic textbooks mainly under the government spending

valve (see below).

The investment valve was emphasised

by John Maynard Keynes in his 1936 General Theory.

Keynes coined the term 'animal

spirits', meaning that businesses could become

spontaneously optimistic prior to an increase in spending on

their products. One could say that at present, in the global

economy, there's high animal spirits in the AI industry. A

few years ago, there were high animal spirits in the

military-hardware industry; but now that 'big-gun' industry

is driven by actual sales rather than by

anticipation.

Business surveys in New Zealand suggest

that business confidence remains low (albeit uneven) in New

Zealand. The reporting of business confidence is

problematic, because, when business confidence is very low,

it may nevertheless be increasing. We tend to report whether

it is increasing or decreasing, not whether it is high or

low. On balance, business confidence in New Zealand today is

acting as a constriction or counter-stimulus on the New

Zealand economy. The business investment valve works through

increased business borrowing (or spending of retained

earnings, or sharemarket floats); generally, by businesses

incurring more debt or other liabilities which they plan to

service out of future sales.

Looking at the

saving valve, high levels of saving

are a leakage; by definition, more saving means less

spending. Saving means 'non-spending'. So, a choice by

households to decrease present spending leads to a process

of austerity or constriction – a diminished flow making

the national waka ('economic ship') leak more, not less; a

set of choices more appropriate for an obese economy than

for a lean economy. More saving can only be beneficial in:

(a) an overstimulated economy; or (b) in an economy where

the extra saving is matched by more spending through one of

the other valves, where extra leakage is matched by extra

We may note that a policy making it easier

for people to withdraw KiwiSaver money before savers are

aged 65 is a form of stimulus; it's dissaving when people

respond to that incentive, and spend their savings early. A

policy to raise the 'retirement age' to say 67 is a leakage

policy (a counter-stimulus), in that it means that more

savings – savings of 65 and 66 year-olds – are deducted

from the circular flow. We note that many New Zealand

households counter the austerity of KiwiSaver by borrowing

more funds (eg from credit cards, or parents) to pay for

consumer goods otherwise unavailable to

Compulsory non-spending creates bad financial

habits, by requiring households to counter this restriction

by incurring more debt. Borrowing money to counter the

austerity of forced saving is the antithesis of true

financial literacy and freedom. KiwiSaver is a device

through which 'Kiwis' become two-time customers of the

finance industry, both by putting money into KiwiSaver

accounts, and by borrowing more money to pay outstanding

bills resulting from contractually-deducted

The first-tier of extraction is the higher

level of profits to financial businesses made possible by

governments granting them a captive market. The second-tier

is represented by the eventual destination of those

Repaying debt is a form of saving; sometimes

contractual saving, sometimes discretionary saving.

Increased debt repayment is additional leakage from the

circular flow of the economy; a counter-stimulus. Paying

interest – servicing debt – is a funds transfer from

debtors to creditors; that process amounts to a leakage from

the circular flow – from the body economic – if the

interest payments diminish overall spending, meaning that

the recipients of that interest save it rather than spend

Reduced saving – dissaving – is a stimulus,

and it can take place in ways we don't often appreciate; for

example, through increased consumer debt, increased

withdrawals from savings' accounts, retirement of term

deposits, or from the sale of assets such as shares, bonds,

gold, or real estate. The so-called wealth-effect,

which provided buoyancy to the New Zealand economy in the

late 2000s and in the 2010s, arose from households incurring

more debt, borrowing more. More consumer debt secured

against rising real estate prices, was the form of dissaving

which kept the New Zealand economy in

Additional spending through the

government valve is a stimulus;

'unfunded' government spending is directly injected into the

circular flow, unmatched by funding tax increases. This most

likely happens through government borrowing, which

initially increases government debt;

debt which is serviced and repaid by the revived circular

(Japan, with around 250% of GDP as government

debt, has government deficits every year, yet its

government-debt-to-GDP ratio is falling. Italy is even more

striking. From 2020 to 2023 its government debt ratio fell

from 154% to 134%, yet in each of those years its fiscal

deficit- its additional borrowing – was between 7% and 10%

of GDP. Subsequent to getting close to fiscal surplus, after

2023, Italy's government debt increased to 137%. A

government policy of 'getting to surplus' commonly increases

that government's indebtedness.)

Commonly, government

spending is split – in an important accounting sense –

into government investment (capital spending such as

physical infrastructure), and government consumption (such

as spending on administration, education, healthcare,

military capacity, and on prisons and courts). The divide

can be artificial; for example, education is often cited as

the acquisition of human capital; though we should note that

the actual purpose of human life is not simply to be an

increasingly productive labour input into the national

Conventionally, the main purpose of debt is

to fund capital spending. As most government spending is

properly understood as capital spending, governments should

not be shy about debt finance. The boost to the circular

flow from such spending induces substantial amounts of

taxation revenue. But spending on wars of aggression should

be financed through direct taxation; that would make

capricious wars less popular. Bombing other countries does

not generate government revenue in the way that boosting

education and healthcare does.

New Zealand's present

predominant political-economy narrative is that more

government borrowing and more government spending is in some

sense 'bad'. That narrative – which, in isolation,

promotes anti-growth constriction rather than pro-growth

stimulus – doesn't adequately spell out where offsetting

stimulus should come from. (Though, implicitly, the favoured

offsetting stimulus is usually a mix of 'tax cuts' and

private borrowing.)

The final 'valve' – the final

policy lever in the body economic – is that of

net taxation. Increases in taxation

are constrictive; decreases in taxation are stimulatory to

the extent that they are spent rather than saved. Under

present taxation structures in most countries, the principal

beneficiaries of taxation reductions are those households in

the top income deciles. The stimulus of such tax cuts is

blunted by the fact that people already with lots of

purchasing power often do not spend much of their increased

There's a more nuanced (but very

significant) problem. When already-rich people receive

pecuniary windfalls, they spend extra on luxury goods rather

than on wage goods. Wage goods are the kinds of goods and

services purchased by everyone and produced at scale.

Industrial capitalism is predicated on mass-production; on

the process of keeping unit costs low through economies of

scale. When we increasingly rely on the very rich to

maintain the circular flow of spending and income, they buy

personal services, luxury travel and hospo

('hospitality'), and bespoke jewellery and fashionwear. When

the new rich

buy disproportionately more bespoke stuff, which is not

produced at scale, increased luxury spending undermines the

industrial system which made the lovers of luxury rich in

the first place.

A more practical and equitable

version of stimulus by reducing net taxes would be to raise

benefits. This would be an easy matter if there is a UBI

(or other form of universal income) in place; just borrow,

raise the level of universal income payable, and collect the

resulting income and expenditure taxation revenue.

Otherwise, this stimulus is a complex matter of navigating

disjointed social income mechanisms, such as Superannuation,

Job-seeker Benefits, Student Allowances, Working for

Families and/or Accommodation Supplements.

New Zealand needs a second stimulus, in addition

to reliance on rising export prices. If New

Zealand households increases their KiwiSavings, a

constriction to the body economic, then New Zealand needs an

extra additional stimulus to counter what would otherwise be

an increasingly leaking domestic economy.

Pair of Valves

In relation to countries' foreign

transactions, there are two more 'valves' – opportunities

for leakage or injection – in addition to exports and

imports: foreign financial inflows and

outflows. These are commonly called 'foreign investment',

but they are quite different from the investment

valve described above.

When New Zealanders sell assets

(especially financial assets such as shares or bonds) to

foreigners, it's an inflow to New Zealand's circular flow; a

stimulus, an injection, for New Zealand. The must ubiquitous

example for New Zealand was this country's participation in

trade from 1985 to 2020; it was the carry trade which

caused New Zealand to have permanent annual deficits on net

exports, despite highly favourable export prices.

New Zealanders buy such assets from foreigners, it's an

outflow from New Zealand's circular flow; a

counter-stimulus, an anti-stimulus. An increase in purchases

of foreign assets represents a domestic leakage. This is

what both Labour's and National's KiwiSaver policies promise

to do; they promise to haemorrhage the present New Zealand

There's a counterpoise. When assets generate

a yield – for example, interest – there is a flow in the

opposite direction. An increase in interest (and similar)

payments to foreigners represents a leakage; an increase in

interest payments from foreigners represents an injection.

This last part today relates to present yields from

international financial investments made in the past.

Interest payments to foreigners are treated in the accounts

as equivalent to imports; interest receipts are treated as

KiwiSaver foreign financial investments are

expected to compound overseas for decades. Meaning that the

advertised counter-inflows into the New Zealand economy are

expected to peak in the 2060s. And those inflows might not

happen. British and French holders of Russian bonds in 1914

did not receive any interest at all, let alone compound

interest; rather, they received practically noting at all on

the liquidation of their 'investments'.

note that much of the present portfolio of the New

Zealand Superannuation Fund – New Zealand's sovereign

wealth fund – is equivalent today to such Russian

bonds in the 1900s. And on the matter of compound interest,

I heard last Monday Sam Stubbs (of Simplicity

Finance) – refer Sam

Stubbs reacts to Labour's KiwiSaver policy, RNZ

14 Sep 2026 – mentioning "the power of compound interest"

in his argument that Labour needs to extract even more than

it is promising to do; Stubbs' comments were divorced from

the economic growth fundamentals which make the real

realisation of compound interest possible in some

circumstances.)

These transactions – relating to

financial capital crossing international borders, crossing

from one currency into another – are neither leakages nor

injections for the world as a whole. For the global economy,

there are just four circular flow 'valves': investment

(in its economic rather than its financial meaning), saving

(meaning 'non-spending'), spending by governments, and

taxation by governments.

When the global circular flow

is in some semblance of balance, more saving by Kiwis means

more spending by some other party – in New Zealand or

overseas. Such other parties may be households, businesses,

or governments.

KiwiSaver Compulsion

Labour and National are advocating larger KiwiSaver

deductions which will become fully compulsory; today

KiwiSaver deductions are only compulsory for the majority of

the population who have previously opted in. This makes such

deductions tantamount to a tax which is paid to funds'

managers rather than to the Treasury.

(fiscal) social contract is that income-shares extracted by

the collective (ie government) as taxes are paid to the

collective, for the purpose of collective

well-being.

Tax-equivalent extractions paid to funds'

managers break this social contract. They represent the

worst of both worlds. These circular flow leakages from

households do not go to government; in all likelihood they

don't facilitate business investment either. Increased net

investment requires positive 'animal spirits'; significantly

positive business confidence. These income deductions

largely go into the pockets of people selling assets,

funding the consumption of upper income decile households;

with perhaps half of these already-rich consumers not being

New Zealand residents.

Bernard Hickey's recent Kaka

podcast on YouTube – Hickey being a widely respected

independent financial journalist in New Zealand – contains

a chart (8' into podcast) labelled "61% of KiwiSaver

contributions invested overseas". The chart shows a big jump

in overseas 'investments' in June 2026 compared to March

2026. Hickey goes on to note that "it's worth remembering

here that that's a large chunk of money which will no longer

be invested or spent into the New Zealand economy … we are

looking at [61% of] $24 billion dollars. … When you

withdraw that money from New Zealand circulation it needs to

be replaced by something else, or you'll get a

depression [my emphasis] or at least a contraction in

your GDP." That's three percent of New Zealand's present

GDP; a massive counter-stimulus.

Much of this

substantial circular flow leakage represents purchases of

assets on the world's primary markets; meaning that it will

be spent as new business spending (especially by the Magnificent

Seven who are the darlings of the world's sharemarkets

– such as SpaceX

building rockets to fly to Mars and AI

hyperscaling, or Super PAC

election bribery in the United States, including the huge

Crypto-funded PAC Fairshake

and the Leading

the Future AI sponsored Super PAC mentioned on Al

Jazeera's Let's

Focus, What

makes these midterms so pivotal? 15 Sep 2026, from 7'

into video). And on hyperscaling, note this What’s

at stake in AI’s trillion-dollar gamble? David Rotman,

MIT Technology Review, 15 Sep 2026.

words, New Zealand's KiwiSaver contributions are

increasingly 'feeding the beast'; or the 'beasts' that are

United States' big tech

in particular and the world's stockmarket bubble in general.

A growing number of financial commentators see a major

global financial crash coming soon; compulsory levies which

feed the beast – such as KiwiSaver deductions –

forestall such a crash, but only exacerbate it when it

A small part of this new 'foreign investment'

by New Zealand households will be advanced to foreign

governments seeking to boost their national economies. Much

new government borrowing – especially in the Global

South – is non-discretionary; it's to keep 'the lights

on' or the schoolteachers paid. While many poor countries'

governments borrow money from the world's financial markets,

often at excessive interest rates, the poorest countries –

and the richest countries – are net 'foreign investors'.

Funds are increasingly leaving New Zealand because of the

lack of domestic borrowers willing and able to compete for

these funds; New Zealand is increasingly behaving like a

poor country lacking investment opportunities outside of the

export-oriented sector.

A lack of domestic

borrowing in New Zealand – except for distress borrowing

by overstressed households, and speculative borrowing – is

the missing piece of the New Zealand narrative. Too many New

Zealand businesses are practically insolvent – a balance-sheet

recession – and central government chooses to minimise

borrowing, preferring to preside over an increasingly leaky

body economic; favouring a sinking waka with a bit of

top-end glitter over a proud sailing waka.

expansion increasingly represents the symptoms of a failing

economic nation. But New Zealand is changing fast; and will

recover, as an increasingly Asian nation state, hopefully

still with its underlying personality intact.

Rankin (keith at rankin dot nz), trained as an economic

historian, is a retired lecturer in Economics and

Statistics. He lives in Auckland, New