The Organisation for Economic Development (OECD) has released a report on New Zealand's economic situation, criticising New Zealand households' "meagre" savings rates and warning about further fiscal expansion. It recommended a decrease in the corporate tax rate and said New Zealand's banks needed to diversify how they get funding. "Households' indebtedness reached 160% of disposable income "“ and, in aggregate they cut their saving, possibly in the mistaken expectation that ever appreciating house prices would fulfil their future savings needs, notably for retirement," OECD economists Alexandra Bibbee and Yvan Guillemette said. "As already meagre personal saving fell further and business borrowing increased strongly, even healthy corporate profits and steady government surpluses were insufficient to finance booming private consumption and housing investment. Hence, much of the financing came from abroad," Bibbee and Guillemette said. The economists argued that New Zealand's banks needed to adapt and diversify away from this dependence on short-term foreign borrowing.
"The banks, though fundamentally sound, are heavily reliant on foreign borrowing, much of it short-term, and must adapt by diversifying and lengthening the maturity of their funding," they said. The report said New Zealand should focus on improving productivity and needed to focus on the production of tradable goods and services. "New Zealand is paradoxically at the forefront of the OECD in adopting policies in many areas that have been shown to lead to high per capita income, and yet it still ranks toward the bottom end of the OECD's productivity league. This performance has many natural and hence unavoidable causes, such as the economy's small size and geographical isolation. But the root of the problem is a structural deficiency in the capacity to produce tradable goods and services," the report said. "The crisis should thus be seized as an opportunity to push forward the nation's productivity agenda." The report also noted that New Zealand's regulatory regime, still of generally high quality, was falling relative to those of other OECD countries. On the policy front, it made several recommendations to improve investment and productivity, including bringing the corporate tax rate down to "at least" match the OECD average. "It should also shrink gaps between the company, personal, trust and portfolio investment entity rates to reduce investment distortions and shift the tax base away from income and towards consumption and immobile factors, including housing." The report made the recommendation that Government should sell off some state-owned assets in the drive to increase public sector efficiency. "There should be a focus on raising public-sector efficiency by curbing growth in public expenditures and subjecting existing and new programmes to a rigorous cost-benefit test that takes into account the economic costs of raising tax revenue. Raising public-sector efficiency also means limiting government ownership and spending to core sectors and divesting assets in non-core sectors such as electricity generation and transport." "Government ownership should be reassessed to spur competition...and beneficial infrastructure projects should be undertaken." "Infrastructure bottlenecks, particularly in roads, electricity, and telecommunications may have discouraged investment and constrained productivity growth."