OECD Economic Surveys: New Zealand 2024

The New Zealand economy bounced back quickly following the Covid-19 recession, but the rapid expansion outran capacity. Overheating, exacerbated by the global energy and food price surge arising from Russia’s invasion of Ukraine, pushed up inflation and the current account deficit (Figure 1.1). Swift and sizeable tightening of monetary policy is helping to rebalance the economy, labour shortages are abating, and inflation and the current account deficit are declining. Like in many OECD countries, the fiscal position has deteriorated and long-term spending pressures from ageing loom. High net inward migration is putting a floor under aggregate growth, has helped to resolve recent labour shortages, and contributes to the skill-mix and cultural richness of New Zealand.

However, the economy has not grown as fast as the population, and GDP per capita fell 3.1% in the year to December 2023. Ensuring higher sustainable and inclusive gains in income per capita will be challenging. The return to the pre-Covid trend of fast population growth will aggravate the country’s infrastructure and housing deficits and put pressure on healthcare and education. Extreme weather events in early 2023 are a reminder that climate change will further increase these infrastructure needs. Economic policy needs to continue rebalancing the economy, with a view to steadily rebuild fiscal buffers and address structural weaknesses (Table 1.1).

The gap in income per capita mainly stems from lower labour productivity due to both lower capital stock per worker and multi-factor productivity than in higher-income OECD countries, reflecting high market concentration, limited competition and low business investment in innovation. Improving the competition framework will stimulate business entry and dynamism and foster innovation. New Zealand’s small market size and distance from major economies make this challenging. Competition regulators should continue to address anticompetitive factors through best practice regulations and market studies and adapt regulations to new developments in digital and labour markets. The overall competition and regulatory policy framework has become more comprehensive, helping to tackle competition problems better, but it needs further updating.

Relative poverty is higher than the OECD average and may worsen given the trend erosion of school education outcomes over the past 20 years (Figure 1.2). Like in most countries recent PISA results fell in part because of Covid-19 disruptions. However, correcting for sampling bias, New Zealand’s fell by more than the OECD average. Māori and Pasifika, disproportionally from low socio-economic backgrounds, continue to score well below New Zealand and OECD averages. Outcomes are too variable, especially within schools, creating a drag on productivity and posing a threat to inclusion. Outcomes for girls tend to be worse than for boys in maths and science and this later flows into the gender pay gap via their career choices. More policy action is required to offset the disadvantages of children from lower socio-economic backgrounds and create equality of opportunity for boys and girls.

An ongoing challenge is reducing emissions, while also adapting to climate-change related extreme weather. A high share of hydro-electricity generation helps to limit greenhouse gas (GHG) emissions but exposes supply to drought. Transport is energy inefficient (Figure 1.3). Greater investment in low-emissions technology is needed in transport, agriculture and economy-wide. A large part of the plan to reach net zero emissions relies on planting more forests but their treatment in the Emissions Trading Scheme suffers from shortcomings. The approach to the green transition has been too ad hoc and needs a more rigorous cost-benefit assessment of emissions reductions options. Adaptation will be crucial to limit climate-related damage to New Zealand’s coastal cities and agricultural and horticultural production, while maintaining a secure energy supply.

Against this background, the main messages of this Survey are:

• Fiscal and monetary policies need to work together to fight remaining inflationary pressures. Public spending has been higher than planned in recent years and the government needs to set and stick to operating allowances and tax policies that gradually reduce the fiscal deficit to reach budget balance. Monetary policy will need to remain restrictive while inflationary pressures persist.

• Productivity remains substantially below the OECD frontier, partly due to insufficient competition. Market concentration should be addressed through facilitating entry, effective regulations, antitrust enforcement and, as a last resort, break-ups. These tools can be made more effective through an extension of the Commerce Commission’s powers, continued market studies together with more competition policy analysis from a wider perspective. Competition jurisprudence and the business environment need to become more competition friendly.

• Results have fallen markedly in primary and secondary education over the past 20 years and inequality remains wide. Raising education achievement for all requires lifting attendance from early childhood education onwards, especially of lower socio-economic groups; increasing focus on core subjects and teaching practice in teacher education; and providing a more detailed, knowledge-rich national curriculum.

• A more systematic approach should be taken to reducing emissions and adapting New Zealand to climate change related extreme weather. This requires reviewing the treatment of forest removals in the Emissions Trading System, finding new funding for local government to build more resilient infrastructure, ensuring insurance remains comprehensive and a long-term energy strategy drawing on a cost-benefit based comparison of all emission reduction options.