Inflation, education and productivity: Some of the problems NZ needs to fix, according to the OECD

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The country is being told it needs to get inflation under control, balance the books, raise educational achievement, and lift productivity.

The Organisation for Economic Co-operation and Development’s (OECD) annual survey highlighted a familiar list of problem areas that needed attention, and forecast economic growth of less than 1 percent this year, rising to just under 2 percent next year.

It said economic growth has stalled and a “rebalancing” was under way to counter high inflation and large budget deficits caused by increased spending during the pandemic.

“Monetary policy will need to remain restrictive coupled with further fiscal consolidation to help curb inflation and restore fiscal space,” the survey commentary said.

It said the Reserve Bank (RBNZ) would need to keep interest rates high until inflation was close to its target band, but also said the government needed to control spending and get the budget back into surplus.

“The government should set operating allowances and tax policies that will gradually reduce the fiscal deficit to reach budget balance.”

It said any tax cuts needed to be fully funded either by spending cuts or an increase in revenue, and said tax reforms should consider a capital gains tax.

Among other suggestions included an independent body to cost policies, and amending immigration rules to control population growth and help fill the country’s real skill shortages:

Productivity

Similar to the International Monetary Fund report in March the OECD made much of New Zealand’s low productivity.

It pinpointed the lack of competition and restrictive foreign investment rules as barriers to improved productivity.

“In some sectors, market concentration can be so high that regulation will not suffice to improve competition enough, and structural solutions such as break-ups, although as a measure of last resort, could be warranted.”

It called foreign investment rules some of the most restrictive in the OECD and should be relaxed to allow easier entry of small to medium enterprises and foreign firms to markets.

Education

The report warned declining school achievement and long-standing inequity for Māori and Pacific students were “a serious threat” to prosperity.

It said research had linked lower scores in the Programme for International Student Assessment (PISA) tests of reading, science and maths to lower productivity.

“This suggests that the decline of almost 29 points in New Zealand’s average PISA score between 2006 and 2018 will eventually reduce aggregate productivity by close to 4 percentage points,” it said.

The report said teachers needed more support including a detailed curriculum, efficient assessment tools, and more advice on the best ways to teach, with the support coming from the Education Ministry’s regional offices.

“The system seems to be missing a sufficiently deep and well enough funded intermediate support layer to help schools and teachers put policy into action, design detailed curriculum guides and assessments and deliver them as well as spreading best practices more generally,” the report said.

It said the school system should remain devolved but the way policies were implemented needed a major overhaul.

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Emissions

The OECD also said the country needed a more systematic approach to cutting greenhouse gas emissions and a coping with climate change.

It said the recent cyclones had highlighted the ad-hoc nature of disaster recovery funding between government and private insurance companies, and the need for risk based decisions to help prepare and adapt for climate change events.

“Monitor the price and availability of insurance for climate related disasters, and, if required, stand ready with options for reform of the market, considering the balance of public and private, optional and mandatory insurance coverage, the nature of risks and household disadvantage,” the report recommended.

It also said the Emissions target Scheme (ETS) needed to be reviewed in how forestry resources are accounted for, while the pricing of agricultural emissions needed to be settled.