OECD's report deepens recession gloom for NZ

Cartoon / Rod Emmerson

The economy is in for a long and deep recession, but the Government has done all it prudently can to stimulate it, says the OECD.

The Paris-based Organisation for Economic Co-operation and Development, which links 29 of the world's richest countries, delivered its biennial report on New Zealand's economy yesterday.

Taking a gloomier view than most forecasters, it says the economy will shrink nearly 3 per cent this year, and grow only 0.5 per cent next year. Unemployment is tipped to rise to nearly 8 per cent from 4.6 per cent now.

Further stimulus will have to come from the Reserve Bank rather than the Government, the OECD says.

It sees room for the bank to cut its official cash rate to 2 per cent, from its present 3 per cent, but warns that it will need to reverse rate cuts quickly once recovery is securely under way.

Fiscal expansion - the combined effect of higher Government spending and tax cuts - is "probably already at the limits of prudence", it says.

Any more should be a last resort.

Next month's Budget needs to lay down a path for returning to at least balanced budgets as quickly as possible if New Zealand is to avoid a credit rating downgrade and be able to compete for international funding.

The OECD also suggests ways to address longer-term problems with economic performance and the Government's finances.

Among them are raising the age of eligibility for NZ Superannuation and linking increases in it to inflation instead of the average wage.

It favours privatising Air New Zealand, KiwiRail, KiwiBank, Solid Energy and the three State-owned electricity generators.

It also suggests a lower company tax rate, a smaller gap between it and the top personal rate, and a shift in the tax mix toward more GST.

It supports more spending on roads, especially in and around Auckland, and "better use" of existing roads by using toll and congestion charges.

Council of Trade Unions secretary Peter Conway said the OECD seemed to have learned nothing from the global financial crisis.

'Overall, the prescription is to privatise in electricity, ports, ACC and health despite the fact that we have just witnessed massive private sector failure in financial management which has required huge bailouts by the public sector.'

Proposals to break up national wage bargaining in the health sector, separate hospitals from District Health Board funders and outsource hospital management would also raise concerns, Mr Conway said.

Finance Minister Bill English said the Budget on May 28 would include a credible plan for recovery and a sharper focus on improving productivity and economic growth.