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Annual Report of the Treasury for the Year Ended 30 June 2012

State of the Economy

International comparisons of income, productivity and the quality of institutions comprise a wide set of indicators and are produced by a number of organisations.

The Economic Development Indicators report produced by the Ministry of Business, Innovation and Employment (MBIE), the Treasury and Statistics New Zealand includes a large number of such indicators, benchmarking New Zealand against the Organisation for Economic Co-operation and Development (OECD) countries and more recently, Australian states. Reports have been published in 2003, 2005, 2007 and 2011. Organisations such as OECD and the International Monetary Fund (IMF) regularly comment on New Zealand's economic performance and, to varying degrees, on the quality of policies and institutions.

Given the wide range of existing reporting, we see the main features of the Treasury's annual reporting as comprising:

  • an update of key indicators for income, productivity and quality of institutions, and
  • external commentary on progress being made to improve the quality of institutions and raise productivity and income.

The most recent policy assessments from IMF and OECD are summarised in the tables below.

The decades-long decline in New Zealand's gross domestic product (GDP) per capita relative to the OECD average stabilised from the 1990s. Over the 1990s and 2000s, GDP per capita increased at around the same pace as the average OECD country.

GDP per capita as a proportion of OECD mean; 1970 to 2010
GDP per capita as a proportion of OECD mean - 1970 to 2010.

The gap in New Zealand's GDP per capita reflects a gap in the level of labour productivity (output per hour) with some offset created by slightly higher than average labour utilisation (hours worked per capita). Since the mid-1990s, the period over which comparable official productivity statistics for Australia and New Zealand are available, labour productivity growth in New Zealand has been below Australia's. While growth in New Zealand's multifactor productivity has been slightly ahead of Australia's, the capital-to-labour ratio in Australia has grown twice as fast.

Australia and New Zealand productivity growth  

Australia's MFP16 and New Zealand's measured sector. Average annual growth rates, percent: 1996 to 2011
  Australia New Zealand
Output 3.5 2.5
Labour  input 1.5 1.1
Capital input 5.3 2.9
Labour productivity 2.0 1.4
Multifactor productivity 0.4 0.6
Capital-to-labour ratio 3.7 1.8

Source: Statistics New Zealand

There are a number of indicators about the quality of New Zealand's institutions, including the International Institute for Management Development (IMD) World Competitiveness Yearbook; theHeritage Foundation Index of Economic Freedom; the World Bank Doing Business Database; and OECD cross-country product market regulation surveys. Many of these are included in the Economic Development Indicators report.

In terms of the quality of the regulatory framework for business, New Zealand has lost ground over the past decade, compared with other countries.

Product market regulation - selected countries; 1998 and 2008
Product market regulation - selected countries - 1998 and 2008.

While we might expect leading sources of indicators to produce similar results, there are often differences owing to the choices made by those preparing cross-country comparisons. In many cases there is no single "best" indicator. The Treasury is working on how to measure and report on international competitiveness, and the quality of regulatory policy and institutions. We are also working with Statistics New Zealand, MBIE and the Productivity Commission to improve our understanding of alternative economic performance data.

Some of the indicators reported here provide additional context to those set out in the Outcome Performance section of this Annual Report. These economic indicators, together with the broader assessment of New Zealand's institutions, are also relevant for the Living Standards Framework discussed previously. We expect the scope of annual reporting on economic performance and quality of institutions to expand somewhat over time as new information emerges and our understanding of the various indicators improves.

IMF 2012 Article IV Consultation: Summary of policy recommendations 

Monetary policy

The current accommodative monetary stance is appropriate. If the recovery remains on track and downside risks dissipate, monetary policy will need to tighten gradually to contain inflationary pressures. However, if the global recovery stalls or international capital markets are disrupted, the Reserve Bank of New Zealand (RBNZ) has scope to cut the policy rate and provide liquidity support for banks.

Fiscal policy

The authorities' plan to return to budget surplus by 2014/15 should put New Zealand in a better position to deal with future shocks and the long-term costs of ageing. Moreover, it will relieve pressure on monetary policy and thereby the exchange rate, helping contain the current account deficit over the medium term. New Zealand's relatively modest public debt gives the authorities some scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook.

External vulnerabilities and the exchange rate

Increasing national saving, including through the planned fiscal deficit reduction, would reduce external vulnerability.

Financial sector issues

While New Zealand's bank regulatory norms are more conservative than in many other countries, the authorities should assess on an ongoing basis the balance between banking sector vulnerability versus efficiency to minimise the risk that systemically important banks pose to the economy. Options to strengthen prudential norms if needed could include setting banks' capital requirements above the Basel III minimum or raising the core funding ratio more than the planned 75% to reduce short-term external debt further. RBNZ's continued work on the costs and benefits of macroprudential measures is welcome, as is the authorities' intention to implement key features of Basel III in early 2013.

Summarised from: IMF Executive Board Conclusion of 2012 Article IV Consultation with New Zealand, Public Information Notice (PIN) No.12/55

OECD Economic Survey of New Zealand 2011: Summary of policy recommendations

Reducing imbalances

  • Return to fiscal surplus as soon as possible.
  • Consider whether further changes are needed to strengthen the existing fiscal framework to reduce the risk of pro-cyclical fiscal policy in the next upswing (eg, expenditure ceiling or independent fiscal watch dog).
  • Target a larger surplus in the medium term than the 2% of GDP signalled in the Half-year Economic and Fiscal Update (HYEFU).
  • Align the top corporate, capital and labour income tax rates at lower levels, or adopt dual income tax approach.
  • Reduce the tax on non-housing savings as long as New Zealand does not have a capital gains tax.
  • Tax the real component of interest income instead of nominal interest income.
  • Increase the retirement age, move to partial price indexation of NZ Superannuation and remove KiwiSaver subsidies.


  • Introduce a capital gains tax, or at least reduce the ability to use tax losses on investment properties to reduce tax liabilities elsewhere (loss ring-fencing), or reduce taxation of alternative savings vehicles and introduce higher property taxes or land tax.
  • Extend regular needs reassessments to all existing tenants, to enhance the capacity for social housing to match household requirements.

Regulatory governance

  • Further strengthen regulatory governance (eg, greater use of periodic review and sunset clauses, requiring clearer net public benefit justifications for any regulatory restrictions on competition), and passing a "suitably refined Regulatory Responsibility Bill".
  • Need more political will to further embed, and make more disciplined use of, the regulatory management system, to change the regulatory culture within government.


Government intervention in network sectors needs to be more transparent and predictable. New Zealand's competition policy framework needs updating, including:

  • stronger accountability on regulators through periodic independent assessments
  • giving the Commerce Commission a "wider range of interventions" (especially remedial orders, payment of damages, compensation and public warnings)
  • having ex post evaluations of Commerce Commission decisions, to act as an audit of their performance, and
  • harmonising anti-monopoly law with Australia or OECD best practice (s.36 and criminalising cartels).

Policy alignment and harmonisation

Increase policy harmonisation and mutual recognition of standards with Australia, and other counterparts where appropriate.

State-Owned Enterprises

If full privatisations are not feasible, partially float SOEs to improve commercial discipline and transparency.

Foreign direct investment

Amend the investment screening regime to provide greater clarity and certainty for foreign investors. In particular, ministerial veto powers should be removed.

Summarised from: OECD (2011), OECD Economic Surveys: New Zealand 2011, OECD Publishing.

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