David Haugh
Kyongjun Kwak
Axel Purwin
OECD Economic Surveys: New Zealand 2026
Abstract
Following more than two years of bouncing along the bottom New Zealand’s economy has entered a recovery powered by lower interest rates and exports. Trade buoyancy amidst high global policy uncertainty and new tariffs owes much to free-trade agreements covering over 70% of exports, strengthening tourism and strong foreign demand for dairy and meat products. The easing in monetary policy is expected to underpin a gradually strengthening recovery. Fiscal pressures loom large. Ageing will drive health, long-term care and pension costs sharply higher, threatening debt sustainability unless reforms accelerate. It is essential to safeguard monetary policy independence and financial stability, while maintaining reform momentum through fiscal consolidation, deepening capital markets and increasing competition to boost productivity. Even as the recovery gathers pace, underlying growth prospects remain modest, held back by weak investment, high energy costs and persistent productivity gaps. The government is taking action to address some long standing and key impediments to productivity growth including flagship education reforms. Raising private pension savings, doubling down on fostering competition across the economy, modernising infrastructure, lowering electricity costs, and leveraging digitalisation and AI can underpin long-term resilience and productivity growth.
New Zealand’s economy began to recover in the second half of 2025, though growth remained moderate and still trails many OECD peers (Figure 1.1, Panel A). Investment has been subdued, weighing on the recovery, partly reflecting uncertainty over the global trade environment. Before the evolving conflict in the Middle East began, there were tentative signs of improvement, with investment stabilising after a period of weakness (Figure 1.1, Panel B). Despite a volatile external environment, activity has continued to be supported by exports and, to a lesser extent, household consumption, although domestic demand remains weak. Tariffs introduced by the United States in 2025 (10% in April, later increased to 15% in August, before being replaced by a temporary 10% tariff in February 2026) have weighed on export price expectations. However, the immediate impact has been cushioned by a weaker exchange rate, tight global dairy and beef markets, and robust commodity prices. Tourism has also supported the recovery so far. In early 2026, some business surveys, including purchasing managers’ indices, pointed to improving confidence and a tentative strengthening in activity. However, growth remained volatile, and the recovery was not firmly entrenched even before the energy shock.
1. Including statistical discrepancy.
Source: OECD Quarterly National Accounts database; OECD Economic Outlook database.
Inflation remained at 3.1% in the first quarter of 2026, slightly above the 1–3 per cent target band, down from its peak of 7.3% in mid-2022, helping to stabilise real household incomes and ease financial conditions. Prior to the recent energy price shock, inflation was expected to ease gradually toward the 2% midpoint, supported by spare capacity and moderating domestic pressures. Lower interest rates had begun to pass through to borrowing costs, providing a stimulus to consumption, housing activity and business investment.
However, sharply higher global energy prices, and notably diesel prices, which more than doubled at the pump in New Zealand following the outbreak of the conflict, are expected to put renewed upward pressure on inflation in 2026, both directly through fuel costs and indirectly through higher transport and production costs including in primary industries. This is likely to slow the disinflation process and weigh on real household incomes. At the same time, uncertainty around the persistence of the shock adds to risks to inflation expectations. While domestic demand remains subdued, persistent cost pressures, particularly energy-related, continue to constrain cost competitiveness and investment.
Following a prolonged period of weak growth, labour market conditions have softened notably. The labour force participation rate and the employment rate declined from 2023 to 2025, while the unemployment rate trended upward from its post-pandemic low in 2021 to 5.4% in the fourth quarter of 2025 (Figure 1.2, Panel A). Wage growth has moderated, mainly reflecting softer labour demand. A sharp drop in net inward migration from its earlier peak in late 2023 reduced labour supply growth, helping to limit the rise in unemployment (Figure 1.2, Panel B). More recent data suggest a tentative pickup in migration flows. Nevertheless, departures continue to be dominated by New Zealand citizens, particularly to Australia, adding to hiring challenges in some sectors despite the weak overall labour market.
Source: Statistics New Zealand.
Economic growth is projected to recover gradually to 1.4% in 2026 and 2.3% in 2027. The outlook is supported by earlier monetary easing, resilient exports and accelerated depreciation tax incentives (Investment Boost), which are expected to provide momentum to private consumption and investment. However, the recovery is expected to remain fragile and uneven in the near term. There has already been significant disruption to global oil, fertiliser and other critical supply chains. This will keep global markets tight in the near term.
Higher energy and input commodity prices and uncertainty will push up production costs and are likely to weigh on activity in the short term. High energy prices will also undermine real incomes, confidence and domestic demand, delaying a stronger pickup in consumption and investment. Export performance remains vulnerable to renewed global shocks but is expected to benefit from sustained external demand across primary and manufacturing sectors, especially food-related exports. Inflation is projected to rise in 2026 as higher energy and transport costs feed through to prices. As these effects dissipate and spare capacity persists, inflation is expected to decline gradually toward the 2% midpoint of the target band in the medium term, although considerable uncertainty surrounds the timing and magnitude of this adjustment, given the risk of further shocks (Table 1.1). Labour market conditions are expected to improve only gradually in 2027, with employment growth picking up as the recovery becomes more firmly established.
Annual percentage changes unless specified, volume (2009/10 prices)
1. Including statistical discrepancy.
Source: OECD Quarterly National Accounts database; OECD Economic Outlook database.
1. Contribution to changes in real GDP.
2. Consumer price index excluding food and energy.
3. As a percentage of potential GDP.
4. As a percentage of population.
5. As a percentage of GDP.
6. National Accounts basis excluding unfunded liabilities of government-employee pension funds.
Source: OECD Economic Outlook No. 119 STEP projection; OECD Secretariat.
Downside risks remain elevated. The recent energy price shock linked to the conflict in the Middle East has increased the risk of weaker growth and higher inflation by eroding real household incomes, raising production and transport costs and adding to uncertainty. New Zealand’s high reliance on imported refined liquid fuels and limited supplier diversification has left it exposed to fuel supply disruptions, especially for diesel, which is critical for transport, agriculture and supply chains. Fuel shortages could lead to significant disruption of primary industry production, exports and a severe recession. A weaker global environment, further escalation of trade tensions, or renewed trade restrictions could also weigh on export growth and investment but to a lesser degree. Climate-related events such as severe floods or droughts pose additional risks to agricultural output and hydro-electric generation. On the upside, a faster-than-expected pass-through of monetary easing or a quicker rebound in business confidence and investment, supported by an acceleration of the green transition sparked by the Middle East conflict, AI adoption, and the “Investment Boost” accelerated depreciation measure introduced in May 2025, could lead to a stronger-than-projected recovery. A sharper-than-expected revival in inbound tourism, particularly from China, would provide additional support to the outlook (Table 1.2).
1.1.1. Open trade and diversification are essential to sustaining exports growth
With a small domestic market that is critically dependent on international trade, keeping the recovery on track in the face of these risks requires an enhanced ability to successfully navigate global policy turbulence. The international trading environment for small open economies such as New Zealand has deteriorated, following new trade restrictions and the undermining of the rules-based international order. Exports as a share of GDP (25% in 2025) have declined since the early 2000s and remain well below that of other small open economies, and indeed below the OECD average (28% in 2024). Nevertheless, New Zealand’s vulnerability is high with roughly one in four jobs connected to the production of goods or services exports.
In April 2025, the United States imposed a 10% base tariff on imports from New Zealand, which was then revised up to 15% in July. In February 2026, these tariffs were replaced by a temporary global tariff of around 10% on most imports, with possible increases to 15%. Tariffs on certain agricultural exports, such as beef and kiwifruit, corresponding to roughly one quarter of New Zealand goods trade to the US, remain exempt.
So far, however, the direct impact of the increased tariffs has been muted by trading partner diversification and New Zealand’s export product mix, which is dominated by agricultural products in short supply in the United States, notably beef, and by niche specialised manufacturing exports (Figure 1.3). The increase in exports to the United States ahead of the sweeping tariff announcements in April pointed to firms in the United States frontloading imports. Since the tariffs took effect, New Zealand goods exports to the United States, as well as to its other major trading partners, have continued to hold up well across the major export products (dairy, meat and processed wood products). This is largely because New Zealand’s primary sector has benefited from a rise in global dairy and beef prices, a weak New Zealand dollar and favourable growing conditions in New Zealand paired with tight global beef supply (Figure 1.4). With high export prices, merchandise terms of trade are at record highs. The Middle East conflict and resulting fears about global food production declines have further increased market tightness and prices for New Zealand’s agricultural commodities. The opening of the border and growing tourism, along with weak growth in imports, has led to an improving trade balance. As a result, the current account deficit has narrowed markedly from its peak of 9% of GDP in December 2022, although it widened slightly to around 3.7% of GDP in the year to December 2025. Higher global energy prices are expected to put some pressure on the trade balance through increased import costs, mitigated by higher prices for New Zealand’s commodity exports.
1. Year to June 2025.
Source: Statistics New Zealand.
1. Real trade-weighted index from the RBNZ.
2. Terms of trade for goods are published on a quarterly basis and have been interpolated to get monthly values.
3. Merchandise exports and imports. Data for year ended June.
Source: ANZ Bank; Statistics New Zealand; Reserve Bank of New Zealand.
Although New Zealand exports have initially fared relatively well in the more uncertain global trade landscape, this is largely due to a confluence of favourable cyclical factors. To maintain export performance in choppy international waters in the medium term and move towards the government’s stretch target of doubling exports by value by 2034, ongoing trade policy initiatives are required, together with a broader set of structural reforms to encourage a new generation of exporting firms in new and expanded product lines.
A long held and successful strategy of pursuing free trade agreements (FTAs) to encourage market diversification has slowed the trend decline in New Zealand’s export-to-GDP ratio. In May 2024 the free trade agreement (FTA) between New Zealand and the EU entered into force, making 91% of New Zealand’s current exports to the EU duty free (a figure that will rise to 97% by 2031). New Zealand authorities estimate that the FTA with the EU will increase the value of New Zealand exports by up to 1.8 billion (0.4% of GDP) per year and GDP by 1.4 billion per year by 2035. In the first year following the EU-New Zealand FTA exports of dairy and industrial products to EU countries rose by 64 and 44%, respectively.
The greater diversification in export markets from FTAs also provides important insurance against large international trade policy swings as well as economic downturns in trading partners. Indeed, over 70% of New Zealand’s exports are covered by FTAs including with key trading partners such as Australia, China and the EU. While China, the United States and Australia continue to be New Zealand’s biggest export markets making up around a half of exports, the government continues to pursue a strategy of trade market diversification, forming new trade partnerships with smaller economies, such as Switzerland, Singapore and the Gulf Cooperation Council (GCC) that represents 6 countries, the UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman. It recently also concluded an FTA with India, eliminating or reducing tariffs on 95% of New Zealand’s exports over time.
High FTA coverage combined with strong agricultural productivity and production has underpinned New Zealand’s past export success. Indeed, primary industries’ productivity growth has outperformed that of other industries (the agriculture sector’s productivity increased by more than 40% between 2000 and 2024) and will remain a key export player for the medium-term future. However, while the government should continue its FTA and market diversification strategy, this will not be enough. New Zealand will need to diversify its export product portfolio and especially services to have a chance of reaching its exports target and maintaining resilience in a turbulent global environment.
FTA potential is diminishing, with less than 30% of New Zealand’s international trade not covered by FTAs, and two of the three largest markets globally, China and the EU, already covered. In addition, increasing agricultural production is coming up against land-use constraints and risks from increasingly volatile weather conditions. Moreover, although a comparatively high share of commodities exports can also enhance resilience (many of the primary exports products have low price elasticity, meaning that exposure to external business cycle volatility decreases), the New Zealand Treasury assesses that with the current trade profile, export product concentration poses a higher economic risk than export market concentration (Treasury, 2025).
Services exports hold significant expansion potential. They account for less than one third of total exports, lower than in other small open OECD countries, even when New Zealand’s relatively large tourism sector is included. Tourism is only indirectly affected by tariffs via their negative impact on consumer real incomes in source market economies, and tourism to New Zealand has largely returned to pre-pandemic levels. In line with a slow recovery of tourism from China to destinations outside southeast Asia post Covid-19, the notable exception is arrivals from China. As a result, China has fallen from the second to the third biggest source of overseas visitor arrivals, behind Australia and the United States. The government has eased the visa process and recently lifted visa requirements on Chinese travelling to New Zealand via Australia to attract Chinese tourists.
Whereas goods exports have tilted towards Asian countries, traditional trading partners such as Australia, United Kingdom and the United States account for a higher share of services exports, suggesting room to diversify and expand. The lingering relative importance of western economies in services exports likely reflects cultural barriers but also other non-tariff barriers (NTB). In this regard, the initiative from the Ministry of Foreign Affairs and Trade to negotiate a plurilateral arrangement with other countries committed to limiting NTBs is welcome. Horizontal policies such as improving capital market access for SMEs are essential to foster export product diversification. International experience suggests that new industries (e.g., low carbon technologies) can be held back by outdated or insufficient regulatory regimes (OECD, 2015a). Prioritising regulatory modernisation in line with New Zealand’s comparative advantage and emerging industries would also help. According to Longitudinal Business Database data from 2021, around 12 000 New Zealand firms have exported at least once, but only about one‑third remain persistent exporters. Diagnosing the underlying causes of why firms give up exporting and which firms continue is a key step for further improving the policy framework.
1.1.2. Structural reforms are needed to sustain growth while maintaining price stability
Sustaining the recovery and preventing over-heating and inflation will also require reducing other structural roadblocks. Despite best practice labour market regulation in many respects that underpins high labour utilisation and long-term growth (Gault, 2023), and ongoing labour market reforms (Table 1.3), skills shortages are expected to re-emerge as the recovery picks up. Limited task delegation (OECD, 2024a) and persistent gender gaps are limiting labour supply and need to be addressed.
New Zealand ranks among OECD leaders in gender equality, with female labour force participation at 66.9% (second to Iceland) and a gender pay gap of 4.2%, far below the OECD average of 11.6% (OECD, 2025a). These gains reflect policies like public sector Kia Toipoto pay equity plans and flexible work arrangements (Ministry for Women, 2024). Despite progress gaps persist, undermining labour supply. Women hold only 31% of NZX-listed directorships versus an average of around 40% in Nordic countries and 44% in France with legislated quotas (Dennis, 2022). Occupational segregation endures with women dominating in health, education, and social services but remaining underrepresented in high-paying sectors such as finance, tech, and STEM (OECD, 2025a). The motherhood penalty is significant, driven by costly childcare and low uptake of shared parental leave (OECD, 2024a). Women also bear most unpaid elder care, a growing challenge with population ageing (OECD, 2024b). Intersectional gaps are stark: Māori women earn 12% less and Pacific women 15.8% less than men (Ministry for Women, 2024). Changes to make estimated fiscal savings of NZD 2.7 billion per year in Budget 2025 will hinder closing these gaps by raising the threshold to prove underpayment due to gender discrimination.
Affordable childcare and elder care are critical to sustaining careers (OECD, 2024b). The “motherhood penalty”, pay lost due to time taken out of work to care for young children, is an important contributor to the gender pay gap (Sin et al., 2018). Family Boost, introduced by the government in 2024, provides a mean tested payment to cover early childhood education and care costs. This welcome initiative should indirectly help reduce the gender pay gap by making childcare affordable, allowing more women to return to work earlier but it is not a full solution (Johnston et al., 2024). Nordic countries ease these pressures via flexible leave and non-transferable parental leave for fathers. New Zealand should integrate elder care into gender and pension strategies (e.g., KiwiSaver), alongside flexible work and career re-entry programs. Greater flexibility for senior roles is crucial for breaking the glass ceiling. Without standardised reporting, hidden pay inequities persist. To accelerate progress the government should introduce mandatory gender pay gap reporting, as implemented in France, the United Kingdom and Nordic countries. This can be combined with equal pay audits and gender-neutral job evaluation systems (OECD, 2021). For leadership positions, evidence from Nordic countries shows quotas rapidly increase representation without harming firm performance (Dennis, 2022). To reduce occupational segregation, Nordic countries use scholarships, industry-led mentoring, and policies to promote more gender balance in programme choice in universities with accountability in hiring (OECD, 2021). New Zealand could adopt similar measures plus industry sponsorship, bias training, and public campaigns promoting female role models in high-paying sectors.
Persistently weak productivity growth also remains one of the key constraints on New Zealand’s medium-term outlook. Although recent reforms have been implemented, further progress is needed to lift the economy’s productive capacity. Several structural factors continue to limit and investment in key sectors and productivity performance, including a small domestic market, shallow capital markets, geographic remoteness, declining education outcomes, high energy costs, outdated regulatory and planning settings. Competition is held back by highly concentrated markets—especially in banking, construction materials, energy and groceries—where incumbents use exclusive supply agreements, vertical integration and predatory pricing to restrict access to essential inputs and deter entry. These longstanding issues are compounded by outdated regulations in fast‑moving areas such as digital markets. Product market regulation is more cumbersome than the OECD average in key areas including an inefficient permitting and licensing regime and outdated digital markets regulation. Slow adaptation of regulation to digital innovation holds back investment and hinders market entry and competition, especially in areas dominated by large platforms and incumbents such as banking (OECD, 2026). These constraints have contributed to sustained underperformance relative to peer OECD economies (Figure 1.5). Without broader and deeper reforms to address these structural barriers, the recovery is likely to remain modest and/or generate inflation and therefore higher interest rates.
Labour productivity
Note: Labour productivity is measured as PPP-adjusted GDP over total employment.
Source: OECD Economic Outlook database.
New Zealand should pair its recent regulatory modernisation with stronger deterrence tools and proactive market design, particularly by increasing Commerce Commission powers, expanding mutual recognition of overseas standards, and introducing essential input markets and code‑making authority to align with OECD best practice. Ensuring affordable, secure and sustainable electricity and gas supplies can have large productivity payoffs even in the short-term but the government will need to build on its reform agenda to fully realise these (Chapter 2). Digitalisation and AI provide an important opportunity to boost productivity in labour-intensive sectors like health where technological progress has traditionally improved outcomes but at higher cost (Chapter 3). Reforms are needed to deepen capital markets, especially by fostering a stronger public equity market, so they can fund a new generation of innovative, technology-based high-growth companies (Chapter 4). These reforms are also essential for diversifying New Zealand’s export products and indeed a good sign they were taking effect would be robust growth in new export products from med-tech to energy intensive goods and services (e.g. methane cracking for solid carbon used in batteries).
Maintaining New Zealand’s OECD-leading institutional strengths is a pre-requisite for these reforms to pay off. New Zealand enjoys generally low levels of corruption according to global indices and its citizens have a relatively high trust in public institutions and fellow citizens (Figure 1.6). Anti-money laundering enforcement is effective and policy settings to control corruption are generally considered best practice among OECD countries. The Serious Fraud Office recently headed an anti-corruption taskforce that sought to identify corruption risk across the public service and priorities for policy improvement.
Note: Panel A shows the point estimate and the margin of error. Panel B shows share of firms experiencing at least one bribe payment request. Panel C shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: World Bank; OECD, Financial Action Task Force (FATF); and Varieties of Democracy Project, V-Dem Dataset v15.
However, inadequate regulation of lobbying is an important weakness. It is comparatively less regulated in New Zealand, with former Ministers quickly transferring into lobbying roles, and little transparency about who is lobbying and why. Lobbying activities (e.g., on tobacco legislation) have at times been intense. Lobbyists up until recently had swipe-card access to parliament buildings, allowing them to bypass the usual public security controls. Various initiatives to rein in lobbying have been launched in the past decade but have not yet resulted in any binding regulation. Introducing cooling off periods for senior political and administrative staff and establishing a lobbying register could increase transparency and societal trust.
In the face of a weak economy and declining inflation, monetary policy shifted towards easing from mid-2024. The Reserve Bank of New Zealand (RBNZ) reduced the Official Cash Rate (OCR) by a cumulative 325 basis points between August 2024 and November 2025 to 2.25% (Figure 1.7, Panel A), reflecting a decline in inflation, well-anchored inflation expectations and increasing spare capacity in the economy. Monetary policy is now providing accommodative support to growth, with the OCR below the RBNZ’s estimated neutral level of around 3–3.5%, although pass-through to lending rates remains gradual. However, the outlook has become more uncertain following the recent energy price shock linked to the conflict in the Middle East. In April 2026, the RBNZ held the policy rate unchanged at 2.25%, as higher energy prices are expected to raise near-term inflation but also weaken the recovery. Monetary policy should continue to look through the energy price shock, as long as medium-term inflation expectations remain well anchored.
1. Tradable inflation covers goods and services that are imported or in competition with foreign goods. Non-tradable inflation includes goods and services that do not face international competition, such as government charges.
2. Salary and ordinary time hourly wages, private sector. The real wages have been deflated with the CPI.
Source: The Reserve Bank of New Zealand and Statistics New Zealand.
Inflation expectations among households and firms had eased before the Middle East war but will inevitably rise for near-term inflation due to the energy price hike. While weak domestic demand and spare capacity are likely to limit stronger second-round effects, the extent and persistence of inflation pressures remain uncertain and the RBNZ will need to monitor incoming data carefully. Developments in the labour market are crucial. Wage pressures have moderated in line with weak labour demand (Figure 1.7, Panel B) and are expected to remain modest especially as labour supply can adjust quickly via migration if conditions tighten. However, destruction of oil and gas production facilities in the Middle East and significant disruption to energy and food related supply chains risk a sustained period of higher tradeables inflation.
Energy price shocks are challenging for any central bank because they place opposing forces on inflation. In New Zealand, these pressures are compounded by structural factors, including weak competitive pressures, rising administrative prices and climate-related insurance cost pressures, which place persistent upward pressure on inflation and lie largely outside the reach of monetary policy. This heightens the importance of the RBNZ’s credibility and independence, which are central to anchoring inflation expectations at the lowest economic cost.
Stability of the monetary policy framework is integral to credibility and independence. Recent decisions have been taken against a backdrop of frequent adjustments to the mandate and remit, reflecting efforts to strengthen clarity, accountability and resilience. Since 2019, changes have included: the introduction of the dual mandate, adding “supporting maximum sustainable employment” alongside price stability; the shift in decision making to a Monetary Policy Committee (MPC); additions (2021) and removals (2023) of housing-related considerations from the remit; and, in 2023 the return to price stability as the sole primary objective, with employment considerations secondary. The MPC Charter has also been strengthened to require clearer explanations when inflation moves outside the 1–3 per cent target band.
Re-establishing a single inflation mandate helps re-centre monetary policy on inflation control following the pandemic and global supply shocks. International experience shows that mandate design works primarily through its effects on inflation expectations, rather than through the wording of the mandate (Bem et al., 2018; BIS, 2022). The shift back to a single mandate helps anchor expectations by removing any perception that the RBNZ might refrain from taking necessary policy action out of concern about employment. It also reduces potential policy conflicts during negative supply shocks. However, if too frequent, changes to the framework can weaken predictability (OECD, 2024a). They can also raise the risk of policy mistakes as the Bank grapples with new constraints simultaneously with challenging operational decisions such as the 2026 energy price shock. Stability is key as the Bank judges whether expectations remain anchored and it can therefore safely look through the energy price shock. Given the number and pace of changes in recent years, maintaining the mandate and remit stable for the full five-year cycle (i.e., until the 2028 five yearly review) would support predictability, credibility and confidence in the monetary policy regime.
A clear separation between political commentary and monetary policy decision is also essential for independence and credibility and effective transmission. International evidence suggests that even perceived political pressure can weaken credibility and raise inflation uncertainty (Rogoff, 1985; Cukierman et al., 1992; Alesina and Summers, 1993, Lim, 2021; Yıldırım et al., 2024; IMF, 2025). New Zealand’s institutional framework remains strong by international standards, with an accountable, credible, operationally independent and transparent central bank. Regular appearances by RBNZ senior management at the parliamentary Finance and Expenditure Committee provide an efficient mechanism for keeping the RBNZ democratically accountable in between five yearly reviews. The RBNZ has rightly continued to emphasise its legislated mandate and data-driven decision making. The RBNZ has also appropriately underlined that protecting operational independence can coexist with constructive engagement with government and industry stakeholders, provided roles remain clearly defined and decision-making stays grounded in its statutory mandate (RBNZ, 2025a).
Strong accountability should complement independence. The Bank already operates with considerable transparency, and while some central banks publish individual policy views, international experience suggests such approaches can, in certain contexts, increase political pressures even as they may strengthen market signalling. In February 2026, the government initiated a review of the Large Scale Asset Purchase (LSAP) programme, and of the broader monetary policy response to Covid-19 pandemic. While such reviews are a normal and important feature of accountability frameworks used internationally and this review is being led by independent international experts, they can reopen debate about the wider monetary policy framework, particularly if the process is perceived as politicised. Clear communication that the review is a technical monetary policy assessment will be important, especially as the publication in September 2026 falls in the lead-up to the general election.
Central banks also need the right tools to meet their mandates effectively. Timely and reliable data remains key for effective monetary policymaking. Several high-frequency indicators—particularly for wages, labour supply, housing costs and firm-level price setting—remain subject to delays or limited coverage, complicating the assessment of inflation persistence and the calibration of policy. Quarterly GDP data exhibit economically implausible volatility, even for a small economy, and revisions are large. The government’s welcome investments up to NZD 100 million to improve the availability and quality of administrative and survey-based data will strengthen the RBNZ’s analytical tools, forecasting accuracy and policy communication. The full budget allocation of NZD 100 million should be spent, as it will help avoid policy mistakes that can cost billions of dollars in lost output and thousands of jobs (Box 1.1).
New Zealand is the only OECD country without a monthly CPI, and GDP figures are published with one of the longest lags in the OECD. Initial GDP estimates also undergo large and upward‑biased revisions (Knowles and Patel, 2025). Quarterly GDP volatility is so high that it often fails to reflect underlying economic conditions, leading policymaking institutions to rely more on labour market indicators to assess the output gap. Modernising statistics to deliver monthly CPI and faster, more reliable GDP estimates is therefore essential (Yung, 2021). Real‑time indicators help central banks and finance ministries adjust interest rates, manage inflation expectations, and calibrate fiscal policy, reducing risks of policy errors during shocks (Croushore, 2011; Orphanides and van Norden, 2002). Since May 2024, the government has committed NZD 100 million to upgrading macroeconomic statistics, including NZD 62 million for eight key indicators and NZD 16.5 million to launch a monthly CPI by 2027, supported by a new Price Indexes Environment platform and expanded data sources such as scanner data, web scraping, and business feeds.
Beyond CPI, Stats NZ is modernising national accounts with updated international standards, more frequent GDP benchmarking, and improved balance‑of‑payments reporting. It is also upgrading the Integrated Data Infrastructure (IDI) to expand capacity and improve data integration for richer micro‑data analysis. Extending high‑frequency indicators, such as monthly labour market and business activity data, including AI adoption, would align New Zealand with mainstream OECD practice. Better integration of administrative and private‑sector data under strong privacy frameworks can further enhance policy insights (OECD, 2022). Investment in advanced analytics and AI can accelerate this transition, provided transparency and quality assurance are maintained (OECD, 2024c). Continued alignment with global standards and participation in international data initiatives will help ensure New Zealand’s statistical system remains fit for purpose in an increasingly interconnected environment.
Source: Stats NZ (2024–2025), CPI Modernisation Programme and Economic Statistics Upgrade Announcements.
According to the RBNZ’s 2025 Financial Stability Report, financial stability risks remain elevated, reflecting global uncertainty and weakness in parts of the domestic economy, even though the financial system remains broadly resilient (RBNZ, 2025b). Although financial conditions have stabilised relative to earlier in the monetary tightening period, credit growth remains subdued amid soft demand and tighter lending standards. Wholesale funding markets have also steadied, yet they remain sensitive to global financial market volatility. Resiliency is supported by strong capital and liquidity regulatory requirements (Figure 1.8).
Implementation of the Deposit Takers Act 2023 has progressed to a new phase, with the Depositor Compensation Scheme operational since July 2025. This marks a major milestone in the transition to the unified prudential regime introduced by the Act. The scheme provides deposit insurance of up to NZD 100 000 per depositor per institution, funded through industry levies, and is expected to strengthen confidence in retail deposits and support a more level playing field across deposit takers. Work is progressing on the multi-year integration of banks and non-bank deposit takers into the new licensing, supervision and resolution framework, including enhanced director obligations, expanded RBNZ inspection powers and modernised crisis-management tools. Continued attention and resourcing will help ensure smooth implementation and support the resilience objectives of the new framework.
The macroeconomic environment is becoming more supportive of financial sector stability. Recent improvements in wholesale funding conditions and stabilising asset quality support this outlook. Banks remain well-capitalised and liquid, and profitability has remained positive overall. High profitability also supports resiliency but this comes at high cost because, as discussed below, this is partly due to weak competition and high margins by international standards. Capital adequacy ratios exceed regulatory minima by a comfortable margin and have been stable over recent years, supported by continued earnings strength despite slight moderation in returns on equity (Figure 1.8, Panel A). Lending remains concentrated in housing, accounting for around 60% of total lending, but non-performing loan (NPL) ratios remain low overall, although there has been a modest increase in arrears in housing and non-agricultural business sectors (Figure 1.8, Panels B and C). This concentration may also reflect structural features of the financial system, including the relatively limited depth of capital markets (see Chapter 4). Liquidity conditions remain stable, with core funding ratios high at around 90%, well above the 75% regulatory minimum (Figure 1.8, Panel D). Wholesale-funding exposure remains manageable but is sensitive to global interest rate volatility and shifts in risk sentiment.
1. Return on equity. Data for the fourth quarter until 2024. Data for the second quarter for 2025 for Australia and the EU and for the third quarter for New Zealand.
2. Common equity tier 1 (CET1) capital relative to risk-weighted assets. ANZ, ASB, BNZ and Westpac for New Zealand. Until September for 2025 for NZL and until June 2025 for the Euro area and Australia.
3. Deposits and debt securities relative to total liabilities.
4. All funding with residual maturity longer than one year over total loans and advances. For more details, see https://www.rbnz.govt.nz/statistics/series/registered-banks/banks-core-funding-ratio.
Source: Reserve Bank of New Zealand, European Central Bank and Australian Prudential Regulation Authority.
Recent RBNZ stress test results, released in November 2025, indicate that the banking system would remain resilient under a severe downturn (RBNZ, 2025c). Under the adverse scenario, which assumes a 6.5% fall in domestic output, unemployment rising to 10.5% and a 35% decline in house prices, the aggregate Common Equity Tier 1 (CET1) ratio of major banks drops from around 13.2% to a trough of roughly 9.6% but stays above the regulatory minimum requirements. A supplementary scenario incorporating a temporary closure of wholesale funding markets and an 18% funding outflow shows that liquidity buffers are sufficient to absorb the shock, although the recovery of funding structures is slower than under standard macroeconomic stress. While profitability is projected to decline noticeably under both scenarios, the results confirm the sector’s capacity to withstand large shocks while underscoring the importance of maintaining strong capital buffers, diversified funding sources and credible contingency-funding plans.
Conservative capital requirements used to assure financial stability have raised concerns that they may be contributing to weak banking competition (Box 1.2). The Parliamentary Finance and Expenditure Committee (FEC) inquiry into banking competition, released in August 2025, highlighted persistent structural issues in New Zealand’s retail banking market, including high market concentration, limited customer switching, and barriers to entry for smaller banks and FinTech firms (FEC, 2025). The inquiry recommended strengthening competitive pressures by reducing regulatory duplication, improving access to core payment infrastructure, accelerating the rollout of open banking, and reassessing elements of the prudential framework that may disproportionately affect smaller lenders. The government and the RBNZ have indicated support for the inquiry’s recommendations, which is a welcome step toward addressing long-standing competition concerns, and have committed to progressing reforms, such as improving payment-system access and advancing open-banking implementation, in a phased manner (Treasury, 2025; RBNZ 2025d). Following the FEC inquiry, the RBNZ has conducted a review of its capital requirements framework and announced revised settings in December 2025, including adjustments to risk weights, capital buffers and the introduction of additional loss-absorbing capacity requirements, reflecting a recalibration of its prudential risk settings following consultation feedback (RBNZ, 2025e).
New Zealand’s bank capital regulation has been among the most conservative globally since the RBNZ’s 2019 Capital Review, which lifted major banks’ total capital ratio (TCR) to 18% of risk‑weighted assets (RWA) by 2028, with CET1 rising to 13.5% and smaller banks facing 16% (RBNZ, 2019). These levels significantly exceed Australia’s effective 10.25% CET1 requirement. The aim was to ensure banks could withstand a one‑in‑200‑year shock, but concerns arose about impacts on credit availability, especially for business lending. International evidence shows higher capital requirements reduce credit and raise spreads, potentially increasing large‑bank market power (Corbae and d’Érasmo, 2021). A one‑percentage‑point increase typically raises loan rates about 9 basis points and lowers lending about 10% (Glancey & Kurzman, 2018; Fraisse et al., 2017). RBNZ estimates were similar, projecting a 28–61 bps rise in business lending rates by 2028 (RBNZ, 2019). Banks appear to have prioritised higher‑return lending, contributing to modest business loan shares, NZD 128 billion or 18% of lending in 2024 versus 30% in Australia, and high SME spreads.
In 2025, the RBNZ initiated a review to better balance stability and efficiency (RBNZ, 2025d), examining buffer design, risk‑weight calibration and loss‑absorbing instruments. Greater granularity in SME risk weights is important to avoid unduly constraining SME finance (OECD, 2025e). The review reassessed risk weights for SME, mortgage and rural lending, which may be overly coarse. International evidence shows well‑calibrated capital rules reduce crisis risks (Pogach, 2022). Calibration can also be assisted by considering capital requirements in a broader framework including macroprudential settings. Rules should be countercyclical and avoid excessive tightening in downturns. They should also take account of borrower-based tools like loan to value ratios, which can be more efficient in managing systemic risks and have less effects on credit supply than raising capital requirements (Budnik, 2020). The review concluded in December 2025 with materially lower CET1 requirements, around 12%, 11% and 10% for large, mid‑sized and small deposit takers, and a 9% minimum total capital requirement, while adding loss‑absorbing instruments and more granular risk weights (RBNZ, 2025e). CET1 across deposit takers is expected to fall around 10% (about NZD 5 billion), whereas total regulatory capital will rise about 18% due to new instruments. These changes are expected to modestly reduce funding costs while preserving resilience.
In line with recommendations emerging from the FEC inquiry, the RBNZ has established a new Financial Policy Committee with responsibility for prudential and macroprudential settings. The committee—comprising the Board Chair, the Governor, three Board members and up to two external experts— became operational in 2026. There is no RBNZ senior staff on the Committee, unlike Ireland, the Netherlands and the United Kingdom. Its creation aims to strengthen governance, provide dedicated decision-making capacity on systemic-risk issues and improve coordination across prudential tools. A clearer institutional structure should also help improve transparency and support more predictable macroprudential policy over the cycle.
Progress has also continued on open-banking implementation, with initial steps focused on establishing common standards for data sharing and consumer consent. The reforms aim to improve data portability, enhance consumer choice and foster greater competition in retail financial services, particularly for payments and SME lending. Regulated open banking formally commenced in December 2025 under the Customer and Product Data Act 2025, with the four major banks required to operate core open-banking systems and MBIE beginning to accredit third-party data requestors. Kiwibank will join the regime in 2026. As the framework shifts from voluntary participation to a regulated system with phased compliance, wider industry uptake and investment in supporting digital infrastructure will remain essential to realise the full benefits of open banking.
Monetary tightening and a sharp slowdown in the economy have taken a lesser toll on household balance sheets and loan performance than in previous tightening cycles, and household net wealth has broadly stabilised. However, balance-sheet adjustment is still ongoing, and uncertainty in global financial markets and domestic structural pressures warrant continued vigilance. Despite the recent easing in interest rates, households and firms are still undergoing adjustment after the earlier run-up in debt, as many borrowers continue to refinance onto lower interest rates and rebuild liquidity buffers. This adjustment remains uneven both across industries and within households. While lower interest rates have begun to ease debt-servicing pressures, sentiment among households remains somewhat fragile (Figure 1.9).
Footnote: Quarterly averages for Panel A.
1. Reserve Bank of New Zealand data, including debt on rental properties.
Source: Reserve Bank of New Zealand; OECD, National Accounts database.
Cash-flow pressures in cyclical sectors—particularly construction, hospitality and retail—have eased somewhat due to lower borrowing costs but remain elevated. Interest coverage ratios have improved only gradually and remain below historical norms in some sectors. Credit demand from SMEs remains weak, reflecting cautious sentiment, delayed investment plans, and high credit costs. Indeed, credit conditions for businesses remain uneven. Large corporates generally maintain diversified access to funding and have benefited from improved external conditions and stronger balance sheets. In contrast, SMEs continue to face more restrictive lending conditions and higher collateral requirements partly due to weak bank competition and shallow capital markets for debt (Chapter 4). Bank surveys indicate that risk appetite remains cautious, reflecting uncertain demand, higher input costs and subdued investment intentions.
Household vulnerabilities remain a source of risk. Elevated debt-servicing burdens continue to weigh on more leveraged households, and some borrower cohorts remain vulnerable to further income or interest-rate shocks. Debt levels remain high by international standards (Figure 1.9, Panel B), and although debt-service ratios have eased from recent peaks, they remain sensitive to interest rate changes. The share of households with elevated debt-to-income ratios has declined modestly following the earlier tightening cycle, but vulnerabilities could re-emerge if inflation pressures pick up or income growth remains weak.
Housing market volatility remains an important channel for macro-financial spillovers, with implications for household consumption, bank loan portfolios and broader financial stability. The market has moved from a period of significant adjustment into an early stabilisation and recovery phase. House prices have broadly stabilised since late 2024, while house sales have shown a modest rebound from earlier trough (Figure 1.9, Panel A), supported by lower mortgage rates and gradually improving buyer sentiment. New construction activity remains below its long-term average, although it has shown early signs of recovery.
Macroprudential tools play a central role in containing housing-related risks. Loan-to-value ratio (LVR) restrictions were eased in December 2025. For owner-occupiers the share of new lending with LVR above 80% will increase from 20% to 25%, and for investor lending the share with LVR above 70% will rise from 5% to 10% (RBNZ, 2025). In line with the recommendations in the previous OECD Economic Surveys (Table 1.4), a new debt-to-income (DTI) framework was introduced in July 2024. The framework limits new owner-occupier loans with DTI above 6 and investor loans with DTI above 7 to no more than 20% of new commitment. This complements existing tools by curbing high-risk lending and reinforcing resilience among new borrowers. Maintaining close coordination between monetary and macroprudential policy will be crucial to mitigate procyclical dynamics as the housing market recovery gathers pace. Having both functions housed with the central bank, as in the RBNZ model, strengthens this coordination by enabling more integrated risk assessment and policy responses.
Broader downside risks persist. A more prolonged domestic slowdown, renewed weakness in the housing market or a deterioration in global financial conditions could intensify pressures on households and firms. Climate-related events also continue to pose material risks to agriculture, infrastructure and insurance. The overall policy stance remains broadly appropriate to address these uncertainties, although continued vigilance and proactive risk monitoring are warranted.
The headline general government balance declined from an average of 0.8% of GDP from 2014 to 2018 to - 3.2% of GDP from 2023-2025. Large fiscal policy support during the Covid-19 pandemic resulted in one of the largest increases in public debt in the OECD from 37% of GDP in 2018 to 59% of GDP in 2025 (Figure 1.10). As a result of higher debt and interest rates, interest costs on public debt have risen from a trough of 1.2% of GDP in 2020 to 2.2% in 2025 and are expected to continue rising to 2.3% of GDP in 2027.
Source: OECD Economic Outlook database.
1.4.1. In the short-term fiscal policy should be tighter
New Zealand has a structural fiscal deficit following the permanent increase in spending during the Covid-19 period (OECD, 2024a). A comprehensive consolidation programme has been in place since 2024, and substantial progress has been made. OECD estimates suggest the structural general government balance has increased from -around -4% of GDP in 2023 to around -1.4% of GDP in 2025. In the short-term, the government plans to return its measure of the central government headline fiscal balance (Crown Operating Balance before gains and losses excluding ACC OBEGALx) to surplus by the June 2029 fiscal year. Based on the post Covid-19 difference between the two this would imply a target of a small deficit of around 1% of GDP in SNA general government terms. While some consolidation has occurred in the early years of the programme, much of the remaining adjustment is scheduled for later in the forecast horizon. OECD estimates, like the Treasury’s, imply that fiscal policy loosens in 2026. Given the structural balance is still in deficit and the economy is entering a recovery, some additional consolidation would be warranted in the short term. However, this should be gradual, as activity is only beginning to recover following around three years of close-to-zero average growth, and downside risks, notably those stemming from heightened geopolitical tensions in the Middle East, remain elevated.
Adjustment to date has been achieved primarily through expenditure restraint. The annual operating allowance was reduced sharply for 2025, from NZD 2.4 billion (0.5% of GDP) to NZD 1.3 billion (0.3% of GDP), although it is set to return to NZD 2.4 billion per year over 2026-29. There is a welcome emphasis on spending efficiency (Table 1.5). This has included capping central administration agency budgets following a large increase in public servant numbers and spending on consultants from 2017 to 2023. In line with international best practice the government has focused on using spending reallocation to finance new initiatives to boost growth with a review of baseline spending to identify savings (Tryggvadottir, 2022). This is an important shift away from a budget process orientated towards introducing new policies by allocating the new operating allowance, which appears to have contributed to a ratcheting up of the allowance through the Budget process, sometimes with limited justification (OECD, 2024a).
Fiscal support measures have also been well designed. Temporary energy‑support measures announced in March 2026 in response to rising energy costs due to the Middle East conflict, notably an additional, targeted income tax credit that will be de-activated after 12 months or when prices fall below a predefined trigger, are consistent with international best practice in being timely, targeted, temporary and maintaining energy saving incentives (Hemmerlé et al., 2023). The use of an explicit price‑based trigger is particularly relevant, as international experience shows that ensuring such crisis‑related energy support measures are unwound in a timely manner is often challenging, and automatic exit mechanisms help safeguard fiscal discipline.
In the 2025 budget, the government implemented NZD 5.3 billion (1.2% of GDP) per annum of savings, reprioritisation and revenue measures, including reprioritising around 0.6 billion into frontline, priority education initiatives. Including a systematic annual expenditure review as part of the Budget process would be an important addition to the fiscal framework, helping cement this key shift in fiscal policymaking. In line with the principles-based fiscal framework the government could choose the scope of the annual exercise but would need to satisfy parliament that the exercise was material and improving the efficiency of public spending. An independent fiscal institution could help parliament make this assessment.
1.4.2. Ageing is putting serious pressure on long-term fiscal sustainability
In the 2025 financial year to June net core Crown debt was 41.8% of GDP and forecast to peak at 46.9% in 2029 (New Zealand Treasury, 2025b). New Zealand principles-based fiscal framework takes a long-term approach to fiscal management including management of the Crown’s balance sheet. Under this framework, the government’s short-term goal is to put net core Crown debt on downward trajectory towards 40% of GDP, which it is addressing through expenditure restraint over the medium-term. Once the debt is below 40%, the long-term goal is to maintain net core Crown debt between 20% and 40% of GDP. Without reforms strong longer-term cost pressures arising from ageing (New Zealand Treasury, 2025c) will eventually put significant upward pressure on public debt. OECD estimates suggest as New Zealand’s population ages with unchanged policies, costs relating to health, long-term care and pensions will increase by around 5% of GDP by 2060 (Figure 1.11).
Annual cost, change between 2025 and 2060
Source: Guillemette and Château (2023).
Based on the average wedge between the two series from 2021-2025, New Zealand’s net Core Crown debt target of 20-40% of GDP implies an internationally comparable SNA general government gross debt target of around 40-70% of GDP, compared to 60% of GDP in the EU. New Zealand’s target is well below OECD average general government debt of 110% of GDP but maintaining low public debt is essential for maintaining fiscal buffers (Figure 1.12). New Zealand’s vulnerability to natural disasters (Fall et al., 2015) means prudence would call for aiming towards the bottom of the target range.
Public debt, general government, percent of GDP
Note: The "current policies" scenario is based on the OECD Economic Outlook database until 2027 and the OECD Long-Term Economic Model thereafter. The “prudent path scenario” assumes consolidation via the measures outlined in Table 1.7. The “prudent path with growth impacts of structural reforms scenario” assumes additional annual real GDP growth of around 0.2%pts with policies outlined in Table 1.6.
Source: OECD long-term model.
Estimates show that around 10% of GDP per decade has historically been needed to respond to major shocks such as earthquakes, floods and pandemics (New Zealand Treasury, 2025c). Indeed, transitioning to a net zero GHG emissions economy and adapting to climate change will likely impose further public capital expenditures to underpin the transition of the electricity system (Chapter 2) and reinforce public infrastructure against increasingly frequent extreme weather events, which are already causing significant damage (OECD, 2024a). Lower debt also reduces interest costs, freeing resources for public investment needs including infrastructure (Treasury, 2010), which are high (Chapter 4) and a key factor underpinning New Zealand’s AA+ credit rating despite these vulnerabilities (S&P, 2025).
Under current policy settings including planned fiscal measures in 2026 and 2027 but not subsequently, the budget deficit would eventually increase again, putting the public debt ratio on steep upward path (Figure 1.12). Putting public debt back on a downward trajectory is key to preserving fiscal resilience, ensure intergenerational equity, and uphold policy credibility (McLiesh, 2023; Barnes & Lord, 2009). New Zealand must reduce debt to rebuild fiscal buffers, while simultaneously boosting GDP growth through productivity-enhancing reforms (Rennie, 2025). To move net debt to its pre-Covid level of around zero and gross debt to 40% of GDP and increase GDP and especially productivity growth requires a package of additional savings or revenues beyond 2027 of around 2.8% of GDP as well as structural reforms. Box.1.3 provides a menu of measures that would achieve this plan and are consistent with the recommendations in this Survey including structural measures to boost growth that require extra spending on for example gradually shifting towards exempt-exempt taxed (EET) for financial savings and reducing dividend payments from the partially state-owned generator-retailers.
Balancing short‑term consolidation with the need to invest remains a central fiscal policy challenge. While rebuilding fiscal buffers requires restraint on current primary expenditure, international experience suggests that growth‑enhancing public investment should be protected even when debt and interest costs are elevated. Well‑designed, one‑off investment injections, including in infrastructure, venture capital, and business growth and innovation funds, can lift potential output, crowd in private investment and strengthen the future tax base, helping debt ratios fall over time rather than rise.
This box summarises potential medium-term impacts of selected budgetary and structural reforms included in this Survey on GDP (Table 1.6) and the fiscal balance (Table 1.7). The quantification impacts and the packages of reforms are only illustrative. The estimated fiscal effects include only the direct impact and exclude potential behavioural responses that might occur due to a policy change. While recommended reforms in this Survey have budget and GDP implications, not all can be quantified due to model limitations. One off capital expenditures, for example investments in new electricity generation and health digitalisation infrastructure, are not included as they have no or only a one-off effect on the fiscal balance.
Source: OECD long-term model and OECD Secretariat calculations
Source: OECD Long-Term model and OECD Secretariat calculations.
Note: Effects are long-term unless otherwise noted. Land‑rezoning revenue estimates assume a limited realisation window. Fiscal impacts depend on how quickly the tax becomes payable following rezoning. Estimates assume that windfall gains are taxed on sale or deemed realisation within a maximum of five years after rezoning. International experience including in Victoria, Australia shows longer deferral periods would delay revenue, weaken incentives to bring land to market and increase land hoarding. Electricity costs estimates are based on the rule of thumb that a 5% increase in electricity prices reduces economy‑wide productivity by around 0.4% (André et al, 2023). Environmental taxes from these reforms may decline if consumers shift to smaller cars in response to the policy. Means‑testing of public pensions for the top income decile is assumed to be phased in over time, with savings rising gradually and reaching around 0.1% of GDP only by the late 2030s (see Figure 1.13, Panel B). In the near term, these savings are smaller and are partly offset by transitional fiscal costs associated with facilitating higher private pension saving, including revenue deferral from improved tax treatment or higher contributions. Net short‑term fiscal effects are therefore modest, while long‑term fiscal savings are substantially larger. Introducing a New Zealand Equity Savings Account (NZESA) with Exempt-Exempt-Taxed (EET) short‑term fiscal impacts are measured relative to continuation of the current Taxed‑Taxed‑Exempt (TTE) treatment of financial savings. Initial revenue effects reflect lower taxation of returns within the account, partially offset by diversion of savings from lightly taxed or untaxed alternatives and by gradually increasing taxation on withdrawal. Over time, larger accumulated balances and exit taxation are expected to broadly offset early revenue deferral, making the reform close to revenue‑neutral in present‑value terms under standard assumptions. Support to growth equity estimates are calibrated to international practice and assume low initial IPO volumes; costs would rise only if public market activity increased significantly.
One approach to consolidation is to constrain all forms of public expenditure equally during consolidation episodes. However, such an approach risks being overly pro‑cyclical if it treats productive investment and recurrent spending as equivalent. A more durable strategy is to anchor consolidation in tight control of operating expenditure, while pairing it with a targeted package of growth‑enhancing investments and structural reforms. This longer‑term perspective helps reconcile near‑term fiscal discipline with the need to raise productivity and living standards and ultimately supports fiscal sustainability.
1.4.3. Comprehensive pension reforms are the key to achieving fiscal sustainability
Like many OECD countries, ensuring fiscal sustainability and adequate retirement income for all in the face of rapidly ageing population is one of the most demanding policy challenges facing New Zealand. Eligibility for the universal public pension (New Zealand Superannuation) begins at age 65, with around 870 000 people (16% of the population) over this age in 2024 (Box 1.4). The share of the population that is eligible will continue to rise, reaching 20% in 2035 and 26% by 2065. The problem is pressing. As in other OECD countries rising public pension costs are already biting, having increased by 0.4% of GDP to 5.4% between 2019 and 2025. Without policy change they will continue to steadily rise, reaching 6.4% by 2035 and 7.8% of GDP by 2060.
Most OECD countries rely on combinations of earnings‑related public pensions often funded through mandatory social security contributions and compulsory private savings. By contrast New Zealand depends heavily on a universal flat‑rate pension funded from general revenue with voluntary private savings. The system combines three main elements NZ Superannuation, the New Zealand Superannuation Fund (NZ Super Fund), and KiwiSaver. NZ Superannuation is a universal, flat‑rate public pension payable from age 65, with residency criteria but no income or asset test. This flat‑rate system produces a distinctive income distribution among retirees, with public transfers making up a far larger share of income for low‑income retirees, while private savings dominate for higher earners (OECD, 2025; Retirement Commission, 2024). Indeed, consistent with the OECD’s Tier‑1 classification New Zealand Superannuation’s primary function is poverty prevention. It is the dominant income source for older New Zealanders with 40% of people aged 65 and over relying almost entirely on NZ Super for income, and another 20% have only a small supplementary amount (Retirement Commission, 2024). The NZ Super Fund is a sovereign wealth fund established to partially pre‑fund future NZ Superannuation costs in response to population ageing. KiwiSaver, New Zealand’s voluntary auto‑enrolment defined‑contribution system, complements NZ Superannuation by facilitating private savings. As of 2024–25, the government has implemented changes including raising default employee and employer contribution rates from 3% to 3.5% in 2026 and 4% in 2028 and reducing the government contribution from July 2025 (New Zealand Government, 2025). KiwiSaver funds are invested by default in balanced funds if the investor makes no choice and are low‑fee (Financial Markets Authority, 2023). Default funds are subject to prescribed asset‑allocation settings that aim to balance growth and risk across the life‑cycle: default balanced funds must hold a diversified mix of growth assets (such as equities and property) and income assets (such as fixed interest and cash), while lifecycle options gradually reduce exposure to growth assets as members approach retirement, unless individuals actively select a different fund or investment strategy.
Important foundations for tackling the public pensions challenge have been laid. These include establishing the New Zealand Superannuation Fund (NZ Super Fund), a sovereign wealth fund, to accumulate assets to help smooth future spending pressures, and a voluntary private pension scheme, KiwiSaver (Chapter 4). Despite long running debate about the re-design of public pensions, including the age of eligibility, no political and social consensus has yet emerged in part because retirement policies usually have many objectives and constraints from equity to fiscal sustainability. Achieving multiple policy objectives and strong interactions between public pensions and other policies and private savings behaviour calls for designing a wider policy package of reforms to the public pension, KiwiSaver and as well as the sovereign wealth fund, NZ Super Fund. These reforms should also consider that a key part of most New Zealanders retirement income strategy is to own a mortgage-free home by retirement.
Implementing reforms as a cohesive package is essential to achieving fiscal sustainability while delivering high standards of retirement income, and doing so in a way that mitigates potential adverse effects on household saving incentives and ensuring fairness across generations, genders, and income groups. New Zealand’s public pension replacement rate is one of the lowest in the OECD because NZ Superannuation is a flat-rate benefit that does not scale with lifetime earnings. Across the OECD, the average net replacement rate for mandatory pensions is 63% of pre‑retirement disposable income (OECD, 2025). In contrast, while NZ Superannuation provides strong income protection and poverty prevention for low-income retirees, replacement rates fall sharply for middle- and higher-income earners (Creedy et al., 2015). For workers earning 50% of the average wage the replacement rate is 65% in New Zealand, close to the OECD average, while at 100% of the average wage it is 40% (OECD 52%) and at 200% of the average wage, New Zealand’s net replacement rate is 20% (OECD 42%) of pre‑retirement net income. As a result, KiwiSaver and other private savings is essential for achieving adequate retirement income among middle‑ and higher‑income earners. Reforms that strengthen private pension accumulation through KiwiSaver and increase the role of the NZ Super Fund can therefore help reduce long-term pressure on public pension spending and limit the extent of future adjustments required to pension eligibility ages or replacement rates to make it sustainable (Box 1.5).
Nineteen OECD countries have made ad hoc increases to their statutory retirement ages in recent years (Mitchell and O’Quinn, 2024). In parallel, nine OECD countries have directly linked pension eligibility ages to life expectancy to maintain fiscal sustainability as populations age (Reilly, 2024). The automatic mechanisms adjust pension eligibility ages in line with changes in life expectancy, but the link is typically less than one-for-one, for example Sweden adjusts by roughly two-thirds of life-expectancy gains. This spreads the costs of longer lives more evenly across generations, reducing the need for repeated political negotiations about the retirement age (Whitehouse, 2007). Recent experience in France shows that these debates can be highly polarising. For New Zealand, adopting a similar automatic adjustment would enhance intergenerational fairness, ensuring that as people live longer on average, the ratio of retirement to work years is more constant across generations, which is key to maintaining both sustainability and adequacy in public pension systems (OECD, 2011). However, New Zealand’s situation is complicated by significant differences in life expectancy across ethnic groups, meaning a simple increase in the public pension age could have regressive effects, particularly for Māori and Pasifika, who on average have shorter life expectancy. Public pension reforms would therefore need to include redistribution and protection for vulnerable groups to avoid inequitable outcomes (OECD, 2011). Flanking policies could include enhanced support for older workers in physically demanding roles, stronger health and employment programmes, and transitional arrangements for groups facing lower lifetime receipt of the public pension.
As a long-lived sovereign wealth fund with known withdrawal demands, the NZ Super Fund can manage liquidity risk well: it can make long-run investments to increase risk-adjusted returns knowing its investor, the government will not suddenly demand its money back. The NZ Super Fund also has a proven record of managing project risk. It’s low exposure to liquidity risk and the deep knowledge and strong investment performance of the NZ Super Fund, returning 6.7% above the 90-day New Zealand Treasury Bill since inception, raises the question of whether the government should rethink its contribution policy for the NZ Super Fund and further increase the role of the NZ Super Fund in mitigating the government’s future public pension liability Government modelling estimates drawdowns to begin on a consistent and growing basis in the early 2050s. Despite substantial growth in the Fund’s balance by that time, its contribution to future pension costs will remain modest but material. Capital withdrawals plus tax payments are expected to cover about 12.7% of the net cost of superannuation by 2040, rising to around 16% by 2060 (Guardians of New Zealand Superannuation, 2025).
The contribution policy, laid out in the NZ Super Act 2001, links payments to fiscal conditions and projected pension liabilities. Due to higher asset values and lower projected pension liabilities as a share of GDP, budget contributions have been sharply reduced, from around NZD 900 million previously to NZD 61 million for the 2025/26 year, which was then diverted to the Elevate Fund, reducing the contribution to zero. From an investor’s and managing long-term pension liabilities perspective, the current policy seems counter-intuitive: the higher the NZ Super Fund returns, the lower the subsequent government’s contribution. This is a consequence of the NZ Super Fund’s legislated contribution rate formula, which includes the Fund’s asset position as one of the parameters that affects contributions and withdrawals. However, the government could choose to override this and put in higher contributions than the formula requires. Continuing periodic contributions could help the government compound investment gains over time, strengthen intergenerational equity, and ease future fiscal pressures from population ageing. For example, increasing the contribution to 0.6% of GDP would eventually increase the fiscal balance on net (NZ Super Fund payout to cover public pension minus contribution to the NZ Super Fund) by 0.6% of GDP per annum (Figure 1.13, panel A).
Fiscal balance, percent of GDP
Note: Panel A shows the effect on the fiscal of increasing contributions to the NZ Super Fund from 2026 and then from 2040 using the resulting higher asset accumulation to cover a higher share of the public pension payouts. The NZ Super Fund is assumed to earn an annual nominal return of 8%. Panel B shows the effect on the fiscal balance public of means testing the public pension payout for the top income decile. The means testing is calibrated so that government would reduce the public pension by half of the extra income stream the household is estimated to receive from higher asset accumulation in KiwiSaver.
Source: OECD Secretariat calculations.
Taxation reform can play a strong role in increasing private pension accumulation, reducing implicit future public pension liabilities. New Zealand’s tax‑tax‑exempt (TTE) treatment of financial savings including pensions combined with light taxation of housing is complex and unusually distortionary by OECD standards. New Zealand, along with Australia and Türkiye are the only OECD countries using an income based TTE system. Almost all OECD countries use EET or TEE, with EET being the most common. New Zealand’s TTE taxation of retirement saving significantly suppresses long‑term wealth accumulation relative to expenditure‑tax benchmarks such as EET (Coleman, 2024). Lower accumulation increases the share (around 40%) of individuals reaching age 65 with insufficient private savings and fully reliant on the public pension, heightening the government’s implicit future pension liability. Moving KiwiSaver toward a more EET‑consistent structure would therefore strengthen both retirement adequacy and the long‑run resilience of the public pension system As part of an overall reform of New Zealand’s capital and savings income taxation regime, the government should gradually shift the burden of taxation of pension savings from contributions and returns towards withdrawals (Chapter 4).
Tax relief on contributions to pensions and investment returns reduces government revenue in the short term. Calculations based on KiwiSaver funds under management and assumptions on return rates by asset class suggest that the government receives an estimated NZD 1 billion (0.2% of GDP) in revenue from taxation of investment returns. However, the location of wealth matters. Greater private pension accumulation strengthens retirement adequacy, reduces future fiscal pressures, and builds domestic capital markets. This is the case even if national wealth is unchanged in a static accounting sense, which assumes the government is as good an investor as the private sector. These distributional and behavioural considerations justify exploring tax relief on KiwiSaver savings within a broader savings‑tax review (Chapter 4).
Transitioning towards an EET regime has two main drawbacks: an upfront loss of fiscal revenue and a tendency to benefit high income individuals facing high marginal tax rates (OECD, 2024). The short‑term fiscal impact of reducing tax on KiwiSaver returns could be managed through phased implementation. For example, applying the new treatment only to accounts opened after a particular date, or gradually extending eligibility by age. One option for maintaining long-term revenue sustainability would be to pair tax‑free returns with a modest withdrawal‑phase tax. Although the government would collect tax later rather than earlier, households would still benefit materially from decades of untaxed compounding, particularly those with lower accumulated balances. For example, a revenue neutral reform of removing taxation on KiwiSaver dividend and interest returns and replacing them with a one-off exit tax at the minimum retirement age could increase total private pension accumulation by around 75% of GDP by 2060 in net present value terms even with no change in contributions, helping to boost funding for capital markets (Chapter 4).
The long‑term fiscal assessment is sensitive to the choice of discount rate (Box 1.6). The illustrative modelling uses the social time preference rate, which is close to the government borrowing rate and therefore consistent with the intertemporal budget‑constraint relevant for tax‑timing questions. Using a higher discount rate closer to expected market returns would reduce the estimated net fiscal gains from shifting toward more EET‑like treatment but does not alter the direction of the effect: untaxed compounding inside KiwiSaver materially increases private retirement balances under auto‑enrolment.
For tax‑timing questions, such as comparing TTE with EET systems, the appropriate benchmark discount rate is the government’s intertemporal budget‑constraint rate, typically approximated by the government borrowing rate. Under standard public‑finance conditions (constant tax rates, no liquidity constraint, and discounting at the budget‑constraint rate), TTE and EET systems are present‑value equivalent (Atkinson-Stiglitz, 1976; Diamond an-Mirrlees, 1971a; Diamond and Mirrlees, 1971b; IFS, 2011) for government revenue. The social time preference rate is appropriate for evaluating long‑term public objectives such as retirement income adequacy and intergenerational equity and is typically close to the government borrowing rate. If a high commercial rate is incorrectly applied to a tax‑timing problem, it will mechanically imply that tax deferral is fiscally expensive, thereby biasing analysis toward short‑term revenue collection and against long‑term retirement saving incentives. A lower discount rate than the commercial rate of return discount rate is also appropriate even for considering the NZ Super Fund investment. Empirical studies find that Sovereign Wealth Funds face no explicit liabilities and minimal liquidity constraints, consistent with a lower opportunity cost of capital than private investors (Bortolotti, Fotak & Megginson, 2015).
As private pension wealth expands, pressure on future public pension expenditure can ease, improving fiscal sustainability while supporting retirement income adequacy. An overall beneficial tax change may still result in some losers and some significant winners depending on their income, investment horizon and personal circumstances, such as employment status and proximity to retirement. To ensure equity, exit tax rates could be calibrated by age at reform to ensure no cohort pays more in present value terms than under the annual regime. To maintain progressivity, the one-off tax could also be calibrated based on the investor’s prior annual tax rate or means testing of public pension could be introduced (Figure 1.13, panel B). Further progressivity could be achieved by exempting a modest asset threshold from the one-off tax and applying a gradually increasing rate above that level.
Because wealth is highly concentrated, with the top income decile estimated to be holding around 50% of KiwiSaver assets, substantial wealth accumulation benefits would also accrue to higher income households from removing tax on KiwiSaver returns. A quid pro quo would be to means test their access to public pensions based on the extra revenue they accrue from higher KiwiSaver balances due to the pensions savings returns tax reform. Confining means testing to the top income decile would also help minimise the private pension savings disincentive effects, although these appear to be tiny when tax changes are made inside an auto-enrolment scheme like KiwiSaver (Chapter 4). Indeed, assuming the extra private pension wealth is converted into an annuity paid over 22 years (life expectancy at 65 in New Zealand), and the government claims 50% of this income stream via paying lower public pensions to the top income decile due to means testing of the public pension, can also generate substantial cost savings and improvement in the fiscal balance over time (Figure 1.13, panel B).
1.4.4. Scaling up digitalisation and AI could help reduce health cost pressures
New Zealand, like other OECD countries, faces strong pressures on public health expenditure that is expected to rise by around 2.6% of GDP between 2025 and 2060. This is due to population ageing combined with Baumol’s cost disease, where wages in labour-intensive, low-productivity sectors like health rise to match high-productivity sectors. Empirical studies attribute 20–80% of health expenditure growth to this effect, especially in labour-intensive services like diagnostics and long-term care (OECD, 2025f). However, digitalisation and especially AI offer an opportunity to make significant fiscal savings while preserving heath care quality. AI offers the possibility of a structural break by automating tasks previously considered non-automatable, such as interpreting PET and MRI scans, triaging cases, and assisting robotic surgery (Chapter 3). OECD analysis and academic studies estimate that AI could offer potential savings of 5–10% of total health spending (Sahini et al., 2022). If a package of reforms is implemented to foster scaling up of AI and digital technologies in health (Chapter 3) potential savings appear potentially significant. Illustrative simulations of the OECD long-term model improving health sector productivity consistent with the top end of this range of savings suggest an improvement in the fiscal balance of around 1 percent of GDP.
1.4.5. There is potential to raise more revenue from environmental taxes and land rezoning
Revenue reforms can also play a role in achieving sustainability. New Zealand’s tax-to-GDP ratio was 33.7% in 2023, in line with the OECD average. With the caveat that unusually New Zealand imposes VAT on public services boosting recorded VAT revenue by around 1% of GDP, New Zealand has a higher reliance than average on value added taxation, which accounts for 29.2% (around 26% excluding VAT on public services) of revenues (OECD 20.5%) and corporate income taxes (12.6% versus OECD 11.9%) and taxes on property (5.9% versus 5.1%). Combined taxes on personal income and social security contributions are 41.7%, well below the OECD average of 49.2%. Some of the common relatively efficient options for raising revenue in OECD countries have already been exploited. Notably, exemptions from the Value Added Tax (VAT) standard rate of 15% are minimal as shown by a VAT Revenue Ratio (VAT collected/maximum potential revenue) of 0.96, one of the highest in the OECD.
Nevertheless, opportunities to raise revenue by improving the tax mix remain. As discussed in the OECD Economic Survey of New Zealand 2024 taxing windfall gains (Murray, 2021) from rezoning land from rural to residential use could help meet fiscal needs including for more climate resilient infrastructure. Illustrative simulations of a 50% tax on windfall gains from the typical annual volume of land rezoning at the Auckland urban boundary suggests this tax could raise around 0.3% of GDP in the long run. Short-term cashflows from this tax would depend on the liability deferral rules. In Victoria, Australia, the tax liability on rezoning can be deferred for up to 30 years or until sale. This has limited initial cash flows and seems too generous, encouraging land-banking and delayed sale of the land, when rezoning from farming to residential land presumably means there is a need for new housing. Fiscal impacts depend on how quickly the tax becomes payable following rezoning with the estimates above assuming that windfall gains are taxed on sale or deemed realisation within a maximum of five years after rezoning. Longer deferral periods would delay revenue, weaken incentives to bring land to market and increase land hoarding. The proposal would go beyond existing rezoning rules (IRD, 2025), which only tax gains when a property is sold within 10 years and at least 20% of the gain is due to zoning or related regulatory changes, with exemptions and notably zone changing for farmland further limiting coverage. As a result, many large rezoning windfalls go untaxed because owners can wait out the time limit or qualify for exclusions. A dedicated windfall gains tax would therefore capture rezoning betterment more consistently by taxing the uplift directly, independent of sale timing or intention tests.
Environmental related taxes accounted for 4.75% of total revenue in 2022, above the OECD average of 4.3%. However, as households move towards hybrid and electric vehicles (EVs), New Zealand like all OECD countries faces replacing taxes on fossil fuels with other revenue to cover the road, infrastructure and other costs associated with passenger vehicles, while at least preserving the incentives to move to EVs that current charges impose. An Emissions Trading Scheme (ETS) charge and a Fuel Excise Duty (FED) is currently built into the price of petrol, the dominant fuel in cars in New Zealand. The government proposes to remove the FED and replace it with road user charges for all passenger vehicles starting in 2027. Road user charges currently increase progressively with vehicle weight beyond 3 500kg but the schedule is not sufficiently graduated below 3 500kg. Indeed, the proposed flat charging per kilometre schedule on vehicles weighing up to 3 500kg is not sufficiently aligned with the social costs as it lumps together small three door city cars, large SUVs and internal combustion engine (ICE) vehicles and EVs. Imposing a more graduated road user schedule by vehicle weight below 3500kg would provide an opportunity to increase total revenue beyond current fuel excise taxes. A graduated schedule should be calibrated to take account of higher risk of injury and death for pedestrians, cyclists and occupants of other vehicles that heavier vehicles impose (Robinson et al. ,2026).
In addition, while the Emission Trading Scheme (ETS) appropriately internalises the climate externality of emissions it is targeted on emissions. Relying on the ETS alone after the removal of the FED would materially weaken incentives to electrify the vehicle fleet, which may be justified for reasons beyond emission reductions. The FED currently adds around 70 cents per litre to petrol prices, more than twice the price signal implied by the ETS alone (around 20-30 cents per litre). Removing this component without replacement would significantly narrow the operating‑cost advantage of EVs relative to ICE vehicles. Maintaining a strong differential in operating costs between ICE vehicles and EVs is therefore important not only for emissions reduction but also on energy‑security and economic‑resilience grounds. New Zealand is highly exposed to disruptions in imported liquid fuel supply, with potentially severe consequences for transport, supply chains and critical services. This vulnerability is underscored by recent conflict in the Middle East. Accelerating transport electrification would materially reduce exposure to such shocks by shifting energy demand toward domestically produced electricity. From this perspective, preserving and, if necessary, strengthening incentives for EV uptake should be treated as a strategic national priority.
A graduated road user charges schedule could be coupled with congestion charging, especially in Auckland where it is estimated that congestion will cost NZD 2.6 billion (0.6% of GDP) in 2026 (EY and ARUP, 2025). Simulations of a three weight-tiered graduated road user charges scheme calibrated to New Zealand passenger vehicle fleet weight combined with a moderate congestion charge in Auckland suggest that 0.3% of GDP could be raised while better taking account of all externalities that private passenger vehicle impose. Revenue may gradually decline if the policy successfully incentivises a consumer shift towards smaller cars.
1.4.6. Balance sheet management has an important role to play
Efficient use of the Crown’s large balance sheet can also have a large effect on fiscal performance. Having made a political choice about the level of state involvement in the economy, it is essential for fiscal sustainability to manage these assets well. The Crown’s balance sheet has more than doubled in size since 2014, reaching NZD 571 billion (131% of GDP) in assets and NZD 380 billion (87% of GDP) in liabilities in 2024. However net worth is projected to decline by around 10% by 2029 if current policy settings remain unchanged (Treasury, 2025a). Ageing social assets, underperforming commercial entities, and risk exposures in the financial portfolio need to be addressed.
New Zealand’s approach to balance sheet management has been largely procedural, focusing on better information and monitoring rather than full integration of Sovereign Asset and Liability Management (SALM) principles and comprehensive coordination across portfolios and contingent liability monitoring (Treasury, 2025c; OECD, 2018). In a similar approach to expenditure reviews, the government has announced a more proactive approach to management of the balance sheet assessing regularly whether assets are meeting their objectives or could be better met with another asset mix. A more proactive approach is line with OECD best practice, which calls for integrated SALM frameworks, regular fiscal risk statements, and active recycling of assets to optimise risk-adjusted returns and reduce vulnerabilities (OECD, 2018; OECD, 2023).
This process should start with ensuring that all Crown owned commercial entities including the partially Crown-owned electricity generator-retailers, have a purpose statement that reflects the government’s wider policy objectives (Chapter 4). This is a key step to be able to improve asset management to extract greater value from existing investments, ensuring capital allocation aligns with strategic priorities, and strengthening risk management practices to maintain resilience and creditworthiness (Treasury, 2025a).
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