Thursday, 23 April 2009

OECD Economic Surveys: New Zealand 2009

The OECD has released the OECD Economic Surveys: New Zealand 2009. It makes for sobering reading. See below for some of the main points - also - note that the headings click to an expanded version of the OECD recommendations.

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. The full report costs around 57 euros - see end note - however, the executive summary says, inter alia:

"The global crisis is hitting New Zealand, at a time when a difficult domestic adjustment is underway.

Its economy is among the most indebted in the OECD. Falling asset prices and a slump in credit demand mean that a process of debt reduction has started. Nevertheless, persistent, large current account deficits and a high external debt render the economy especially vulnerable in the face of the ongoing global financial and demand shocks.

The economy was already in recession during 2008 and is likely to remain so throughout 2009, before recovering only hesitantly in 2010, as major deleveraging continues. The banks, though fundamentally sound, are heavily reliant on foreign borrowing, much of it short term, and must adapt by diversifying and lengthening the maturity of their funding.

Households, buffeted by wealth losses and rising unemployment, are beginning to increase saving from historically low rates. Firms, faced with shrinking demand, a much more uncertain business environment and tougher financing, are cutting employment and investment.

These forces, along with the large real depreciation of the exchange rate, should over time encourage a much needed shift of resources away from housing and consumption into tradables production.

Macroeconomic policies are, for now, focused on supporting domestic demand, although fiscal policy needs to continue to ensure that public debt stays on a sustainable path.

In response to the slowdown, the Reserve Bank has lowered the official cash rate by 5¼ percentage points since last July, to 3 per cent. Fiscal policy is injecting stimulus of some 5% of GDP during 2008 10. In this light and with the sharp projected deterioration in public finances, monetary policy should be the primary tool used to provide further stimulus. Indeed, the much improved inflation outlook allows scope for further easing.

Given the risks to the government’s credit rating and to market confidence and the heavy dependence on foreign debt funding, there is little room for more fiscal expansion. It is crucial that the new government’s first budget this May delivers a credible consolidation plan.

Boosting productivity growth is critical for closing the substantial income gap with other OECD countries.

Although the quality of New Zealand’s regulatory regime is generally high, it has fallen relative to other OECD countries. Even if a cyclical improvement is likely following the downturn, a durable pick up in productivity growth with high employment will require structural policy changes.

Government ownership should be reassessed to spur competition, notably in transport and energy, and beneficial infrastructure projects should be undertaken.

Regulatory quality and uncertainty should be tackled, starting with the new Emissions Trading Scheme and the Resource Management Act.

A major goal should be to create a more welcoming environment for business and labour with fewer tax distortions to saving, investment and work incentives. Public sector productivity should also be increased.

Rising health care costs are the biggest threat to long run fiscal sustainability. Health spending has grown rapidly over the last decade without significant increases in health outputs. Population ageing will multiply demands on the system a decade or so hence, in addition to technology-cost pressures.

With the risk of a baseline level of debt much higher than expected before the crisis, controlling future health (and pension) costs is even more important.

Reforms should strive to improve incentives. Central control over devolved purchasing agents should be eased, giving them autonomy and responsibility for efficient allocations.

The health sector should build on existing momentum towards greater District Health Board collaboration in regional planning and seek to achieve greater contestability among public hospitals and with private providers so as to stimulate hospital efficiency. GPs should be given stronger incentives for both prevention and efficient care.

A greater role for private insurance and provision could be envisaged so as to spur competition and burden sharing.

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Content summaries - note - click header for more detail:
Chapter 1
Macroeconomic adjustments in the current crisis
Even though New Zealand’s banks are sound, global interdependencies and accumulated domestic imbalances mean that the economy is being affected by the worldwide financial and economic crisis.

New Zealand has one of the OECD’s highest levels of foreign debt, the result of sustained and sometimes large current account deficits that reflect a long period of unbalanced growth and structural deficiencies, notably a small pool of household savings and a low rate of productivity growth.

These imbalances, along with the present reversals in global risk appetite and credit availability, present a risk of sudden and costly macroeconomic adjustments. As a small nation on the world’s periphery, New Zealand is affected by the sharp decline in world trade, which began in late 2008 and is unlikely to be reversed during 2009.

At the start of the crisis, both fiscal and monetary policies had substantial room for counter cyclical action, and much has been done on both fronts.

There remains more room for monetary policy easing than in most OECD countries, while fiscal policy is now constrained by the projected growth in debt and associated credit rating concerns.

Even so, a deep and protracted recession, involving a housing market correction and deleveraging of household and business balance sheets, is unlikely to be avoided.

As principal intermediaries between foreign savers and domestic borrowers, banks depend to a large extent on overseas funding, most of which is short term.

A number of smaller finance companies, less regulated than banks, have gone bust. To maintain confidence in the banking and financial sector, new guarantee schemes for retail deposits and wholesale bank funding have been introduced, along with temporary liquidity facilities, and non bank deposit taking institutions have been brought under the central bank’s regulatory umbrella.

The main challenges for policy makers are to manage the downside economic risks posed by the current crisis, while preserving the longer run credibility of the macroeconomic policy framework.

Chapter 2
Structural policies to overcome geographic barriers and create prosperity
New Zealand’s living standards remain well below the OECD average. This is entirely attributable to persistently low labour productivity, which in turn is related to economic geography as well as structural policy factors.

The small size and remoteness of the economy diminish its access to world markets, the scale and efficiency of domestic businesses, the level of competition and proximity to the world’s technology frontier.

This points to the need for a “New Zealand policy advantage”, that is, a set of structural policies attractive and welcoming enough to overcome the geographic handicap and attract the drivers of prosperity – investment, skills and ideas – to New Zealand.

The reforms of the 1980s and 1990s laid much of the groundwork for creating this advantage and for a pickup in productivity growth. But in recent years, New Zealand has lost ground relative to its OECD peers.

The reform focus has shifted away from growth and the government has introduced a large quantity of often poor quality regulation.

Policies should be refocused around the productivity goal in a number of areas, beginning with those covered in this chapter, namely international trade, the business climate for domestic and foreign investment, public sector efficiency, infrastructure, innovation and natural resources management.

This chapter also evaluates the recently legislated emissions trading scheme through a productivity lens.

Chapter 3
Health care reform: challenges for the next phase
New Zealand spends less per capita on its health care system than many OECD countries, yet as elsewhere, trends in demography, technology and costs will exert mounting and unaffordable pressures on spending over the long run.

Policy makers can manage the fiscal challenge by controlling health care costs and putting limits on public coverage. The fiscal framework, which imposes hard budget constraints on health and other spending, provides a good foundation for cost control.

However, government intervention to blunt price signals in health care systems and enormous supplier influence over patient demand mean that health care markets do not behave like other markets and there can be no guarantee that best value for money is being extracted from health budgets.

While health care reforms in the past have attempted to improve incentives for efficient health market behaviour, over the past decade or so, large boosts to hospital wages and primary care subsidies have most likely failed to elicit commensurate gains in either the quantity or quality of output.

Another concern is the sustainability of the health care service delivery model in the face of rising demands and looming health care workforce shortages.

As a high immigration country, with large and poor minorities, New Zealand is striving to promote equality of health outcomes, improved access to care and more efficient management of chronic conditions, the big clinical challenge of an ageing society.

Efforts are also underway to rationalise the hospital sector to assure its clinical viability. To achieve these important goals, there is still a need to improve efficiency incentives and information, clarify institutional roles, and enhance the attraction of New Zealand as a place in which to live and practise medicine...."

quotations sourced from
www.oecd.org/eco/surveys/nz

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The complete edition of the Economic survey of New Zealand is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

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