New Zealand


Key Challenges

Highly competitive economy
Since the 1980s, New Zealand has turned itself into a global poster child of market-oriented reforms and international openness. Today, New Zealand is widely perceived to be one of the most competitive economies in the world, characterized by a very lean business environment and a simple policy framework. The Heritage Foundation – a conservative U.S. think tank – ranks it third in the 2019 Index of Economic Freedom, only behind Hong Kong and Singapore. The Tax Foundation places New Zealand second in terms of “tax competitiveness” (ahead of international financial centers such as Switzerland and Luxembourg), while the World Bank even puts the country at the very top in its most recent Doing Business Index.
Growth dependent on agriculture; skilled-worker shortage looming
While New Zealand seems to be well positioned to succeed in the global economy, there are at least two areas that will require policymakers’ attention. First, economic growth continues to be highly dependent on the agricultural sector, which accounts for more than half of merchandise exports. In an attempt to wean the economy off meat and dairy products, both the previous National Party government and the current Labour government have increased public spending on research and innovation, in part by offering tax breaks. Yet critics note that these policies are not enough to boost technology-intensive industries. Second, policymakers need to address New Zealand’s shortage of skilled workers – not only through further investment in education and training, but also by reforming the immigration system. The outlook for immigration reform, however, is not promising. In the run-up to the 2017 election, all major parties campaigned on tightening immigration policy. There is no indication that this will change ahead of the 2020 election, though net migration has fallen somewhat.
New focus on economic, social inequalities
Although New Zealand is heralded as one of the most competitive economies in the world, this competitiveness has been achieved at the expense of social inclusion and environmental sustainability. The Labour-led Coalition government has sought to remedy economic and social inequalities by introducing several changes to benefits and parental leave policies while increasing the minimum wage and continuing to support universal superannuation.
Efficient, but non-progressive tax system
New Zealand’s tax system, which is often praised for its simplicity and efficiency, displays very little progressivity. Government revenue comes largely from a “broad base, low rate” income tax and value added tax. Apart from a “bright line” tax on investors who sell residential properties within two years of purchase, New Zealand does not have a capital gains tax. A tax advisory group, set up by the government in late 2017, recommended closing this gap in the tax system, yet the proposal was vetoed by Labour’s coalition partner NZ First.
Housing market
fueling inequality
Due to a lack of funding, public provisions for healthcare and pensions are overstretched. A growing number of New Zealanders have joined one of the private pension schemes supported by the government through the Kiwisaver program. In addition, social inequality is further accelerated by New Zealand’s overheated housing market. According to the 2019 Demographia International Housing Affordability survey, housing prices in New Zealand are among the most unaffordable in the world. Recent policy interventions aimed at cooling the market failed: Labour’s affordable housing scheme (KiwiBuild) was axed after only eighteen months and a foreign buyer ban does not seem to have had the anticipated effect either.
Māori face myriad disadvantages
Social inequalities disproportionately affect the Māori population. Compared to Pākehā (New Zealanders of European descent), Māori suffer worse health, have lower education attainments, employment and income and are more likely to be victims of crime. The Labour government – even though it has shown a commitment to economic and social well-being – has been criticized for attempting to tackle these issues through universal development schemes rather than allocating funding to Māori-specific programs.
Growth taking toll
on environment
In addition, New Zealand’s economic growth is starting to show its devastating impact on environmental issues. The agricultural sector in particular severely exacerbates environmental degradation – not just through the methane and nitrous oxide gases (which make up around half of New Zealand’s total greenhouse gas emissions) it generates but also by polluting rivers and lakes. Furthermore, New Zealand faces a serious biodiversity crisis, with around 4,000 species being at risk of extinction.
Progress will require balancing act
In short, the biggest challenge for New Zealand policymakers will be to balance global economic competitiveness with environmental sustainability as well as economic and social inclusion. Though different, these policy objectives are not necessarily incompatible. For example, Māori-specific education and training programs could help address both skilled labor shortages and ethnic discrimination. Similarly, incentivizing research and innovation in green technologies could boost the manufacturing sector while, at the same time, improving New Zealand’s environmental record.

Party Polarization

New electoral system increases polarization; minority government with external support
Under the first-past-the-post (FPTP) electoral system used throughout much of New Zealand’s history, party system polarization was very low. The system produced a party duopoly, with the two major parties – National and Labour – converging toward the center on the ideological spectrum, although in a number of elections from 1980s onwards, an increasing number of voters chose to support minor parties, on both the libertarian right (NZ Party), the center (Social Credit) and the left (Values Party). However, the mixed-member electoral system, which was introduced in 1996 and combines FPTP with a party list system, has not only created a need to form multiparty cabinets but has also increased polarization between political parties. According to several indicators, New Zealand’s current party system is moderately polarized, similar to that observed in Germany and Finland. While the party system still revolves around Labour (which currently has 46 parliamentary seats) and the National Party (55 seats), there are now also relevant parties further to the right (NZ First, nine seats; ACT Party, one seat) and further to the left (Green Party, eight seats). However, the increase in the spread of ideological polarization does not pose a significant obstacle to finding cross-party agreements in policymaking. The current minority government is formed by Labour and NZ First, with the Green Party holding a “confidence and supply” agreement. This replicates similar arrangements held in the past, such as the previous National-led government including a libertarian party (ACT), a center party (United Future) and an indigenous peoples party (the Māori Party). In each case, the coalition negotiations see major parties swapping concessions. After the most recent election (in 2017), both Labour and National offered concessions to NZ First in return for support. For example, NZ First dropped its demands for referendums on overturning New Zealand’s anti-smacking law and abolishing the Māori electorates, in return for Labour support on a Regional Development Fund, the re-establishment of the New Zealand Forest Service, and a minimum-wage increase. (Score: 6)
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Roy, New Zealand Labour signs coalition deal and makes Winston Peters deputy PM, The Guardian (
Vowles, Jack (2018) Surprise, surprise: the New Zealand general election
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