Opinion: Has New Zealand proven the OECD wrong?

By NZPA

Friday 27th April 2007

Has New Zealand proven the OECD's idea of best practice is wrong?
After 20 years of opening the economic doors to the world, the Paris-based think tank report on New Zealand this week shows us slouching near the bottom of the list of 30 countries measured and going backwards.

The report says New Zealand's economy faces an uncertain future and a more certain prospect of lower living standards without change.

"What really matters is living standards are quite a lot below the OECD median and they don't seem to be catching up," Deborah Roseveare, who heads the OECD's New Zealand desk, told NZPA.

Despite ranking near the top of the class for its policy and regulatory framework, productivity and saving is near the bottom.

Last month, figures showed labour productivity grew just 0.4% in the March 2006 year -- the lowest since the series began in 1988, and well off the pace of the 18-year average of 2.5% growth.

Roseveare said the reforms of the 1980s and '90s were essential and had contributed to productivity growth. Without them New Zealand would have been even worse off.

"New Zealand really deserves a reputation for having put in place a set of policy and labour market reforms that are pretty much best practice."

She admits the OECD is puzzled New Zealand hasn't performed better.

Roseveare believes part of the explanation is due to the huge swings the currency undergoes and its persistently high interest rates.

The volatile exchange rate has put businesses off taking the plunge into exporting, while high interest rates make business propositions less viable.

"It's not obvious what policy makers can do about it."
The OECD does not subscribe to the view that blames poor performance on New Zealand being a small and far away country.

What it does prescribe is better savings and it says Kiwisaver is a step in the right direction.

Stronger and deeper financial markets are needed. But why our share and bond markets are so shallow "leaves us scratching our heads".

It also pointed the finger at increased government spending contributing to inflationary pressures and economic imbalances.

But most of all, it needs to rethink its tax system so it is more closely linked to raising living standards.

Taxes needed to encourage people to work and save and invest, she said.

This could be achieved by having a flatter, more broadly-based system that would see lower income and company taxes and higher GST. Or, there could be a dual system that taxes capital as well as income.

The OECD report focused on the country's reliance on property as a savings vehicle, suggesting a capital gains tax -- a policy that New Zealand politicians dare not name.

Either way would be better than the current arrangement.
"We think it's timely for New Zealand to sit down to rethink its tax system."

Such a review would need much work but the Government quickly made it clear it would not even consider such a review.

The Government says it will not be implementing the suggested tax changes, selling off state owned enterprises, or raising the eligibility age for the pension to reduce spending.

Finance Minister Michael Cullen said New Zealand had already done enough by creating the New Zealand Superannuation Fund and reducing debt. "We have a sound strategy to shift the mix away from consumption to higher value exporting," he said.

Ganesh Nana, economist with independent think tank Berl, said New Zealand appeared to have given up on business, enterprises and workers delivering the investment and productivity improvements needed to fight inflation.

The decision yesterday of iconic manufacturer Fisher & Paykel to shift most of its laundry production to Thailand, with 350 jobs lost, added weight to that argument.

Nana agrees with the OECD that high interest rates to suppress demand and dampen inflation are problematic and the Reserve Bank is in danger of winning a Pyrrhic victory, obtaining its goals at too great a cost.

NZ Institute head David Skilling said New Zealand faced long-standing structural problems to raise productivity and thereby living standards.

"The lesson for New Zealand as a whole is how we extract far more value for each hour that people work, in terms of either finding more creative ways of producing, or alternatively being able to sell into larger markets where you can earn higher prices for whatever it is that you sell," Skilling said.

Westpac NZ chief economist Brendan O'Donovan said he was not surprised at the OECD criticisms of the New Zealand economy.

"New Zealand has been on a debt-financed binge, with extremely strong property price appreciation. Spending has been well ahead of income growth ... The growth outlook isn't as good as it was."

He believes the situation is worse than described.

"The imbalances are certainly not unwinding. They are exacerbated if anything ... There are huge imbalances that have to correct at some stage," he said.

Most economists come back to the old bogey of over-investment in property as core to our economic woes. However, no political party has the will to tackle the issue either by scrapping the favourable tax regime, and, or, imposing a capital gains tax.

Some 96% of New Zealanders' net wealth is associated with housing value.

"Underlying the current fragility of the NZ dollar and unsustainable economic growth appears to be a bias towards housing investments and poor financial savings," said Goldman Sachs JBWere economist Shamubeel Eaqub.

"Easier access to capital globally has facilitated increased activity in the NZ residential property market, where locals bid up in prices in buying and selling properties to each other without creating additional value to the economy."

To prevent such a drain on future generations as we have under the current framework, Eaqub called for open debate and bipartisan political collaboration -- noting that the "housing phenomenon" was a policy issue, not a monetary one that could be directly fixed by the Reserve Bank.

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