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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic survey of New Zealand, published on 23 April 2007.
New Zealand has undertaken wide-ranging reforms over the past 20 years and now has one of the most flexible and resilient economies in the OECD. However, a large external deficit, very low household saving and still-strong inflation pressures indicate an unbalanced growth pattern. There are some signs that these imbalances are starting to unwind, but the short-term outlook remains uncertain. On current settings, it will take time for inflation pressures to dissipate and, notwithstanding a large fiscal surplus, strong growth in government spending is complicating the stabilisation task of the Reserve Bank. Moreover, additional fiscal stimulus beyond present plans whether from spending increases or tax reductions would delay internal and external rebalancing and exacerbate the adjustment required to ensure fiscal sustainability in the longer term.
Despite strong economic growth since the early 1990s and policy settings in product and labour markets that for the most part enhance efficiency, total economy labour productivity growth has been lacklustre although productivity growth in the “measured sector” has been somewhat stronger. A number of factors have affected productivity, but the persistent gap in living standards with the rest of the OECD is still not well understood. This Survey explores whether the large medium-term swings in the NZ dollar and higher long-term interest rates than in other OECD countries might play a role. Looking ahead, the key challenges will be to maximise improvements in living standards and to absorb pressures for increasing health and superannuation spending as the population ages. In this light, this Survey focuses on the following issues.
Improving pension and retirement savings policies. Overall, the foundations of public pensions are sound, but the pre-funding approach will only partially meet the pressures from rising pension outlays. Without undermining the basic design of New Zealand Superannuation, two measures could diminish its long-term cost: using a lower indexation formula for pension payments and/or lifting the eligibility age. Moreover, automatically adjusting the retirement age to changing life expectancy would help to manage fiscal risks. KiwiSaver is being introduced to encourage New Zealanders to accumulate assets for their retirement and is expected to raise household saving rates. The removal of its pro-housing elements would promote a more diversified mix in households’ asset portfolios.
Deepening and enhancing the efficiency of financial markets. More developed financial markets make for better resource allocation and risk management, but New Zealand’s markets remain relatively thin: higher savings for retirement might help to deepen them. Although there are no major regulatory barriers impeding the expansion of financial markets, refinements of the governance framework for collective investment schemes and stronger disclosure requirements would help, as would further efforts to boost financial literacy. More generally, a better understanding of why some parts of the country’s financial markets remain under-developed and why households are accumulating so few financial assets despite high rates of return would permit a fuller assessment of the role for policy.
Adapting the tax system to future needs. The tax system has long been regarded as one of the most efficient within the OECD. Looking forward, however, the system will face challenges, including risks to the tax base arising from increasingly mobile capital and labour. A clearer strategic direction for the tax system is needed to help maximise living standards in the long term. There are at least two broad options: adapting the system within a comprehensive income approach or moving to a dual income tax system, in which capital income is taxed at a lower rate than earned income. These options should be evaluated against the criteria of efficiency, equity, simplicity and transition costs within an inter-temporal economy-wide framework. In any case, weak points within the current tax bases should be re-examined, recognising the merits of a “broad-base, low-rate” approach. Any actions taken in the near-term should avoid adding to domestic demand and be consistent with the long-term direction eventually adopted. Reforms should also not put long-term fiscal sustainability at risk: a higher GST rate could help achieve this objective.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of New Zealand 2007 is available from:
For further information please contact the New Zealand Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Deborah Roseveare, Annabelle Mourougane and Shuji Kobayakawa under the supervision of Peter Jarrett.