Going for Growth 2021 – New Zealand

New Zealand

The economy recovered strongly, supported by large policy stimulus and an effective response to COVID- 19, but some sectors hardest hit by border restrictions, notably tourism, lag behind. The pandemic highlighted a number of structural challenges. A key priority is to address the deteriorating access to affordable housing, which weakens financial resilience, hampers labour mobility and reduces inclusiveness.

Performance prior to the COVID-19 crisis

Economy: Percentage gap with respect to the population-weighted average of the highest 18 OECD countries in terms of GDP per capita (in constant 2015 PPPs). Labour productivity is likely to be underestimated in New Zealand as there is no correction for over-reporting of hours worked, in contrast to the practice in most other OECD countries.

Inequality: The Gini coefficient for disposable income measures the extent to which the distribution of disposable income among households deviates from perfect equal distribution. A value of zero represents perfect equality and a value of 100 extreme inequality.

Environment: Greenhouse gas (GHG) emissions include emissions or removals from land-use, land-use change and forestry (LULUCF). A high exposure to air pollution refers to above 10 μg/m3 of PM2.5.

Source: Economy: OECD, National Accounts, Productivity and Labour Force Statistics Databases; Inequality: OECD, Income Distribution Database and World Bank, World Development Indicators Database; Environment: OECD, Environment Database and United Nations Framework Convention on Climate Change (UNFCCC) Database.

Improving housing affordability for a more inclusive and resilient recovery

Shortages of affordable housing have resulted in high rent payments for low-income households (Panel A), undermining wellbeing and raising poverty risks. High housing prices also increase financial vulnerabilities and hamper labour mobility, which reduces productivity growth. The authorities are taking measures to reign in speculative housing demand and to increase housing supply, but further reforms are needed to achieve sustained improvements in housing affordability. Housing supply needs to be increased by streamlining restrictive and complex land-use regulations, giving local governments greater access to capital for infrastructure investment and aligning their investment incentives with the benefits of well- planned and well-regulated growth. Refocusing the role of KiwiBuild from delivering modestly priced homes to supplying land through aggregating fragmented land holdings and de-risking development sites for developers would increase efficiency in supplying affordable housing. Boosting the supply of social housing, which is low compared with other OECD countries, would reduce poverty by increasing incomes after housing costs.

Productivity performance has been poor, despite generally favourable policy settings. This partly owes to low trade intensity and the small domestic market, which limit returns to innovation and the adoption of new technologies. Innovation support should be geared toward exports and integration in global value chains to boost innovation activities aimed at capturing foreign markets. Innovation support should also target firms that seek to integrate into global supply chains by attracting FDI or supplying to local subsidiaries of multinational enterprises. Lengthy FDI screening processes should be streamlined, for instance by introducing a fast track for FDI that facilitates exports or knowledge transfer.

Vulnerabilities and areas for reform

1. The group of small advanced economies includes OECD countries with less than ten million inhabitants (in panel B, data are missing for Israel, Ireland and Lithuania).

2. The variance components in mathematics, science and reading were estimated for all students in participating countries with data on socio- economic background and study programmes. The variance in student performance is calculated as the square of the standard deviation of PISA scores in reading, mathematics and science for the students used in the analysis.

Productivity growth can also be boosted through better allocation of resources. Facilitating the movement of workers towards sectors with larger labour demand and high-paying job opportunities improves both productivity and employment. However, the means-tested income support for unemployed jobseekers (the

Jobseeker Support) offers less generous compensation for lost labour earnings compared to earnings- related unemployment insurance in other OECD countries. Support for workers during job transitions should be strengthened through reforms to the existing welfare system (the Jobseeker Support), introduction of unemployment insurance, or some hybrid approach, and wider provision of training measures like the existing COVID-19 related scheme that retrains workers in hospitality and aviation for jobs in construction, agriculture, manufacturing and healthcare.

While educational achievement is high on average, Māori and Pasifika children underperform considerably, and the influence of socio-economic background on educational outcomes remains higher than in many OECD countries (Panel B). Improving educational achievement among specific groups by following through the ongoing governance system reform, increasing enrolment in early childhood education and enhancing school-to-work transitions would strengthen inclusiveness by improving educational achievement and reducing the high relative poverty rate among Māori and Pasifika.

Child poverty concerns 15% of children in New Zealand when measured based on the 50% poverty line for income, ranking in the mid-range of OECD countries. Amid the increase in unemployment in the wake of the COVID-19, the government should ensure that progress towards meeting the long-term target remains on track by monitoring the impact of the crisis on child poverty and stepping up support if needed.

New Zealand: Summary of Going for Growth priorities and recommendations

Recent progress on structural reforms

Significant actions were taken in all reform priority areas highlighted in the 2019 edition of Going for Growth, except in reducing barriers to FDI. In other areas, the COVID-19 crisis accelerated reforms as the government included several important measures in the areas of poverty reduction, education and innovation in its fiscal response package. In housing, measures taken this year to quell demand include re-instating and, in some cases, reducing loan-to-value limits on housing loans, phasing out mortgage interest deductions against residential rental income by 2025 and increasing the holding period for the non- taxation of capital gains on residential property other than the primary residence to 10 years. In March, the government also announced measures to increase housing supply, such as creation of a housing acceleration fund (NZD 3.8 billion) to provide contestable grants to municipalities to help fund infrastructure for housing development, the creation of a fund (NZD 2 billion) to purchase land for social housing and increased funding for apprenticeships in the construction sector.

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