New Zealand

   

Economic Policies

#11
Key Findings
Despite New Zealand’s small size and geographic remoteness, the country scores well (rank 11) in terms of economic policy. Its score on this measure has risen by 0.2 points relative to 2014.

The government has pursued a cautious, incremental approach prioritizing debt reduction. Nevertheless, growth has been moderate and stable over the last few years, at around 3%. Debt levels are moderate by OECD standards, showing steady small declines thanks to years of modest budget surpluses.

Unemployment rates have fallen to under 5%, the lowest rate since the 2008 crisis. The once-problematic drain of highly skilled workers to Australia has stopped. Labor-market policies have helped reduce youth-unemployment rates, but indigenous-community unemployment remains troublesome.

Taxes are comparatively low. Tax reductions were delayed in pursuit of a budget surplus, while a property tax imposed to control speculation was retained. R&D policy is a weakness, but private-sector spending is rising. A visa aimed at temporary workers was changed to require them to leave the country before applying for a new visa for a different position.

Economy

#23

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
New Zealand is widely known for the significant structural policy reforms introduced in the 1980s and 1990s. Despite strong early public opposition, these reforms have had a largely positive impact, and the resulting policies have remained largely intact. Yet New Zealand is also often cited as a country for which free-market reforms have not yielded the improvements in productivity, economic growth and living standards that were anticipated and promised by reformers. The demand for a return to growth became more insistent after the National government took office in 2008, with some blaming the minority nature of the National government for the slow and incremental nature of change. However, given that National has been able to implement a vast majority of its economic initiatives, responsibility may have less to do with lack of support from its junior support parties than with the cautious, pragmatic and poll-driven nature of the government’s economic agenda. This is not to ignore the wider context of the global financial crisis, which drove the New Zealand economy into recession, albeit less severely than in many other OECD countries. Fiscal surpluses, due in part to earlier reforms, swung to deficits. Getting back to a balanced budget has since been the pre-eminent issue on the government’s agenda. According to the 2017 OECD Economic Survey of New Zealand, economic growth has averaged around 3% over the past three years and is projected to remain strong through 2018. Whereas inflation increased somewhat to 2.2 % in early 2017, it then slowed down to 1.7% in the second quarter of the same year.

Citations:
OECD Economic Outlook, Volume 2016 Issue 1 (Paris: OECD 2016).
OECD Economic Survey of New Zealand 2017. http://www.oecd.org/newzealand/economic-survey-new-zealand.htm (accessed 12 July 2017).
Budget 2017. Fiscal Strategy Report. 25 May 2017 (http://www.treasury.govt.nz/budget/2017/fsr/b17-fsr.pdf) (accessed 18 September 2017).
Inflation. Reserve Bank of New Zealand (https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-inflation) (accessed 18 September 2017).

Labor Markets

#12

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Although the National-led government was reluctant to intervene directly in the labor market, New Zealand’s labor-market policy has been relatively successful. The unemployment rate was at 4.8% in June 2017, the lowest rate since December 2008 and the onset of the global financial crisis. Averaged over time, unemployment rates have risen less than in most OECD countries. In addition to longer-term measures to reduce non-wage labor costs, the government has concentrated on online information for job seekers (the Department of Labor’s Jobs Online Index) and on measures to build up skill levels in the workforce and address skill shortages. For a number of years, a major problem in this regard was the persistent loss of highly skilled workers to Australia. The volume of this expatriation rose at its peak to over 50,000 persons per annum, a significant loss for a country with a population of only 4.8 million. This trend has been stopped. In 2017, net migration amounted to over 70,000. However, skills shortages in the telecommunication, IT and construction sectors remain a problem. In April 2016, the Global Impact Visa policy was announced. A collaborative public-private sector approach, the policy aims to identify the best applicants from around the world and provide support as they integrate into the New Zealand economy.

In April 2017, changes were announced to the Essential Skills visa program, which is designed to facilitate the entry of temporary workers needed to fill employment shortages. These changes included requiring Essential Skills visa holders to leave New Zealand for a period of 12 months after having resided a maximum of three years in the country before they can apply for another Essential Skills visa to work in another low-skilled position.

Areas of concern remain, such as the differentials between urban and non-urban areas, and in terms of unemployment rates for the Maori and Pasifika populations (11.1% and 10.1% respectively for the second quarter of 2017). The unemployment rate for young people has been on the decline since 2008. This is mainly due to the government’s youth-based initiatives, including increased financial support for apprenticeship training, greater vocational preparation in schools and the introduction of a 90-day employment trial period. The rebuilding of Christchurch and the housing boom, especially in Auckland, stimulated economic growth. This has been sustained by sharp growth in tourism, a rise in net migration and an associated demand for housing, especially affordable housing targeted toward first-time buyers.

Citations:
Essential Skills Work Visa Changes. New Zealand Immigration. (https://www.immigration.govt.nz/about-us/media-centre/news-notifications/changes-temporary-migrant-work-settings) (accessed 21 September 2017).
Global Impact Visa policy. Ministry of Business, Innovation & Employment. 5 May 2016 (http://www.mbie.govt.nz/about/whats-happening/news/2016/global-impact-visa-policy) (accessed 16 September, 2016)
Quarterly Labour Market Report. Ministry of Business, Innovation & Employment. August 2017 (http://www.mbie.govt.nz/info-services/employment-skills/labour-market-reports/labour-market-analysis/labour-market-report/document-image-library/quarterly-labour-market-report-august-2017.pdf) (accessed September 19, 2017).

Taxes

#11

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
8
Taxation policy continues to successfully promote competitiveness and the generation of sufficient public revenues. Regarding equity, governments have followed a policy of equal treatment of tax types, including income earned outside New Zealand, but at relatively low rates. The National government reduced rates across the board in 2010, but at the same time increased the goods and services (GST) tax from 12.5% to 15%. The government has postponed plans for a new round of tax reductions in the face of its “zero budget” priority policy, with the goal of bringing the economy back into surplus. While it has resisted pressure from some media outlets, opposition parties and other sources to introduce a stamp duty and/or capital-gains tax on residential investment properties, in 2015 it was forced to respond to the property boom in Auckland by imposing a “bright line” tax on investors who sold their residential properties (other than the family home) within two years of purchase. As house prices continue to rise, quite dramatically in some regions, the Institute for Governance and Policy Studies in Wellington has argued that such a tax would increase government revenue and reduce distortions in the tax system. Moreover, it would address the issue of inequality in New Zealand.

In the lead-up of the 2017 general election campaign, the Labour Party promised to increase the period of eligibility for the “bright line” property tax from two to five years. Overall, tax policy emerged as one of the most divisive election issues, with the National and Labour parties offering significantly different proposals. Whereas the National Party focused on tax cuts, Labour promised to scrap those tax cuts in order to use the money for its policy pledges in areas such as fees (free education for tertiary students), a far more generous Working for Families package and a new universal payment of $60 a week for parents of newborn babies once paid parental leave runs out.

Citations:
Salmond, Rob. 2011. The New New Zealand Tax System: New Zealand Taxes in Comparative Perspective. Wellington: Institute of Policy Studies.
$857m to deliver a modern tax system. 26 May, 2016 https://www.beehive.govt.nz/release/857m-deliver-modern-tax-system (accessed 13 September, 2016).
Elliffe, Craig, 2014. Time to Examine the Sacred Cow of Capital Gains Tax. New Zealand Herald. 11 July 2014 (http://www.nzherald.co.nz/brand-insight/news/article.cfm?c_id=1503637&objectid=11290494).
Marriott, Lisa, 2016. Advancing Better Tax Policy. The role of wealth taxes in New Zealand. Institute for Governance and Policy Studies. University of Wellington. Policy Quarterly – Volume 12, Issue 3. August 2016 (http://igps.victoria.ac.nz/publications/files/4da6aee2dcb.pdf) (accessed 16 September, 2016).
Trevett, Claire, 2017. Election policies: Swords flash in tax battle. New Zealand Herald. 6 September 2017 (http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11917669).

Budgets

#3

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
New Zealand’s budgetary policy is fiscally sustainable. The advent of the world financial crisis ended 14 years of budget surplus. The National government stated very early on that a return to high-debt levels would be imprudent, and made decisions designed to ensure that gross debt peaked below 40% of GDP in 2010, well below the OECD average. In succeeding years, the National government maintained its course of fiscal consolidation. According to an OECD forecast, general government gross financial liabilities as a percentage of nominal GDP would decrease from 39.7% in 2016 to 39.1% in 2017 to 38.2% in 2018. Although opposition parties were highly skeptical of the way it was achieved, the government posted a modest budget surplus of NZD 275 million in 2015, the first such surplus since 2008. This trend continued into 2016 and 2017. The longer-term aim of bringing net debt down to 20% of GDP by 2020 appears to be more and more realistic. The government announced that it would only be willing to reassess this course if the economy were hit by a severe negative shock that might imply that sticking to the current fiscal strategy would harm the economy by forcing a sharp reduction in demand.

Citations:
Fiscal Strategy Report 2017 (http://www.treasury.govt.nz/budget/2017/fsr/b17-fsr.pdf) (accessed 21 September 2017).
OECD Economic Survey of New Zealand 2017 (http://www.oecd.org/newzealand/economic-survey-new-zealand.htm) (accessed 21 September 2017).
Government at a Glance 2013 – Country Note: New Zealand (Paris: OECD 2013).

Research and Innovation

#22

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
New Zealand policy regarding research and development (R&D) strategies and expenditure, high-technology employment and patent indicators is deficient, a situation criticized by the OECD. The OECD strongly recommends a coherent policy that makes more use of incentives for enterprises to invest in R&D and that steers and funds public infrastructure with regard to basic and applied research institutions. The problem does not seem to result from cumbersome bureaucratic procedures, but mainly has to do with New Zealand’s size and the geographical isolation, as well as the lack of large companies operating at an international level.

According to Statistics New Zealand’s Business Operations Survey, business spending on R&D has grown by more than 29% from 2014. While the government has increased spending on tertiary training in the fields of engineering and science, domestic expenditures on R&D as a percentage of GDP place New Zealand well down the list of OECD countries, including its closest economic partner, Australia. New Zealand spent 1.3% of GDP on R&D in 2016; the OECD average is 2.4%. Funds have been provided for the establishment of privately led regional research institutes, agricultural and biological research partnerships, and natural-hazards projects. In October 2015, New Zealand’s first national science strategy, National Statement of Science Investment (NSSI), was launched. The statement aims to establish a long-term strategy for government investment in science. Despite these initiatives, government spending on R&D falls far short of levels in many other OECD countries.

Citations:
Research and Development Survey: 2016. Statistics New Zealand. 29 March 2017. (http://www.stats.govt.nz/browse_for_stats/businesses/research_and_development/ResearchandDevelopmentSurvey_HOTP2016.aspx) (accessed 22 September 2017).
Callaghan Innovation: http://www.callaghaninnovation.govt.nz/ (accessed December 1, 2016).
First National Science Strategy launched. 5 October, 2015( https://www.beehive.govt.nz/release/first-national-science-strategy-launched) (accessed 13 September, 2016).

Global Financial System

#17

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
6
As a globally oriented country with a high degree of international economic integration, including financial market integration, New Zealand has a strong interest in promoting a stable, efficient and transparent international financial system. There is a commitment to preventing criminal financial activities, including tax evasion. The Inland Revenue department’s audit activities focus on cases in which multinationals appear to be avoiding taxes. In May 2016, it was announced that New Zealand had joined an OECD initiative to allow all participating tax jurisdictions to exchange information on the economic activity of multinational corporations among participating countries. In June 2017, New Zealand signed the OECD Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (known as the Multilateral Instrument). However, New Zealand is too small a player in the international arena to contribute proactively to the regulation and supervision of financial markets. It concentrates on regional arenas, such as the Asia-Pacific Economic Cooperation (APEC). Even here, the country has only limited ability to shape the regulatory process within multilateral institutions.

Citations:
NZ joins country-by-country reporting. Tax Policy – Inland Revenue. 18 May 2016 (http://taxpolicy.ird.govt.nz/news/2016-05-18-nz-joins-country-country-reporting) (accessed September 17, 2016).
New Zealand signs OECD Multilateral Instrument. Beehive. 8 June 2017. (https://www.beehive.govt.nz/release/new-zealand-signs-oecd-multilateral-instrument) (accessed 1 October 2017).
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