Treasury Releases March Round of Working Papers

The Treasury today released its March round of Working Papers.

Working Papers report high quality, refereed, systematic investigations of a particular area. They include new empirical research relevant to understanding the New Zealand economy or the impact of economic policy in New Zealand, theoretical frameworks relevant for understanding microeconomic or macroeconomic behaviour or the impact of a policy proposal, or syntheses of literature.

The papers released today are:

• Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK (WP 07/01)

• An Analysis of Tax Revenue Forecast Errors (WP 07/02)

• Adaptive Governance and Evolving Solutions to Natural Resource Conflicts (WP 07/03)

• Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Findings from SOFIE (WP 07/04)

Summaries of the papers follow. The full papers are available on the Treasury’s website at: [http://www.treasury.govt.nz/publications/research-policy/.]

The four Working Papers released today are:

WP 07/01 Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK

This paper presents a New Zealand/United Kingdom comparison of average labour productivity (average output per hour worked, “ALP”) in 21 different market sectors. The paper is significant in that previous studies have focused solely on comparisons with Australia. It shows that New Zealand is similar to the UK in terms of labour quality, but that the UK is ahead of New Zealand in both physical capital intensity and multifactor productivity in most sectors. ALP in New Zealand market sectors compares unfavourably to the UK in 15 out of the 21 sectors studied. New Zealand’s ALP is ahead in the following sectors: food, drink and tobacco; accommodation, restaurants and bars; communication services; finance and insurance; cultural and recreational services; and metal products. The study indicates that ALP has grown more quickly over the period of the study for the UK compared to New Zealand. This result is likely to be at least partially driven by New Zealand’s labour market deepening significantly more over this period, which pulls down productivity but clearly has significant economic and social benefits.

WP 07/02 An Analysis of Tax Revenue Forecast Errors

The accuracy of the Treasury’s tax revenue forecasts is important for the Government’s annual budget decisions as they affect key fiscal aggregates such as the operating balance and debt levels. Good decision-making in this area is important for macroeconomic stability and sustainability, one of the Treasury’s outcomes. Over the past six years, Treasury tax forecasts, and the macroeconomic forecasts on which they are based, have underestimated the actual outturns. This paper presents an analysis of the Treasury’s tax revenue forecast errors, both in aggregate and disaggregated by individual tax type. It shows that the main source of tax revenue underforecasting is the underforecasting of the macroeconomic variables used as tax-base proxies. The paper suggests further investigation of alternative tax forecasting methodologies.

WP 07/03 Adaptive Governance and Evolving Solutions to Natural Resource Conflicts

New Zealand is facing increasing challenges in managing natural resources (e.g. land, freshwater, marine space and air quality). These challenges can be described in terms of managing “wicked problems”; i.e. problems that may not be understood fully until after the formulation of a solution; where stakeholders have different world views and frames for understanding the problem; constraints and resources to solve the problem change over time; and no complete solution is ever found. This paper discusses the key aspects of an adaptive approach to “wicked problems” in natural resource policy, including adaptive governance and adaptive management. It concludes that a comprehensive response to a particular “wicked problem” should entail: an agreed long-term vision supported by intensive stakeholder involvement; good science and information; and a balance between providing certainty to stakeholders, flexibility to regulators, and procedural fairness.

WP 07/04 Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Findings from SOFIE

This paper addresses two main questions: “What is the pattern of property ownership and investment among New Zealand households?” and “What role might housing equity play in retirement income and what would that imply for retirement saving?” It estimates the rates of saving that would be needed to smooth consumption between pre- and post-retirement, and then explores the effect of some home equity withdrawal on the required saving rates. The authors’ modelling of the sufficiency of retirement savings uses the assumption that an individual’s pre-retirement consumption is a good predictor of their post-retirement needs. Among the key findings are that housing represents a major share of household wealth, and this share has risen in line with the increase in house prices. Empirical results indicate that even if households planned to draw down half of housing equity to support retirement income, the impact on the saving rate needed to smooth consumption would be modest. While housing equity represents a store of value that could be drawn on to meet unanticipated expenditures, it should not be viewed as a substitute for adequate levels of retirement saving. Please note that the authors have also recently released a paper titled “Are Kiwis Saving Enough for Retirement? Preliminary Evidence from SOFIE”, which examines adequacy of retirement savings in the 45-64 age group.

ENDS