As covered by general media over th epast week, the OECD have released their latest report on New Zealand’s situation in particular in relation to other OECD countries. I went through the document (146 pages) wearing a distinctly rural hat to try and ascertain how New Zealand agriculture was faring (in relation to other countries) as mainstream media had focused largely on the retirement age and how New Zealand had handled the Covid pandemic from a government level.
Most of what the document contains has been said or signalled before in previous reports (Covid excepted) and the ‘work insurance scheme’ which the government announced this week has been one of the continuing themes in previous OECD reports which may indicate that the government does take at least some notice of what they present.
One of the major areas where the report believes improvements to both productivity and underpinning of new exports could be made is in the area of digital technology.
With New Zealand so distant from its export markets the report believes there needs to be more digital training and incentives to build up greater capacity as distance become less of an issue. It specifically targets agriculture as a sector that would benefit from incorporating more digital technology to increase productivity.
They use the graph below to illustrate how the IT industry has outstripped other sectors in recent years.
The report highlights the fact that despite having virtually no government support and being highly exposed to international competition (which often do have the benefit of government support) it has performed well and prices are “in line with international prices”. However, improvements in “Total Factor Productivity” are lacking and growth from 2007 -2016 was only 0.7% (to gain an insight in TFP go to link). Lower than many of our competitors including Australia, EU and USA, with most of our growth coming from increased on farm productivity.
The authors believe this indicates a heavy reliance on migrant labour and a slow adoption of new technologies and innovations.
Given the calls to allow in more migrant workers it is difficult to refute this.
They highlight the consumer preferences are moving towards a more plant based diet, which while may take time is certainly the trend for the future. They believe the use of more digital technologies could improve productivity over time by 21%.
Many in the rural sector would point out that they feel ‘kneecapped’ by the lack of more powerful internet services. Generally, the report says that New Zealand compares well with other OECD countries with strength and coverage. However, New Zealand with its greater reliance on the rural sector for exports is not quite comparing apples with apples as the best coverage is still far and away located in the larger cities. Panel B which shows the area covered by wireless broadband is acknowledged as still developing and ‘holes’ exist and is definitely not at the same quality as fibre.
Perhaps surprisingly they found New Zealand’s firm export intensity low for a small country. This translates into the degree of exporting activities measured as the percentage of exports relative to sales. So, while agriculture which by and large exports about 90% of ‘sales’, other sectors are not so active and are perceived to be more at risk of failure as a result.
An area farmers are likely to be concerned with is the belief that the report authors not only believe water use should all be monitored and paid for but also be a tradeable right so that it ends up going to its best (economic) use. I would argue that given the high cost of electricity and irrigation schemes making water one of the higher input costs into a farming system that uses irrigation water, this is already occurring. I suspect trading water would be a step too far for the government and likely Māori as a resource partner would also be hesitant to pursue this also, although it could be a good money earner.
On the topic of climate change and greenhouse gases, they highlight the fact that New Zealand are falling well short of where we need to be to meet our international commitments. They steered cleared of targeting livestock farming too much except to recognise that it is the largest emitting sector but will be coming into the ETS (at a lower level) in 2025. They did however state that they saw merit in developing environmental taxes to capture more externalities. They felt that not having a fuel tax on fuels used off road was an oversight that could/should be rectified.
Other areas raised was the low levels of “Foreign Direct Investment” (FDI) coming into the country considering New Zealand’s small size and open economy. (Countries on the left of the graph are the smaller [less than 20m population] OECD countries).
On a similar vein they questioned New Zealand’s corporate tax rate and felt it should align with Australia’s which may keep more business and investment here. Currently our “Statutory” corporate tax is lower than Australia but the marginal tax rate which better reflects the real cost of tax is considerably higher.
Perhaps of interest Australia’s FDI is similar to that of New Zealand, so we do not look to be currently losing much offshore investment to them. Staying on taxes the report has repeatedly called for a ‘Capital Gains Tax” and notes that the ‘bright-line test’ has been extended to 10 years.
The fact that the government is proposing to adopt a health and work insurance policy similar to other OECD countries (Australia one of the few developed countries that also has not got one) could indicate that government does take notice of these reports. However, any change is likely to be incremental and no great threats appear to be looming, providing my take on water trading is correct.
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