Good timing makes NZ new 'lucky country'

New Zealand has become the new "lucky country", thanks to a series of fortuitous economic circumstances.

And, the economic outlook remains providential, the Organisation for Economic Co-operation and Development (OECD) says.

Its latest detailed report on New Zealand says that, thanks to the right timing of strength and weakness in various sectors, New Zealand's economy has been "remarkably resilient" over the past year - given the background of the world economy.

Just as September 11 hit, domestic demand rose as the effects of high farm incomes trickled through to the wider economy and the brain-drain reversed.

Such factors helped New Zealand "cruise through the global turbulence reasonably smoothly".

"The short-term outlook reflects what has been, to some extent, fortunate timing," the survey says.

Conducted every 12-to-18 months, the 130-page report by the OECD's Economic and Development Review Committee takes a detailed look at New Zealand's economy and public policies.

It predicts the economy will grow 2.7 per cent this year and 3.5 per cent next year and forecasts benign trends on virtually all fronts except the current account deficit, which it says will rise to 4 per cent of GDP next year from 3.2 per cent last year.

It supports the decision by former Reserve Bank Governor Don Brash to raise interest rates in March and last month as "fully appropriate" and notes "a further gradual firming in rates will be called for in the course of this year and in 2003", if the global and domestic economies grow as projected.

If recoveries in North America and Europe take off, then New Zealand could experience sharper growth, led by exports, but if they go into reverse, New Zealand could experience a sharp downturn.

"An end to the 'lucky timing' would result in an economy that is either unusually strong or unusually weak. In either case, the policy response would need to be quick and fairly aggressive," the report says.

The committee gives New Zealand a general tick but takes a swipe at some Labour Government policies on tax, labour markets and public investment.

The overall macro and micro-economic framework is sound, it says.

But if New Zealand wants to climb back up the OECD ladder of industrialised nations, priority should be given to strengthening fundamentals where structural distortions and obstacles to business development exist.

"Improvements are certainly needed in areas such as, for example, labour markets and education, but they should be based on a clear identification of the specific problems to be addressed."

It says the Government's fiscal stance has been fairly prudent but to meet its budget surplus targets, it will require restraint, particularly in the health sector.

The quality of the Government's investment decisions could be better.

For example, it says the decision to set up Kiwibank was not based on a market failure.

Government decisions to invest in Air New Zealand and the Auckland rail infrastructure were significant investments with little clear social payoffs in the medium-term.

However, setting Government surpluses aside to pay for future pensions was seen as a "useful step", "although it is hard to judge whether paying down debt or lowering taxes would be better than building up a fund".

Overall, New Zealand's public spending was in good shape.

The report is critical of some of Labour's changes, including easing restrictions on claiming the dole, abolishing school zoning and renationalising ACC.

Commenting on New Zealand's attempts to grow fast enough to reclimb the OECD ladder, the report echoes the words of economic reform architect Sir Roger Douglas, saying: "There is still unfinished business in several areas".

The report says "more pro-active and selective interventions should be limited to cases where they are clearly justified by identifiable market failures".

It queries the need for Government involvement in the venture capital market in the absence of a demonstrated gap.

"What is still lacking in many cases is a clear identification of the market failures that policy interventions are intended to address and a focus on well-defined and verifiable goals.

"A coherent set of policies designed to enhance the country's long-term growth potential is the best strategy for meeting the goal of improving incomes for all."

It says developing, and more fully using, human capital should be a key priority.

The report repeats the strong criticism in the previous report in 2000 that New Zealand lacked a capital gains tax.

It also questions Government proposals to encourage more foreign investment through tax incentives and notes that the aligning of the top income tax rate with the corporate tax rate would be "helpful".

- NZPA