OECD prescribes less debt, more productivity for NZ

The OECD’s latest report on New Zealand  forecasts a shrinking economy for the rest of this year with hesitant growth in 2010.

It recommends that the Reserve Bank cuts interest rates again and keeps them low and says the government must take control of deficits and debt.

Given the risks to the government’s credit rating and to market confidence and the heavy dependence on foreign debt funding, there is little room for more fiscal expansion. It is crucial that the new government’s first budget this May delivers a credible consolidation plan.

It says the gap between New Zealand’s productivity and the rest of the OECD must be addressed.

Although the quality of New Zealand’s regulatory regime is generally high, it has fallen relative to other OECD countries. Even if a cyclical improvement is likely following the downturn, a durable pick-up in productivity growth with high employment will require structural policy changes

The graph in the previous post shows how bad the gap is and the report says that is partially explained by our geographical isolation but:

The country appeared to be on the right policy track with its earlier market-oriented reforms. But the policy focus on productivity and growth eroded during the years of economic buoyancy, while other countries advanced. Notably, a large amount of new regulation, at times poorly designed, coordinated and focused, was introduced. Such measures have increased the costs of doing business and sent bad signals to foreign investors.

The report’s prescription for economic recovery includes increasing public sector productivity, shifting the tax base from income to consumption and selling assets.

The authors commend the basic principles of the RMA but recommends improvements to  its management and implementation including streamlining the consenting process and establishing local provisions for water trading and the measurement and consent of nutrient flows.

They also suggest our greenhouse gas targets are dependent on other countries having similar policies and targets.

The report says that rising health care costs threaten long term fiscal sustainability and suggests an increase in private insurance and provision.

Its prescription also includes increasing medical student numbers and accepting more foreign students.

To the extent that New Zealand cannot offer international-level specialist wages, it should work harder to create a satisfying and innovative clinical environment, giving doctors a high degree of autonomy and interaction with other professionals in the new collaborative-care settings.

How easy would that be and would it be enough?

The report is recommending strong medicine and memories of the fallout from the last time that was administered in the 1980s and early 90s will foster resistance.

But tough times require tough measures and the challenge for the government is to deliver the medicine the economy needs without turning it into political poison.

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