OECD Economic Surveys: New Zealand 2019

Report

OECD Economic Surveys: New Zealand

24 June 2019

Key policy insights

The New Zealand Government is applying a well-being approach to policy and budget decision-making with the objective of lifting New Zealanders’ well-being. Their approach embraces the whole of government, with agencies working together to achieve well-being objectives, a focus on inter-generational outcomes and moving to broader measures of success. The new well-being focus is being deployed through a range of actions: amending legislation to embed well-being objective-setting and reporting; developing well-being frameworks and indicator sets; and using well-being evidence to inform budget priority-setting and decision-making.

New Zealanders generally enjoy high levels of well-being, as indicated by the OECD’s How’s Life indicators (Figure 1, Panel A). Overall outcomes are particularly good for employment and long-term unemployment, housing size, perceived health, social support and air quality. However, compared with other OECD countries, average earnings and household income are low, reflecting low productivity (Figure 2, Panel A), housing affordability is a significant challenge, a large share of people usually work long hours (50 or more per week) or don’t have much time off work, and feelings of safety are below the OECD average.

New Zealand fares well in several aspects of the four capitals – natural, financial and physical, human, and social – that underpin future well-being. At least half of the indicators monitored by the OECD in each category rank amongst the top third of OECD countries, except for financial and physical capital (Figure 1, Panel B). Nevertheless, reforms will be needed to counter the deterioration over the past decade in some areas of relative strength, notably students’ cognitive skills at age 15, long-term unemployment and land area covered by forests. New Zealand does less well in building knowledge capital through R&D, natural capital through greenhouse gas (GHG) emissions and freshwater abstractions, and human capital owing to the spread of obesity. Although not included amongst the indicators referred to above, the expansion of dairy farming has catalysed a deterioration in water quality, and biodiversity is under threat. Over the last decade, child poverty rates have increased on some measures (e.g., based on a relative poverty line of 50% of median equivalised disposable household income before housing costs) but declined on others (e.g., based on the same relative poverty line but after housing costs) (Stats NZ, 2019[1]).

Social capital is particularly strong. A factor that contributes to high social capital is low perceptions of corruption (Figure 3, Panel A), although there has been some deterioration in recent years (Panel B). Perceptions of the use of public power for private gain are also low (Panel C). New Zealand has addressed many of the recommendations in the OECD Working Group on Bribery’s New Zealand Phase 3 report (OECD, 2013[2]) on combating bribery of foreign public officials, in particular by amending key pieces of legislation (OECD, 2016[3]). The Group noted that while New Zealand had made progress in detecting and investigating foreign bribery offences, none of the six investigations to date had given rise to a prosecution. It stressed the ‘significant need for New Zealand to strengthen enforcement of its foreign bribery offence’ (ibid, p. 4).

Figure 1. On average, New Zealand performs well on several OECD *How’s Life?* indicators

A. Current well-being

New Zealand has had high net immigration, although it has slowed and recent methodological changes have somewhat reduced estimates of how big it has been. The immigration system contributes to well-being by promoting economic development, reuniting families and responding to humanitarian objectives. Immigration is high and residence approvals are targeted on the high-skilled to enhance economic benefits, although these are constrained by the failure of housing- and infrastructure supply to keep up with the resulting population growth, notably in Auckland. On most measures, immigrants are well integrated (OECD and European Union, 2015[5]). They generally have good labour market outcomes and levels of social inclusion, most eventually become citizens and their children do well in education and subsequently in the labour market. However, immigrants’ entry earnings are considerably lower than for the New Zealand-born with comparable labour market characteristics and only converge slowly, as in other countries. Narrowing this gap by attracting immigrants with better labour market prospects and improving integration measures would enable more immigrants to realise their potential, boosting their well-being and that of the rest of the community. Concerns have also arisen that the employer-assisted temporary work visa system is not limiting recruitment of migrants to resolving genuine skills and labour shortages, is attracting too many low-skilled migrants and may be weakening incentives for employers to employ and train New Zealanders.

Housing costs now represent a major burden for low-income households, absorbing 45% of income for the households in the bottom quintile of the income distribution, compared with 15% for households in the top quintile (Perry, 2018[6]). Moreover, housing quality for low-income households is often poor owing to inadequate insulation, dampness, lack of adequate heating and overcrowding (especially among Pasifika, Māori and Asian households and in Auckland).

This Survey focuses on implementing a well-being approach to policymaking in New Zealand. It reviews well-being outcomes, highlighting strengths and areas for improvement, and discusses the challenges of implementing such an approach (Chapter 1). Immigration has improved the economic well-being of both immigrants and the NZ-born but temporary migration has had small negative impacts on new hires of some groups of people and, as in other countries, immigrants initially earn less than the comparable native-born (Chapter 2). The Survey discusses reforms to migration policy to enhance the benefits and reduce the costs, notably by contributing to easing labour shortages, attracting immigrants with stronger earnings prospects and improving migrant integration. Housing policy also has a significant bearing on well-being (Chapter 3). Housing supply has not kept pace with rising demand in recent years, including from net immigration, resulting in large increases in house prices and declines in housing affordability. Reforms to increase housing supply responsiveness to demand would improve affordability, enhancing well-being. The Survey also discusses reforms in labour market regulation and environmental policy aimed at improving well-being, both today and for future generations.

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

Well-being is high on most dimensions but weaknesses, such as relatively low productivity and earnings, uneven distribution, challenges of housing affordability and child well-being, and threats to natural capital, need to be addressed. Embedding the well-being approach further into public policymaking holds the promise of making policy advice and implementation more effective, through better targeted actions, a deeper understanding of trade-offs, and more coordinated collaboration across agencies.
Despite generally good macroeconomic- and structural policy settings, New Zealand has relatively low productivity levels and hence earnings. This is due to lack of international connection and scale, qualification and skills mismatches, weak competitive pressures and low rates of capital investment and R&D activity. Policy settings should be adjusted to further support innovation, business dynamism and competition.
Immigration has increased well-being for both immigrants and the New Zealand-born. It would be even more beneficial if temporary migration more effectively targeted skills and labour shortages and recent immigrants were better integrated into the labour market.
House prices have risen, affordability has dropped and homelessness is high, calling for urgent reforms to ease constraints on housing supply.

Recent economic developments, macroeconomic and labour market policies

Economic growth has stabilised, but capacity constraints remain tight

Economic growth is an important driver of well-being through its positive contribution to jobs and income. Growth has slowed from the high rates recorded in 2015 and 2016 to around 2½ per cent, just below the OECD estimate of potential growth and less than 1% on a per capita basis (Figure 4, Panels A and B). Weaker private consumption growth has been a key driver (Panel C), as migration inflows and wealth gains from house price appreciation have slowed. These effects have been offset in the second half of 2018 by increases in government transfer payments, notably with the Families Package coming into effect. Housing investment rose rapidly between 2011 and 2016, supported by the Canterbury earthquake rebuild. Its share of GDP has since stabilised as the construction industry has faced capacity constraints associated with labour shortages, credit constraints and a lack of land with suitable infrastructure (Panel D).

Figure 4. Growth has slowed to slightly below potential

The level of output is estimated to have been just above potential since 2016. Despite capacity pressures, business investment was weak in 2018. This is partly the result of faltering business confidence (Figure 5), which has fallen from among the five highest levels in OECD countries in 2016 to among the bottom five in 2018. Low business confidence reflects concerns about government policy (cited by more than 60% of surveyed firms), the costs and availability of labour and tight profit margins (NZIER, 2018[7]). Labour market reforms proposed and underway (see below) are likely to be a factor, although data are not available to link low business confidence with specific policy measures. The concerns expressed by the business sector should be taken into consideration and balanced against the broader goals of the reforms. In contrast, tourism is buoyant and New Zealand’s terms of trade remain elevated (Figure 6). Weak business investment, volatility due to lumpy items and biosecurity issues concerning some motor vehicle shipments contributed to slow import growth in late 2018 and early 2019, temporarily raising the contribution of net exports to growth. New Zealand’s net international investment position has improved considerably since 2009, though net international liabilities remain high by international comparison. New Zealand is exposed to economic developments in China, both as its largest export market and indirectly via links with Australia, its second largest export market (Figure 7).

Figure 5. Low business confidence has contributed to weak investment

The labour market is tight, with widespread skills shortages. Unemployment reached a ten-year low in late 2018 (Figure 8). At the same time, the share of unemployed people who have been out of work for 12 months or more has continued to increase though it is only half of the OECD average. Wage growth has picked up, partly boosted by minimum wage hikes and increases in caregiver wages. Moreover, public sector unions have stepped up action to obtain pay rises. However, as in many other OECD countries, overall nominal wage growth remains lower than in previous expansions, reflecting weak productivity growth, low inflation expectations and low job-to-job flows.

Figure 6. Robust external demand has supported the economy

Figure 7. China and Australia are key export markets

2018

While inflation remains below the mid-point of the RBNZ 1-3% target band, non-tradeables inflation has increased significantly to 2.8% (Figure 9), reflecting the lack of spare capacity in the domestic economy. Underlying inflation remains around 1.7%, just below the mid-point of the target band. Inflationary expectations are well-anchored, at close to 2% across all horizons.

Low productivity impedes well-being

New Zealand has a large labour productivity gap vis-à-vis the upper half of OECD countries, albeit somewhat overstated owing to methodological differences between New Zealand and most other countries in measuring hours actually worked (Figure 2, Panel A). Relatively low productivity depresses well-being by holding down earnings and household incomes and, all else equal, revenue available to fund societal goals. Since the mid-1990s, growth in GDP per capita has been in line with other OECD countries despite lacklustre productivity growth, reflecting increases in hours worked per person. Weak labour productivity growth has reflected both slow multifactor productivity growth and insufficient investment (Figure 2, Panel B). As a result, the gap with leading OECD countries has not diminished.

As described in the 2017 Economic Survey, productivity performance has been poor despite generally favourable policy settings owing to a lack of international connection and scale, high rates of qualification and skills mismatches, muted competitive pressures and low business investment and research and development activity. New Zealand’s location and small population are contributing factors as they constrain gains from specialisation and agglomeration.

Productivity, and hence labour earnings and household incomes, could be boosted by adopting policies aimed at spreading innovation and technology diffusion and at catching up to global productivity leaders. Examples include strengthening business dynamism through greater venture capital support for early-expansion-stage firms and facilitating exit of non-viable firms, boosting support for collaboration between research institutions and industry, and sharpening competitive pressures (Table 1). Strategic deployment of the Commerce Commission’s new market studies power and increased support through the new research and development tax credit should also serve to increase productivity. Qualification and skills mismatches should be reduced through better careers education and guidance, improved managerial practices, as well as reforms to reduce planning and infrastructure impediments to new housing (see below), which increase house prices in growing areas, making it more difficult for workers to move to a better matched job where they would be more productive.

Figure 9. Inflation is just below the mid-point of the target band

International experience indicates that reducing barriers to foreign direct investment could promote competition, open up access to global supply chains, as well as bring in much-needed technological, skills and managerial quality transfers. In New Zealand, foreign owned firms’ labour productivity is almost twice as high as domestic firms’, but the evidence for productive spillovers from foreign into locally owned firms is fairly weak and concentrated in the construction and retail sectors (Doan, Maré and Iyer, 2015[8]). New Zealand has a comprehensive and poorly-targeted foreign investment screening process that creates delays, significant compliance costs and uncertainty for investors. Compliance costs have recently been reduced for some transactions, notably in forestry. Further steps in this direction should be taken.

Recommendations in past Surveys	Actions taken since the previous Survey
Progressively narrow screening of foreign investment. Continue to reduce compliance costs and boost predictability for investors.	Introduction of a streamlined process for overseas investment in forestry, including standing consents and exemption for foreign buyers of fewer than 1000 hectares of forestry rights per year.
Review the merits of refocusing competition law on the effects of potentially anti-competitive conduct, as opposed to its intent. Provide the Commerce Commission with the power and resources to undertake market studies.	Market studies power has been granted to the Commerce Commission.
Expand the use of ex post evaluations of Commerce Commission decisions to assess performance.	No action taken – ex post evaluations are undertaken on an ad hoc basis.
Increase fiscal support for business research and development. Maintain or increase long-term support for successful collaboration between research institutions and industry.	A 15% research and development tax credit has been introduced, replacing Growth Grants.
To address equity financing gaps, shift the allocation of the NZ Venture Investment Fund to provide greater support for early-expansion-stage firms.	No action taken.
Move towards privatisation of state-owned enterprises (SOEs), and consider reducing local government ownership of port assets to bring more market discipline to the sector.	No action taken.

Macroeconomic policies remain expansionary

Sound macroeconomic policies underpin New Zealand’s stable economy and make an important contribution to subjective well-being, as downturns have large negative effects on reported life satisfaction of those who become unemployed or fear becoming unemployed (Tella, MacCulloch and Oswald, 2003[9]). A solid macroeconomic framework is also important for sustainable financing of public services critical for well-being, such as health and education. Appropriately given low and stable inflation, the monetary policy interest rate (1.5%) remains well below the neutral rate, estimated by the Reserve Bank to be around 3½ per cent. The term premium has declined over the past year as 10-year government bond yields have fallen, reflecting expectations that policy tightening will occur later than previously thought domestically and flattening of global yield curves, led by the United States where policy rate hikes have not been matched by long-term rates. The RBNZ moved away from a neutral stance in March 2019, noting that its next rate move is more likely to be down than up.

House prices have risen rapidly over almost two decades and so has household debt, which now exceeds the OECD average (Figure 10). Bank lending standards have been tightened since late 2016, reflecting lower risk tolerance (particularly vis-à-vis property developers) and regulatory changes, including in Australia, since Australian-owned banks in New Zealand have been required to reduce their non-equity exposures to their NZ operations.

Tighter lending standards have slowed mortgage credit. Easing population growth, foreign buyer restrictions, extension of capital gains tax to investment properties held for up to five years, relaxation of some planning restrictions and stretched affordability have also contributed to reduce house price inflation over the past two years (with small price falls in Auckland in late 2018 and early 2019). The Reserve Bank has imposed macro-prudential restrictions on loan-to-value ratios since 2013, managing growth/stability trade-offs by relaxing restrictions recently in response to tightening bank lending standards and slower credit and house price growth. Further analysis would be welcome to assess the merits of restrictions on debt-to-income ratios (or, more commonly, on debt servicing), which can complement loan-to-value caps by ensuring households have sufficient income to service their debt (Table 2).

Figure 10. House prices and household indebtedness have increased markedly

Recommendations in past Surveys	Actions taken since the previous Survey
Consider implementing bank leverage ratios, permanent deposit insurance and higher capital requirements for too-big-to-fail banks.	The Reserve Bank has proposed to increase the required regulatory level of Tier 1 capital for systemically important banks from 8.5% currently to 16%. As part of this consultation the Bank has also sought views on whether leverage ratio requirements should be included in the New Zealand capital framework. The Treasury and Reserve Bank are consulting on the possible introduction of depositor preference or a deposit insurance scheme as one key topic in Phase 2 of the government’s review of the Reserve Bank Act.
Add a debt-to-income limit to the Reserve Bank’s macroprudential instruments to increase the resilience of bank balance sheets, with attention to benefits exceeding costs.	The Reserve Bank has relaxed loan-to-value restrictions, so that no more than 20% of bank’s total new lending (compared with 10% in 2017) to owner occupiers can now have a deposit of less than 20% and no more than 5% of new lending to housing investors can have a deposit under 30% (40% in 2017). The Reserve Bank has requested that debt-to-income limits be added to its prudential tool kit.

Recommendations in past Surveys

Actions taken since the previous Survey

Consider implementing bank leverage ratios, permanent deposit insurance and higher capital requirements for too-big-to-fail banks.

The Reserve Bank has proposed to increase the required regulatory level of Tier 1 capital for systemically important banks from 8.5% currently to 16%. As part of this consultation the Bank has also sought views on whether leverage ratio requirements should be included in the New Zealand capital framework.

The Treasury and Reserve Bank are consulting on the possible introduction of depositor preference or a deposit insurance scheme as one key topic in Phase 2 of the government’s review of the Reserve Bank Act.

Add a debt-to-income limit to the Reserve Bank’s macroprudential instruments to increase the resilience of bank balance sheets, with attention to benefits exceeding costs.

The Reserve Bank has relaxed loan-to-value restrictions, so that no more than 20% of bank’s total new lending (compared with 10% in 2017) to owner occupiers can now have a deposit of less than 20% and no more than 5% of new lending to housing investors can have a deposit under 30% (40% in 2017). The Reserve Bank has requested that debt-to-income limits be added to its prudential tool kit.

Review of the Reserve Bank Act

The government has completed the first phase of its review of the Reserve Bank Act. Reflecting the importance of financial and price stability for economic outcomes and therefore well-being, the purpose of the Reserve Bank Act has been clarified to “promote the prosperity and well-being of New Zealanders”. A maximum sustainable employment objective has been added to the price stability objective of monetary policy and a Monetary Policy Committee formed to take over the Governor’s decision-making role. A non-voting Treasury observer will be included in the committee to support the coordination of monetary and fiscal policy. While the practice is unusual among OECD countries there is no evidence that it has diminished the independence of the Bank of England or Bank of Japan, and it does not go as far as in Australia, where the Secretary of the Treasury is a voting member.

The second phase will consider the RBNZ’s role in financial market regulation, supervision, and crisis management, as well as possible further changes to the Bank’s objectives and governance. It will also consider whether to introduce deposit protection insurance, as in all but one other OECD country. Deposit insurance typically serves financial stability as well as consumer protection objectives, with protection limits generally above USD 100 000 (Figure 11). In case of bank failure, deposit insurance would make triggering Open Bank Resolution more credible by protecting depositors up to some specified limit. It would not significantly increase moral hazard, as retail depositors are not well-placed to assess bank failure risks and there is likely an assumption of an implicit guarantee in any case, in part as a consequence of the retail deposit guarantee scheme introduced during the global financial crisis.

Figure 11. New Zealand is unusual in not having deposit insurance

Depositor protection limits, per depositor per institution (thousand USD), as of end 2017

Proposed increase in bank capital requirements

The Reserve Bank in late 2018 proposed a large increase in Tier 1 capital requirements for banks to reduce the risk of failure in a crisis. While international comparability is complicated by differences in asset risk weightings used and different economic context, this would take Tier 1 capital requirements beyond those applying in other OECD countries (Figure 12). The increase in actual capital held will not be as large as the increase in regulatory capital requirements insofar as banks choose to hold smaller discretionary buffers. Higher capital requirements reduce the probability of banks becoming insolvent, lowering the likelihood and expected costs of banking crises. They can also reduce economic activity by increasing lending rates due to a higher cost of funding for banks (albeit offset by the reduced risk of bank equity). The Bank has set its proposed capital requirements by first limiting the probability of a financial crisis to 1 in 200 years, then considering the trade-off between economic activity and the expected costs from financial crises for any level of capital beyond this.

There is a strong case for higher capital requirements, but considerable uncertainty around the appropriate end point. As New Zealand is a small open economy, the output cost of financial crises is likely to be greater than in larger countries (Furceri and Mourougane, 2012[10]). High levels of household debt also exacerbate risks. Such local contextual factors have been incorporated in quantitative analysis by the RBNZ (2019[11]), which shows substantial uncertainty around “optimal” capital ratios but clear gains from increasing capital to around 12 to 13% of risk-weighted assets (7.5% to 8% of unweighted assets). The Bank’s choice of a 1 in 200 year threshold drives its specific proposal for capital requirements, which is well above what it had previously advocated (RBNZ, 2012[12]). The Bank, which completed public consultation on its proposal in May 2019, should proceed with higher capital requirements as warranted by its forthcoming cost-benefit analysis. The effect on lending spreads, bank credit availability and credit activity pushed outside the banking sector (to credit unions, for example) needs to be carefully monitored.

Figure 12. Proposed new capital requirements exceed those in other OECD economies

Tier 1 capital requirements, as a percentage of risk-weighted assets

The Financial Markets Authority and Reserve Bank together undertook conduct and culture reviews of New Zealand banks and life insurers in 2018. The regulators concluded that there were no widespread misconduct or poor culture issues across banks. However, they found extensive weaknesses in life insurers’ systems and controls, with a lack of focus on good customer outcomes (particularly where sales occur through intermediaries), inappropriate sales incentive structures and poor remediation of known issues. Also, high commissions reduce the affordability of life insurance (Figure 13). The regulators concluded that the overall standard of both banks’ and life insurers’ approaches to identifying, managing and dealing with conduct risk needs to improve markedly.

Figure 13. Life insurance commissions are high

Commissions as a share of gross premium revenue, 2017

Fiscal policy is set to tighten

Fiscal policy became expansionary in 2018 due to a pick-up in infrastructure and health spending, free tuition for the first year of tertiary education, and increased transfer payments to students and families. The fiscal stance is projected to remain expansionary in 2019, broadly neutral in 2020 and become moderately contractionary from 2021 as spending slows in the absence of substantial further discretionary measures, allowing tax receipts to catch up as economic growth continues (Table 3).

Fiscal policy is on a sustainable path, with government debt low and set to decline as a share of GDP. Even under an adverse scenario for economic growth and interest rates, and with the fiscal balance falling to neutral, general government debt would remain roughly stable to 2040 (Figure 14). New Zealand has a relatively young population, but in line with the OECD average the old age dependency ratio is projected to nearly double by 2060, increasing fiscal pressures through slower revenue growth and greater healthcare and pension expenses. The government puts great store on the country’s reputation for fiscal prudence and has set a target of reducing net core Crown debt to 20% of GDP by 2022. As a small economy highly exposed to global shocks and natural disasters, and with challenges ahead from an ageing population, such a strategy is wise. The government has announced a net debt target range of 15% to 25% of GDP after meeting its 20% target, subject to any significant shocks to the economy. Policy recommendations in this Survey will have little effect on the overall fiscal balance (Box 1). The government is currently working towards establishing an Independent Fiscal Institution, as recommended in the 2017 Survey (Table 5).

	Actual	Projections
	2017/18	2018-19	2019-20	2020-21	2021-22	2022-23
Core Crown tax revenue	27.8	28.2	28.2	28.5	28.6	28.8
Core Crown expenditure	27.9	29.1	29.4	29.6	29.0	28.8
of which: Social security and welfare	9.0	9.7	9.8	9.7	9.6	9.5
Health	5.9	6.1	6.1	5.7	5.5	5.3
Education	4.7	4.8	4.7	4.6	4.4	4.3
Capital spending	2.0	2.2	2.9	2.6	2.4	2.2
Core Crown balance^1,2	-0.1	-0.9	-1.3	-1.1	-0.4	0.0
Total Crown balance^1,2	1.9	1.2	0.4	0.6	1.3	1.7
Cyclically adjusted total crown balance	1.6	1.1	0.3	0.4	1.2	1.7
Fiscal impulse (core Crown plus Crown entities)3	0.3	1.1	0.0	-0.2	-0.6	-0.5
Net core Crown debt	19.9	20.1	20.4	20.7	19.9	18.7
Gross core Crown debt	30.5	27.8	27.4	26.5	27.6	25.3
General government net lending (+) or borrowing (-)	1.2	0.5	-0.5	0.2	0.9	1.5
equal to: central government net lending4	1.3	0.6	-0.4	0.3	1.0	1.5
plus local government net lending5	-0.1	-0.1	-0.1	-0.1	-0.1	-0.1
Memorandum items (Treasury projections)
Real GDP growth (production based)	3.2	2.4	3.0	2.8	2.4	2.4
Nominal GDP growth (expenditure based)	5.7	3.8	5.8	5.4	4.9	4.7
CPI (annual per cent change)	1.5	1.8	2.0	2.1	2.0	2.0
Ten-year government bond (per cent)	2.8	1.9	2.3	2.5	2.7	2.9

1. Core Crown includes government departments, offices of parliament, the New Zealand Superannuation Fund and the Reserve Bank. Total Crown consists of core Crown plus Crown entities (such as the Accident Compensation Commission and Callaghan Innovation) and State-owned enterprises.

2. Based on operating balance before gains and losses.

3. Excluding Earthquake Commission and Southern Response payments and receipts related to the Canterbury and Kaikoura earthquakes.

4. Based on GFS projections from the May 2018 Budget Update adjusted for changes to the total Crown balance between the Budget Update and the Half Year Fiscal Update.

5. Estimates based on a continuation of the 2017/18 deficit (Stats NZ, 2018).

Source: Treasury (2018) Half Year Economic and Fiscal Update; OECD calculations based on Stats NZ (2018), Government Finance Statistics (General Government): Year Ended June 2018; Stats NZ (2018), National accounts (income and expenditure): Year ended March 2018, and Treasury (2018) Budget Economic and Fiscal Update.

The government created the Tax Working Group in late 2017 to consider the future of tax in New Zealand. Its terms of reference put several issues outside the scope of review, including increasing any income tax rate or the rate of goods and services tax, inheritance tax, and any tax on the family home. The Group highlighted the important role of the tax system in supporting well-being through fair and efficient sourcing of revenue, redistribution, and influencing behaviour. The majority of the Group’s members recommended a broad expansion of the taxation of capital gains, excluding the family home as per the terms of reference. A capital gains tax was subsequently ruled out by the government. The OECD has previously recommended introducing a comprehensive capital gains tax (Table 5), which would offer several benefits but with some costs (Table 6). Exempting the family home would mean that any reduction in house prices would likely be small (accompanied by higher rents) and would strengthen incentives to direct savings towards the family home. Along with any other exemptions (for example, exemptions for farms and small businesses were discussed) this would reduce the benefits from capital gains taxation. The Group also recommended expanding the coverage and rate of the Waste Disposal Levy, strengthening the Emissions Trading Scheme and advancing the use of congestion charging for roads.

Figure 14. Government debt is sustainable, but ageing will increase fiscal pressures

Simulations of gross general government debt as a percentage of GDP

Box 1. Quantifying this Survey's fiscal recommendations

Table 4 quantifies the approximate net general government budgetary impact of the recommendation to increase social housing provision. Other recommendations are not quantified because they involve transfers between different levels of government or programmes (other housing recommendations) or very small expenditures (expansion of mentoring, English language and bridge programmes for immigrants).

	% of GDP	NZD million per year
Increase social housing provision	0.01	33

Note: Increase in social housing provision based on the long-term annual cost of 1 922 new units, as required in addition to the 6 400 new units planned over the next four years to meet demand from Priority A applicants on the waiting list as at December 2018. Cost per social housing unit based on MSD (2017[13]).

Recommendations in past Surveys	Actions taken since the previous Survey
Bring forward the increase in the pension age from 65 to 67, lengthen the transition period and then index the pension age to life expectancy.	The government has announced that the age of eligibility is to remain 65.
Gradually reduce net public debt in line with the government’s fiscal strategy. Increase spending that enhances well-being and reduce taxes within the constraints of this strategy.	Net public debt continues to decline. Some new expenditure has failed to improve well-being as much as possible due to poor targeting: Winter Energy Payments are not means tested for those aged 65 and over; free tertiary education favours more advantaged socio-economic groups; and KiwiBuild delivers the greatest benefits to people who can afford to buy their own home.
Create an Independent Fiscal Council, focused on providing policy advice and analysis on the fiscal stance.	The government has consulted on its proposal to establish an Independent Fiscal Institution that would provide independent evaluation of fiscal policy performance, support parliamentary scrutiny of public finances and provide independent costings of political party policies.
Undertake a tax review that considers corporate and personal income tax settings and potential new tax bases.	The final report of the Tax Working Group was released publicly in February 2019.
Eliminate the double-taxation of trans-Tasman profits distributed to shareholders by continuing to work towards agreement with Australia on mutual recognition of imputation and franking credits for foreign investment.	No action taken.
Implement a capital gains tax and boost environmental and property or land taxes to facilitate a more efficient and equitable tax structure.	The capital gains tax on investment properties has been extended from those held for less than two years to those held for less than five years.
Consider limiting KiwiSaver tax credits to low-income members. Extend automatic enrolment to all existing employees. Change the investment strategy for default funds to a life-cycle approach that is adapted to the member’s age.	No action taken.

Advantages	Disadvantages
Increase progressivity of the tax system	Inefficient lock-in due to incentive to hold on to assets to avoid paying capital gains tax
Improve horizontal equity by taxing income whether it is earned on capital gains or otherwise	Taxes accrue on nominal as well as real gains¹
Improve efficiency through reducing tax-driven incentive to make investments in assets that provide capital gains rather than income, in particular housing	In the absence of other tax changes, can discourage saving and investment through reducing post-tax returns, particularly if there are strict limits around relief for capital losses
Reduce incentive to shelter income from tax by transforming ordinary income into capital gain	Taxing gains on shares has potential for some double taxation of retained profits on which company tax has already been paid²

1. This is a feature of a nominal tax system more broadly and is more important for taxation of interest-bearing assets. Because capital gains taxed on realisation benefit from deferral of tax payments, real after-tax gains increase over time and thus capital gains are less affected by taxation of nominal gains than are interest-bearing assets (Burman, 2009[14]).

2. Retained profits are not subject to full double taxation to the extent that there is a value placed on unused imputation credits that can be used for future dividends, as this value will be capitalised into the value of the company and thus increase capital gains (Burman and White, 2009[15]). New Zealand companies can also avoid double taxation of retained earnings through a taxable bonus issue (Tax Working Group, 2019).

Source: OECD (2017), OECD Economic Surveys: New Zealand.

The government plans labour market reforms to increase low-paid workers’ wages

Minimum wages

Increasing minimum wages is one of the pillars in the government’s Workplace Relations Package aimed at increasing low-paid workers’ earnings. The government plans to raise the minimum hourly wage progressively by 21% by 2021 from the 2018 rate (NZD 16.50), increasing the minimum wage relative to median wages by 7% from a starting point that is already one of the highest in the OECD (Figure 15). Planned annual increases are subject to each year’s annual review, which will take into account economic conditions at the time. The New Zealand Treasury (2017[16]) estimates that the additional increase in the minimum wage relative to unchanged policy (7% to NZD 17.60) will increase the share of hours worked at the minimum wage from 8% currently to 19% by 2021, reduce total hours worked by 0.4% (assuming an elasticity of labour demand with respect to wages of -0.3), add 1.6 percentage points to wage growth over 2018–21, and leave potential GDP around a net 0.2% lower by 2021. Aggregating effects on multifactor productivity, capital intensity and the employment rate, OECD country panel analysis suggests a 0.3% reduction in GDP per capita after two years, rising to 1.8% in the long term owing to lower youth- and prime-age female employment rates, groups which have a higher proportion of low-wage workers than the other groups considered (prime-age men and older workers) (Égert and Gal, 2017[17]). These estimates are based on average policy effects obtained across OECD countries. Effects in New Zealand may differ significantly from the OECD average. Based on a review of the evidence, OECD (2015[18]) concludes that the impact of moderate minimum wage hikes on employment tends to be small, although effects on some vulnerable groups – such as youth – may be more negative, although these conclusions remain controversial (OECD, 2018[19]). Again, outcomes could be different in New Zealand.

The boost to the minimum wage has well-being trade-offs: it will increase wages for the low paid, and so narrow the market income distribution; but it may also worsen poverty for other people to the extent that it forces them out of work. Based on international evidence, high minimum wages, as in New Zealand, do indeed reduce wage inequality, but less so over the long run owing to the possibility of mobility in and out of employment and up and down the wage ladder (OECD, 2015[18]; OECD, 2018[19]). However, the minimum wage hike risks reducing employment opportunities for youth, particularly as lower minimum wages for new entrant youth are so short-lived (an employer can only pay the youth minimum wage during the first six months of an employment contract) and subject to qualification rules (concerning age, employment and social benefit history, and training requirements) that are so complicated that in most cases employers choose simply to pay the adult minimum wage. During the last period when real minimum wages increased markedly for youth (122.8% for teenagers and 32.9% for adults between 1999 and 2008), the unemployment rate for the young (15-24 years old) rose from 2.9 times that for working-age adults (25-64 years) in 2000 to 4.1 times the adult rate in 2008. Over the same period, this relative unemployment rate barely increased in OECD countries on average and was considerably lower (2.3 in 2000, 2.5 in 2008) than in New Zealand. Based on data for this last period of substantial increases in real minimum wages in New Zealand, Maloney and Pacheco (2012[20]) estimate that a 10% increase in minimum wages lowers the 50% relative poverty rate by less than 0.1 percentage point, even in the absence of a decline in hours worked. This is because many low-income households do not have any working members and many minimum wage workers do not live in poor households. Moreover, poor households with children would not benefit because the Minimum Family Tax Credit has an effective marginal tax rate of 100% (MBIE, 2018[21]). The rather limited effects of minimum wages on reducing poverty in New Zealand are consistent with findings in other countries OECD (2018[19]).

Figure 15. The minimum wage is high relative to the median wage

Minimum wage relative to median wage of full-time workers

Fair Pay Agreements

Another plank in the Package is to increase wages by strengthening worker bargaining power through the introduction of Fair Pay Agreements (FPAs) for workers in low-paid occupations or sectors. The Fair Pay Agreement Working Group (2018[22]) was established to advise the government on the implementation of FPAs, and has reported back but decisions about the design of the regime are still to be finalised. FPAs would allow representatives of employers and workers from a specific industry or occupation to agree a set of minimum employment terms and conditions exceeding legislated minima (such as the minimum wage and minimum leave entitlements) that would apply to all workplaces, whether or not the employer or employees were party to the negotiation process (all parties operating in the sector at the time of bargaining would have had an opportunity to be represented in bargaining). The Working Group recommends that the FPA bargaining process should only be initiated by workers or their union representatives and be subject to a representativeness trigger – in any sector or occupation, at least 1000 workers or 10% of workers can initiate negotiations – or a public interest trigger (to eliminate harmful labour market conditions). Where bargaining parties reach agreement, the Working Group recommended that ratification by a simple majority of both employers and workers would be required for it to enter into force. In other cases, a tribunal would determine the terms of the agreement and ratification would not be required. For workplaces covered by FPAs, enterprise agreements (including individual employment contracts) could only include more favourable employee conditions than in the relevant FPA. In the OECD’s taxonomy of collective bargaining systems, FPAs correspond to predominantly centralised bargaining systems, where sector-level agreements play a strong role and extensions are widely used, or organised decentralised if there is significant room for lower-level agreements to set the standards (OECD, 2018[23]).

If agreed, this reform could potentially represent a major break from New Zealand’s current system, which is classified as fully decentralised, with bargaining essentially confined to the enterprise level, as in Canada, the United Kingdom, the United States and ten other OECD countries. New Zealand has few employer organisations with existing capability to negotiate at sector or occupational level and trade union density is only 18%.

As there is considerable uncertainty about the design and coverage of the regime, there is also considerable uncertainty about the effects of such a reform. Based on cross-county evidence, OECD (2018[23]) suggests that it could increase employment and reduce wage inequality for full-time employees but cut both lower labour- and multifactor productivity growth in the covered sectors (OECD, 2017[24]). This latter result suggests that lower flexibility at firm level, which characterises centralised bargaining systems, may result in lower productivity growth. The OECD Economics Department’s structural reform quantification simulator suggests that the reform would reduce GDP per capita in the long run, the more so the greater of extension of agreements (Égert and Gal, 2017[17]).

OECD (2018[23]) suggests that organised decentralisation (Traxler, 1995[25]) may deliver better employment and wage inequality outcomes without lower productivity. Organised decentralisation within the framework of sector-level agreements allows for elements of working conditions and organisation to be determined at company or individual level under certain conditions. One such model, which is widespread in the Netherlands and may also be more suitable for New Zealand than others, is à-la-carte, in which working conditions are not set by a company agreement but by individual workers. They have the option to exchange, within pre-defined limits, wages, working time and free time. Other models, predicated on multi-level bargaining and strong local representation (or extensions), are unlikely to be suitable for New Zealand owing to the prevalence of SMEs, where enterprise-level bargaining mainly occurs with individual workers.

As sector-level agreements that also cover small and medium-sized businesses, FPAs could help spread best practices in terms of personnel management, training, health and safety, technology usage, insurance, or retirement packages (OECD, 2019[26]). In this regard, FPAs could play a significant role in enhancing labour market security and strengthening workers’ labour market adaptability (OECD, 2018[23]). As evolving demands for products and services as well as technological change are quickly affecting skills needs, the social partners could provide active support to workers displaced from their existing jobs to help them back into good jobs (OECD, 2019[26]), in line with past Survey recommendations to enhance support for displaced workers (Table 7).

Pay equity

The Package also seeks to enhance gender pay equity and hence contribute to reducing the gender wage gap, which although smaller than in most other countries is still 7.2% for full-time employees (see Figure 19, Panel A). To this end, a Bill to facilitate pay-equity claims is before Parliament. Pay equity compares jobs usually done by women with different jobs usually done by men with a view to setting equal pay for work of equal value, which is determined by the skills and qualifications, amongst other things, needed to do the jobs. It differs from equal pay legislation, which requires that people doing the same job be paid the same, regardless of gender; New Zealand passed such legislation for the public sector in 1960 and the private sector in the Equal Pay Act 1972. In 2014, the Court of Appeal found that the Equal Pay Act provided for pay equity. The Bill before Parliament would enable women to make a claim through the simpler and more accessible process to be implemented through an amendment to the Equal Pay Act, rather than having to resort to court action in the first instance. The increase in wage costs from pay equity settlements may result in a small rise in the unemployment rate.

There is much uncertainty about the extent of negotiated back pay or any potential award of back pay. Parties are free to negotiate whether or not back pay should be part of a pay equity settlement. A potential award of back pay can only be considered by a court if it is making a determination to fix terms and conditions and once all other reasonable alternatives to resolve the dispute have been exhausted. In deciding whether to award back pay, or the amount to award, the court must consider certain discretion factors, including the ‘ability of the employer to pay’.

The Bill currently limits back pay to the date the claim was raised, if a claim was raised within the first five years of enactment. If the claim was raised later on, back pay can be awarded to the date of the five-year anniversary of enactment. For claims made before enactment, back pay may be awarded back to the date the claim was raised. In the OECD’s view, the ability of the court to award back pay should be limited to the period after the new law comes into effect, as occurred for the pay equity settlement for care and support workers legislated in 2017, to avoid a negative financial impact on some small businesses that paid the market wage in good faith.

Recommendations in past Surveys	Actions taken since the previous Survey
Consider introducing unemployment insurance or, alternatively, longer notice periods and mandatory notification of layoffs. Also consider expanding training, guidance and counselling for displaced workers.	The government is considering the Welfare Expert Advisory Group’s recommendations on reforming New Zealand’s social support system to ensure that people have adequate incomes and can participate in their communities. The Group’s terms of reference include adapting social support to changing family structures and the changing labour market. The Ministry of Business, Innovation and Employment has initiated cross-government work on improving support for helping displaced workers, looking across all the feasible levers.
Increase tertiary-sector responsiveness to labour market needs by formalising linkages between providers and employers, and directing funding to projected areas of skills shortfall, including better targeting of course offerings by providers and merit- and needs-based scholarships.	The government has initiated a review of the vocational education and training (VET) system to strengthen it. To this end, the review will make recommendations to make VET more attractive to learners, more responsive to employers and industry and more capable to respond well to changes in the external environment.
More frequently update immigration skills shortage categories to reduce labour market bottlenecks.	Changes were made in 2017 to Essential Skills visa settings to better assess skills levels. Australia and New Zealand Occupational Skills Categories are being reviewed. The government plans further reforms to the temporary work visa process to ensure that identified regional skills shortages trigger responses in the VET and welfare systems.

Recommendations in past Surveys

Actions taken since the previous Survey

Consider introducing unemployment insurance or, alternatively, longer notice periods and mandatory notification of layoffs. Also consider expanding training, guidance and counselling for displaced workers.

The government is considering the Welfare Expert Advisory Group’s recommendations on reforming New Zealand’s social support system to ensure that people have adequate incomes and can participate in their communities. The Group’s terms of reference include adapting social support to changing family structures and the changing labour market.

The Ministry of Business, Innovation and Employment has initiated cross-government work on improving support for helping displaced workers, looking across all the feasible levers.

Increase tertiary-sector responsiveness to labour market needs by formalising linkages between providers and employers, and directing funding to projected areas of skills shortfall, including better targeting of course offerings by providers and merit- and needs-based scholarships.

The government has initiated a review of the vocational education and training (VET) system to strengthen it. To this end, the review will make recommendations to make VET more attractive to learners, more responsive to employers and industry and more capable to respond well to changes in the external environment.

More frequently update immigration skills shortage categories to reduce labour market bottlenecks.

Changes were made in 2017 to Essential Skills visa settings to better assess skills levels. Australia and New Zealand Occupational Skills Categories are being reviewed. The government plans further reforms to the temporary work visa process to ensure that identified regional skills shortages trigger responses in the VET and welfare systems.

Economic growth is projected to remain around potential

Economic growth is projected to remain around 2½ per cent in 2019 and 2020 (Table 8). Consumption is set to slow as net migration falls and the effect of higher transfer payments through the Families Package fades, outweighing wage growth from minimum wage hikes, pay equity decisions and public sector wage awards. Residential and business investment will expand to meet housing shortages, and capacity constraints respectively. Global economic growth has peaked, with headwinds from trade tensions and tighter financial conditions, so external demand growth is expected to be weaker and net exports to ease. A tightening fiscal stance will be less supportive of growth in 2020.

	2015	2016	2017	2018	2019	2020
	Current prices (NZL billion)	2016	2017	2018	2019	2020
Gross domestic product (GDP)	250	4.2	2.6	2.8	2.6	2.5
Private consumption	144	5.4	4.7	3.3	3.4	2.5
Government consumption	46	2.0	2.9	2.2	2.1	1.4
Gross fixed capital formation	57	4.3	3.5	3.8	2.0	3.2
Housing	17	10.1	0.0	2.2	4.9	4.9
Business	26	3.3	6.1	3.5	-0.2	3.4
Government	15	-0.5	3.2	6.5	6.0	1.0
Final domestic demand	248	4.5	4.1	3.2	2.8	2.5
Stockbuilding2	1	0.1	-0.2	0.4	-0.7	0.0
Total domestic demand	248	4.6	3.9	3.6	2.1	2.5
Exports of goods and services	70	2.1	1.8	3.0	2.4	2.9
Imports of goods and services	68	3.4	6.9	5.5	0.0	3.1
Net exports2	2	-0.3	-1.3	-0.6	0.6	0.0
Other indicators (growth rates, unless specified)
Potential GDP	. .	3.0	3.0	2.9	2.7	2.5
Output gap3	. .	0.6	0.2	0.1	0.2	0.2
Employment	. .	4.6	4.2	3.0	1.0	1.1
Working-age population (15-74)		2.1	2.0	1.5	1.3	1.2
Unemployment rate4	. .	5.1	4.7	4.3	4.2	4.3
GDP deflator	. .	1.8	3.5	1.1	1.4	2.1
Consumer price index	. .	0.6	1.9	1.6	1.5	2.1
Core consumer prices5	. .	1.4	1.4	1.2	1.6	2.0
Household saving ratio, net6	. .	0.1	-1.4	-1.0	-1.0	-0.9
Terms of trade		2.1	5.0	-1.7	-0.4	0.3
Trade balance^{7, 8}	. .	1.0	1.0	-0.1	0.4	0.5
Current account balance7	. .	-2.2	-2.9	-3.7	-2.9	-2.7
General government fiscal balance7	. .	1.2	1.1	0.1	-0.4	0.1
General government gross debt ^{7, 9}	. .	37.7	36.2	36.3	36.6	36.5
General government net debt^{7, 9}	. .	3.3	0.8	0.2	0.5	0.4
Three-month money market rate, average	. .	2.3	2.0	1.9	1.7	1.7
Ten-year government bond yield, average	. .	2.8	3.0	2.8	1.9	2.0

1. Projections do not incorporate the 2019 Budget, which was released after the May 2019 Economic Outlook.

2. Contribution to changes in real GDP.

3. As a percentage of potential GDP.

4. As a percentage of the labour force.

5. Consumer price index excluding food and energy.

6. As a percentage of household disposable income.

7. As a percentage of GDP.

8. Goods and services.

9. National Accounts basis excluding unfunded liabilities of government-employee pension funds.

Source: OECD, OECD Economic Outlook 105 database.

The main domestic risk is a housing market correction, although housing shortages (unlike in Australia) make a large-scale correction unlikely absent developments external to the housing market, such as an increase in unemployment or interest rates. Amplifying the potential effects of interest rate hikes, two thirds of outstanding mortgage balances are scheduled to be repriced within the next year. Further weakness in the Australian housing market is a risk, given strong economic and financial links and the historical tendency for the Auckland market to follow developments in Australia. Rising trade restrictions internationally could have substantial repercussions for New Zealand as a small open economy without a large domestic market and heavily exposed to international commodity prices. New Zealand is also exposed to some additional lower-probability severe events (Table 9). Conversely, growth would be higher if net immigration declines less than assumed, particularly if this triggered a resumption of wealth gains through house price growth, or if business investment recovers more quickly than anticipated as businesses seek to address capacity constraints. Macro-financial vulnerabilities are generally lower than those observed at the end of the last expansion in 2007 (Figure 16), although the housing boom has meant that risks associated with high house prices and household debt remain elevated.

Shock	Possible impact
Sharp slowdown in China	Economic growth in China has eased. While there are signs that growth is now stabilising under the effect of policy stimulus measures, substantial risks remain around the potential for further trade restrictions, notably between the United States and China, and elevated levels of non-financial corporate debt. A slowdown in China would push down prices for New Zealands agricultural commodity exports, reducing economic well-being through a decline in the terms of trade. Weaker tourism and education demand would weigh on service exports. An unexpected slowdown in China would impact New Zealand indirectly through its adverse effect on global growth and trade. In particular, demand from Australia would weaken due to that countrys strong trade and financial links with China.
Natural disasters	The probability of large aftershock earthquakes in regions affected by the 2016 Kaikoura and 2010-11 Canterbury earthquakes continues to decline. Nevertheless, the probability of a magnitude 7 or higher earthquake affecting Central New Zealand in the next decade is still estimated at between 10% and 60% (Earthquake Commission, 2019[27]). Natural disasters can cause significant loss of life, disruption of economic activity, destruction of capital and longer-term challenges for public and private financing.

Shock

Possible impact

Sharp slowdown in China

Economic growth in China has eased. While there are signs that growth is now stabilising under the effect of policy stimulus measures, substantial risks remain around the potential for further trade restrictions, notably between the United States and China, and elevated levels of non-financial corporate debt. A slowdown in China would push down prices for New Zealands agricultural commodity exports, reducing economic well-being through a decline in the terms of trade. Weaker tourism and education demand would weigh on service exports. An unexpected slowdown in China would impact New Zealand indirectly through its adverse effect on global growth and trade. In particular, demand from Australia would weaken due to that countrys strong trade and financial links with China.

Natural disasters

The probability of large aftershock earthquakes in regions affected by the 2016 Kaikoura and 2010-11 Canterbury earthquakes continues to decline. Nevertheless, the probability of a magnitude 7 or higher earthquake affecting Central New Zealand in the next decade is still estimated at between 10% and 60% (Earthquake Commission, 2019[27]). Natural disasters can cause significant loss of life, disruption of economic activity, destruction of capital and longer-term challenges for public and private financing.

Figure 16. Macro-financial vulnerabilities are generally lower than at the end of the last expansion

Index scale of -1 to 1 from lowest to greatest potential vulnerability, where 0 refers to long-term average

Well-being policy challenges

Well-being outcomes for some groups lag behind those for others

While well-being is high on average, outcomes are unevenly distributed. Income inequality grew markedly between the mid-1980s and mid-1990s and, following a period of stability, has increased somewhat in recent years (Figure 17, Panel A). High-income households have enjoyed faster income growth than median-income households, which in turn have enjoyed higher income growth than low-income households (Panel B). Disposable income inequality now exceeds the OECD average, even though market income inequality is in line with the average, reflecting below-average redistribution through taxes and transfers (Figure 18, Panel A). The income distribution is more skewed towards high-income households than in most other OECD countries (Panel B). The labour share of national income fell sharply in the decade to the mid-1990s but has increased since the turn of the century, partially reversing the earlier decline (Figure 17, Panel A). Household net wealth, which on average is among the highest in the OECD, is skewed towards the wealthy: the top 10% of households account for about 53% of household net worth, a level similar to that in Canada and France but somewhat higher than in Australia and the United Kingdom and much lower than in the United States (OECD, 2017[28]).

The relative poverty rate (the share of households with incomes less than 50% of the median) is below the OECD average (Figure 18, Panels C and D) but higher for Māori and Pasifika peoples and in certain regions, often those where a large proportion of the population is Māori or Pasifika. Similarly, while the child poverty rate is close to the OECD average, it is higher for certain groups – sole-parent or jobless households and Māori and Pasifika.

Figure 17. Income inequality has increased since the mid-1980s

Figure 18. Income inequality is above the OECD average and relative poverty rates are below¹

2016 or latest available year²

Full-time female workers in New Zealand earn 7% less on average than their male counterparts, one of the lowest gender wage gaps in OECD countries (Figure 19, Panel A). While the gender employment rate gap is smaller than the OECD average, the gender full-time employment gap is greater (Panel B), reflecting the prevalence of part-time female employment.

Inequalities in well-being also abound in education, health and housing. Māori and Pasifika education achievement remains below that of the rest of the population (Figure 20, Panel A) and the influence of socio-economic background on students’ cognitive skills remains higher than in most other countries (Panel B). While substantial progress was made in reducing the gap in life expectancy between Māori and non-Māori during the three decades to the mid-1980s, the gap widened sharply in the decade to the mid-1990s and has only declined modestly since then (Figure 21, Panel A). Much of the widening of the gap was due to increasing inequality in socioeconomic factors such as incomes, education, car access and housing tenure (Blakely et al., 2007[29]). Māori and Pasifika life expectancy is considerably lower than for the rest of the population (Panel B) and amenable mortality (i.e., premature deaths that could potentially be avoided given effective and timely healthcare) rates for Māori and Pasifika are 2.5 times higher than for others (Ministry of Health, 2017[30]). A contributing factor is higher infant mortality for Māori at 4.9 per 1 000 live births, compared with 3.8 for the population as a whole (Stats NZ, 2019[31]).

Figure 19. The gender gap is low for wages but high for employment1

In percentage

Figure 20. There are large inequalities in education achievement

Integrating a well-being approach in policymaking

Improving the well-being of New Zealanders and their families is one of three strategic priorities for the government, alongside building a productive, sustainable and inclusive economy, and providing new leadership by government (New Zealand Government, 2018[32]). The focus on well-being is supported by the work of the New Zealand Treasury, which has been developing its Living Standards Framework (LSF) over many years. It aims to inform policy and support better decision making through taking on board a broad range of impacts, including distributional effects, examining trade-offs and improving transparency.

Figure 21. Māori and Pasifika have shorter life expectancy than the rest of the population

Life expectancy at birth

The latest version of the LSF identifies 12 domains or factors that matter for New Zealanders’ well-being, as well as four capital stocks, which are the foundations of current and future well-being. Resilience, which is about enabling the country to respond to shocks, is also a key dimension of the framework. Distribution (e.g. across population groups and regions) is important across the domains, the capital stocks and resilience.

The identified domains are very similar to those in the OECD Framework (Figure 22), except that the LSF also includes a ‘cultural identity’ dimension, recognising its central importance in a New Zealand context. A strength of these frameworks (and of Belgium’s Complementary Indicators to GDP and the Dutch Well-being Monitor) is that they explicitly distinguish current individual well-being outcomes from the broader systems and means to sustain those outcomes over time. This helps to monitor whether a country is maximising well-being today at the expense of tomorrow, to clarify intertemporal trade-offs in policy design, and to emphasise the inter-generational character of well-being (Stiglitz, Sen and Fitoussi, 2009[33]; UNECE, 2013[34]; UNU-IHDP and UNEP, 2014[35]; OECD, 2015[36]).

The LSF Dashboard contains 55 indicators in total, several of which relate to subjective well-being or other self-reported measures. This is consistent with the balance of objective and subjective well-being seen in other frameworks used by OECD countries, and in the OECD’s How’s Life? approach. It is increasingly recognised that subjective well-being can be meaningfully measured through national official statistics, and can add value and context to policy discussions (OECD, 2013[37]). Nevertheless, the policy applications of subjective well-being data are still evolving, and there are legitimate questions about the extent to which they can be used to guide macroeconomic analysis and policy decisions. As a consequence, well-being dashboards adopted by OECD governments should use subjective data as a complement to, rather than a replacement for, objective data on people’s living conditions, quality of life and resources for future well-being.

Figure 22. The NZ- and OECD well-being frameworks have much in common

The first edition of the LSF Dashboard was released in late 2018 to support the use of well-being analysis and evidence in the Treasury’s policy advice and to support a well-being approach in other public sector agencies. The indicators were selected based on a comparison of international and New Zealand-specific well-being frameworks, and an assessment of their suitability for New Zealand. Overlaps with other national well-being dashboards suggest that the Dashboard broadly reflects international consensus on the key aspects of well-being. The Dashboard also follows good practice by providing a detailed assessment of the distribution of well-being, for example by gender, age, ethnicity and household structure. Nevertheless, conceptual and data gaps, as well as the need for a concise indicator set, mean several themes and indicators that consistently appear in other countries’ approaches are absent. In some cases, these measurement gaps are in priority areas for New Zealand. For example, in natural capital, OECD data indicate that New Zealand performs poorly relative to other countries in terms of GHG emissions and soil nutrient balance, while Stats NZ data indicate worsening nitrogen pollution in rivers, yet these aspects are currently absent from the Dashboard. Similarly, investment in R&D is low, and not represented in the Dashboard. Identifying whether these indicators should be included in the Dashboard, better integrating Te Ao Māori, Asian and Pasifika perspectives, and ensuring greater consensus on the framework adopted across the public sector should be priorities when the LSF and its Dashboard are reviewed and updated in 2021.

The 2021 review should also clarify the role of the Dashboard, vis-à-vis other well-being frameworks and indicator sets being developed in New Zealand, such as those to support the Child and Youth Well-Being Strategy, the Social Report, Environmental Report, and the new Indicators Aotearoa New Zealand (IANZ) dashboard that will be released by Stats NZ in mid-2019. This will influence the extent to which additional indicators need to be included in the Treasury’s Dashboard, rather than being covered elsewhere. The size and indicator coverage of the Dashboard currently falls between that of frameworks focused on monitoring and reporting, which typically have many indicators, and that of frameworks focused on concise communication and prioritisation – such as those used in budget debates in France, Sweden or Italy, which tend to have small, focussed indicator sets (Figure 23). Stats NZ’s IANZ will be a more comprehensive indicator set, and is intended to become a key source of data on New Zealand’s well-being in the future (Figure 24).

Figure 23. The LSF Dashboard has a middling number of indicators

Number of indicators per well-being framework

The Treasury has developed its Living Standards Framework to bring a well-being perspective to its own analysis and advice. Although agencies were required to use LSF concepts in their Budget 2019 funding requests, a number of agencies also have their own well-being approaches and multidimensional indicator sets. This distributed approach enables government ministries and agencies to tailor their analyses to their needs, including providing greater depth than the LSF Dashboard can offer. However, the lack of one consistent framework, or one definitive account of New Zealanders’ well-being, risks creating confusion among stakeholders and researchers tasked with generating the evidence base. The potential gains from a more collaborative whole-of-government approach may also become harder to realise. Public sector chief executives should therefore consider adopting a common high-level conceptual framing of well-being – perhaps by adopting the LSF or IANZ - as an organising framework under which agency well-being frameworks are nested.

Figure 24. The anticipated Indicators Aotearoa New Zealand data pipeline

There is also more work to do to integrate well-being approaches into policy toolkits and approaches. New Zealand’s Wellbeing Budget 2019 uses well-being evidence at different stages of the budget process (Figure 25). New innovations include using well-being evidence to set Budget priorities, strongly encouraging and incentivising collaboration among agencies, and using a well-being framework to assess spending proposals. This includes requiring all ministries seeking funding for new initiatives to identify and, where possible, to quantify how their proposals are expected to affect the relevant well-being domains and capitals, using an impact and cost-benefit analysis template designed for Budget 2019. An optional spreadsheet tool (CBAx) available to agencies, which aims to support a consistent approach to cost-benefit analysis and the use of monetised impact values, has now been adapted to enable impacts to be linked to well-being domains. The Treasury should review experiences from the 2019 Budget with departments, and further develop its own expertise in well-being impact analysis. The 2019 Wellbeing Budget affects only the marginal spend – around 4% of core Crown expenditure. One of the Treasury’s future challenges will be to bring a well-being lens into reviewing the baseline spend. Given the emphasis placed on improving policy advice through the LSF, there is also scope for incorporating it into existing quality assurance procedures both within Treasury and across government, as well as through other policy tools such as regulatory impact assessment and policy evaluation. Strong oversight will be needed to both embed the approach and to maintain the robustness of policy analysis and advice while mainstreaming the LSF.

For well-being to become an effective tool for government, it will be important to trace how the processes, inputs and outputs under policymakers’ immediate influence affect the ultimate outcomes highlighted in dashboards and frameworks. This will also be central to the success of the government’s proposed amendments to the Public Finance Act, which will require governments to set well-being objectives and report on them annually, with a report on well-being outcomes from Treasury every four years. Infrequent data collections, low timeliness of data, and time lags between policy action and meaningful change in well-being outcomes could pose challenges in this context. Thus, identifying intermediate outcomes – i.e. those which respond rapidly to changes in policy systems and can be linked empirically to final well-being outcomes, may prove pivotal to both setting well-being objectives and coordinating the response needed to meet them.

Figure 25. New Zealand’s Wellbeing Budget process

Raising well-being through more environmentally sustainable growth

New Zealand’s natural capital is vital for both current and future well-being. Compared with most other OECD countries, New Zealand enjoys clean air (Figure 26, Panel C), high levels of renewable freshwater resources and abundant attractive recreational spaces. The natural environment also provides the basis for the economy’s primary sector, which accounts for about 45% of total exports. However, as the 2017 OECD Environmental Performance Review (OECD, 2017[38]) argued, New Zealand’s growth model is approaching its environmental limits. The expansion of dairy farming in recent decades has increased freshwater contamination, threats to biodiversity and greenhouse gas (GHG) emissions. New Zealand should build on its well-developed knowledge and innovation system for exporting higher value export products and decouple growth from natural resource use. As argued in the 2017 Economic Survey, efficiently decoupling growth in primary production from natural resource depletion is likely to require that producers pay for the environmental damage they cause and continued support for R&D investment to mitigate GHG emissions (mainly biological methane) and water pollution from agriculture. In urban areas where sewage and storm-water infrastructure has not been able to cope with a rapidly growing population, more investment in these facilities is needed to reduce overflows of untreated water into watercourses and harbours.

Increasing diffuse sources of pollution – notably nutrients, pathogens and sediments – have reduced water quality in many areas (OECD, 2017[39]). The nitrogen balance per hectare is slightly worse than the OECD median, but the increase over the past two decades has been the second largest, mainly owing to the expansion of dairy farming. Horticulture, arable farming, and sheep and beef farming can also have significant impacts, but such land uses have not expanded at the rapid rate of dairy. Dairy cattle also make a proportionally higher contribution to nitrogen leached from agricultural soils. Water pollution hotspots are largely focused in regions of dairy farming. There are concerns that if large-scale conversion of land to dairy farming were to continue, it would result in more freshwater degradation in years to come (all the more so in the more distant future owing to substantial lagged effects), even with the best mitigation techniques. Water pollution in New Zealand can have negative impacts on freshwater ecosystems, drinking water sources and human health, swimming and water-based recreation (OECD, 2017[39]). Although water abstractions are not excessive in aggregate (Figure 26, Panel D), irrigation of livestock pasture also puts some local water resources under stress quantitatively, reinforcing water quality degradation. Freshwater abstraction for agriculture is high by international comparison (OECD, 2017[38]). In 2017, dairy farming accounted for 59 percent of the irrigated agricultural land area in New Zealand (Ministry for the Environment & Stats NZ, 2019[40]). Fortunately, the government recently stopped subsidising new large-scale irrigation projects.

Deteriorating water quality also contributes to loss of biodiversity. Biodiversity loss is a key world-wide threat to the foundations for human wellbeing, alongside climate change and soil degradation. New Zealand has some of the highest levels of threatened native freshwater species; a high proportion of other endemic species are also threatened with extinction (OECD, 2017[39]). The National Policy Statement on Freshwater Management and the Clean Water Package 2017 require regional councils to manage water within ambitious quality and quantity limits, a task for which they need additional support. In 2018 the government launched an Essential Freshwater Work Programme to stop further degradation and loss, reverse past damage and improve water allocation. It includes addressing the rights and interests of Māori. As recommended in past Surveys, pricing and permit trading should be expanded (subject to agreeing iwi (tribal)/Māori rights) to achieve these objectives efficiently (Table 11). Using economic instruments to improve water quality would entail levying pollution charges or setting caps on discharges of pollutants in a catchment (watershed) and allowing trade in discharge permits.

New Zealand has among the highest GHG emissions per capita and per unit of GDP in the OECD and they have fallen little since 2010. Biological emissions from agriculture – primarily methane – make up almost half of New Zealand’s GHG emissions. Although the increase in the number of dairy cattle slowed 2012-2017, the rise in dairy farming is undermining New Zealand’s aspiration to become a low-emissions economy, as the emissions intensity of dairy production has fallen by only 1% per year. Addressing GHG emissions from agriculture, and especially from dairy farming, should remain a priority if the country is to achieve its 2030 climate mitigation target under the Paris Agreement (OECD, 2017[39]). Indeed, modelled pathways that limit global warming to 1.5°C with no or limited overshoot involve reductions in global emissions of methane emissions of 35% or more by 2050 (Intergovernmental Panel on Climate Change, 2018[41]). Energy-related CO₂ emissions per unit of GDP are lower than the OECD average, despite high emissions from the transport sector, as most electricity generation is renewable (mostly hydropower) (Figure 26, Panels A and B). The transport sector is the main source of growth in GHG emissions.

The new government has declared climate policy a priority. The Climate Change Response (Zero Carbon) Amendment Bill proposes setting a target for emissions reductions by 2050, an independent Climate Change Commission for providing advice to government and carrying out a national climate change risk assessment, which will inform a national adaptation plan produced by the government to address the changes New Zealand will experience as a result of climate change. This will entail achieving net zero emissions of greenhouse gases excluding biological methane (any gross emissions are offset by sequestration, such as through tree planting) by 2050 and a 24% to 47% reduction in biological methane emissions relative to 2017 levels. The government has committed to a “just transition” to avoid leaving vulnerable population groups behind. Like other signatories to the Paris Agreement, New Zealand will be recommunicating its nationally determined contribution in the coming year. On current policies, New Zealand’s gross GHG emissions are projected to exceed its current 2030 target (Ministry for the Environment, 2017[42]). Therefore, the government envisages reaching the target from land use and land-use change, notably using afforestation as a CO₂ emissions sink, as well as the international market mechanisms. Carbon sequestration from reforestation cannot provide an indefinite flow of negative emissions, so cannot substitute for long-term GHG emissions reductions in the other sectors.

These steps would bring New Zealand’s policy objectives closer in line with the objectives of the Paris Agreement, which requires countries to limit global warming to well below 2 degrees and make efforts towards limiting global warming to 1.5 degrees. Limiting global warming to 1.5 degrees is likely to result in substantial benefits in terms of lower climate risks, compared to 2 degrees, world-wide (Intergovernmental Panel on Climate Change, 2018[43]). For example, it could reduce the number of people exposed to both climate-related risks and poverty by up to several hundred million and reduce the proportion of the world population exposed to a climate-change induced increase in water stress by up to 50%. Worldwide, reaching the 1.5 degree target requires anthropogenic CO₂ emissions to drop to net zero around 2050 (Intergovernmental Panel on Climate Change, 2018[43]). High-income countries need to reach net zero emissions earlier (OECD, 2017[44]).

New Zealand needs a comprehensive plan to achieve its GHG emissions reduction ambitions. Carbon pricing is weak (OECD, 2018[45]), transport fuel taxes are low and non-transport fossil fuel uses are almost all untaxed, including coal use in industry (OECD, 2018[46]), thus keeping environmental tax revenue low (Panels F, G). A 2018 ban on new offshore oil and gas exploration was billed as an important step to address climate change when announced. Subsequent analysis indicated that the net impact on global emissions is uncertain, due to a shift to higher-emissions production internationally, but more likely to be negative (MBIE, 2018[47]). The annual cost to New Zealand has been estimated to average 0.22% of GDP over 25 years (NZIER, 2019[48]).

Recommendations in past Surveys	Actions taken since the previous *Survey*
Develop a long-term vision for a transition towards a low-emissions, greener economy.	The Zero Carbon Bill that sets a target for emissions reduction by 2050 went before Parliament in May, 2019.
Increase the price of carbon to a level consistent with New Zealand’s intended transition to a low-emissions economy. Adopt alternative pricing or regulatory measures to reduce biological emissions. Support research in new mitigation technologies, especially for farming.	The price of permits in the NZ Emissions Trading Scheme (NZ ETS) has increased to around NZD 25 per tonne following de-linking of the NZ ETS from other schemes with cheap permits and the phasing out of the one-for-two arrangement, which halved the number of permits needed by emitters. The current price is too low to be compatible with an efficient transition to a low-emissions economy. The government has made decisions to improve the NZ ETS by: Ensuring that it assists with delivery of emissions reduction targets and supports implementation of the Paris Agreement; Enabling a cap to be placed on emissions covered by the NZ ETS; Improving administration and operation of the NZ ETS; and Improving how forestry is treated in the NZ ETS. The government is considering further improvements to the NZ ETS covering the use of proceeds from auctions, a potential price floor, how decisions to phase down industrial allocations should be made; further improvements to the compliance and penalties regime and the broader market governance framework.
Introduce an excise duty on diesel and ensure that petrol and diesel tax/charge rates consider the environmental costs of transport. Introduce fuel efficiency and air emission standards for new and imported used vehicles.1	No action taken.
Extend the waste disposal levy and encourage local authorities to introduce quantity- or volume-based waste charges to help minimise waste, foster recycling and recover costs of waste service.1	The Ministry for the Environment is currently reviewing the coverage and rate of the Waste Disposal Levy. A discussion document is being prepared for public consultation on expanding the Waste Disposal Levy to begin around July 2019.
Monitor the implementation of the 2014 National Policy Statement for Freshwater Management in regional plans to ensure water quality meets agreed goals. Provide clearer technical guidance for regional councils.	In 2017, the Ministry for the Environment published a review of how regional councils are progressing towards implementing the National Policy Statement for Freshwater Management. In the last four years, the Ministry for the Environment has provided a suite of technical guidance to help regional councils, including guidance on freshwater accounting, calculating water quantity over-allocation, identifying freshwater management units, using the attribute tables to set objectives, and managing periphyton. In October 2018, the government launched an Essential Freshwater Work Programme to stop further degradation and loss, reverse past damage and address water allocation issues. These would be achieved through a new National Policy Statement for Freshwater Management and a new National Environmental Standard for Freshwater Management, among other things.
Introduce pollution charges or cap-and-trade measures for water quality. Expand water trading and pricing to ensure scarce water goes to its best use.	The government is exploring systems that will achieve efficient and fair allocation of freshwater and nutrient discharges, having regard to all interests including Māori, and existing and potential new users.
Review government support for irrigation to ensure that funding is only provided for projects that would not proceed otherwise, and that have net community-wide benefits.1	The government is winding down funding for large-scale irrigation projects, while honouring existing commitments.
Intensify protection of species by continuing to develop a National Policy Statement on biodiversity.	The government has supported a collaborative stakeholder group to develop a draft National Policy Statement on Indigenous Biodiversity. Government officials are considering these recommendations and preparing a proposed National Policy Statement on Indigenous Biodiversity for public consultation.

1. Recommendation from the 2017 Environmental Performance Review of New Zealand.

ETS prices have been well below low-end estimates of climate-related costs of CO₂ emissions of EUR 30 per tonne. The scheme also excludes biological CO₂ emissions from agriculture. The government is reforming the ETS to ensure an emissions price consistent with New Zealand’s intended transition to a low-emissions economy (Table 11). It is planning to phase down industrial allocation of permits (i.e., free allocation). Free allocation can generate incentives to invest in high-emissions production because this would result in the attribution of free permits (Flues and van Dender, 2017[49]). Auctioning permits instead of allocating them free also generates government receipts. Evidence from the European Union’s ETS also indicates that free allocation of permits to firms is regressive (Zachmann, Fredriksson and Claeys, 2018[50]). The government should also announce a date for the inclusion of biological emissions from agriculture or alternative pricing and regulatory measures taken to enforce emissions reductions earlier (OECD, 2017[44]). While the ETS will be a key tool to meet targets efficiently, urban planning and transport policy reforms also have an important role to play, notably in reducing car dependency.

Reforms of metropolitan governance, following the example of Auckland, can improve urban planning, for example by reducing urban sprawl and better integrating housing and public transport (OECD, 2015[51]). Built-up area per capita is high which is likely to reflect urban sprawl (Figure 26, panel E). Similarly, a shift in the share of transport subsidies from roads (currently 90%) towards public transport and infrastructure for cycling and walking, as is beginning to occur, would also help. Such measures can reduce CO₂ emissions and local pollutants, help improve productivity of the urban economy by reducing congestion as well as reduce the cost of deploying infrastructure, including public transport. Support for the rollout of the electric vehicle (EVs) fleet – for example, EVs are currently exempt from road-user charges – will also help to reduce GHG emissions and local air pollution. Defining public service requirements for urban electric vehicle charging infrastructure could boost uptake further. Introducing digital-based ridesharing to replace individual private car use has much potential to improve efficiency in mobility and achieve large reductions in CO₂ emissions and pollution (Chapter 3). Introducing ride-sharing can also make electrification more cost effective. It would curb the increase in electricity demand. More intensive use of shared vehicles makes electric vehicles more cost-effective, as they have low operating costs.

Improving well-being through better migration policy

New Zealand has experienced high emigration in recent decades. It picked up in the late 1960s, when income levels in New Zealand slipped below those in Australia, and grew until the 1980s as New Zealand’s relative economic performance deteriorated (Figure 27). Following profound economic reforms in the late 1980s and early 1990s, New Zealand’s relative economic performance stopped deteriorating and emigration moderated, but remained high. New Zealand’s emigrants are on average more highly educated than the rest of the population, raising concerns about potential negative effects on economic well-being (Brunow, Nijkamp and Poot, 2015[52]).

Figure 27. Emigration from New Zealand is high

Partly in response to high emigration, immigration policy was overhauled in the late 1980s and early 1990s to attract many more high-skilled immigrants. New Zealand adopted a points-based system along the lines of those in Australia and Canada. Immigration has been high since then, increasing the immigrant share of the population to one of the highest in the OECD (Figure 28). By international comparison, a high share of immigrants enter as principal applicants selected for their skills or as their immediate family members (Figure 29). In all, net permanent and long-term immigration has been positive in recent decades and well above the long-term average in recent years (Figure 30).

New Zealand’s immigration system is predominantly aimed at increasing the well-being of permanent New Zealand residents (both New Zealand-born and immigrants) and is well run. Outcomes are monitored and policies adjusted accordingly to ensure that the system’s objectives - to enhance well-being by promoting economic development, reuniting families and meeting humanitarian objectives - are met. Immigration has contributed to an increase in the education attainment of the working-age population (Figure 31, Panel A) and made the country more culturally diverse. Immigrants and their children are better integrated in New Zealand based on a variety of indicators than in most other countries, reflecting the importance of skills-based selection in the immigration system (OECD and European Union, 2015[5]). In contrast to the experience in most other OECD countries, where immigrants have mostly worse outcomes, immigrants in New Zealand tend to experience similar well-being outcomes to the native-born. Immigrants boast higher literacy (and numeracy) scores in New Zealand than in any other OECD country, contributing to a narrow gap in scores between adults who are native-born and immigrants (Panel B). Immigrant children’s (first- and second-generation) PISA results are on a par with those for non-immigrant children, controlling for socio-economic background, whereas in most other countries their scores are lower (Panel C).

Economic and labour market effects

Immigration appears to have small, positive effects on GDP per capita after about two decades, consistent with integration of new immigrants taking 10 to 20 years (Brunow, Nijkamp and Poot, 2015[52]). Endogenous productivity growth through additional new investment, which is required to equip immigrants, may take a similar time to be realised. Agglomeration economies have contributed to higher productivity in Auckland, where most immigrants settle (Maré, 2016[53]), although such benefits have been constrained by insufficient infrastructure- and housing investment, which has resulted in growing traffic congestion (and water pollution) and rising house prices. Traffic congestion has directly reduced productivity and, together with rising house prices, has made it more difficult for workers to move to a better skills-matched job where they would be more productive. Adalet McGowan and Andrews (2017[54]) estimate that reducing literacy skills mismatch in New Zealand to the best practice minimum could increase industry labour productivity by 7% through gains in allocative efficiency. They find that the biggest problem in this area is the relatively low long-run elasticity of new housing supply, which is only one third of the best practice level in the United States (Andrews, Caldera Sánchez and Johansson, 2011[55]).

Figure 29. The share of skilled immigrants (and accompanying family) in residence approvals is one of the highest in OECD countries1

Per cent of total residence approvals excluding free movements and other, 2016

Figure 30. Net permanent and long-term migration has been high in recent years1

Figure 31. Immigrants in New Zealand are highly educated and their children’s education achievement is on a par with that of non-immigrants

On average, immigration has no negative effects on wage rates or employment of New Zealanders (Maré and Stillman, 2009[56]). Nonetheless, an increase in the relative skill composition of recent immigrants has a small negative effect on the wages of the high-skilled NZ-born that is offset by a positive effect on wages of the medium-skilled NZ-born. Temporary labour migrants – whose numbers have increased greatly and now represent almost 5% of the labour force - have not had negative effects overall on employment and new hires and have increased the earnings of New Zealanders aged 25 years or more (Ministry of Business, Innovation and Employment, 2018[57]). There were, however, negative effects on new hires of social welfare beneficiaries in areas outside the (16) most urbanised areas, particularly in horticultural regions, and negative impacts from particular visa categories, notably post-study work visas for international students, Essential Skills (ES) visas and Family visas.

Attracting higher-skilled temporary migrants and reducing exploitation

Most (80%) immigrants to New Zealand were already living in New Zealand when they applied for residence. The main route to residence is through Essential Skills temporary work visas, followed by post-study work (PSW) visas. Changes were made in 2017 to ES visa settings to ensure that only those likely to be able to transition to residence could stay in New Zealand long term and to use remuneration to better assess skills levels. Education requirements to obtain a PSW visa were increased in 2018 to make clear that studying in New Zealand is not a pathway to residence for students with low education attainment. International students’ chances of gaining residence would be enhanced further by providing them with more information about labour market needs and opportunities in New Zealand as few of them seem to go into fields in high demand (OECD, 2014[58]).

The government is planning further reforms to the employer-assisted temporary work visa system (i.e., temporary work visas that are issued for a specific employer) and associated labour market tests to ensure that migrants are only recruited for genuine regional skills shortages and to create better connections between the immigration, education/skills and welfare systems as well as to increase expectations for employers to employ and train more New Zealanders. To recruit migrant workers, employers will first have to be accredited, which will require them to demonstrate that their business practices incentivise training and upskilling of New Zealanders and put upward pressure on wages and conditions, amongst other conditions. No labour market test will be required for occupations on new Regional Skills Shortages lists and for highly-skilled jobs paying at least twice the median wage. In sectors with high demand for lower-skilled migrant labour, sector agreements are to be negotiated that will oblige employers to commit to improvements to industry productivity, investment in training and development of domestic workers, or better conditions for both domestic and migrant workers in exchange for access to migrant labour. Regional differentiation in the labour market test is planned to support the alignment of the education/skills, welfare and immigration systems. Officials are working on how this alignment could best be achieved. These reforms and increases in the salary thresholds for mid-skilled- and high-skilled temporary migrants are expected to reduce employers’ reliance on lower-skilled immigration over time.

To reduce exploitation of temporary migrants on work visas, the government recently increased the number of labour inspectors and ended the link between PSW visas and a sponsoring employer. It also initiated a review of the problem that includes in-depth policy analysis, independent commissioned research and a consultation group to hear the voices of migrants, business, unions, international students, the legal profession and community advocates. The more intense employer checks envisaged in the planned employer-assisted temporary work visa system may help to reduce exploitation. Making it easier for workers on such visas to change employers could also help by reducing opportunities for exploitation.

Improving labour market outcomes for immigrants

Immigrants fare less well in the labour market than the comparable NZ-born, although the gap closes over time. Controlling for relevant characteristics, Stillman and Maré (2009[59]) find that newly arriving immigrants have on average employment rates and annual incomes that are 20 percentage points and 30-35% lower, respectively, than for the comparable NZ-born. However, after about 15 years in New Zealand, employment rates for immigrants are close to those of the comparable NZ-born and the income difference has halved for men and vanished for women. University qualified immigrants recover their entry disadvantage relatively quickly.

To improve earnings prospects for newly arriving immigrants, the points system was further realigned in 2017 to emphasise characteristics associated with better labour market outcomes. For the Skilled Migrant Category, the minimum number of points for automatic selection from the Expression of Interest pool was increased, remuneration thresholds were introduced as an additional means of defining skilled employment, and more points were awarded for skilled work experience, some post-graduate qualifications and applicants aged 30-39 years. The government decided not to award additional points for English language skills beyond the minimum required level (International English Language Testing System level 6.5 on a 1-9 scale, corresponding to a competent to good user). However, evidence shows that better mastery of the host country language is associated with better labour market outcomes (OECD, 2014[58]).

Improving settlement programmes also helps immigrants to integrate better. Two groups in particular have been identified in the New Zealand Migrant Settlement and Integration Strategy as needing help to find employment that makes good use of their skills: spouses/partners of principal skilled applicants, only 45% of whom were employed in jobs that matched their skills and qualifications in 2016, compared with 81% for principal applicants; and international student graduates. The government has given priority to these groups in Work Connect, an employment service for migrants that provides them with career management competencies to help them find, secure and remain in employment.

Regional Skills Matching programmes, which connect priority job-seeking migrants and employers, could usefully be complemented by mentoring programmes. These help currently employed skilled immigrant workers meet people in their profession, potentially integrating them in job-search networks, and provide profession-specific language skills as well as literacy and soft skills specific to host country workplaces. Such programmes have proven to be a promising way to overcome immigrants’ underrepresentation in high-wage jobs in Canada (Skuterud and Su, 2012[60]).

The government should also expand bridge programmes, which combine advanced language training specific to an immigrant’s field and courses needed to bring credentials up to host country standards in regulated occupations. In New Zealand, there are shortages of places for getting bridging qualifications in some fields, and some candidates have to wait years before getting a place. The government should also consider supporting occupationally-based language courses, which can be very helpful in equipping immigrants with the advanced language skills needed to find and retain high-skilled employment.

Improving well-being through better housing policy

As noted above, the high cost of relatively low-quality housing is now among New Zealand’s most pressing well-being challenges. Low-income renters are particularly badly affected: more than half of renters in the bottom quintile of the income distribution spend over 40% of their gross income on housing (Figure 32). Māori, Pasifika and Asian people have particularly poor housing conditions and would benefit from reforms to improve housing quality and affordability. The government has recently established a Minister and unit for Māori Housing and is investigating ways to reduce barriers to building on Māori land, such as difficulty accessing finance.

Figure 32. Most low-income renters face very high housing costs

Share of population in the bottom quintile of the income distribution spending more than 40% of disposable income on rent, 2014 or latest year available

Further reforms to allow new housing supply and improve outcomes for low-income renters are critical to improve well-being through better housing affordability. Targeting those with low incomes would assist the government with its priority to reduce child poverty, by increasing incomes after housing costs. Less directly, housing reforms can improve jobs and earnings through facilitating children’s education and geographic mobility, and deliver better subjective well-being and health outcomes through enhancing physical housing conditions. More affordable housing would reduce inequality through increasing affordability for low-income renters while moderating house price increases that mainly benefit relatively wealthy owners, particularly owners of multiple properties. The inability of new housing supply to meet demand has meant that high net immigration has contributed to worsening affordability; the policy response should be to enable supply to respond, rather than to restrict immigration and the well-being benefits it delivers.

Enabling supply of additional housing

Substantial work is underway to relax overly strict planning restrictions and improve infrastructure delivery through the central government’s Urban Growth Agenda and associated programmes (Box 2). Implementation of the Urban Growth Agenda, and the specific way in which this is done, will be key to achieving its ambitious goals. Councils still need greater clarity on principles for sustainable urban development and need to act to reduce their reliance on strict regulatory containment policies, which do not align well with desired outcomes and have impeded densification, affordability and innovation.

Box 2. Policy measures taken to lift New Zealand’s low housing affordability

Steps are underway to meet the long-term challenge of facilitating new housing supply.

The government’s Urban Growth Agenda shows promise in rectifying urban planning problems through steps to enable growth (both up and out), define clear built environment principles, provide a framework for spatial planning and reform infrastructure funding and financing mechanisms.
Establishment of a national housing and urban development authority (Kāinga Ora – Homes and Communities) will assist with much-needed land amalgamation (including via compulsory acquisition as a last resort) though this will be restricted to areas judged to have significant redevelopment potential.
The Auckland Unitary Plan, which incorporated spatial planning and upfront consultation to overcome vested interests, has facilitated compact development in brownfield sites where greater density is now permitted.

In advance of new supply, measures to curb demand will contribute to affordability. The Kiwibuild programme (discussed below) also seeks to boost affordability in the short term.

Macro-prudential restrictions on the share of loans that can be issued with high loan-to-value ratios have contributed to lower overall demand since 2013.
The extension of capital gains taxation to properties (excluding the primary home) sold within five years or more and proposed ring-fencing of rental losses will dampen demand, though in both cases only a subset of investment property owners are directly affected. More comprehensive capital gains taxation has been ruled out.
The government has asked the Productivity Commission to consider a tax on vacant residential land as part of its inquiry into local government funding and financing. Such taxation would reduce incentives for land banking, but could also encourage token use of land and similar incentives could be realised by shifting the tax base for local government rates to unimproved land values.
A ban on housing purchases by foreign residents, passed in August 2018, is likely to have little effect on affordability but risks holding back foreign direct investment and thus construction industry competition and productivity.

Local governments have limited ability to recoup infrastructure costs except through development contributions, user charges or rates charged to residents. Infrastructure financing is a pressing issue for high growth councils, which are constrained by conservative debt limits. The Urban Growth Agenda envisages greater use of project-specific financing through special purpose vehicles, which are a viable option for large, long duration projects with external ratings. Servicing such debt with revenue from the new properties in a development helps ensure that the beneficiaries pay, but is likely to be more complicated in situations (such as brownfield development) where existing residents also gain.

Irrespective of how infrastructure is financed upfront, existing residents have an incentive to oppose development where they are eventually liable through rates. Giving councils access to additional revenue linked to local development could overcome this problem by improving the fiscal dividends from growth. Local governments should be allowed to apply targeted rates to the value “uplift” that occurs following new infrastructure development, even if implementing such value capture can be difficult in practice; shifting the rate base to unimproved land value would be another way to target uplift while encouraging densification and improving equity. More user charging for road and water infrastructure would be fairer in terms of “user pays” and could also reduce the need for additional infrastructure spending. Steps were recommended in the 2017 Survey to increase New Zealand’s poor construction industry productivity, which has also constrained new supply.

The government is taking a more active role in increasing housing supply through Kiwibuild, with the dominant delivery mechanism to date involving government underwriting or purchasing of new homes “off the plans” and allocating to eligible first-home buyers via a ballot. Kiwibuild offers potential benefits through increasing housing supply and smoothing construction cycles, but only to the extent that new dwellings would not otherwise have been delivered by the private sector. The programme could be better targeted, as direct beneficiaries are sufficiently well-off to buy a home and the income threshold is so high that it only excludes 8% of potential first home buyers. Other OECD countries, including Austria, Canada, France and Germany, promote delivery of affordable housing without incurring the same fiscal risks or hands-on allocation role, primarily through subsidising construction of affordable (often rental) housing. Re‑focusing KiwiBuild on enabling the supply of land through aggregating fragmented land holdings and de-risking development sites, with subsidies to developers of affordable housing if necessary, would allow private and not-for-profit developers to take the lead in delivery and allocation of affordable housing and better allocate risks to those best placed to manage them.

Other forms of housing support should be reviewed. Subsidies for home ownership, which compound tax advantages, should be consolidated and reduced. Tenure-neutral housing allowances through the Accommodation Supplement are a better way to support affordability. However, around one third of the benefits are estimated to accrue to landlords through higher rents (Hyslop and Rea, 2018[61]) and allowances are already high by international comparison. There may be scope to better target payments by phasing out housing allowances more rapidly with increasing income.

Improving outcomes for low-income renters

Rental quality and security of tenure are low. While there can be mobility advantages from ease of moving, duration of tenure has been found to be associated with better outcomes for some well-being dimensions, notably children’s education. Proposals currently under consultation would go some way to improving security of tenure. One missing component is some restriction to keep rent increases for incumbent tenants from diverging too far from market trends. Germany has fostered a successful private rental sector through leaving initial rents effectively unregulated and tying subsequent increases to local reference rents, with greater increases permitted in proportion to any renovation expenditure (de Boer and Bitetti, 2014[62]).

Social housing supply is low by international comparison and there are poor outcomes for at-risk groups, including overcrowding, low quality housing and high homelessness (though international comparability here is problematic – Figure 33). The share of homeless people increased from 0.8% in 2006 to 1.0% in 2013 with an increase in the incidence of temporary sharing with others (Amore, 2016[63]). Deteriorating access to affordable housing was a contributing factor. Access to social housing delivers improvements in a number of well-being dimensions, including health, education and life satisfaction. Expansion of social housing will need to go beyond the planned 6 400 units over four years just to meet current demand from those with highest need; substantial broadening of exemptions from tenancy reviews will add to demand (Table 10). Further entry of community housing providers should be encouraged through allowing competition with Housing NZ on a level playing field.

Figure 33. Homelessness is high and social housing stocks are low

2015 or latest year available

Recommendations in past Surveys	Actions taken since the previous Survey
Improve house price supply response: Adopt spatial planning for all urban areas Reform the Resource Management Act to better incorporate urban development needs. Reduce the scope for vested interests to thwart rezoning and development that would be in the wider public interest.	The government’s Urban Growth Agenda seeks to rectify urban planning problems (Box 2).
Consider diversifying revenue sources for infrastructure funding. Enhance councils’ incentives to accommodate growth, for example by sharing in a tax base linked to local economic activity. Apply user charging more broadly for infrastructure, including congestion charging.	Work is underway on developing special purpose vehicles for infrastructure funding, as is a Productivity Commission inquiry into Local Government Funding and Financing. A Joint Auckland and central government project is investigating potential application of congestion charging.
Facilitate competition in construction through a Commerce Commission market study and extending suspension of anti-dumping actions on residential building materials.	The suspension of anti-dumping actions on residential building materials was extended in 2017.
Limit the tax deductibility of losses from rental property investments by only allowing them to be offset against future rental income.	The government has proposed ring fencing of rental losses.
Raise the supply of social housing for low-income households. Increase targeted housing subsidies for low-income households that are not in social housing.	An additional 6 400 social housing units are planned over the next four years. The Maximum Accommodation Supplement payments was increased from 1 April 2018 to reflect increased housing costs.
Begin regular tenancy re-assessments for all occupants of social housing, accompanied by increased efforts to help tenants achieve financial independence and self-sufficiency.	Social housing tenancy reviews were put on hold between September 2018 and February 2019. Exemptions were broadened to cover 81% of tenants, including those with children aged 18 or under and those aged 65 or over.
Evaluate whether state housing tenants requiring more permanent housing provision, such as the elderly and disabled, may benefit from placement in specialised long-term housing facilities better adapted to their needs.	The government has funded registered charities that provide specified housing options for older people. Some local authorities are also active in the provision of pensioner housing.
Remove water rate subsidies to tenants paying market rents.	No action taken.
Treat Kiwisaver withdrawals for first-home purchases as interest-bearing loans or limit to low-income members.	No action taken.

References

[54] Adalet McGowan, M. and D. Andrews (2017), “Skills mismatch, productivity and policies: Evidence from the second wave of PIAAC”, OECD Economics Department Working Papers, No. 1403, OECD Publishing, Paris, https://dx.doi.org/10.1787/65dab7c6-en.

[63] Amore, K. (2016), Severe Housing Deprivation in Aotearoa/New Zealand, He Kainga Oranga/Housing & Health Research Programme, University of Otago.

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