The International Monetary Fund (IMF) has concluded its annual monitoring mission to New Zealand and released a statement making a familiar set of recommendations.
Many of the key messages would be welcomed by the new Coalition Government, things such as advising it should rein in structural deficits and take a tight fiscal stance in Budget 2024.
It also recommended urgently enacting policies to boost housing supply, such as the zoning reform and infrastructure investment promised by Housing Minister Chris Bishop.
But one of its perennial recommendations, to use a capital gains tax to promote productivity, was dismissed out of hand by the Prime Minister and Finance Minister.
Christopher Luxon said he did not believe it was a good idea, while Nicola Willis said the IMF made the same recommendation every year to no avail.
“There are some things that are certain in life: death, taxes, and the IMF recommending a capital gains tax,” she quipped.
Anyone listening?
A few minutes later and one block away from Parliament, IMF mission chief Evan Papageorgiou was asked at a press conference if he felt his words were falling on deaf ears.
“We repeat that line because we think there is a reason why, we think there is a fundamental purpose for a different tax system”.
Politicians and policymakers did listen to the advice but it was ultimately New Zealand voters who got to decide how they want to be taxed.
“Our advice here is that the tax system has a very distinct role to play in how the economy operates and what sort of activities are incentivized, or potentially not incentivized,” he said.
The IMF has recommended a combination of a comprehensive capital gains tax, land value tax, and a reduction in corporate income tax.
Revenue raised could be used to lower individual taxes, or fund the infrastructure and social investments sorely needed in New Zealand.
This reform could help to boost lacklustre productivity as it would remove some of the added incentive that comes from investing in housing over more productive assets.
“I would say that this is a long standing recommendation. Yes, we have repeated it repeatedly. But we are not the only ones. Many other international institutions, the Treasury, and IRD all have very similar opinions,” Papageorgiou said.
Later on Wednesday, Willis reiterated the Coalition Government did not have a mandate to look at this kind of tax reform.
“We take our recommendations from the New Zealand people. We had an election, we were very clear that we are going to deliver personal income tax relief for working New Zealanders and that's what we're focused on”.
Willis said she valued engagement with the IMF as it provided an international perspective which compared New Zealand to other countries and prompted a deeper look at some issues.
The IMF and other economists were welcome to keep making recommendations, many of which she “wholeheartedly agreed with” such as zoning, productivity, and fiscal policy.
Monetary policy
The IMF said it expected economic growth to be slow in 2024, before beginning to pick up pace after the Reserve Bank started to ease interest rates towards the end of the year.
This is a commonly-held view but it differs from the central bank’s own projections for the Official Cash Rate which suggests it won’t be cut until the second quarter of 2025.
While the IMF nominally doesn't have any more insight into the future than any other economist, they do meet with the Reserve Bank and Treasury to discuss policy.
IMF staff said the risk outlook was more balanced than when they visited a year ago and the risk of a policy mistake remained.
“a premature loosening of monetary policy could de-anchor inflation expectations given the extended period of high prices. Conversely, a larger than-anticipated impact of monetary tightening could cause a protracted downturn and drive inflation to undershoot the RBNZ target,” they wrote.
Other recommendations
New Zealand’s fiscal policy was more expansionary than in most other advanced economies and it should be consolidated. A surplus in the next four years should be a priority.
Net debt was currently at sustainable levels but it would continue to grow if the structural operating deficit was not corrected.
The number of units in the Emissions Trading Scheme (ETS) needed to be reduced in order to meet both domestic and international climate targets.
Additionally, agriculture emissions need to be priced and the ETS itself should be adjusted to prioritise gross, rather than net, emission reductions.
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