New Zealand

   

Economic Policies

#15
Key Findings
After years of restrained budgets, the country scores in the upper-middle ranks (rank 15) in terms of economic policy. Its score on this measure has risen by 0.2 points relative to 2014.

Successive governments have pursued a prudent, sustainable approach to spending. Growth has been moderate and stable over the last few years, at around 3%, but is showing perceptible declines. Debt levels are moderate by OECD standards, showing steady small declines thanks to years of modest budget surpluses. U.S.-China trade tensions have undermined business confidence.

Unemployment rates have fallen to under 4%. Labor-market policies have helped reduce youth-unemployment rates, but indigenous-community unemployment rates remains troublesomely high. Wage rates are showing only modest increases

Corporate taxes are high in international comparison. The incoming Labour-NZ First government rolled back planned tax cuts for families, and raised tax credits instead. The new government has also allocated funds for R&D tax incentives, with the goal of lifting R&D spending to 2% of GDP within 10 years.

Economy

#30

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
Under the previous National government (2008-2017), New Zealand experienced a steady recovery from the 2008-2009 global financial crisis, which saw the national economy enter into recession, albeit less severely than in many other OECD countries. The National government pursued a cautious, pragmatic and poll-driven economic agenda. The new Labour-led government has also followed a cautious approach, with prudent fiscal policy despite increased welfare and health spending. However, New Zealand was hardly immune to economic trends found elsewhere. Data from Statistics New Zealand indicates that economic growth slowed from around 3% over the three years 2014-2016 to 2.7% in the year to June 2018. In the third quarter of 2018 growth slumped to its lowest rate since 2013, with manufacturing and farm business particularly hard hit. Consequences included a weakening of the local dollar and low business confidence due to headwinds from U.S.-China trade tensions. Business investment slowed in the third and fourth quarters of 2018, driven by falling investment in plant, machinery and equipment. According to the OECD, economic growth is projected to edge down to 2.6% by 2020, mainly reflecting a slowdown in private consumption, which can be partly attributed to an unintended consequence of government policies such as diminished net immigration and increased financial support for families. Export growth is also set to decline. Inflation increased to 2% – the mid-point of its target range – in the second quarter of 2018. This represented a slight increase on the 1.7% rate of inflation experienced in the second quarter of the previous year; the CPI 2018-2019 forecast is 1.9%, and the inflation rate is projected to increase to slightly over 2% in 2019/20. Housing is a substantial social problem, driven by high costs, especially in Auckland, where it exceeds the OECD average. Inevitably, the cost of housing affects the poor most. Although the Labour party had campaigned during the 2017 election on the need to make housing more affordable, especially for low-income and first-time house buyers, the promise of a comprehensive program of low-cost housing construction proved excessively ambitious, especially in the short term. Despite the passing of the Overseas Investment Amendment Act 2018, which bans the sale of existing homes to non-residents as a means of easing the housing shortage in New Zealand (Singaporeans and Australians are exempt from the ban), house prices continued to grow in most urban centers. On a positive note, in the September 2018 quarter, the seasonally adjusted unemployment rate fell to 3.9 percent from 4.7 percent in September 2017. Despite an expansionary fiscal policy, the government deficit was projected to be 0.0% of GDP in 2018 (down from 1.2% in 2016), and government gross debt declined from 37.6% in 2016 to 36.0% in 2018. Further decline is projected. The government has started to address the need for improved economic and social well-being, especially in the area of child poverty, and the need to transition toward a more environmentally sustainable economy.

Citations:
OECD Economic Outlook, Volume 2018 Issue 2, preliminary version (Paris: OECD 2018).
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).
Key facts https://www.stats.govt.nz/information-releases/labour-market-statistics-septembe r-2018-quarter
CTU Montly Economic Bulletin – September 2018.

Labor Markets

#5

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
8
In recent times the New Zealand labor market has started to improve. Under the Labour-NZ First coalition government, the unemployment rate has declined from 4.7% in September 2017 (the lowest rate since December 2008) to 3.9% as of September 2018. While the under-utilization rate also fell (to 11.3%), the employment rate rose to 68.3% (with an annual increase of 0.6%). However, areas of concern remain. These include variations in the unemployment rates between urban and non-urban areas, between the North and South Islands, and, most critically, within the young, Māori and Pasifika (Pacific Island) populations.
Although still of concern, the unemployment rate for young people has been falling since 2008. In the September 2018 quarter, the seasonally adjusted rate for people aged 15–24 years who were not in employment, education or training, fell to 10.1% (from 10.9% in the previous quarter). While unemployment for 15-19 year olds was approximately 19%, for Māori it was 29%, down from 34.5% a year earlier. Similarly, the Pasifika rate of unemployment was 12.6% (down from 22.8% in 2017). For 20 to 24 year-olds, unemployment declined from 8.8% in June 2017 to 7.7% in June 2018. For Māori in this same age group, there was a sharp decline from 16.6% in June 2017 to 8.3% in June 2018. Annually, the largest occupational increases in employment occurred in: professional, scientific, technical, administrative and support services; wholesale trade; and in education and training. Wage rates however increased only modestly during this period, by 1.8% annually.

Citations:
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).
Key facts https://www.stats.govt.nz/information-releases/labour-market-statistics-september-2018-quarter
CTU Monthly Economic Bulletin – September 2018.

Taxes

#13

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 in New Zealand has been relatively successful in promoting competitiveness and the efficient allocation of public revenues. Available studies suggest that compliance costs are fairly low and that key strengths of the tax system are its very lean business environment and relatively simple legislation. But the system exhibits weakness in achieving vertical equity and addressing inequality in society. The personal income tax system is less effective in reducing inequality compared to most other OECD countries. The same can be said for the inequality-reducing effects of the tax and transfer system, which are similar to those of Canada, but smaller than 26 other OECD countries.
For the 2015/16 year, central government taxes represented 30.5% of GDP and local government taxes represented 2.2% of GDP (combined OECD average was 34%). The largest share of revenue comes from personal income, together with company and goods & sales (GST) taxes. New Zealand does not have social security taxes and there is no tax on capital gains, although a “bright line” tax was introduced for property investors in 2015 (see below).
New Zealand collects the fifth highest amount of personal tax as a percentage of GDP among OECD countries. The personal income tax system is based on a broad-based, low-rate framework with a relatively flat tax scale (the top tax rate begins to apply at the relatively low level of 1.2 times the average wage). While the country has the sixth lowest rate of GST, collections amounted to 31% of total tax revenue in 2017 and about 10% of GDP, the highest proportion in the OECD. GST is regressive, with the lowest decile of households by income paying approximately twice the proportion of their income in GST than the highest income households Corporate taxes, which comprise 4.4% of GDP at a rate of 27% in 2017, are higher than the OECD and international average.
In 2010, the National government reduced personal income and company tax rates while at the same time increasing GST rates. As a response to rapidly increasing property and housing prices, in 2015 the government introduced a “bright line” tax on investors who sold their residential properties (other than the family home) within two years of purchase. In the lead-up to the 2017 general election, the National party announced a NZD 2 billion per year Family Incomes Package that would have raised the tax thresholds from April 2018 and made changes to the Working for Families and Accommodation Supplement policies. Immediately on coming into office, the new Labour-NZ First coalition government canceled these planned tax cuts, boosted family tax credits instead, and initiated a program of “free” tertiary education for new entrants. Moreover, the government reinstalled the Independent Earner Tax Credit, an entitlement for individuals who earn between NZD 24,000 and NZD 48,000 (after expenses and losses) a year, in July 2018.
In December 2017, the government established a Tax Working Group led by a former Finance Minister, Michael Cullen, with the stated goal of exploring “further improvements in the structure, fairness and balance of the tax system.” The Working Group will report to the New Zealand government on matters such as the fair operation of the tax system in relation to taxpayers, income, assets and wealth, whether the tax system promotes the right balance between supporting the productive economy and the speculative economy, and how the system could be made more fair, balanced and efficient. In September 2018, the group published its first interim report.

Citations:
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).
Inland Revenue 2017. The New Zealand tax system and how it compares internationally.
Evans, Chris/Tran-Nam Binh 2014. Tax Compliance Costs in New Zealand: An international comparative evaluation. WP 02/2014. Victoria University of Wellington. http://nzpublicfinance.com/wp-content/uploads/2014/08/20140611-Tax-Administration-WP02_-Evans_REVISED.pdf
OECD Dataset: Income Distribution and Poverty.
Tax Working Group. 2018. Future of Tax: Interim Report. https://taxworkinggroup.govt.nz/resources/future-tax-interim-report

Budgets

#4

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
Budgetary policy is prudent and sustainable. The 2008-2009 world financial crisis ended 14 years of budget surplus. From 2010, the National-led government followed a course of fiscal consolidation. The incoming Labour-NZ First government’s first budget was also viewed as restrained and fiscally cautious, with the Finance Minister, Grant Robertson, forecasting a NZD3 billion ($2 billion) surplus in 2018, increasing to NZD7 billion in 2020. Central government spending remained at roughly 28% of GDP. Gross financial liabilities as a percentage of nominal GDP was projected to decrease from 39.7% in 2016 to 39.1% in 2017 to 38.2% in 2018.
The new government’s first budget was focused on expanding or rebuilding public services, especially in the health care and education sectors. Major announcements in the budget included a NZD3.2 billion increase in health spending, a commitment to build an extra 1,600 properties for public housing every year (a goal the government missed by almost 1,200 properties in 2018), and cheaper doctors’ visits for half a million people (and free visits for those under 14). Early childhood education was projected to receive an extra NZD590.2 million over four years. Further expenditure included NZD284 million for children with special needs and NZD394 million for new classrooms and teachers. The government also allocated NZD450 million for the establishment of new schools.

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, Innovation and Infrastructure

#21

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
The OECD has identified deficiencies in the New Zealand government’s commitment to R&D strategies and expenditure, high-technology employment and patent indicators. The problem stems from New Zealand’s small size and geographic isolation, as well as the absence of large companies operating at an international level. While the National-led government increased spending on tertiary training in engineering and science, as well as increasing domestic expenditure on R&D as a percentage of GDP (1.3%), New Zealand is ranked low on these metrics among OECD countries, including that of its closest economic partner, Australia. On 19 April 2018 the Minister for Research, Science and Innovation announced that, from 1 April 2019, a 12.5% tax credit on eligible expenditure would be available for businesses spending more than NZD100,000 a year on R&D. However, critics consider the 12.5% rate inadequate. Moreover, it is felt that the “science test” which determines eligibility will serve as too much of a deterrent, especially for software firms. Other new research and innovation initiatives include a Green Investment Fund of NZD100 million to help the transition to a low-carbon economy and NZD45 million funding toward healthier homes. In addition to allocating over NZD1 billion in R&D tax incentives to encourage business to innovate, the government signaled its focus on lifting R&D spending to 2% of GDP over the next 10 years.

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).
Science Media Centre 2018. BUDGET 2018: Science and Innovation – Expert Reaction. https://www.sciencemediacentre.co.nz/2018/05/17/budget-2018-science-and-innovation-expert-reaction/.

Global Financial System

#23

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 System
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. Since 2016, New Zealand has been a member of the OECD initiative to allow all participating tax jurisdictions to exchange information on the economic activity of multinational corporations among participating countries. In 2017, it signed the OECD Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (known as the Multilateral Instrument). Both the National and the Labour-led governments entered into free trade agreements. For instance, in June 2017 New Zealand launched free trade agreement (FTA) negotiations with the Pacific Alliance (Chile, Colombia, Mexico and Peru) and was an initiator of the 11-member Trans-Pacific Partnership Agreement (TPP). The Labour-led government announced its decision to proceed with TPP-11, after the United States had withdrawn from the TPP agreement. Furthermore, it has entered talks with the European Union concerning a FTA and has signaled an interest in a separate trade arrangement with Britain in the event that it leaves the EU.

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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