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Reasons unclear why economy lagging


Tuesday 24th April 2007

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The OECD says reasons for New Zealand's persistent gap in living standards to other developed nations, despite wide-ranging reforms over the last 20 years, are not well understood.

The Organisation for Economic Co-operation and Development said in a report released today that New Zealand's economy was one of the group's most flexible and resilient.

However, increased government spending was contributing to inflationary pressures and economic imbalances.

"On current settings, it will take time for inflation pressures to dissipate and, notwithstanding a large fiscal surplus, strong growth in government spending is complicating the stabilisation task of the Reserve Bank," the survey's authors said.

Productivity growth, which the OECD called "lacklustre", was key to generating higher incomes and meeting the costs of an ageing population, such as rising health and pension obligations.

"Despite strong growth performance since the early 1990s and the adoption over the past 20 years of structural policies that are, for the most part, consistent with OECD best practices, living standard have remained some 16% below the OECD median for some years," the report's authors said.

To improve the country's economic performance, the OECD recommended the Government curb reliance on housing as a form of savings; reform the tax system, possibly increasing GST; improve retirement savings policies; and raise the retirement age due to increased life expectancy.

The Government had reformed the public pension system, raising the age of entitlement to 65 years and establishing the "Cullen Fund" to partly meet future superannuation liabilities.

However, further changes were needed to ensure fiscal sustainability over the very long run. The organisation suggested raising the age of pension eligibility further, and increasing superannuation payments at a slower rate than real wages.

The Government's voluntary KiwiSaver scheme starting in July was an "innovative approach to encouraging private savings for retirement, drawing on insights from behavioural economics".

The OECD agreed it should be voluntary as long as it produced the desired effects over the medium term. However, the organisation criticised provisions it said encouraged reliance on housing as a savings vehicle, such as financial advantages for first-home buyers.

Key to improving savings was the development of New Zealand's financial markets, small by OECD standards and dominated by bank loans as a source of financing.

Also important was a well-designed tax scheme, able to guard against risks to the tax base from increasingly mobile capital and labour.

"The New Zealand regime has long been regarded as one of the simplest and most efficient in the OECD. Looking forward, however, the system will face challenges."

One option was to adopt a dual income system, with a tax on capital gains at a lower rate than wages and salary.

Another option was to lower rates and a flatter structure to reduce efficiency losses, although the report noted that substantial tax cuts beyond those already signalled could lead to further interest rate rises.

Raising GST would help offset the cost of tax reform, with a one%age point rise generating almost $1 billion in revenue.

Among other concerns were the lack of availability of places under the Government's free early childcare policy; a sharper focus on outcomes in education particularly for Maori and Pacific Island youth; efficient provision of road infrastructure; and increased competition in network industries, such as telecommunications and electricity.

"To the extent that New Zealand is more exposed to macroeconomic volatility than most other OECD countries, the country should aim for regulations and institutions whose design and efficiency are at `best practice' levels," the survey said.

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