Strong government support to protect jobs and incomes in the face of the pandemic helped New Zealand recover rapidly from the severe Covid-19-induced downturn, but challenges remain to set the economy on a sustainable growth path, according to a new OECD report.

The unemployment rate fell to its lowest level since 2007 while the employment rate rose to its highest level on record in the third quarter of 2021. However, inflation and house prices have picked up significantly and both household and government debt have increased.

The latest OECD Economic Survey of New Zealand recommends that fiscal policy be adjusted in the near term to help stabilise the economy. Boosting productivity, particularly by making better use of digital technologies, would support further increases in living standards.

Economic growth is expected to slow as capacity constraints bite and macroeconomic policies are tightened. Consumption growth is also expected to ease to a more sustainable pace as employment growth slows. After surging to 4.7% in 2021, New Zealand’s GDP is expected to rise by 3.8% this year before easing to 2.5% growth in 2023.

“The near-term economic outlook is positive. The New Zealand economy has recovered strongly from the pandemic. The need for policy action is pressing in a number of areas to make economic growth sustainable. For instance, helping the digital sector to grow would help boost labour productivity.” OECD Secretary-General Mathias Cormann said, presenting the Survey alongside Finance Minister and Deputy Prime Minister Grant Robertson and Minister for the Digital Economy and Communications David Clark.

“Linking pension eligibility to life expectancy and adopting long-term debt-to-GDP targets would help address the projected increase in government debt.”

With affordability for first homebuyers at low levels and a buoyant housing market, it is important for the government to complete reforms to increase housing supply and for macro-prudential regulations to be tightened further, the Survey says.

Policy settings will need adjusting to avoid population ageing leading to significant additional increases in public debt. Raising the pension eligibility age by linking it to life expectancy, while taking measures to limit the impact on disadvantaged groups, would help address long-term fiscal challenges.

Adopting explicit long-term debt-to-GDP targets would represent a clear commitment to improving the country’s fiscal position.

Boosting productivity is essential to raising living standards, notably through a better use of digital technologies.

Challenges to productivity growth owing to muted product market competition, weak international linkages and innovation, and skills and qualifications mismatches should be addressed.

Barriers to competition in the retail grocery sector should be removed while R&D tax credits should be complemented with targeted grants to ensure a wider application of innovative technology and practices.

It is important for New Zealand to implement its new national digitalisation strategy. There are severe shortages of specialised ICT skills in the country, in part owing to Covid-19 related border restrictions.

More intensive use of digital tools is also held back by low availability of high-speed Internet connections in rural areas while weak coordination between export promotion and innovation support hampers export expansion by young, innovative firms.

To help unleash the technological transformation, digital apprenticeships should be developed and particular help be provided for women and for Māori in pursuing digital careers.

The GOVTechTalent graduate programme should be expanded to all public sector organisations.

The New Zealand government has improved the legal framework for reducing greenhouse gas emissions but is not on track to meet its 2050 net-zero carbon emissions target.

The carbon price is too low and efficient complementary measures, which address market failures not corrected by carbon pricing alone, still need to be taken.