WELLINGTON (Pacnews) — New Zealand’s economy is facing an uncertain future, with low household savings and inflationary pressure, according to the Organization for Economic Cooperation and Development’s annual report card.
The report found New Zealand has a flexible and resilient economy but it faces “a large external deficit, very low household savings and still-strong inflation pressures. There are some signs that these imbalances are starting to unwind, but the short-term outlook remains uncertain,” it said.
It also found a persistent gap in New Zealand’s living standards with the rest of the OECD.
“Looking ahead the key challenges will be to maximize improvements in living standards and to absorb pressures for increasing health and superannuation spending as the population ages,” it said.
Chief economist with Westpac NZ, Brendan O’Donovan, said he was not surprised at the criticisms of the New Zealand economy.
“New Zealand has been on a debt-financed binge, with extremely strong property price appreciation. Spending has been well ahead of income growth .... The growth outlook isn’t as good as it was,” O’Donovan said.
O’Donovan said the report is suggesting that more is needed to be done to overcome the problems New Zealand faced and he thought the situation is worse than described.
“The imbalances are certainly not unwinding. They are exacerbated if anything .... There are huge imbalances that have to correct at some stage,” he said.
The OECD report said a higher GST, currently at 12.5 percent, could be one way to reform taxation in New Zealand without putting at risk long-term fiscal sustainability.
Overall, New Zealand’s retirement policies are sound, but some people are not saving enough to fund their retirement, and could be relying too much on housing as a savings substitute, the report said.
“They may get a rude shock when they retire to discover that they have considerably less spending power than they had expected,” it said.
New Zealand Finance Minister Michael Cullen said the report highlighted the importance of the government’s strategy to lift savings and investment.
“It is reassuring that the OECD considers New Zealand to be ‘one of the most flexible and resilient economies’ in the world. Our structural policies are judged overwhelmingly consistent with international best practice,” Cullen said in a statement.
“The OECD has highlighted challenges around the high current account deficit, persistent inflation and low productivity. We have a sound strategy to shift the mix of growth away from consumption to higher value exporting. Measures that will be announced in budget 2007 related to the business tax review that will encourage innovation and improve competitiveness are all crucial parts of our integrated approach to better position New Zealand for the long haul,” Cullen said.
He said the government has run budget surpluses in recent years to ease pressure on inflation.
The OECD report also touched on the possibility of New Zealand adopting the Australian dollar as their currency, but warned surrendering monetary sovereignty may not reduce the risk their exporters face from fluctuating exchange rates.
O’Donovan said the report showed that there is no pressing need for New Zealand to adopt the Australian dollar.