The Organisation for Economic Co-operation and Development, the ‘rich countries club’, conducts an economic survey of its members. They just published their latest (2017) edition for New Zealand, which makes for some interesting reading.
While the OECD’s reviews reflect its own views about what’s going right and wrong in its members’ economies, it sends staff to check out things on the ground. This usually involves working with government departments in the host country and holding a lot of meetings with local experts and interested parties. (For instance, in a professional capacity, I attended a workshop for the OECD’s most recent environmental review last year.)
As a result, the OECD’s findings are usually inflected by local perceptions of problems and opportunities. This year’s review has a strong focus on New Zealand’s cities: in particular, around the need to improve housing affordability and strengthen opportunities for agglomeration economies.
Here’s their one-page headline summary of what’s going on in the New Zealand economy:
New Zealand continues to enjoy a strong, broad-based economic expansion
Strong economic growth is being driven by booming tourism, strong net inward migration, solid construction activity, and supportive monetary policy. The fiscal position is sound, with low public debt and a balanced budget. The major vulnerability facing the economy is high levels of household debt associated with rapid house price increases, particularly in Auckland. New Zealand is also exposed to protectionist trade policies abroad and to slowing Chinese economic growth. While the short-term economic outlook is strong, there are long-term challenges from low productivity growth and a changing labour market.
Productivity remains well below that of leading OECD countries
Labour productivity is well below leading OECD countries, restraining living standards and well-being. Productivity is held back by a lack of international connections, agglomeration economies and scale; weak competitive pressures; low rates of capital investment; and meagre research and development activity. Opportunities to address these factors include reducing barriers to foreign direct investment, lowering the corporate tax rate, expanding infrastructure funding options to increase housing supply (preferably through densification), reviewing the insolvency regime and the current provisions for misuse of market power, and increasing support for business innovation.
Employment has been shifting towards high-skilled occupations
Employment has shifted towards high-skilled occupations, a trend that is likely to continue with further diffusion of digital technologies, including Artificial Intelligence. New Zealand has high levels of skills but also high levels of mismatch between jobs and qualifications. As in other countries, people will need to acquire more initial education in fields in demand and upgrade or reorient their skills during their working lives. Improving education achievement in mathematics would provide more young people with good job prospects in fields such as engineering and computing. With more workers likely to be displaced over the next 10-20 years, there may be a need to strengthen New Zealand’s limited arrangements for supporting displaced workers.
So there’s some things to like and some things to be worried about. We’re not in a bad position, but we should work to be in a better one.
Rather than running through the whole story, I wanted to highlight a few things that the OECD has to say that are more directly related to Greater Auckland’s aims.
The first is about housing affordability, which is a major weakness of the New Zealand economy right now. Alongside its economic review, two OECD economists wrote a blog post entitled “The downsides of New Zealand’s inflated house prices“, which sets out the argument pretty clearly. Here’s what they had to say:
Price increases have been most pronounced in Auckland. Around half of all new migrants settle in Auckland, exceeding its (one third) share of the national population. Since 2008, new housing construction in Auckland has failed to keep pace with population growth. Prices in the rest of New Zealand, on the other hand, have risen despite little or no increase in the population-to-dwelling ratio. Throughout the country, record low interest rates have magnified house price increases.
The long-term solution, for Auckland in particular, is to address supply constraints. The recent Auckland Unitary Plan will allow greater densification and some expansion of urban development limits. However, insufficient infrastructure has constrained the extent to which densification is possible in central parts of Auckland. As in other parts of the country, infrastructure provision is primarily the responsibility of local governments, which face financial constraints and weak incentives to invest in amenities to facilitate growth. Options to broaden funding sources for public infrastructure should be explored, including more user charging, targeted property taxes, more cost-reflective developer contributions, sharing in a tax base linked to local economic activity and further recourse to alternative delivery models such as public-private partnerships. Reforms to the urban planning system are also needed – recommendations from the OECD’s Environmental Performance Review and the Productivity Commission’s Inquiry into Land Use Planning should be considered in order to deliver a more responsive and efficient planning system.
Relieving supply constraints takes time, however, so demand-side measures are also important to address financial stability risks. The Reserve Bank has progressively tightened restrictions on loan-to-value ratios, constraining the maximum amount that banks can lend to most customers. House price increases have moderated since the last round of tightening in October 2016. Debt-to-income restrictions, which complement loan-to-value ratios by limiting further debt as house prices increase relative to incomes, may be necessary if house price increases resume, and should be added to the Reserve Bank’s toolkit following analysis demonstrating that benefits would outweigh costs.
The OECD also had some words about competition and productivity in the construction sector – see Box 1.4 on page 100 of the full survey.
The second point is around the role of agglomeration economies in lifting New Zealand’s productivity. Here, the OECD is very good at highlighting how better urban planning policies and better infrastructure pricing and provision can enable higher productivity growth:
Exploiting benefits from agglomeration by reforming urban planning and infrastructure funding
Agglomeration economies generated by cities and industrial clusters are an important source of productivity growth (Glaeser, 2010). New Zealand’s small population limits such economies. Even so, the urban planning system and a lack of land transport and water infrastructure have been barriers to agglomeration by preventing increases in housing supply from meeting demand, boosting housing costs and inhibiting people from moving into economically successful, highly productive urban areas. Land prices inside Auckland’s urban boundary are nearly 10 times higher than outside, while a suite of complex and restrictive land-use rules (including maximum building heights, minimum lot sizes and parking requirements) has made development more difficult and expensive (OECD, 2017c), although many of these practices have been reduced or removed through the Auckland Unitary Plan (as described below). Rapid population growth due to high immigration is placing additional pressures on infrastructure. The inability of water supply infrastructure to keep pace with demand has restricted developers’ ability to deliver new housing in a timely manner (NZPC, 2017a), and transport congestion is likely to worsen (Auckland Transport Alignment Project, 2016).
The recent Auckland Unitary Plan will allow greater densification and some expansion of urban development limits. It represents a major step forward in spatial planning, integrating land use, housing, transport, infrastructure and other urban planning issues. Nevertheless, permitted housing density follows a U-shape, with a fall in density in areas close to the city centre but higher density further out, which contrasts with the more usual linear decline in density as distance from the centre increases. This form is partly the result of insufficient infrastructure in areas close to the city centre. Large investments are being made to rectify this problem, which should permit the Plan to be revisited in the future to permit greater densification, provided that opposition from vested interests can be overcome.
While infrastructure investments have been stepped up in Auckland, they still appear to be lagging behind the requirements of such a rapidly growing population. A major problem is that the Auckland Council, like others in New Zealand, has weak incentives to invest in amenities to facilitate growth, as local ratepayers bear much of their cost, but the fiscal benefits flow mainly to central government. To mitigate this problem a number of avenues for diversifying revenue sources should be considered, as discussed in the 2015 Survey (Table 6). These include: making greater use of tolls to fund local and national roads and of Public-Private Partnerships where that could increase efficiency (see Chapter 1); introducing volumetric charges for water outside the few councils, such as Auckland, that already have them; ensuring that housing development contributions (one-off levies imposed by local authorities on developers to finance parts of the capital costs associated with new development) reflect costs; and increasing the Council’s debt-servicing capacity so that it could issue more debt to finance infrastructure. Options for increasing this capacity include sharing in a revenue base linked to local economic activity, such as GST, and using targeted rates to tax the windfall gains that accrue to local landowners from the provision of new amenities. Property owners should lose underground property rights that unnecessarily add to the costs of infrastructure provision, as with Auckland’s underground rail line.
Overall, it seemed like a pretty balanced review that should (hopefully) strengthen the case to push on positive changes to our policy settings.
What do you make of the OECD’s economic review?