The report specifically warned against borrowing that is not fully funded. The pandemic and subsequent spending overruns have significantly deteriorated New Zealand’s fiscal health, leading to a permanent rise in the government spending to GDP ratio.
To address this, the OECD recommended a gradual approach to returning the government’s budget to surplus. If tax increases are necessary, the OECD advised broadening the tax base rather than raising existing taxes. One key recommendation was the introduction of a capital gains tax to ensure fair treatment of shares, land, and owner-occupied property.
As New Zealand faces the financial challenges of an ageing population, the OECD suggested immediate action to gradually raise the age of eligibility for superannuation. While supporting government spending cuts, the OECD warned against potential pitfalls, such as excessive hiring of costly consultants and temporary workers, which could arise from unrealistic fixed headcount targets for government agencies.
The report also critiqued the previous government’s tendency to overspend beyond its initial commitments, noting that such expenditure often led to permanently higher spending trends. While the pandemic stimulus was deemed necessary, the OECD pointed out that its inflationary impact was more pronounced in New Zealand compared to other countries. This was partly due to the Reserve Bank’s lower starting interest rates and exacerbated by domestic supply shocks, labour shortages, and the aftermath of Cyclone Gabrielle.
New Zealand’s low economic growth is partly attributed to the rebalancing of the economy post-COVID. The OECD projected that interest rates would need to remain high to control inflation, resulting in continued sluggish economic growth and a deep trade deficit.
To boost productivity, the OECD recommended enhancing competition among businesses, noting that large firms in New Zealand often face limited pressure to innovate and improve services. In some sectors, where market concentration is particularly high, structural solutions like breaking up companies might be necessary.
Improving education was another major focus of the report. The OECD stressed the urgent need to revamp the curriculum, reform teacher education, and bolster support for teachers and schools, as New Zealand students’ academic performance has been declining rapidly.
On climate change, the OECD suggested that the agricultural sector should improve emission measurements to facilitate better accountability. It also criticized New Zealand’s reliance on planting trees to offset emissions, advocating for a review of the Emissions Trading Scheme. Additionally, the OECD highlighted the need for local governments to secure extra revenue for resilient infrastructure and suggested the government plan for scenarios where affordable insurance for flood-affected properties is unavailable.
The OECD’s extensive recommendations underscore the necessity for New Zealand to adopt a multifaceted approach to economic, educational, and environmental challenges to ensure sustainable growth and resilience.
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