OECD calls on NZ to implement Capital Gains Tax and land tax to improve savings and investment habits; also wants deposit insurance scheme and higher capital for banks

OECD calls on NZ to implement Capital Gains Tax and land tax to improve savings and investment habits; also wants deposit insurance scheme and higher capital for banks

By Bernard Hickey

The Organisation for Economic Cooperation and Development (OECD) has called on New Zealand to implement a capital gains tax and a property or land tax to improve its economic performance.

The OECD made a raft of recommendations for economic and social policy reform in its 139 page country report, its first on New Zealand in two years.

The OECD said the New Zealand economy was beginning to gain some momentum because of the Christchurch rebuild and a rise in business investment and household spending, but risks to growth remained because of high household debt, weak foreign demand, a large foreign debt and an over-valued exchange rate.

"The main structural challenge will be to create the conditions that encourage resources to shift towards more sustainable sources of prosperity. Incomes per head are well below the OECD average, and productivity growth has been sluggish for a long time. Lifting living standards sustainably and equitably will require structural reforms to improve productivity performance and the quality of human capital," the OECD said.

Monetary policy was "appropriately accommodative," given the high exchange rate, weak employment growth and subdued inflation, but that price pressures were likely to strengthen from quake rebuilding costs and strong housing markets. The OECD recommended the gradual removal of that monetary stimulus.

The OECD welcomed the government's moves to restore the budget to surplus. "Fiscal consolidation is on track to restoring surpluses. Achieving sustained reductions in government debt will establish a favourable starting position for confronting the longer-term cost pressures resulting from demographic ageing. It will also tend to raise national saving rates, thereby reducing external vulnerabilities," it said. 

The OECD said boosting productivity was the key to long-term growth prospects.

"Low trade intensity and limited engagement in global value chains suggest New Zealand is not reaping the full productivity-enhancing benefits of globalisation, perhaps in part because of the persistent overvaluation of the exchange rate," it said, also pointing out inefficiencies in New Zealand's information and communications technology infrastructure may undermine international connectedness.

The OECD pointed to emerging risks to financial stability from the housing market and welcomed the Reserve Bank's move to use macro-prudential policy tools.

"Consider implementing bank leverage ratios, permanent deposit insurance and higher capital requirements for too-big-to-fail banks," it recommended.

It also made a raft of recommendations about taking early steps to address the long term cost pressures from an ageing population.

"Raise the pension eligibility age in line with longevity. Consider increasing further the KiwiSaver minimum contribution rates and indexing NZ Superannuation benefits wholly or partly to the CPI," it said.

The OECD also called for the removal of tax concessions for petroleum exploration. 

Redistribute income

The OECD also warned about a widening of income inequality and suggested New Zealand use its tax system to redistribute income.

"Disposable income inequality has widened materially since the 1980s, albeit from a lower level than in other advanced low-tax countries, and remains high," the OECD said.

"This almost entirely reflects a sharp increase in market income inequality between the mid-1980s and mid-1990s, only weakly countered by the tax and benefit system; since then, income inequality has stabilised," it said.

"Within New Zealand, sizable income gaps for Maori and Pacific minorities have not improved – from 1990 to 2011 respectively standing at 75% and 72% of the Pakeha/European equivalised median household income. While many factors drive market income inequality (e.g. labour market institutions affecting the degree of wage compression), this is an issue that needs to be addressed in the design of fiscal policies. The redistributive impact of taxes and benefits has not been sufficient to offset the increased inequality of market incomes, and is below the median of OECD countries."

Too Big to Fail

The OECD also recommended the Reserve Bank use leverage ratios to make New Zealand's 'Too Big To Fail' banks safer and bring in a deposit insurance scheme.

"The banking system is among the most concentrated in the OECD, so that many of these banks are “too big to fail” and pose fiscal risks as well," it said.

"The Reserve Bank should therefore require even higher capital buffers than currently envisaged for the four systemically important banks, as Canada has recently done for its big banks. Despite relatively simple bank balance sheets and extensive regulatory add-ons applied to minimum risk weights in New Zealand, the Bank should also consider applying a maximum leverage ratio, as recommended in the 2011 Survey, to backstop the use of banks’ internal model-based assessments of asset risks upon which the Basel ratios are based."

OECD research had found that the leverage ratio was a far better predictor of “distance-to-default” than was the Basel Tier 1 ratio. See Interest.co.nz's measures of bank leverage here.

Deposit insurance best

The OECD said the Reserve Bank's current Open Bank Resolution policy may not be enough to prevent bank runs.

"Once OBR is applied to one bank, depositors may fear contagion to the others. Implementing a permanent deposit insurance scheme may help reduce risks of retail runs. To be sure, deposit insurance raises moral hazard, but that should be handled by tighter bank supervision. Furthermore, some moral hazard exists already: the fact that deposit insurance was adopted under urgency in 2008 (and progressively removed over the following few years) may lead to the expectation that a similar policy would be implemented in a future crisis."

(Updated with more detail)

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9 Comments

love the headline, lets tax people more  so they will improve their savings and invest more...I understand the economics however the reality is people have taken investment positions that they cannot unwind instantly so end up with less disposable income to invest...

Fair go...a bunch of OECD economists and "experts" having the gall to tell our Bill English how best to manage the whole economy for a better future for more Kiwi....tisk tisk...they ought to know better...our Bill is streets ahead of all of them and so experienced....doh.

Bernard's summary suggests the report provides a fairly extensive critique of many current government policies.
 
I would like to read the report but the OECD want to be paid for that privilege so I have given it a miss.

I bet that some Treasury folks were on the writing panel for the NZ chapter.

The OECD has been advising economies for quite a long time and look at the mess the world has.

The NZ 'economy' has been mismanaged by Kiwi pollies and bureaucrats for quite a long time and look at the mess NZ is in...if you can see past the propertry bubble!

"Low trade intensity and limited engagement in global value chains suggest New Zealand is not reaping the full productivity-enhancing benefits of globalisation, perhaps in part because of the persistent overvaluation of the exchange rate," it said, also pointing out inefficiencies in New Zealand's information and communications technology infrastructure may undermine international connectedness.
 
If my local telephony infrastructure maintenance regime is anything to go by we are definitely flirting with third world service.
 
The wooden power pole out side my house was replaced by a concrete unit on or about 12 March 2013 as per the Hutt City Council notice.
 
The power lines contractor temporarily strapped the telephone line equipment to the pole with single core power line wire - subsequently a southerly storm ripped the equipment away from the pole so it was dandling at head height between two poles over the road - calls by neighbours to their respective telephone service agents resulted in a gang of workers making a repair and so it remains today - nearly 3mths down the track.
Graphic pictorial evidence
 

"The Organisation for Economic Cooperation and Development (OECD) has called on New Zealand to implement a capital gains tax and a property or land tax to improve its economic performance."
NZ has got its very own Productivity Commission to look at these same issues.
Funny, they have never said squat about the need for a CGT or some such.
Now, why may that be I wonder?
 

NZ's productivity commission has a particular neo-liberal ideological bias which makes its recommendations pretty useless.
On the other hand the evidence is that OECD is clearly a far left organisation, and most of its recommendations have been dictated by Dr R Norman.