IMF says NZ's rising superannuation costs means reforms are needed for both superannuation settings and KiwiSaver

New Zealand's rising superannuation costs are ringing alarm bells for the International Monetary Fund (IMF), which is recommending a strengthening of KiwiSaver and going as far as to suggest the need for potential revenue measures such as a comprehensive capital gains tax and reforms to land value taxation.

This comes from the IMF's latest official mission testing the economic waters in NZ. The interviews for the IMF’s preliminary findings took place between June 18 and July 1, with Finance Minister Nicola Willis, Governor of the Reserve Bank Anna Breman, Secretary to the Treasury Iain Rennie, and other MPs, officials, think tanks, trade unionists and business groups. The mission was led by Yan Carrière-Swallow, Deputy Division Chief at the IMF's Asia and Pacific Department.

Sustained discipline over successive budgets was needed to achieve surpluses, the IMF said - particularly in light of the building pressure from NZ Superannuation payments and Defence Force commitments. 

And while expenditure discipline should be central in the medium term, expenditure restraint alone could have an impact on the quality and delivery of public services, especially in light of the country's rising age-related spending costs. 

"An adjustment strategy that includes a broader set of expenditure and revenue measures would distribute the effort across fiscal instruments, strengthen the credibility of the fiscal anchor, and help reduce distortions in the tax system," it said. 

On the Superannuation costs, the IMF said a gradual reform package should include both changes to the superannuation settings and changes to KiwiSaver such as increases to contribution rates and also measures to boost membership. 

KiwiSaver is a key policy area so far in the lead up to November's election, with National and NZ First announcing a suite of proposed changes, while Labour has promised its policy is on the way. 

The IMF recommends systematic cost-benefit reviews of government programmes for further efficiency gains, and on revenue reforms, it suggested potential measures could include a comprehensive capital gains tax and reforms to land value taxation.

On the Government's last Budget, while the IMF supported efforts to contain operating expenditure and improve public-sector efficiency, it added that public service workforce reductions should be "carefully prioritised and sequenced to protect the highest value uses, preserve implementation capacity, and ensure durability of generated savings."

The Government in May announced major reform across the public service in an effort to save $2.4 billion, along with a reduction of almost 9000 workers over three years. 

The IMF also gave NZ a tick for avoiding generalised price subsidies in response to the fuel price shock, calling the targeted, temporary response in line with international best practice. 

"The measure effectively supports vulnerable households with children while prices are elevated, preserving price signals that incentivise energy demand adjustment - which helps prevent shortages from occurring - and its modest cost avoids creating inflationary pressures and preserves fiscal space."

The IMF recommended structural reform as being critical in lifting NZ's productivity and living standards and in strengthening resilience. 

On the country's economic recovery, it noted the delay due to the oil price shock and elevated uncertainty, with inflation expected to remain temporarily above the Reserve Bank's target 1% to 3% band. 

However, prior to the Middle East war, it said the recovery remained uneven across sectors and regions. Services were expanding steadily, but labour market conditions continued to loosen, wage growth slowed and the construction and manufacturing sectors remained subdued.

It also noted the economy was subjected to frequent shocks, which showed the importance of strong a policy framework "that underpins macroeconomic stability: a flexible exchange rate regime, strong fiscal buffers, and credible central bank".

Those more frequent external shocks included geoeconomic fragmentation, trade disruptions, and natural disasters, posed risks to the country's growth and inflation. 

"Conversely, a stronger transmission of monetary accommodation, or productivity gains from structural reforms could support a quicker rebound," the IMF said.

The need to rebuild buffers was stressed in light of the external turbulence and persistent deficits since the Covid pandemic. 

"About half of the public debt is held by non-residents, which supports market liquidity in the context of a shallow pool of domestic savings, but amplifies the sensitivity of New Zealand’s sovereign yields to shifts in global financial conditions," it said.