Warning on tax cuts and spending

An OECD report on New Zealand sounds a warning on tax cuts and suggests there is scope for some liposuction in Government spending.

"The country will not be immune to the spending pressures of an ageing population and the difficulties in constraining increases in healthcare coverage and costs," it said.

"Against this backdrop, it would be regrettable if spending or tax initiatives were implemented that significantly weakened the long-term fiscal outlook."

The Government has ramped up spending on health and education and introduced the Working for Families package.

"In the environment of large surpluses, there has been relatively little evidence of counterbalancing these initiatives by pruning back lower-priority spending," the OECD said.

Information on performance in the health and education sectors was patchy, making it difficult to see how productive different parts of the sectors were and whether they delivered value for money.

The OECD suggests a national testing system for children at the beginning and end of each year could provide valuable information about "classroom productivity".

Finance Minster Michael Cullen said he agreed with the OECD about the importance of fiscal discipline in the light of an ageing population.

"That is why the Government has been strengthening the Crown accounts by reducing debt, with the aim of taking it below 20 per cent of GDP by 2015," he said.

The OECD said a key challenge was to raise productivity growth which remained relatively weak by its standards.

But lowering barriers to working could also lift living standards.

Some parents might be put off working because they could not find good, affordable childcare for under-fives. They might also be affected by the loss of family assistance, creating high effective marginal tax rates.

Cullen said high marginal tax rates were a feature of any targeted system of assistance and were no higher now than they had been before.