Box 1: Summary of key policy recommendations

Building greater economic resilience and lifting trend growth, by enough to materially narrow the income gap between New Zealand and the most advanced economies, will require a wide and ambitious programme of policy reform. Although some progress has been made, current forecasts indicate that partial or incremental reforms are unlikely to be sufficient. The policy recommendations below summarise the Treasury's advice for increasing trend growth and resilience. Implemented as an integrated programme, our assessment is that these recommendations would lead to a substantial lift in economic performance within the next decade, with corresponding improvements in New Zealanders' living standards.

1.   A resilient and stable macroeconomic environment

• Restore fiscal buffers and support rebalancing of activity towards the tradable sector by adopting a fiscal strategy that commits to:
  • returning the total Crown operating balance before gains and losses to surplus in 2014/15
  • reducing net debt (excluding the New Zealand Superannuation Fund) to no higher than 20 per cent of GDP by 2020
• Introduce further measures to increase the resilience of the financial system, such as requiring banks to hold more capital to absorb losses and tools to safely resolve failing institutions
• Add macroeconomic stability and fiscal structure dimensions to fiscal responsibility provisions in the Public Finance Act to reduce risks of procyclical fiscal policy during future periods of strong economic growth, and to improve the impact of government expenditure and revenue on the economy and other government objectives
• Address long-term fiscal sustainability issues by building broad public consensus on the required policy adjustments, particularly in the areas of health and retirement income. In addition to addressing long-term fiscal sustainability, reforming retirement income settings could help reduce saving-investment imbalances and increase labour force participation
• Consider the role that tax reform could play to reduce distortions to saving and investment decisions, and encourage a higher overall rate of national saving

2.   A smaller, more effective and responsive state sector

• Actively manage overall state sector cost pressures, particularly in health, welfare, education and justice, in order to achieve the recommended fiscal strategy while growing priority services:
  • Drive further efficiency gains
  • Encourage greater innovation and contestability in service delivery
  • Prioritise expenditure that has clear public good benefits and a focus on improving living standards
  • Make better use of the Crown’s assets and overall balance sheet
• Reform the education systemto improve educational attainment at lower cost:
  • Target existing early childhood education funding to children in low-income households
  • Implement initiatives to improve school teacher quality, funded by consolidation of the school network and increasing student/teacher ratios
  • Reintroduce interest on student loans and target tertiary funding to younger students and higher-level qualifications
• Strengthen agreed welfare reforms with wider changes to improve social and labour force outcomes while reducing benefit expenditure:
  • Ensure sufficient capability within Work and Income to deliver a new service delivery model, including more extensive use of contracting-out to external providers where appropriate
  • Simplify and align benefit payments with work expectations
  • Reduce the age of the youngest child at which work testing for sole parents begins, and tighten eligibility criteria for the Supported Living Payment
• Support the objectives outlined in the Better Public Services Advisory Group Report to deliver a state
  service that:
  [Withheld under s 9(2)(f)(iv) of the OIA]

3.   A more internationally-competitive business environment

• Improve international connections:
  • Strengthen external relationships, especially with Australia, the US, China and India
  • Reduce “at-the-border” barriers in New Zealand and overseas
  • Ensure domestic policy settings take better account of the international context
• Increase the efficiency and competitiveness of the tax system:
  • Reduce personal and company tax rates, funded by more base-broadening and/or reductions in low-value expenditure (without compromising fiscal targets)
  • Continue to push for mutual recognition of imputation and franking credits with Australia
• Drive regulatory change at the regime and system level:
  • Reform regulatory regimes relating to investment screening, resource management, local government, new organisms and chemicals, housing supply and the minimum wage
  • Promote principles of best practice and improve regulatory scanning and planning
• Focus science and innovation policyon firm-led research & development and commercialisation:
  • Increase the proportion of Crown expenditure on research & development that is business led
  • Increase the incentives for research and tertiary education institutes to undertake more firm-relevant research and to transfer knowledge to firms
• Continue network infrastructure investment and management, with a particular focus on:
  • Ensuring a realistic and confidence-building plan for Auckland transport, including use of network pricing and other demand management tools
  • Prioritising and accelerating future investment in growth-enhancing projects (where benefits exceed costs), and using a range of funding mechanisms including increases in fuel excise and road user charges
• Manage natural resourcesmore efficiently:
  • Continue reform of the Resource Management Act to ensure appropriate consideration of economic objectives and incentives for better planning at the local level
  • Establish administrative and market structures to facilitate more efficient use of water
  • Reduce the short-term costs imposed by the Emissions Trading Scheme, while positioning the economy for the longer-term risks and potential opportunities associated with climate change
• Ensure that the longer-term recovery strategy for greater Christchurch is realistic, maintains confidence in the future of the city, and contributes to the return of normal operation in the insurance, financial, property and labour markets