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New Zealand's low productivity presents long-term challenges to growth, OECD says

Thursday 15th June 2017

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New Zealand's low levels of productivity present long-term challenges to an economy with a strong short-term outlook, and policymakers should cut corporate taxes, free up foreign investment, expand infrastructure funding sources and review competition law, says the Organisation for Economic Cooperative and Development.

In its two-yearly review of the local economy and policy settings, the global club for rich countries again found New Zealand was experiencing strong economic growth with sound government finances. The country's biggest vulnerability was the high level of household debt and New Zealand's exposure to a growing tide of trade protectionism, while sub-standard productivity relative to the rest of the OECD meant living standards were restrained and could pose long-term issues for the nation.

"New Zealanders enjoy high living standards, with all components of the Better Life Index stronger than the OECD average except household disposable income and wealth," the report said. "GDP per capita is below the OECD mean owing to low labour productivity, and improving productivity growth is a major long-term challenge for improving inclusiveness and living standards."

Productivity has been a long-running problem for successive governments, with New Zealand's geographic distance restricting access to the global economy and reducing competitive pressures, while a high cost of capital stifles investment. The current administration sought to find answers to some of the more intractable issues by setting up the Productivity Commission in 2010.

The OECD recommends narrowing the screening of foreign investment and cutting the corporate tax rate to stir business investment, while reviewing competition and insolvency law would go some way to deal with the "indications that weak competition is an issue in New Zealand".

The international agency also recommends an overhaul of urban planning and infrastructure funding, with current policy settings providing a lack of incentives for local bodies to invest in amenities.

The OECD welcomed the government's proposed increase in the superannuation age of eligibility while saying an earlier adjustment than the 2037 transition period mooted "would better contain costs and would distribute the burden of adjustment more evenly across cohorts".

Unlike the International Monetary Fund, the OECD did consider the changing nature of labour markets in its survey, saying “employment has shifted towards high-skilled occupations, a trend that is likely to continue with further diffusion of digital technologies, including Artificial Intelligence”. Among the policy prescriptions thrown up, the agency encourages improved math teaching competency and a review of minimum numeracy levels for school leavers, and better matching of tertiary education paths to skills shortages.

The OECD also said the government should consider introducing unemployment insurance or introducing longer notice periods for laying off staff, with displaced workers likely to bear the brunt of the changing labour environment.


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