OECD Economic Surveys: New Zealand 2024

Charles Dennery

David Haugh

Axel Purwin

The New Zealand economy bounced back quickly following the deep Covid-19 recession (Figure 2.1, Panel A). By late-2022 the economy was already 8% larger than just prior to the pandemic, but the rapid expansion came with over-stretch and growth has stalled since. Excess demand, along with rising imports prices as demand for durable goods surged globally, and the shut-off of inbound tourism to New Zealand due to Covid-19 border controls, pushed the current account deficit to a peak of 8.8% of GDP. The unemployment rate fell quickly to a trough of 3.2%, its lowest level in 40 years. As a result of excess demand and pandemic-induced supply chain tensions first, and later aggravated by Russia’s war of aggression against Ukraine, inflation began to rise quickly from mid-2021 (Box 2.1). In response, the Reserve Bank of New Zealand (RBNZ) raised the policy interest rate by 525 basis points to 5.5% between late 2021 and mid-2023.

This rapid tightening of monetary policy, declining household real incomes, along with a cooling of global growth and international merchandise trade, slowed growth in New Zealand, which declined from a peak of over 6% in 2021 to 0.6% by 2023 (Table 2.1) despite a rapidly rising population due to high net inward migration. As a result, GDP per capita fell 3.1% in the year to 2023Q4 and national disposable income per capita, which better measures the purchasing power of New Zealand residents by nearly 5%. Higher interest rates have weighed on the housing market and contributed – along with low population growth in 2020 and 2021 – to a contraction in housing construction in the course of -2023. With activity slowing, consumer price inflation fell from a peak of 7.2% to 4% in the first quarter of 2024. Core inflation is sticker but has also started to ease, helped by fading labour market tensions and cost pressures, to around 4.2% (Figure 2.1, Panel B).

Imbalances are partially cyclical and are unwinding. With slowing GDP and imports plus an increase in international tourist arrivals, the current account deficit shrank from a recent peak of 8.8% of GDP to 6.9% in 2023Q4. This remains above the long-run average for New Zealand and still one of the highest in the OECD (Figure 2.4). A further decline appears in prospect. How fast this occurs depends mainly on the ongoing recovery in services exports, and especially tourist arrivals, which were around 76% of their pre-Covid levels in the year to February 2024. All else equal a lift in tourist arrivals to pre-Covid levels would reduce the deficit by around 0.7 percentage points of GDP. The ongoing re-establishment of flights to New Zealand will help support tourist arrivals. More uncertain is how much and how fast tourism from China will recover given weak growth there but it showed signs of picking up in early 2024. However, part of the current account deficit widening is structural, and the deficit is likely to remain higher than the long-run average until the government shrinks its deficit further.

Strong GDP growth and over two years of Covid-19 border control restrictions led to a tight labour market with high skills shortages from mid-2020 to mid-2023. Strong employment growth helped quickly push the unemployment rate lower, attract more people into the labour market and increase the participation rate to 72.4%, a record high. However, this was not enough to offset almost no inward migration and labour costs rose sharply, though real wages did not (Figure 2.5).

The increase in vacancies and wage pressures helped increase the employment rate for men and women, both through lower unemployment and higher labour force participation. Overall, the recovery post Covid-19 was favourable to women and ethnic minorities in the labour market. Between March 2020 and March 2023, the employment rate of males increased from 72.8% to 74.0%, but it rose even faster for women, from 62.8% to 65.2%, shrinking the employment gap between men and women. The gender pay gap declined from 9.3% in 2020 to 8.6% in 2023. The employment rate also increased more for Māori and Pasifika workers, contributing to a reduction of the employment gap with Europeans.

With the almost full re-opening of the border from mid-2022, employment expanded through mid-2023 as employers filled a large stock of vacancies partly with migrant arrivals. However, the backlog of vacancies is fading quickly. Labour demand is weakening, vacancies are declining and employment growth slowed sharply from the first to the second half of 2023. The unemployment rate has risen from the 3.2% trough to 4.0%. Annual wage growth as measured by the Labour Cost Index eased from 4.5% in 2022Q3 to 3.9% at the end of 2023. However, to help ensure inflation falls to the middle of the RBNZ’s 1-3% target, nominal wage growth will need to fall to around 2.5% to ensure real wage growth is around 0.5%, consistent with New Zealand’s productivity growth.

Skill shortages have also declined significantly according to the QSBO business survey but in some fields, they are, as in many OECD countries, more structural. New Zealand faces medium-term skill shortages across the skill spectrum in many different industries (Figure 2.6). In some cases (e.g., education, health, care and science roles), this is partly due to insufficient students entering higher education in these fields, which is in part because they haven’t acquired the pre-requisite competencies in mathematics and science at school (Chapter 4). New Zealand has long relied on partly filling these gaps through inward migration of foreign skilled labour and is second among OECD countries after Luxembourg for the share of foreigners with secondary or tertiary qualifications.

While the recent surge in immigration has helped to address a fraction of New Zealand’s skill needs, skill shortages and vacancies are a global phenomenon, and New Zealand will not be able to address structural skill shortages only by attracting skilled migrants from other countries, especially in fields like health where international competition from Australia and other advanced OECD countries is fierce. Indeed, skilled work visa schemes have in the past attracted many low skilled arrivals (OECD, 2019) and this appears to be continuing. Of the long-term migrant arrivals in the year to September 2023 with an occupation classification, only 21% (versus a 25% average over 2009-23) appear to be in the two higher skill levels, ANSCO 1 and 2, which include ICT managers, health professionals and teachers. This could nevertheless partly reflect a catch-up of unmet demand for low skills when the borders were closed due to Covid.

More needs to be done to increase local skills supply. Improving primary and secondary education (Chapter 4) is necessary to build the pre-requisite skills, including in mathematics and science, for entering tertiary level studies in health, science, teaching and other occupations in shortage. It is also important that the choices of young people and tertiary education providers are well informed about the skills and occupations that are in demand in the labour market (OECD, 2017). Further improving and widening access to vocational training, work-based training, as well as lifelong learning opportunities, and support to displaced workers would help increase the skills of all New Zealanders and speed up occupation transitions (NZPC, 2019; NZPC, 2020). It is also important for increasing the labour force participation and inclusion of young people from lower socioeconomic backgrounds. There is also scope to make more use of the skills already available in New Zealand. Other countries that face skills shortages have increasingly relied on tasks delegation, labour-augmenting artificial intelligence, as well as short-term contracting for some professionals; New Zealand could benefit from further expanding these practices.

As in other OECD countries, shortages of healthcare and childcare professionals have become more acute in New Zealand, especially for general practitioners at the local level (Gorman and Horn, 2023). To make the most of the existing health workforce, there is some scope for overhauling the healthcare organisation, by delegating more tasks to professionals with more limited training (Gorman, 2009). Specialist nurses in New Zealand have gained new responsibilities in aged care and for prescribing diabetes drugs; a more systematic review is likely to highlight new tasks to substitute (Carryer and Adams, 2017). A thorough review of occupational licensing rules is probably warranted in this regard. Artificial intelligence and remote medical diagnostics by specialists are likely to help in this task delegation locally. Finally, the same principle of task delegation can probably be envisioned to boost the supply of childcare services in nurseries and kindergartens, but this warrants further investigation as part of a wider review of childcare (Chapter 4) as there can be a trade-off between availability and quality. Making childcare more readily available and affordable is one of the keys keeping mothers in the workforce and addressing the child penalty in terms of career and wages.

Task delegation and labour-augmenting AI are also likely to help address likely future shortages of particular skills in professions like architects, engineers, lawyers, accountants and IT workers. Sometimes this might require a change in the law to specify that a certain task does not need to be carried out entirely by a professional but only to be supervised by her. Legislation might also have to adapt to the growing role of AI and generative AI in professional services: while some safeguards are necessary to preserve confidentiality and maintain trust, AI has already started to disrupt these industries and increase labour productivity.

The end of Covid-19 controls saw demand rise far above the economy’s productive capacity. The slowing of growth since is reducing excess demand as evidenced by an easing in labour market shortages and wage growth. Demand is expected to fall below the economy’s sustainable capacity to supply in 2024 (i.e., the output gap will become negative), as needed to help bring down inflation. Although inflation is coming down, it remains above the RBNZ’s 1 to 3% target range, and services inflation is persistent, calling for continued restrictive monetary policy coupled with fiscal consolidation.

Against this backdrop, GDP growth is projected to be slow in 2024 but to pick up in 2025 as disinflation helps to restore modest real household income and consumption growth (Table 2.1). A growing shortage of housing and rising house prices and rents are expected to eventually stimulate housing construction, while higher growth in demand from trading partners, and especially the recovery in tourist arrivals will help to boost exports. Inflation is projected to continue easing gradually in line with the end of supply chain tensions, weaker demand, higher unemployment, and more modest nominal wage increases.

The international trading environment for small open economies has deteriorated, with a breakdown in multilateral trade negotiations, rising restrictions on trade and a trend slowdown in global trade growth (OECD, 2023b). An extended slowdown in China, New Zealand’s largest export market, presents an important risk to New Zealand’s main exports and overall growth. Growing geopolitical tensions and the spread of conflict in Europe and the Middle East present a high risk of negative shocks that would push New Zealand’s inflation higher and growth lower. In addition, natural disaster risks arising from earthquakes or climate-change related extreme weather remain high. Policy can only partially mitigate these risks (Table 2.2). On the upside, stronger tourism growth could spark a more vigorous export-led recovery.

After increasing by more than 40% in 2020 and 2021, house prices have fallen by around 15% between 2021Q4 and 2023Q1 as increased interest rates have reduced the purchasing power of homebuyers, but with a marked variation in declines between the different urban areas (Figure 2.7, Panel A). Prices have stabilised and partly rebounded since, at least in nominal terms, and will likely be supported by positive net immigration. The improvement in affordability from the decline in household debt has been offset by rising interest rates and household debt servicing is rising (Panel B). Affordability is low especially for renters compared to the OECD average (OECD, 2022a). Expanding the supply of housing remains a priority to better align house prices and rents with debt servicing and rental payment capacity.

However, higher interest rates have not fully been passed through to borrowers yet, and there is a risk that prices could fall again, with significant negative effects for the economy and eventually financial stability. Debt servicing obligations have increased but remain well below 2007-08 Global Financial Crisis levels. So far, debt repayment capacity has not been severely impaired – partly because mortgage terms can sometimes be extended or temporarily switched to interest only payments when interest rates increase to limit the rise in monthly payments – but a sharp economic downturn and increase in unemployment would test this repayment capacity further especially given high household debt (165 % of disposable income in July 2023). Banks are reporting that arrears have been mostly associated with illness or unemployment, rather than an inability to service higher interest rates (RBNZ, 2023b).

New Zealand banks have reduced the diversification of their loan book, with their exposure to the housing sector increasing during the pandemic (Figure 2.8, Panel A). At the same time their exposure to foreign funding has decreased (Panel B), cutting back their exposure to global economic and financial disruptions. Non-performing loan (NPL) ratios have increased since the end of 2022 and are expected to further increase over the next two years as an effect of higher interest rates and slower economic activity (Figure 2.9, Panel A). However, NPL ratios are expected to remain well below the levels observed after the Global Financial Crisis, and banks have increased loan provisions in anticipation of a rise in NPLs. The RBNZ’s 2023 solvency stress test showed that the largest four banks were resilient to a severe “stagflation” scenario, combining high interest rates, inflation and high unemployment. Aggregate results indicate capital ratios falling materially under this scenario but remaining well above the regulatory minimum for Tier 1 capital of 6% in New Zealand, which is in line with the international standard in the Basel III accords (Panel B).

The severe weather events in 2023 have led to high claims (Chapter 5) and an increase in reinsurance costs for insurers. However, insurers have generally been able to obtain additional cover and are passing on higher reinsurance costs to policyholders. Life insurers’ profitability has also been reduced by investment losses due to rising interest rates over the past two years but their solvency ratios remain above regulatory requirements.

New Zealand’s financial supervisory and prudential landscape has seen significant improvements in 2023. The Deposit Takers Act, passed in July 2023, gives additional powers to the RBNZ, with new requirements on company directors, greater inspection powers and an improved penalty framework. It also unifies the regulatory regime for all deposit-taking institutions, bank and non-bank, with a more robust monitoring system, a framework for managing and resolving distressed institutions, and a deposit compensation scheme of up to NZD 100 000 per depositor, per institution. This deposit insurance scheme, which was recommended in past OECD Economic Surveys, is expected to go live in 2025 and is a big improvement on the current absence of such insurance. Additionally, banks’ minimum total capital requirement was increased from 8% to 9% in July and banks are progressing towards the new capital requirements applicable in 2028.

The large current account deficit and negative net international investment position (NIIP) also carry financial stability risks (Figure 2.10, Panel A). The key one is a loss of investor confidence and sudden stop of capital inflows, which would lead to a sharp depreciation of the currency. The high share of government debt held by non-residents (58% of the secondary market) makes it more vulnerable to a loss of confidence due to a ratings downgrade (Panel B). New Zealand has run current account deficits of about 4% of GDP over the past 30 years, reflecting its long-standing structural saving-investment imbalance and generating a negative NIIP of -50% of GDP in 2022. While sizable, this negative NIIP has reduced substantially over the past 15 years due to a cumulation of lower debt servicing outflows as a result of lower interest rates and revaluation gains. Risk is also mitigated by external NIIP liabilities being mainly denominated in New Zealand dollars and having a net foreign currency asset position, so that a nominal depreciation of the New Zealand dollar tends to strengthen the external balance sheet, all else equal. The banking sector has a net foreign currency liability position, but it is fully hedged (IMF, 2023).

The significant tightening of monetary policy since the end of 2021 has led to a marked increase in financing costs for banks, non-financial corporations and the government (Figure 2.11, Panel A), and inflation expectations have started to normalise (Panel B). The tightening of monetary policy has slowed economic activity and inflation including via higher mortgage rates. Due to large increases in interest rates elsewhere, exchange rate movements have been relatively small and therefore contributing very little to changes in inflation. Global developments, including a reduction in supply-chain bottlenecks, have eased electronic goods prices. However, services inflation is persistent, in part due to faster rising rents and a tight labour market, which makes it difficult to achieve faster disinflation. This persistence in inflation limits the scope for lowering the official cash rate in 2024 and it should remain constant at 5.5% until there is clear evidence that inflation will fall to the middle of the RBNZ’s target range of 1-3%.

Monetary policy needs to keep inflation on track towards the RBNZ’s target. This is challenging: services inflation is persistent and the timing and size of the contractionary effect of increased interest rates is uncertain. Transmission lags mean higher interest rates will continue to impact consumption throughout 2024 but the exact timing and magnitudes are difficult to anticipate. Rapid population growth and large swings in productivity during and post Covid-19 make it harder to project the economy’s productive capacity. The RBNZ’s task is also made harder by less timely and frequent data to base its policy decisions on than in the rest of the OECD and the costs of a policy mistake far outweigh the cost of more timely statistics (Box 2.2).

The adjustment of the variable- or adjustable-rate mortgages will continue into 2024 and policy should adapt if these effects are materially weaker or stronger than the RBNZ was anticipating. Disruptions in the funding market caused by a negative global shock can be partially addressed with macroprudential tools. Nevertheless, the monetary policy stance may have to adapt quickly to a slowdown. Conversely, further monetary tightening would be warranted if inflationary pressures remain even more persistent than expected due to for example more pressure in housing markets or further delays in fiscal consolidation.

The 2022 Review and Assessment of the Formulation and Implementation of Monetary Policy looked at the conduct of monetary policy in 2017-22. It found that overall the Monetary Policy Committee (MPC) had been agile in reacting to the unprecedented Covid shock, and that the inflation and employment objectives had not been in conflict over the review period (RBNZ, 2022). The review also rightly assessed that in hindsight, monetary policy should have been tightened earlier as demand was already high and inflationary, but such a tightening would not have prevented inflation overshooting the target given the global and supply-side shocks that occurred. However, the MPC did not fully anticipate the effects of massive, innovative and unprecedented fiscal policies employed to support the economy during the pandemic. This was further compounded by higher-than-expected public spending. Furthermore, while alternative monetary policy tools (asset purchases and forward guidance) proved efficient at stimulating economic activity during the pandemic, they likely added to inflation later.

Coordination around alternative monetary tools works well. Institutional arrangements between the RBNZ and the Treasury for asset purchases are transparent and allowed the RBNZ to maintain independence over monetary policy (Box 2.3). However, with the benefit of hindsight, the overall macroeconomic policy response to the pandemic stabilised output and employment well but contributed to high inflation. It may be difficult to do better when making decisions under such uncertainty. Nevertheless, to prepare for future crises, further work should go into how to coordinate macroeconomic policy, and notably the assignment of fiscal and monetary policies in response to destabilising events (Buckle, 2023). This work should consider the implications of novel and/or large fiscal policy responses to a crisis for monetary policy and vice versa, as well as implications for central bank independence and the government’s financial position.

The MPC remit did include a dual mandate of promoting price stability and maximum sustainable employment and required the MPC to assess the effect of its monetary policy decisions on house prices. The statutory review of the monetary policy Remit and Charter, finished in June 2023, concluded that New Zealand’s inflation targeting framework remains appropriate. While this review did not advocate an end of the dual mandate, it did recommend inflation targeting as the primary objective, with employment becoming a secondary target. The previous government did not enshrine this hierarchy in the new June 2023 remit but the new government legislated a return to a single inflation target, and amended the remit accordingly, in December 2023. The new remit also requires that, when inflation lies outside the 1-3% range, the MPC explains why and provides a timeframe for inflation normalisation. The single inflation mandate reduces the risk of overshooting the inflation target in the face of negative supply shocks (e.g., the recent global energy price shock) when employment and inflation considerations pull in different directions. The effect of the new reporting requirements is likely to be modest as the RBNZ was already publishing economic projections including a path for inflation in the context of its quarterly monetary policy statements.

Additionally, the new remit has narrowed the list of secondary elements for the RBNZ to consider while achieving its primary objective. The MPC shall now have regard to financial stability and seek to avoid unnecessary instability in output, employment, interest rates and the exchange rate. As such, employment considerations have, rightly, not been fully discarded. Nevertheless, New Zealand should for the moment avoid further changes to the RBNZ’s mandate or secondary objectives. New Zealand is somewhat an outlier among OECD economies with respect to the frequency of changes in the MPC remit and further changes if any should occur in the context of the five-yearly statutory reviews of the charter and remit of the RBNZ.

Recent large fiscal deficits have contributed to excess demand and the unsustainably high current account deficit. The discretionary increase in expenditure in the previous government’s 2023 Budget (partly due to the North Island Weather Events) has worked against monetary policy efforts to reduce inflation by contributing to an increase in demand in the 2023/24 financial year. More of the macroeconomic policy tightening ought to come from fiscal policy in 2024. The government should gradually tighten fiscal policy in the 2024 Budget. This would contribute to the rebalancing of the economy and reduce the burden on monetary policy, allowing interest rates to fall sooner than otherwise. The government has announced in the Budget Policy Statement 2024, released in March 2024, that the new operating allowance for the 2024 Budget will be less than NZD 3.5 billion. It is key for fiscal policy credibility that, absent a further large negative shock, the government does not deviate from the new operating allowances as set out in Budget 2024.

As in many OECD countries, the medium-term fiscal position has deteriorated significantly in recent years. The general government fiscal balance is estimated to have declined from a surplus averaging 0.9% of GDP between 2014 and 2018 to a deficit averaging 3.7% of GDP between 2019 and 2023. Gross general government public debt, although still low compared to 113% of GDP in the OECD area, rose quickly to 56% of GDP by 2023 (Figure 2.12). A massive policy response to shield households and firms from the worst effects of the Covid-19 pandemic, the 2022 global energy and food price shock caused by Russia’s war against Ukraine and the costs of extreme weather events in 2023 played a large role in the deterioration.

However, although it has declined from its Covid-19 peak in 2020, total general government spending has taken a step change up and was around 6 percentage points of GDP higher in 2023 than in 2018. Structural changes to spending and notably the decision to index welfare payments to wages instead of the CPI from April 2020 increased expenditure growth. This is expected to be reversed by legislation introduced in February 2024 to re-index the main benefits back to the CPI. Increasing government expenditure is a political decision, but the increase is also partly due to government spending exceeding the new expenditure allowances set after Covid-19 had already struck (Figure 2.13). The spending slippage against allowances in 2020 (not shown) can be explained by Covid-19 but shocks in the following years do not explain important increases in expenditure as they occurred after the slippage.

Expenditure slippage occurred in part due to additional expenditure to cover extensive governance reform programmes in health, education, water, and other sectors, as well as initial work on investment programmes. Expenditure slippage is sometimes justified as a “one-off” but a repetition of “one-offs” can quickly contribute to a permanently higher trend increase in expenditure. This carries with it risks of undermining policy credibility and contributing to macroeconomic imbalances and higher government debt.

Slippage arose in two main ways. First, the government increased the annual spending allowances set down at the beginning of the three-year parliamentary term. For example, at the beginning of the term in February 2021, the government set the new operating allowance (i.e., the permitted total increase in new spending initiatives) at NZD 2.625 billion per annum for the four budgets 2021-24. Subsequently, the Budget Policy Statement (BPS) 2022, released in December 2021 before Russia’s invasion of Ukraine, showed the government would increase the new operating allowance to NZD 6 billion and NZD 4 billion for the 2022 (financial year ending June 2023) and 2023 budgets respectively. In Budget 2022 (released May 2022) the government kept spending for 2022 within the allowance set in the BPS, spending NZD 5.9 billion, but it increased the allowance for Budget 2023 further to NZD 4.5 billion. New allowances were partly increased because nominal GDP growth was expected to be higher than it turned out to be. This led to an over-estimation in revenue and therefore spending that would be in line with the operating balance target, highlighting the vulnerability of a balance target to economic forecasting errors.

The second type of slippage occurred between the announcement of the operating allowance for the next financial year in the BPS (December) and the subsequent Budget (May). For example, the 2021 BPS (released December 2020) announced the operating allowance for Budget 2021 at NZD 2.625 billion but by Budget 2021 (released in May 2021) it had been increased to NZD 3.8 billion.

On top of the increase in baseline government expenditure, an expected rise of nearly 3% of GDP in ageing-related health and pension expenditure by 2040 will also need to be tackled (Figure 2.14). If public expenditure, the population and the economy continue to grow at historical rates, and absent policy changes or individual responses, net public debt will continue to rise unsustainably (New Zealand Treasury, 2021). Sustained spending slippage would increase debt further but reforms to raise labour productivity and average hours worked would help limit the increase (Figure 2.15).

Beyond the immediate need to contribute to reducing imbalances in the economy, it is important that the government continues to steadily reduce the fiscal deficit as planned to limit the rise in public debt and thereby increase the fiscal buffer available for the next negative shock. On the revenue side, any tax cuts should be fully funded by offsetting revenue or expenditure measures. Raising revenues should be first achieved through broadening the tax base and reducing distortions before raising rates of existing taxes. There is a need to reduce distortions to household choice of asset allocation. Shares, land and owner-occupied residential property are tax-favoured. Most capital gains from shares, owner-occupied residential property and land are not taxed. To ensure the tax system is not overly distorting saving and supporting broader growth, capital gains taxation reform should be done as part a wider review of tax settings for saving. New Zealand’s tax settings remain an outlier in some respects in international comparison and notably in offering no tax deduction for contributions and in taxing the returns pension funds earn while they are invested, and prior to withdrawal at progressive rates (OECD, 2018). This likely distorts saving away from national private pension saving. Foreign savings are not a perfect substitute for national savings. Even in a country relatively open to international capital flows like New Zealand, low national savings likely constrains investment (David et al., 2020). This is particularly the case for New Zealand’s significant infrastructure and long-lived capital investments needs, for which pension savings is well suited as a funding source given its long-term nature.

On the spending side, ageing-related expenditure is rising quickly and pensions are starting to be a major driver of new expenditure. Many of the reforms needed to sustainably tackle ageing-related expenditure need to be introduced gradually (e.g., increasing the retirement age) and take a long time to have an effect (e.g., reforms to raise productivity). This argues for acting now despite the relatively benign outlook for public debt until 2030. There are some areas where targeted new spending would be justified (education for example, see chapter 4 of this Survey), but more fiscal room must be found before these spending priorities can be addressed. Others are small enough that re-prioritisation of current expenditure would allow them despite the overall necessity to reduce the deficit (Table 2.3). There is no silver bullet for increasing revenues or containing spending, but the medium-to-long run fiscal balance will remain a pressing challenge for the years ahead. Additionally, expenditure consolidation plans need to be mindful about unintended consequences of spending rules. For example, setting unrealistic fixed headcount targets for Government agencies can at times lead to excessive hiring of consultants and temporary workers, which can be costly and counterproductive.

New Zealand’s principles-based fiscal framework is closely aligned with the OECD’s principles on budgetary governance (OECD, 2015). It has many strengths, notably flexibility and transparency with legislated requirements for regular statements of the government’s short-term intentions and long-term objectives and economic and fiscal reporting including long-term fiscal statements on whether the objectives are in line with responsible fiscal management. However, the experience over the past five years with spending slippage, as well as debates and uncertainties about the costings of political party promises, suggest that the framework has shortcomings.

This spending slippage shows that a framework that focuses fiscal targets on the operating balance and debt but not expenditure is insufficient. In addition, despite the existing framework's focus on transparency, the spending slippage was not well explained. For example, the over NZD 3 billion increase in the allowance for Budget 2022 announced in BPS 2022 was explained as a “one-off” to cover the restructuring of the health services and pressing health needs, while the increase for Budget 2023 of NZD 1.4 billion was not explained at all in the BPS. Inaccuracies in the cost of the major political party proposals risk sub-optimal policy and further fiscal slippage, especially as these costings are presently often provided by consultants, who do not always have access to all the necessary fiscal information.

Fiscal rules, although not legislated, are already a part of government fiscal strategy in New Zealand. However, a further refinement of the use of fiscal rules and an independent fiscal institution (IFI) in New Zealand could complement the current framework and help to deal with both these weaknesses. Research has found both fiscal rules (Nerlich and Reuter, 2013; Fall et al., 2015) and IFIs (Debrun et al., 2009; Debrun and Kinda, 2017; Beetsma et al., 2019; Martins and Correia, 2020) can improve fiscal performance with lower deficits, less optimistic forecasts and less pro-cyclical fiscal policy and that IFIs help with greater compliance with fiscal rules. The main causal mechanism appears to be that they both improve transparency, allowing parliament, civil society, and the media to better hold the executive to account.

The Public Finance Act 1989 requires the government to set out annually a strategy with its long-term objectives for fiscal policy, including total expenditure and the balance between total operating expenses and revenues. Governments have adopted fiscal rules and numerical targets as part of these strategies but have been focused on net debt and the operating balance. This focus has not prevented spending slippage. This is in part because positive revenue surprises, due to the economy performing better than expected, have at times been used to increase spending beyond what was planned, a practice that operating balance and net debt targets do not constrain.

Within the current public finance framework, one option to better counter spending slippage would be for the government to set out in all the main fiscal documents a fiscal target for discretionary expenditure growth and not only for the operating balance. This would retain the flexibility and government ownership advantages of the current principles-based framework but would have an additional accountability advantage as the government has more control over expenditure than over the operating balance. This would give the Treasury a more transparent technical yardstick to measure and report on fiscal performance, which in turn would provide Parliament and the public more information to hold the government to account.

A proposal to introduce an IFI was made in New Zealand before the Covid pandemic (Kopits, 2019). A range of submissions from international institutions to individuals generally agreed with the proposal but some were sceptical about how much value it would add to the existing framework. There were also a variety of views about the functions of the IFI and especially whether it should cost political parties’ policies. Most submissions were in favour of the IFI being an Officer of Parliament although some pointed out this imposed some constraints (The Treasury, 2019).

IFIs are present in around 80% of OECD countries. The functions of these institutions vary across countries and often include the assessments of budgetary plans, long-term sustainability and the evaluation or provision of macroeconomic and budgetary forecasts (von Trapp et al., 2016). An IFI would complement the current fiscal framework by providing a voice for fiscal sustainability independent of the executive, as well as strengthening the support to parliament in its role in balancing the power of the executive. The mandate of the IFI matters for its effectiveness. IFIs tasked with assessing budget forecasts and monitoring fiscal rules are on average successful in delivering more accurate forecasts and stronger fiscal rule compliance (Debrun and Kinda, 2017). An IFI should be informed by international experience (Box 2.4). However, a New Zealand IFI should be home built and tailored to New Zealand’s needs and institutional constraints (Kopits, 2019). Given the extra costs involved in setting up an IFI with these macroeconomic and fiscal monitoring functions and, the limited availability of experts in fiscal policy in New Zealand, and the duplication of Treasury functions, it would be preferable to first test the approach of a greater focus on expenditure monitored by the Treasury discussed above.

By contrast, constant doubts about the costs of major policy proposals with significant implications for the fiscal position argue for introducing an IFI as there appears to be a genuine gap in the policy framework. This is not a function the Treasury can fulfil without compromising its independence from politics. Internationally some IFIs cost party political policy proposals. If a New Zealand IFI was given this costing function it could help the democratic process by switching the debate from the veracity of the costings, where it has been focussed in the two past parliamentary elections, to the merits of the policy itself. Independent, expert costing would also reduce the risk of fiscal sustainability being undermined by large errors in these costings.

The OECD principles on IFIs (OECD, 2014) and international research also suggest certain IFI design features that would increase its effectiveness. These include independence, appropriate resourcing commensurate with its mandate, having access to all the information required to carry out its mandate, and that the IFI leadership is visible in the media and effective in public debate (Debrun and Kumar, 2009; Debrun and Kinder, 2017; Martins and Correia, 2020). The latter is more likely if the IFI Chair or Parliamentary Officer is respected across the political spectrum for their independence and expertise in fiscal policy and public finance. The OECD IFI principles also highlight the importance of IFI accountability to parliament regardless of its institutional reporting lines.

High net inward migration of over 126 000 (2.4% of the population) in 2023 is the result of very high arrivals of non-New Zealand citizens (4.5% of the population) (Figure 2.16) combined with increasing departures of locals. The ensuing strong population growth is supporting consumption and GDP and has helped to ease labour shortages but it is also slowing the decline in inflation in the short-term as immigration adds to housing demand (NZPC, 2021; RBNZ, 2023a).

The surge in net migration is likely partly a temporary release of pent‑up demand to migrate to New Zealand following the lifting of most Covid-19 border controls by end‑July 2022. It may also reflect the interaction between changes to visa settings, employer behaviour, and the profile of labour demand across all skill levels when the border reopened. The main temporary work visa is the Accredited Employer Work Visa (AEWV). It was introduced in July 2022 to replace the Essential Skills Work Visa, with the aim of encouraging more highly skilled migrants to come to New Zealand. The new visa made the system employer-led and came with increased documentation and verification requirements for employers to be accredited (which the Essential Skills Work Visa had not previously required). It also changed the requirements on proving whether the job could not be filled in New Zealand (the job test). In practice, checking by Immigration New Zealand that requirements were met was more limited than it should have been (Public Service Commission, 2024)

A key feature of the AEWV was the requirement that the job offered the median wage or above, as a way of discouraging the incidence of low-skilled temporary migration. Exceptions were permitted in defined sectors where a longer transition path to paying the median wage to migrants was agreed (Sector Agreements). Further changes were introduced in 2023, including extending the maximum duration of the AEWV from three to five years, with the proviso that it cannot no longer be renewed. This change was designed to reduce the risk of temporary migrant workers settling in New Zealand without meeting the residence requirements. The AEWV has been abused by employers and immigration consultants with some migrants being fired soon after arriving in New Zealand or being housed in crowded unsanitary conditions and a review of its operation was launched in August 2023. As of mid-February 2024, Immigration New Zealand had received 2107 complaints against accredited employers and had over 170 active investigations underway. A review into the implementation of this visa found shortcomings in the operation of the visa including insufficient resourcing to process applications within the required deadlines, leading to instructions to reduce application checking (Public Service Commission, 2024). It will be especially important to make the employer accreditation and job testing processes more rigorous.

Net inward migration was already high in the decade leading up to Covid-19. It boosted aggregate growth and government revenue, benefited individual firms facing a labour shortage with no proven overall negative effects on the employment and wages of New Zealanders although the available evidence indicates it has been negative for some, notably welfare beneficiaries outside Auckland during certain periods of time (OECD, 2019; MBIE, 2018). However, the recent rate of net immigration has been far higher than experienced in the past. While immigrants have filled many job vacancies, high population growth has not been matched by an equivalent investment in housing and physical capital to maintain productivity, and the supply of skilled professionals (notably in health and education) has also failed to follow the needs of a growing population.

If the speed of inward migration exceeds the absorptive capacity of the economy to provide the new migrants with quality housing, infrastructure and capital, it can exert a drag on the capital-to-labour ratio, which is already low in international comparison, and be negative for overall economic performance and wellbeing and slow productivity growth (NZPC, 2021). There is mounting evidence that this is happening with investment in infrastructure, housing and government services failing to keep pace with high population growth over a long period spanning several governments. As a result, there is a substantial infrastructure deficit, contributing to growing traffic congestion, particularly in Auckland, housing shortages contributing to high housing prices and rents, amongst the highest relative to incomes in the OECD, and overcrowding, a shortage of GPs due to not expanding places at medical schools, and schools and teachers not being resourced sufficiently to face new pressures such as integrating recent migrants with little knowledge of English. Indeed, rental housing shortages have contributed to an annual increase of 5.1% in rents for new tenancies in March 2024.

Making investment more responsive to high net inward migration requires removing several structural impediments. Barriers to housing supply include weak competition in building materials (Chapter 3) and excessively tight supply of space to build (Chapter 5). The planning system has also failed to cope well with past demands for new infrastructure and housing created by population growth. New developments are “hotter and harder” than traditional suburbs and more vulnerable to climate change. Several reforms, including to council funding, are required to ensure these investments are of higher quality, more affordable and adapted to a warmer climate with more extreme weather (Chapter 5).

However, even more responsive investment is unlikely to keep pace with very high net inward migration. Importantly, the level and type of net inward migration seems to be out of line with New Zealand labour market needs. Covid-19 labour shortages are dissipating and unemployment is rising and as discussed above around 80% of current immigrants are not formally classified as high-skilled (i.e., they are doing jobs in classified in Skill Levels 3-5). A caveat is that this figure includes highly skilled trades staff for whom firms persistently report the highest and rising levels of severe recruitment difficulties in the New Zealand labour market. However, it also includes low-skilled workforces that have grown rapidly over recent years (construction, hospitality), but where there will now be fewer vacancies as the labour market cools.

New Zealand should consider strengthening the AEWV regime to reinforce the original goal of the immigration ‘rebalance’ towards a higher share of high-skilled migration including tradespeople who remain in demand. To reduce the share of low-skilled migrants and encourage higher-skilled migration, Australia and Sweden both increased the minimum salary required for work permits in 2023 and created priority processing for high-skilled labour. Sweden has also set up a streamlined work permit service dedicated to recruiting high-skilled labour from outside the European Union. Australia has launched a marketing campaign targeting skilled workers overseas in key occupations and prioritised processing for skilled visa applications in healthcare and teaching occupations (OECD, 2023a).

The main tool being employed to ensure the AEWV attracts high skilled migrants is a requirement that the job offer must pay the median wage. However, this wage floor doesn’t seem high enough as evidenced by the large share of low-skilled immigrants arriving under the programme. To help keep new migration more in line with the genuine skill needs, most of which are in high-skill categories, the government should increase the minimum wage required to obtain a work visa, as recommended in the 2019 OECD Economic Survey of New Zealand (OECD, 2019). This would also help ensure that migrants are the more experienced and able to contribute more to New Zealand even if they are in lower skill categories. The government could also prioritise processing of work permits for high-skilled health and education workers that have not already been prioritised straight to a residence status pathway through the new Green List that was introduced at the same time as the AEWV.

Strengthening the job testing process in the AEWV including introducing effective elements of pre Covid-19 settings for work visas would also help. In a welcome move in this direction the government announced in early April 2024 more requirements at the employer accreditation and job check stages. The government should monitor the effectiveness of these changes and further tighten them if employer abuse complaints do not fall markedly. It also announced measures to rebalance migration towards high skilled by introducing requirements for applicants to lower paid positions (i.e., below 2 times the median wage) and those not on the Green-List to show evidence of skills and qualifications above certain thresholds, including at least 3 years relevant work experience or a relevant qualification at level 4 or above of the New Zealand Qualifications and Credential Framework. In addition, the maximum continuous stay on an AEWV has been reduced from 5 to 3 years for lower skilled job categories (ANZSCO 4 and 5) that pay less than 1.5 times the median wage and that are not on the Green List. It will also be necessary to meet an English language requirement for migrants applying for ANZSCO Level 4 and 5 roles. The government should also consider operating a variable band or guide path on total non-citizen total work visa issuance. This could operate via a variable points system, depending on the net migration of New Zealand citizens.

Prospects for sustainable economic performance beyond the expected cyclical improvement in growth as purchasing power improves depend mainly on lifting productivity performance and a cost-effective transition to a low-emissions economy. New Zealand’s per capita growth has been stronger in the past 20 years than previously, allowing some catch-up in income levels to higher-income OECD countries. However, this has largely been due to greater labour utilisation and improved terms of trade (Galt, 2023). The still large gap in income per capita is due to lower labour productivity (GDP per hour worked) level and slower productivity growth than in higher-income OECD countries (Figure 2.17) and especially weak multifactor productivity growth (OECD, 2017). In this context, the abolition of the Productivity Commission represents a loss of high-quality policy advice on one of New Zealand’s key economic problems. Some of this loss should be mitigated by the Treasury and MBIE and the new Ministry for Regulation fulfilling some of these functions.

Closing the productivity gap requires acting on a broad front including: reinvigorating competition and reducing regulatory barriers (Chapter 3); fostering greater digitalisation (2022 OECD Economic Survey of New Zealand); increasing innovation, including through greater fiscal support for R&D and industry-research institute collaboration (2017 Survey); adopting lower-emissions technologies in the agricultural, transport and manufacturing sectors (Chapter 5), improving the planning system to capture more benefits from agglomeration (2017 Survey), facilitating investment in infrastructure (2017 Survey), improving achievement of all children whatever their background in school education (Chapter 4) and keeping immigration to a level consistent with New Zealand’s absorptive capacity in order to maintain a growing capital-to-labour ratio (NZPC, 2021).

Income inequality is slightly above the OECD average in New Zealand and despite progress, Māori and Pasifika continue to lag on many economic and social indicators. The outlook for reducing inequality and increasing aggregate productivity is not bright unless more progress is made in improving education opportunities for Māori and Pasifika children, who account for 25% and 13% of school enrolments, to reach their full potential (Chapter 4). This requires improving the living conditions of low-income families. In international comparison, rental housing affordability is particularly low (OECD, 2022), the majority of low-income households spend more than 40% of their income on rent and vulnerable groups often experience overcrowding, low-quality housing (notably damp and cold) and homelessness (2019 Survey). Strongly rising rents due to rapid population growth will aggravate these problems so increasing the supply of higher-quality rental housing for low-income families, which is associated with better education and health outcomes, should be a social policy priority. Mental distress is higher amongst youth, Māori and Pasifika and youth suicide rates are high in international comparison, calling for more support in this area as well (2019 Survey).

Beetsma, R. et al. (2019), “Independent fiscal councils: Recent trends and performance”, European Journal of Political Economy, Vol. 57.

Bell, S. et al. (2023), “Why are central banks reporting losses? Does it matter?”, BIS Bulletin, No. 68.

Buckle, R. (2023), “Distinguished fellow lecture: monetary policy and the benefits and limits of central bank independence”, New Zealand Economic Papers, Vol. 57, No. 3, pp 263-289.

Carryer, J. and S. Adams (2017), “Nurse Practitioners as a Solution to Transformative and Sustainable Health Services in Primary Health Care: A Qualitative Exploratory Study”, Collegian, Vol. 24/6.

Chote, R. and S. Wren-Lewis (2013), “United Kingdom: Fiscal watchdog and official forecaster”, in Restoring Public Debt Sustainability, Oxford University Press

Debrun, X., D. Hauner and M. Kumar (2009), “Independent fiscal agencies”, Journal of Economic Surveys, Vol. 23, Issue 1.

David, A.C., C.E. Goncalves and A. Werner (2020) Reexamining the National Savings-Investment Nexus Across Time and Countries, IMF Working paper, WP/20/124.

Debrun, X. and T. Kinda (2017), “Strengthening post-crisis fiscal credibility: Fiscal councils on the rise – A new dataset”, Fiscal Studies, Vol. 38.

Galt, M. (2023), “Examining New Zealand’s increased rate of income growth between the lates 1990s and 2019”, Analytical Note 23/04, The Treasury, Wellington.

Gorman, D. (2009), “The Nurse Practitioner Provides a Substantive Opportunity for Task Substitution in Primary Care”, Journal of Primary Health Care, Vol. 1/2.

Gorman, D. and M. Horn (2023), Lifeline for Health: Meeting New Zealand’s need for General Practitioners, The New Zealand Initiative.

Guillemette, Y. and J. Château (2023), “Long-term Scenarios Update: Incorporating the Energy Transition”, OECD Economic Policy Paper, No. 33.

Hooley, J. et al. (2023), “Quasi-Fiscal Implications of Central Bank Crisis Interventions", IMF Working Papers, WP/23/114.

IMF (2023), New Zealand: Staff Report for the 2023 Article IV Consultation, International Monetary Fund.

Kopits, G. (2019), Proposal for an Independent Fiscal Institution in New Zealand: Selected Issues, New Zealand Treasury Consultation Paper, Wellington.

Martins, P. and L. Correia (2020), “Fiscal institutions: different classifications and their effectiveness”, Eurasian Economic Review.

Ministry of Business, Innovation and Employment (MBIE) (2018), Impact of Temporary Migration on Employment and Earnings of New Zealanders, Wellington.

New Zealand Productivity Commission (NZPC) (2019), “Training New Zealand’s workforce, Technological change and the future of work”, Draft report 3, December.

New Zealand Productivity Commission (NZPC) (2020), “Technological change and the future of work”, Final report, March.

New Zealand Productivity Commission (NZPC) (2021), “The wider wellbeing effects of immigration”, Working paper No. 2021/07.

OECD (2014), Recommendation of the Council on Principles for Independent Fiscal Institutions, OECD Publishing, Paris.

OECD (2015), Recommendation of the Council on Budgetary Governance.

OECD (2017), OECD Economic Surveys: New Zealand 2017, OECD Publishing, Paris.

OECD (2017a), OECD Review of the Irish Fiscal Advisory Council, Paris.

OECD (2018), Taxation of Household Savings, OECD Tax Policy Studies, No. 25, OECD Publishing, Paris.

OECD (2019), OECD Economic Surveys: New Zealand 2019, OECD Publishing, Paris.

OECD (2022), OECD Economic Outlook, Volume 2022 Issue 2, OECD Publishing, Paris.

OECD (2022a), “HC1.2. Housing Costs Over Income”, memo, OECD.

OECD (2023a), International Migration Outlook 2023, OECD Publishing, Paris.

OECD (2023b), OECD Economic Outlook, Volume 2023 Issue 2, OECD Publishing, Paris.

Public Service Commission (2024), Review of the administration of the Accredited Employer Work Visa Scheme, Public Service Commission, Wellington.

Reserve Bank of New Zealand (RBNZ) (2023a), Monetary Policy Statement 11/23, Wellington.

RBNZ (2023b), November 2023 Financial Stability Report, Reserve Bank of New Zealand.

RBNZ (2022), In Retrospect: Monetary Policy in New Zealand 2017-22, Reserve Bank of New Zealand.

von Trapp, L., I. Lienert and J. Wehner (2016), “Principles for independent fiscal institutions and case studies”, OECD Journal on Budgeting, Vol. 15/2.

The Treasury (2015), An introduction to New Zealand’s Fiscal Policy Framework, Wellington.

The Treasury (2019), New Zealand’s Fiscal Policy Framework: Establishing an Independent Fiscal Institution, Summary of submissions on the September 2018 Discussion Document, Wellington.

The Treasury (2021), He Tirohanga Mokopuna 2021, The Treasury’s combined Statement on the Long-term Fiscal Position and Long-term Insights Briefing, Wellington.

The Treasury (2023), FEU Special Topic: Decomposing inflation into supply and demand drivers, Wellington.

Shapiro, A. (2022), Decomposing Supply and Demand Driven Inflation, Federal Reserve Bank of San Francisco Working Paper, No. 2022-18.