Improving education, competition, and climate mitigation and adaptation key priorities for New Zealand

06/05/2024 – New Zealand’s economy is steadily rebalancing after a post-COVID-19 period of overheating followed by weak growth. Economic growth is slowly picking up and inflation is easing. Lower inflation is expected to improve real incomes and economic growth in 2025, a recent OECD report explains.

The latest OECD Economic Survey of New Zealand projects GDP growth to edge up from 0.6% in 2023 to 0.8% in 2024 and to pick up more strongly to 1.9% in 2025. Headline inflation is declining as tighter monetary policy is slowing the economy. The unemployment rate, which stood at 3.7% in 2023, is projected to rise to 4.7% in 2024 and 4.8% in 2025.

The strong domestic-demand-led recovery from the pandemic saw the current account deficit increase to one of the highest in the OECD, though it has declined since due to slower GDP and imports growth and the return of international tourists.

The risk of an extended growth slowdown in China and that of heightening geopolitical tensions, including from the evolving conflicts in the Middle East, along with domestic interest rate and inflation uncertainty, overshadow the growth outlook.

“New Zealand’s economy continues to rebalance with inflation easing and the current account deficit declining,” OECD Chief Economist Clare Lombardelli said, presenting the Survey in Wellington alongside New Zealand’s Minister of Finance Nicola Willis. “Reforms to improve education outcomes, competition, and climate mitigation and adaptation are needed to support sustained growth and underpin better living standards for New Zealanders across society”.

The Survey shows that New Zealand’s recent spending overruns contributed to the public debt-to-GDP ratio increasing by 16 percentage points between 2019 and 2023. This is one of the largest increases in the OECD, substantially worsening New Zealand’s fiscal position. To achieve a balanced budget and support progress towards the inflation target, New Zealand should gradually reduce its deficit by consolidating public spending, while maintaining restrictive monetary policy until inflation nears the target.

Stricter control over government spending would put New Zealand in a stronger position to meet the funding needs of an ageing population and of the green energy transition. As extreme weather events become more frequent in New Zealand, the insurance market should be monitored and potentially reformed to ensure current high coverage against climate-related damage continues. Public planning is under pressure from more frequent extreme weather events, as well as population growth, urban expansion, and legal appeal rights. Additional resourcing will be required to deliver recommended land-use planning and resilient infrastructure in the face of climate change, as well as to reduce greenhouse gas emissions.

The Survey also stresses the need to boost competition to help raise productivity. New Zealand’s small and distant economy means large firms face fewer pressures to innovate and seek efficiencies while providing better services and lower prices to consumers. Ensuring competition policy is up to international standards is important for offsetting these handicaps. Improvements to legislation and regulation have helped better address anti-competitive factors in recent years. However, a more explicit strategy of gradual escalation of regulatory intervention is needed to tackle more persistent competition challenges. More should also be done to tackle the challenges posed to competition in the digital economy.

Education is another area where reform could help sustain future growth. Achievement in school education has declined between 2009 and 2022, with OECD research showing a negative impact on aggregate productivity by nearly 4% as a result.

New Zealand’s devolved school system has many strengths. However, a more detailed and knowledge-rich national curriculum, extra specialist subject advisors and revamped initial teacher training, particularly for mathematics and science, would help address the highly variable learning outcomes found between and within schools. New Zealand is an international leader in increasing the cultural relevance and involvement of family and community in education. An effort to transfer these practices from the Māori to English medium schools could improve a sense of belonging and help raise attendance, which remains below pre-COVID-19 levels and is particularly low for disadvantaged groups.

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