New Zealand


Key Challenges

Well positioned for
future challenges
New Zealand is well positioned to tackle current and future challenges. Over recent decades, it has radically reformed its economy as well as its electoral and public management systems. Compared to other OECD countries, New Zealand has emerged from the global financial crisis in a relatively strong position. Nevertheless, four problem areas persist: innovation, tax policy, regional development and government structures, and the government’s agenda-setting capacities.
Tertiary education must
be improved
First, innovation. Although governments, including the recent National minority government, have increased investment in tertiary education (particularly in science, technology, engineering and mathematics), and research and development, there remains a need to intensify these efforts, as comparative data for OECD countries has made clear. Similarly, New Zealand does not invest enough in ongoing job-based education and training. The country has followed the tradition of Anglo-American liberal market economies (LMEs), which invest more extensively in transferable skills than in job-based training, which is the focus of some continental European coordinated market economies (CMEs). Given that the New Zealand economy is extremely small, other approaches, including those used in Scandinavian countries, may well be better suited to local conditions. Although unemployment rates are relatively low, at just under 5%, a particular area of concern is the high rate of youth unemployment in Maori and Pasifika communities.
Innovation linked to immigration policy
The economy’s innovation potential is inextricably linked to immigration policy, where attracting highly skilled workers is of utmost importance. The new government led by Labour Prime Minister Jacinda Adern needs to remain committed to attracting skilled immigrants and ignore pressure from its populist anti-immigration coalition partner New Zealand First. Although New Zealand First is a small parliamentary party, as the key to maintaining the balance of power, it was strategically placed to negotiate with both major parties, Labour and National. By forming a coalition with the former, it has been given far more power than vote (7.2%) or seat share (nine of 120 in parliament) would indicate. The recent surge in support for anti-immigrant parties in the United States and Europe has placed immigration policy firmly on the New Zealand political agenda.
Tax policy a tool for cooling property market
Second, tax policy. Prioritizing a balanced budget, the new government has shelved plans for the new round of tax cuts promised by the former National-led government. The new government needs to tackle the politically sensitive issue of extending National’s “bright line” tax – a mild form of capital-gains tax – from two to five years with a view to reducing the impact of property speculation on the housing market. Since this has been a key Labour election proposal for some time, the new government is likely to initiate legislation in this area. The new government has also promised to prevent non-resident foreign investors from speculating on housing. Unsurprisingly, the country has one of the highest rates of home ownership in the world at 63.2% in 2016. However, these policies violate horizontal equity and divert capital away from more productive uses. A more robust capital-gains tax on all but the family home would cool the property market, especially in Auckland (population 1.4 million). There is growing consensus among parties and economists that this anomaly in the tax structure needs to tackled.
Rural-urban divide increasing
Third, regional development and governance structures. The economy is characterized by a large and increasing urban-rural divide, particularly regional economic growth, labor productivity and population growth. The government needs to create a focused regional policy both in metropolitan and rural areas. Regional economic policies should be accompanied by governance structures that geographically fit the problem area. The establishment of a unitary Auckland authority with an elected all-Auckland council has been a good starting point, but this should not be the end of local government reform. A similar centralized structure for the Wellington area was rejected by a poll of the city’s residents in 2015. Auckland’s local government covers more than one-third of the total population of the country. This implies a heavily asymmetric local government structure vis-à-vis central government. The 2010 and 2011 earthquakes in the Christchurch and the Canterbury region, followed by a 2016 earthquake that hit the South Island provincial town of Kaikoura, has understandably dominated the government’s regional-development agenda, with most of its activities receiving praise. The potential for restructuring the regions on a more general scale should be evaluated.
Electoral system still gaining legitimacy
Fourth, government as agenda-setter. New Zealand’s political system is still characterized by majoritarian design. There are no institutional veto players whose policy positions the government must consider (such as provincial or state governments, second chambers, constitutional courts or local governments with constitutionally guaranteed powers). However, the change to a mixed-member proportional electoral system has led to a multiparty system, the emergence of several minor political parties with de facto veto powers, and the formation of minority and coalition governments of different formats. After more than a decade, this governing arrangement has proven relatively positive, although parts of the electorate, especially older and more conservative voters, still need to be persuaded of the benefits of proportional representation. The outcome of the 2017 election, with the most popular party being rebuffed by the small New Zealand First Party, has prompted many older and more conservative voters to question the legitimacy of the new center-left government.
Extending parliamentary term considered
Recent governments have been able to proactively pursue their respective policy-reform agendas with noticeable success. However, while successive governments have been able to implement the vast majority of their policies, the process has been very time-consuming and occasionally produced contradictory policy initiatives. In 2013, former prime minister John Key proposed increasing parliamentary terms from three to four years to promote policy coherence and consensus. The proposal had failed in two previous government-initiated referendums (1967 and 1990). Judging from comments made by other party leaders, this proposal appeared to have wide-ranging support. At the same time, there is no evidence that public opposition has weakened. Short of gaining a 75% majority among members of the unicameral parliament, a four-year term seems an unlikely proposition.
Statistics New Zealand ‘Dwelling and Household Estimates: December 2016 Quarter,’ 10 January 2017.
Raymond Miller, Democracy in New Zealand, Auckland, Auckland University Press, 2015, pp. 78-81.
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