New Zealand

   

Economic Policies

#14
Key Findings
After years of restrained budgets, the country scores in the upper-middle ranks (rank 14) 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 but steady in recent years, declining in 2019 to 2.1%. Thanks to years of modest budget surpluses, overall government debt is low by OECD standards, at around 19.2% of GDP. Business confidence has fallen to the lowest levels since 2008, driven by global trade concerns.

Unemployment rates have fallen to under 4%. A regional development program has focused on reducing income and employment gaps for Māori and Pasifika communities. Separate programs address youth unemployment. The minimum wage is rising in annual increments. The job market suffers from a shortage of skilled workers and seasonal labor.

Revenues are skewed toward personal-income and value-added taxes. The Labour government designed its 2019 budget around “well-being priorities.” Tax incentives for R&D have been increased, with the goal of increasing R&D spending to 2% of GDP over the next 10 years.

Economy

#24

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
Similar to the previous National Party government (2008-2017), the current Labour-led government has pursued a cautious economic agenda, characterized by prudent fiscal policy despite increased welfare and health spending. Partly because of government prudence, but also because of tax receipts have exceeded expectations and the country’s rail network has increased in value, New Zealand reported a budget surplus of NZD 7.5 billion for the year up to June 2019, up two billion dollars from the previous financial year. However, at the same time, the economy only grew by 2.1% – the slowest rate since 2013. While the export sector has continued to expand – driven largely by dairy products, the value of total goods exports hit a new record in March 2019 (up 19% from March 2018 to reach NZD 5.7 billion) – the manufacturing and construction sectors have been shrinking (by 0.2% in the quarter up to June 2019).

Business confidence has, according to ANZ’s September Business Outlook Survey, fallen to the lowest levels since 2008. To some extent, the decline in business confidence is due to headwinds in the global economy – in particular, trade tensions between the United States and China as well as the unforeseeable impact of Brexit – and uncertainty surrounding socially progressive Labour policies, such as step-wise increases in the minimum wage rate and a ban on non-residents buying property. While evidence suggests that there is an element of political bias among those who complete the business surveys (Hickey 2017), the fall in confidence is also the result of some unpredictability in government decision-making, partly due to the coalition arrangements. For example, the government commissioned a review on a capital gains tax but, lacking support from New Zealand First, backed away from its recommendations and removed the proposal from the political agenda entirely, despite an expectation from Labour supporters that such a tax would eventuate. Other examples of government U-turns and policy changes include the decisions to drop a major road transport infrastructure project in the Auckland area (although additional funds have been put into other forms of transport), put a stop to oil and gas exploration in the Taranaki region, and replacing the KiwiBuild homeownership initiative – after having launched it only 18 months earlier.

Crucially, low business confidence appears to have contributed to weak investment. As per a report by the New Zealand Institute for Economic Research (NZIER) published in October 2019, investment in buildings, plants and machinery has dropped to the lowest levels in ten years. The OECD Economic Survey of New Zealand strikes an optimistic note, expecting business investment to pick up again in 2020. To help boost business investment, the Reserve Bank cut the official cash rate to a record low of 1% in August 2019.

Citations:
ANZ Business Outlook (https://www.anz.co.nz/about-us/economic-markets-research/business-outlook)
Hickey, Bernard, 2017. ‘Politically-Biased Business confidence.’ Newsroom, 17 November. www.newsroom.co.nz/2017/11/17/61626/politically-biased-business-confidenceNZIER, Quarterly Survey of Business Opinion (https://nzier.org.nz/ABout%20QSBO/)
OECD, OECD Economic Surveys: New Zealand (http://www.oecd.org/economy/surveys/new-zealand-2019-OECD-economic-survey-overview.pdf)
Stats NZ, March exports hit a record $5.7 billion (https://www.stats.govt.nz/news/march-exports-hit-a-record-5-7-billion)
The Treasury, Budget 2019 (https://treasury.govt.nz/publications/budgets/budget-2019)
tradingeconomics.com/new-zealand/business-confidence

Labor Markets

#11

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
Labor market figures have improved steadily since the global financial crisis in 2008. The rate of unemployed New Zealanders dropped to 3.9% in June 2019 – the lowest unemployment rate since June 2008. However, it needs to be noted that unemployment continues to vary widely across different regions and social groups. In particular, Taranaki (5.2%), Northland (5.1%), and Gisborne/Hawke’s Bay (4.8%) struggle with above national average unemployment rates. Unemployment also remains comparatively higher among Māori (7.7%), despite falling from 9.4% in June 2018. Meanwhile, the proportion of young people (aged 15–24 years) who are not in employment, education or training is still over 10%.

To address these employment inequalities, the Labour government launched a regional development program in 2018. The Pathways to Work (Te Ara Mahi) skills and jobs initiative has been allotted more than NZD 100 million and focuses specifically on reducing income and employment gaps for Māori and Pasifika (Pacific islands) people. In addition, the government committed a further NZD 15 million to an already existing scheme aimed at tackling youth unemployment in rural areas (He Poutama Rangatahi) and launched an additional program targeting unemployed youths in urban areas (Pae Aronui).

Unemployment figures appear to be unaffected by the minimum wage increase under the Labour administration. On 1 April 2019, the minimum wage was raised from NZD 16.50 per hour to NZD 17.70 per hour. The minimum wage will continue to rise in annual increments, reaching NZD 20 per hour by 2021. Largely as a result of these policies, private sector salary and wage rates rose 0.8% for the June 2019 quarter. The impact of the minimum wage change on industry groups was most significant in retail trade (up 1.4%), and accommodation and food services (up 2.3%) for the June 2019 quarter.

Meanwhile, the New Zealand job market suffers from a shortage of skilled workers and seasonal labor. Viticultural and horticultural sectors in the Hawke’s Bay and Bay of Plenty regions have been particularly affected by low workforce availability. Hospitals and schools have also complained of shortages. The construction industry says it needs over 50,000 skilled workers by 2023 to meet demands. The government has increased funding for teaching education and increased its intake of nurses from overseas. Some easing of immigration rules has been applied to address seasonal worker shortages, and improvements to the vocational training system (including trades associated with construction) is underway. More generally however, the government has been reluctant to ease immigration rules to attract foreign jobseekers, mainly because – in the run-up to the 2017 elections – both Labour and New Zealand First campaigned on promises to tighten immigration, in part to ease pressure on infrastructure which had failed to keep abreast of the significant increases in net migration experienced during the term of the previous government. In view of the current policy stasis, the Reserve Bank of New Zealand forecasts annual net immigration of working-age people to fall to 29,000 in 2021 from 40,000 in 2018 and a mid-2017 peak of 72,400.

Citations:
Reserve Bank of New Zealand, Monetary Policy Statement (https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement)
Stats NZ, Labour market statistics: June 2019 quarter (https://www.stats.govt.nz/information-releases/labour-market-statistics-june-2019-quarter)
Stats NZ, Minimum wage rise boosts private sector pay rates (https://www.stats.govt.nz/news/minimum-wage-rise-boosts-private-sector-pay-rates)

Taxes

#13

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
7
Compared to other OECD countries, the New Zealand tax system performs relatively poorly in terms of revenue collection. In 2017, New Zealand’s tax-to-GDP ratio (32%) was significantly lower than the OECD average (34.2%). Not only that, but the gap in revenue collection has widened over the last 20 years: while the New Zealand tax-to-GDP ratio has decreased by 0.5 percentage points from 32.5% in 2000, the OECD average has increased by 0.4 percentage points since 2000. Nevertheless, the tax system provides the government with adequate resources to perform its basic functions. In fact, based on prudent government spending policies, New Zealand posted a budget surplus of NZD 7.5 billion in the financial year up to June 2019 (up NZD 2 billion from 2017/18). For the same period, government net debt fell to 19.2% of GDP, down from 19.9%.

In terms of government revenue structure, two things stand out: relative to the OECD average, New Zealand relies heavily on personal income tax (ranked third in comparison with other OECD countries) and value added tax (ranked second). While VAT is, generally speaking, considered a regressive tax (because it falls disproportionately on lower-income people), New Zealand’s personal income tax also lacks in progressivity: following a “broad base, low rate” approach, the top tax rate begins to apply at the relatively low level of 1.2 times the average wage. In short, the New Zealand tax system exhibits weakness in achieving vertical equity and addressing inequality in society.

Apart from a “bright line” tax on investors who sell residential properties (other than their family home) within two years of purchase, New Zealand does not have a tax on capital gains. After entering government in 2017, Labour set up a tax working group, with the stated goal of exploring “further improvements in the structure, fairness and balance of the tax system.” The group published its report in February 2019, recommending a broad-based tax on capital gains from rental homes, second homes, business assets, land and shares. However, this proposal was vetoed by Labour’s coalition partner NZ First and never came to fruition.

While New Zealand’s tax system is not particularly effective in reducing social inequality, it is relatively successful in promoting the country’s global competitiveness. Independent assessments have lauded the very lean business environment and the simple policy framework. For example, the conservative Tax Foundation think tank ranks New Zealand second in terms of “tax competitiveness,” ahead of international financial centers such as Switzerland and Luxembourg. In PwC’s 2019 Paying Taxes Index, which attempts to measure how easy it is for companies to discharge its tax obligations in a given jurisdiction, New Zealand was placed tenth out of 189 territories, situating it ahead of all other OECD member countries with the exception of Denmark. The World Bank even ranks New Zealand in first place in its most recent Doing Business Index. According to the World Bank, not only has New Zealand made paying taxes easier by improving the online portal for filing and paying general sales tax, it also has a single procedure that a prospective business need undertake to form, and the process is typically completed in less than a day.

New Zealand has a fairly poor record when it comes to tax policies steering economic activities toward environmental sustainability. As a share of GDP, New Zealand has the 5th lowest environmentally related tax revenue among all OECD countries. In 2014, environmentally related tax revenues were at 1.34% of GDP, compared to 2.0% on average among 34 OECD and partner economies. The tax working group set up by the Labour government in 2017 identified taxes designed to improve environmental outcomes as a key policy focus. Specifically, in its 2019 report, the group recommended that immediate government priorities should include expanding the coverage and rate of the Waste Disposal Levy, strengthening the Emissions Trading Scheme (ETS) and advancing the use of congestion charging. Longer-term measures include a water abstraction and water pollution tax, a natural capital enhancement tax, changes to the existing concessions regime, and a high-level consideration of mechanisms that support Te Ao Māori (a worldview that considers everything living and non-living to be interconnected).

Citations:
OECD, Revenue from environmentally related taxes in New Zealand (https://www.oecd.org/tax/tax-policy/environmental-tax-profile-new-zealand.pdf)
OECD, Revenue Statistics 2018: New Zealand (https://www.oecd.org/newzealand/revenue-statistics-new-zealand.pdf)
PwC, Paying Taxes 2019 (https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2019.html)
Tax Foundation, International Tax Competitiveness Index 2019 (https://taxfoundation.org/publications/international-tax-competitiveness-index/)
The Treasury, Budget 2019 (https://treasury.govt.nz/publications/budgets/budget-2019)
World Bank, Rankings & Ease of Doing Business Score (https://www.doingbusiness.org/en/rankings)

Budgets

#6

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
Since the 2008 global financial crisis, budgetary policy has been prudent and sustainable – under both National Party (2008–2017) and Labour-led governments (2017–present). In the financial year 2017/18, New Zealand reported a budget surplus of NZD 5.5 billion. In the 2018/19 year, the surplus increased by a further NZD 2 billion to NZD 7.5 billion. In the same time frame, net government debt fell to 19.2% of GDP from 19.9%. Capital spending for 2018/19 was NZD 6.7 billion – up NZD 0.8 billion from 2017/18. This included purchases of NZD 0.9 billion of school property, NZD 0.7 billion for defense equipment, NZD 0.4 billion for prisons, and NZD 0.2 billion for hospitals. Investments included NZD 1.1 billion for state highways, NZD 0.3 billion for KiwiRail, and NZD 0.2 billion for district health boards. In 2019, New Zealand became the first industrialized country to design its entire budget based on well-being priorities. In particular, Labour’s “well-being” budget focuses on mental health services (NZD 1.9 billion) and child poverty (NZD 1 billion), and includes a record investment in measures to tackle domestic violence (NZD 320 million). Despite these allocations to health and well-being, the Treasury’s Budget Economic and Fiscal Update published in May 2019 forecasts a surplus of NZD 1.3 billion for 2019/20.

Citations:
The Treasury, Budget 2019 (https://treasury.govt.nz/publications/budgets/budget-2019)
The Treasury, Budget Economic and Fiscal Update 2019 (https://treasury.govt.nz/publications/efu/budget-economic-and-fiscal-update-2019)
The Treasury, The Wellbeing Budget 2019 (https://treasury.govt.nz/publications/wellbeing-budget/wellbeing-budget-2019)

Research, Innovation and Infrastructure

#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
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 Party-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 continues to be ranked low on these metrics among OECD countries – including its closest economic partner, Australia. Recognizing these deficits, the current Labour administration chose “Foundations for the Future” as the theme for its 2018 budget, with the aim to increase R&D expenditure to 2% of GDP over the next 10 years. The main vehicle to achieve this goal is a tax credit on eligible R&D expenditure. Since the scheme was first announced, the originally proposed 12.5% tax break has been upped to 15%, while the minimum of R&D spending has been halved to NZD 50,000 from NZD 100,000. In addition, the maximum amount that can be claimed by any company in any one year has been increased to NZD 18 million and the definition of R&D has been broadened, shifting the focus from “scientific research” to “systematic approaches to solving scientific and technical uncertainty.” While these changes address key concerns expressed by critics, it remains unclear how start-up companies – which generally do not have profits to claim tax breaks – will benefit from the government’s R&D scheme. More generally, funding for blue sky research through the government’s contestable funding sources for Crown Enterprises and the University sector has not increased significantly over the past decade.

Citations:
New Zealand Government, Budget 2018: Foundations for the Future (https://www.beehive.govt.nz/feature/budget-2018-foundations-future)
Pullar-Strecker, Tax break for R&D upped to 15pc, with stop gap help for startups, Stuff (https://www.stuff.co.nz/business/107538937/tax-break-for-rd-upped-to-15pc-with-stop-gap-help-for-startups)

Global Financial System

#20

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. To this end, New Zealand passed the Anti-Money Laundering and Counter Financing of Terrorism Act (AML/CFT) in 2013. Initially, the law came into force with banks and financial institutions but, in 2018, the law was extended to include accountants, real estate agents, lawyers and conveyancers, in an effort to ensure illegal funds are not washed through property purchases. 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, 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). Regulatory market reviews by the Commerce Commission – tasked with promoting competition and consumer protection – appear to have increased in number since the shift from a National to Labour government. In late 2018, the Financial Markets Authority and the Reserve Bank released a report after a four-month review into the conduct and culture of eleven banks that operate in New Zealand. While the report did not find the widespread systemic issues that plague Australia, it highlighted that banks lacked effective procedures to manage poor conduct, and were slow to remove sales incentives that pushed staff to sell items such as personal loans and credit cards.

Citations:
Cheng, PM to banking sector: Up your game or the Govt will force your hand (https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12154903)
Gray, NZ markets face regulatory risks in 2019, New Zealand Herald (https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12188855)
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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