Having radically reformed its economy, society and its electoral and public management systems over recent decades, New Zealand is in good shape to tackle current and future challenges. The country has emerged from the global financial crisis relatively well, when compared to other OECD countries. Nevertheless, there are four problem areas where additional efforts for reform are advisable:
(1) Innovation. Although recent governments, including the current National Party-led minority government, have made further investments in tertiary education and research and development, there is a need to intensify these efforts, as comparative data for OECD countries has made clear. A related problem is that New Zealand does not invest enough in continuing job-based education and training. The country has understandably followed the tradition of Anglo-American liberal market economies (LMEs) which invest more extensively in transferable skills rather than in job-based training, as some continental European coordinated market economies (CMEs) do. Since the New Zealand economy is extremely small, other approaches, including those used in Scandinavian countries, may be well-suited to New Zealand’s conditions.
(2) Tax policy. Instead of pursuing a new round of tax reform, the government needs to tackle the politically sensitive priority of introducing a capital gains tax. The current situation provides a strong incentive for New Zealanders to invest in housing. Not surprisingly, the country has one of the highest rates of home ownership in the world. The downside is that these policies violate horizontal equity and potentially divert capital away from more productive uses. A capital gains tax on all but the family home would also help to tackle the problem of an overheated property market. Although there have been calls to include such a tax even from inside the current government in 2009, the prime minister has ruled out this option on the grounds that it would be too complex to administer.
(3) Regional development and governance structures. New Zealand is characterized by a large, and increasing, divide between urban centers and rural regions. Taking labor productivity as an example, in 2003 the regional labor productivity in Auckland, Wellington and Taranaki was between 15 and 30 percentage points higher than the New Zealand average; some rural areas were more than 20 percentage points below. Although more recent data are unavailable, the government has to increase efforts in creating a focused regional policy in both metropolitan and rural areas. Regional economic policies have to be accompanied by governance structures that geographically fit the problem area. The establishment of an elected, all-Auckland council may provide a good starting point.
(4) Government as agenda-setter. New Zealand’s political system is still characterized by majoritarian design. There are no institutional veto players, whose policy positions have to be anticipated by the government in its legislative activities (such as second chambers, constitutional courts or subnational governments with constitutionally guaranteed veto powers). However, the change to a mixed-member proportional electoral system has led to a multiparty system and the formation of minority governments. After more than a decade, the experience with this format is relatively positive. Governments seem to be able to be proactive with respect to reform agendas, and the performance of governments is not a disincentive for similar experiments in the future. However, the implementation of the government agenda is highly time-consuming. One thing that might help is to provide more time to seek greater policy coherence and consensus by increasing parliamentary terms from three years to four or five years.