OECD Secretary general Mathias Cormann

The OECD’s Economic Survey of New Zealand published yesterday may have congratulated the Government on its management of Covid and the current state of the economy but it contained a series of warnings that all may not be well.

That was probably why it got a lukewarm reception from Finance Minister Grant Robertson.

“It is a useful, sometimes provocative commentary on the New Zealand economy and helpful for us as we move forward with our recovery from Covid,’ he said.

“As ever we will not agree on every individual policy recommendation, but we are grateful for the depth of analysis within the report.”

OECD Director and former Australian Finance Minister, Mathias Gorman, joining Robertson for the virtual presentation of the report, praised New Zealand’s economic recovery from Covid.

He said New Zealand had regained its pre-pandemic GDP level faster than many other OECD economies and despite additional containment measures following the emergence of the Delta variant real GDP grew by almost five percent in 2021.

That was the good news.

The report itself said the recovery has been rapid and strong but the economy was showing signs of overheating.

“The government plans to increase the structural budget balance slowly and to reduce medium-term government debt only modestly,” it said.

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Oldies boost debt

“In the longer run, population ageing will substantially increase budget deficits and debt on unchanged policies.”

That is an echo of Treasury’s Long Term Fiscal Statement

The report recommends that the age of eligibility for NZ Super be raised so that life expected to be spent in retirement remained constant, as in Finland.

“The government is opposed to increasing the pension eligibility age from 65, where it has been for the past quarter century, partly out of concern that groups with shorter life expectancy, notably Māori and Pasifika, would be disadvantaged,” it says.

“It would be preferable to address these concerns through measures to limit the impact on these groups Instead of freezing the eligibility age for everyone.

“One such measure could be to provide the pension on a means-tested basis from age 65 until the life expectancy-linked eligibility age, at which point the pension would no longer be means tested.”

But Robertson re-iterated the Government’s refusal to countenance any increase in the age.

“It is a clear policy commitment that New Zealand I heard from our government and it won’t be one that we’re going back on,” he said.

Cut super or cut health spending — your choice, Grant

Treasury, in its Statement last September said there two alternatives; either a future government could raise income tax or it could restrain health spending, the main driver of the increased government spending which was enlarging the deficit.

Robertson doesn’t accept these proposals either.

“I think it’s important to note that we’re looking well out into the future,” he said.

“This is the Treasury’s long term insights briefing that they give us that this data is drawn from, and it is a model that assumes current settings and current outcomes in terms of productivity, for example, remain essentially the same.

“Our view is that we can actually grow the economy sustainably within these and areas like skills, research and development, infrastructure and so on, which mean that the direction of travel doesn’t have to be the way that it is.”

Certainly any attempt to restrain health expenditure would seem dangerous.

The report contains a graph showing Intensive Care (ICU) beds per 100,000 population among the 38 OECD member countries. New Zealand is second to bottom.

Only Mexico has fewer ICU beds than New Zealand. With 3.6 beds per hundred thousand, we are well behind Australia with 9.4 and Germany with 33.9.

Our number has gone down since 2010 when we had the equivalent of 6.8 beds per 100,000 population.

In its report the OECD confirmed what many critics of the Government’s Covid response have been saying; that “New Zealand’s aggressive elimination strategy against COVID-19 was partly motivated by its relatively low capacity to treat acute infection cases.”

It noted that the Government had allocated $31.5 million to increase intensive care beds, and an additional $10 million for ventilators to boost Intensive Care Unit (ICU) capacity.

“Short training programmes were offered to enable health professionals who are not ICU specialists to acquire the skills needed to assist fully trained staff in this area,” the report said.

“This, however, has not remedied the fundamental shortage of qualified ICU personnel.”

Our lacklustre export performance

Robertson’s hope that we can grow the economy sustainably faces a number of challenges according to the report.

It says New Zealand’s export intensity (ratio of export sales to total sales) at 27% is the lowest among small OECD economies (population less than 20 million), largely owing to the country’s geographical isolation

New Zealand is also poorly integrated in global value chains partly as a result of its geographical isolation.

“While terms-of-trade gains and rising labour utilisation rates have limited the long-term decline in

GDP per capita relative to the richest countries, they cannot be relied upon indefinitely,” it says.

“The only long-term solution to sustain high living standards is to boost productivity, notably through making better use of digital technologies.”

But it finds structural challenges in doing that; notably in education where we are once again  second to bottom in maths achievement among primary school and lower secondary school students.

The report notes that New Zealand has been declining in scores on its Programme for International Student Assessment (PISA) since 2009.

“The decline since 2009 reflects an increased share of low performers and a reduced share of high performers,” it says.

Something doesn’t add up

“The increased share of low performers, which is over 20% in mathematics, is serious as they do not demonstrate the competencies that are needed to participate effectively in life as continuing students, workers and citizens.

“Similarly, the decline in the share of top performers is a problem as this group has acquired the foundation skills at an early stage of their education that are needed to be well equipped in the digital era.

“Māori and Pasifika achievement has also declined since PISA tests began and continues to lag well behind that of the rest of the population.

“The influence of socio-economic background on scores is similar to the OECD average but is higher than in the other English-speaking countries except the United States.”

And so it recommends that we improve mathematics and science teaching in primary schools, including by putting more emphasis on inquiry plus guided teaching using well articulated knowledge bases for both the student and the teacher; develop digital apprenticeships and internships and expand the GOVTechTalent graduate programme to all public sector organisations.

But the report does not just deal with the long term.

It also finds problems in current policies.

So much for being clean and green

It notes that New Zealand has recorded the second largest increase in greenhouse gas (GHG) emissions amongst OECD countries since 1990 and emissions per capita are high.

“New Zealand is estimated to have met its unconditional commitment to reduce GHG emissions by 5% from the 1990 level by 2020 by relying on net emissions and removals from eligible forestry activities and carrying over unused units from the first Kyoto commitment period to fall within the carbon budget for 2013-2020,” it said.

 “It is unlikely that New Zealand will be able to respect future international commitments without substantially reducing gross emissions.”

Climate Change Minister James Shaw has already admitted that to reach the 2050 Zero Carbon target we will need to spend between $900,000 and $1.5 billion a year buying up international carbon credits to account for two thirds of the reductions we are supposed to make.

The OECD says to avoid that New Zealand needs to:

  • Reduce emissions from existing and new urban areas, including by phasing out gas connections to homes;
  • Introduce measures to ensure that vehicles entering the fleet are efficient, accelerate the uptakeof electric vehicles, and create options to decarbonise heavy transport and freight;
  • Decarbonise the energy system;
  • Accelerate the switch to low-emissions fuels for process heat and transform buildings to have low emissions;
  • Introduce policies, tools and incentives to speed up emissions reductions from agriculture;
  •  Reduce reliance on forestry carbon removals, manage afforestation and incentivise the reversion and planting of new native forests to create a lasting carbon sink.

Previous OECD Economic Surveys of New Zealand have dealt with rising house prices and a lack of supply.

The National Policy Statement on Urban Development is a direct outcome of those reports but even so, this latest report, cannot help but note that fundamental problems persist.

They might come down

“Runaway house prices are a major drag on wellbeing in New Zealand, especially for first-home buyers, and are by far the greatest concern identified by households in the IPSOS NZ Issues Monitor,” it said.

“Real house prices had already increased much more than in most other OECD countries since the turn of the century before the COVID-19 pandemic hit but went on to rise by another quarter since then, largely owing to the monetary policy measures implemented to support the economy.

“House prices have also increased more relative to fundamentals – household income and rents – than in most other OECD countries.

“The large rise in house prices has increased wealth inequality between house-owners and non-owners.”

But the report sees some hope, particularly with much-reduced immigration and the current hosue construction boom.

“Combined with the decline in demographic demand associated with the sharp fall in net migration, the high level of house construction should continue to drive down the shortage that developed in recent years and, should net migration remain much lower than in the past, as expected, eliminate it within the next few years,” it said.

“Several factors are likely to reduce demand for housing further.

“The most important are an increase in interest rates to more neutral levels, which would make residential property investment less attractive and result in a substantial increase in debt servicing costs and intensified use of macro-prudential tools

“The government’s recent tax measures to discourage investment in existing rental properties together with lower LVR limits on mortgages for such properties has already reduced the share of mortgage lending for them from 21% at the beginning of 2021 to 17% in November.

“With increased housing supply and reduced demand, the Reserve Bank expects house prices to begin to fall modestly from late 2022, eventually reaching more sustainable levels.”

So though the headline economic numbers are strong, it is clear that the economy now faces major challenges. Ordinarily that should encourage the Opposition but most of the challenges identified by the OECD have their origins over 10 years ago — when National was last in power.

This document was really a critique of our whole political system.