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OECD says NZ faces 2nd largest fiscal consolidation effort of OECD nations to get gross public debt under 50% of GDP by 2050; But OECD uses old figures
By Alex Tarrant
The New Zealand government is being urged by the OECD to tax property more, rein in poorly-targeted social benefits, and sharpen incentives to work and save as it faces the second largest fiscal tightening effort in the OECD to ensure gross public debt is below 50% of GDP by 2050.
At least, that's what the government needed to do in 2009.
In a research paper released on Friday morning titled, Fiscal Consolidation: How much, how fast and by what means?, the OECD says New Zealand's government needed to tighten the fiscal purse-strings to the tune of 9% of GDP - about NZ$20 billion, to ensure gross public debt stayed below 50% of GDP by 2050. Of the OECD nations, only Japan, at 12% of GDP, faced a larger task than New Zealand.
But the OECD appears to have used dated figures, based on Treasury's most recent set of long-term projections, which are released every four years, and last released in 2009. Those projections themselves incorporated 2008 projections from Statistics New Zealand.
Treasury's most recent Long-Term Fiscal Model, released in 2009, projected New Zealand's gross government debt would hit Japenese-type levels of 221% of GDP in the 2049/50 year.
More recent picks from Treasury are a far cry from those projections, and the government appears to already be on track to meet the commitment to have gross government debt below 50% of GDP by 2050, at least going by its forecasts out to 2020.
In Budget 2011, Treasury was picking gross public debt would peak under 40% of GDP. And while the situation may have worsened slightly over the past year, the government's position is far from what was projected in 2009.
The paper the OECD based its projections on assumed gross government debt of 52% of GDP in 2012 - well above the current level of 37% of GDP. That is consistent with Treasury's long-term projections in 2009, which forecast gross public debt sitting at 52.6% of GDP at the start of the 2012/13 year.
But here are the OECD's fixes anyway...
"New OECD research shows that bringing debt down to prudent levels will require sustained fiscal consolidations of more than 3% of GDP in many, though not all countries. Some countries must anticipate extremely large efforts: Japan faces fiscal tightening of up to 12% of GDP, while consolidation in the United States, the United Kingdom and New Zealand is projected at more than 8% of GDP," the OECD said on Friday.
In the short term, the pace of consolidation needed to be balanced with the effects of fiscal retrenchment on growth.
"The trade-off will depend on the choice of fiscal instrument, the size of the multiplier (which is highly uncertain) and whether monetary policy can offset the adverse demand effect. Even so, other things being equal, slower consolidation will ultimately require more effort to meet a given debt target," the OECD says.
"Given the currently high level of taxation in many OECD countries, which adversely affects economic performance, and the future spending pressures due to population ageing, a large part of consolidation should probably focus on cutting public spending and addressing the drivers of future spending pressures. In countries where spending is low, greater emphasis may have to be put on revenue measures," it says.
Countries could reap sizeable budgetary benefits – both directly and indirectly, through growth-generated fiscal gains – by adopting “best practices” for health and education spending and pursuing pension reforms.
"Governments can also reform transfer programmes, to rein in spending on often poorly-targeted social benefits and to sharpen incentives to work and save," the OECD says.
'Tax property more'
On the revenue side, governments should concentrate on limiting tax-induced distortions that were detrimental to growth, notably by broadening tax bases.
"Governments should also emphasise less-harmful taxes, such as those on immobile property, and corrective taxes, such as pollution charges," it says
"Indicative estimates of budgetary gains from spending and revenue measures, which have little adverse effect on growth, suggest that countries could achieve consolidation of 7% of GDP on average from the cumulative impact of spending and revenue measures. However, flanking measures to cushion the blow to those most exposed to additional hardship will add spending, and thereby offset some of the potential budgetary gains."