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Executive summary.

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 5 1/4 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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Title Annotation:economy of New Zealand
Publication:OECD Economic Surveys - New Zealand
Geographic Code:8NEWZ
Date:Apr 1, 2009
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