Cullen on OECD report on New Zealand

Finance Minister Michael Cullen today welcomed the latest OECD review of New Zealand, saying he agreed with much of the analysis – particularly the importance of maintaining fiscal discipline.

The report says the economy’s strong performance over recent years and the accompanying lift in living standards have put New Zealand on track to achieving the government’s objective of returning to the top half of the OECD.

It is also optimistic about New Zealand’s prospects describing them as bright, with potential growth projected to remain comfortably above 3 per cent a year over the medium term.

But it warns that there are fiscal challenges on the horizon saying: Further out, the country will not be immune to the spending pressures of an ageing population and difficulties in constraining increases in health care coverage and costs. Against this backdrop, it would be regrettable if spending or tax initiatives were implemented that significantly weakened the long-term fiscal outlook.

“That is why the government has been strengthening the Crown accounts by reducing debt with the aim of taking it below 20 per cent of GDP by 2015.

“This is in sharp contrast to National which plans to fund its tax cuts partly from borrowing. There is no way that can be justified given New Zealand’s demographic profile. It would undo the hard work of the last 20 years and our hard won reputation overseas for fiscal prudence,” Dr Cullen said.

The OECD praises large elements of the budget business tax package, saying it addressed important problem areas including the tax treatment of managed unit trusts and the depreciation regime.

“The government agrees with the OECD’s advice that tertiary funding has to be more sharply focused on high quality programmes relevant to New Zealand’s needs and is already moving strongly in that direction.

“We also agree with the OECD’s view that the primary challenge facing New Zealand is to raise productivity growth and to boost participation among groups that remain under-represented in employment.

“The OECD acknowledges that the government is reducing the barriers to work by significantly boosting support for early childhood education and through the new In-Work Payment and more generous abatement provisions in the Working for Families package.

“But it is critical of the high marginal tax rates some income groups still face if they enter the workforce. This misses the point that there are no losers under Working for Families. Everyone who comes within its coverage is better off as a result, and most are substantially better off,” Dr Cullen said.

“The OECD criticism also misses the point that high marginal tax rates are endemic to any targetted system and are no higher now than what existed before. The only difference is that they have moved further up the income chain as support is extended to higher income families.

“Previously, for example in the case of a one-child family, family assistance meant higher marginal tax rates for families whose income ranged from $20,000 to $34,000. With Working for Families that moves to incomes between $27,500 and $52,000.”

Dr Cullen also pointed out that the OECD Employment Outlook 2005, released by the OECD last week, had praised New Zealand’s active labour market policies as a success story, saying they had contributed to the recent sharp fall in the number of people on benefits.

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