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OECD Report Says New Zealand Could Do Better

5 July 2005

OECD Report Says New Zealand Could Do Better

"This week's OECD report on New Zealand is disappointingly bland but some important messages can be read between the lines", Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

The report notes that New Zealand's annual average rate of growth since the recession of the early nineties has been an impressive 3.75 percent. It states: "This is a deserved reward for the wide-reaching macroeconomic and structural reforms put in place over the past 20 years".

"The jury is in. Those who used to recite the mantra about 'the failed policies of the past' should do the decent thing and recant it."

The report states that New Zealand's productivity growth rate picked up pace in the second half of the 1990s, but that it is still one of the lowest in the OECD - labour productivity growth is estimated to be around half a percentage point a year lower than the OECD median.

This statement is difficult to reconcile with a comment in the report that "the country is on track towards achieving the government's longer-term goal of lifting GDP per person back into the top of the OECD".

"Nothing in the report substantiates that comment", Mr Kerr said. "Substituting diplomatic niceties for analysis does not do the OECD or the New Zealand public a service."

It is hard to see how the OECD could be sanguine about an acceleration in New Zealand's growth rate given the many implicit criticisms of current policies in the report. Examples include:

· public spending is increasing by around 2 percentage points of GDP over the coming five years, is not delivering the best value for money, and needs to be "more effectively channelled into the highest priority areas";

· the Working for Families package is badly targeted, imposes high marginal tax rates and does not create strong incentives to move from welfare to work;

· the government's opposition to privatisation - contrary to the trend in other OECD countries - is misguided, as is the move to eliminate private prison management, and ACC should be opened up to competition;

· heavier-handed regulation of the electricity sector has failed to solve problems;

· the Employment Relations and Holidays Acts have reduced labour market flexibility and increased labour costs;

· land transport legislation is restricting the use of public-private partnerships and congestion charges should be applied;

· there has been a proliferation of education courses "that are of low quality and/or in subjects that have only remote career relevance"; and

· the bias of funding of early childhood education against private providers is unjustified.

Mr Kerr said the OECD was naïve to think that the changes in the Resource Management Act currently before parliament might be effective solutions, and it had failed to note that the Commerce Commission's total-surplus standard, which it commended, had been abandoned by the Commission in recent determinations.

"To its credit, however, and contrary to claims by the minister of finance, the OECD makes the unequivocal statement that "higher taxes have a negative impact on economic growth". It cites estimates that an increase of about one percentage point in the tax burden could be associated with a direct reduction of about 0.3 percent in output per capita, rising to 0.6-0.7 percent if indirect effects are taken into account. These are in line with estimates which the Business Roundtable has presented.

"On tax and some other issues, the OECD report contains messages that any growth-oriented government should take on board", Mr Kerr said. "Overall, however, the OECD has lost an opportunity to outline an economic strategy for New Zealand that would make the government's goals for lifting the country's sustainable growth rate credible."


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