Management skills have a big impact on organisational performance. New Zealand's perceived availability of management skills ranks below that of Australia, the UK and many OECD countries.

Education levels are important because more highly educated people tend to be more productive.

The education level of New Zealand's workforce is above the OECD median and improving. However, we have significant numbers of people at the lowest levels of literacy and numeracy.

New Zealand's university graduation rate is one of the highest in the OECD, and our best university is similar in quality to the median leading universities in OECD countries. The mix of fields of study, however, may not be optimal from the perspective of economic growth. New Zealand's 15- to 20-year-olds have lower enrolment rates than the OECD average, indicating a higher proportion of students leaving school and not enrolling in tertiary education.

Maori and Pasifika educational achievement in schools is below average but improving.

Introduction

Skills and talent are essential to improving productivity and incomes. People with the right skills help firms to create, develop and use new technology, new markets and new workplace practices. Skills are a focal point of the government's strategy for economic transformation.

Skills and talent are influenced by formal learning processes, informal experiences, networking, and social and cultural norms. This chapter provides a general picture of New Zealand's current performance in a number of aspects of skills and talent, including educational achievement, adult literacy and perceptions of managerial ability.⁵³

4.1.1 Management and Leadership Skills

Management and leadership skills impact substantially on organisational performance. Skilled managers create an environment where innovation and skill development can flourish. A number of recent studies confirm the link between management quality and productivity.⁵⁴

Because objective internationally comparable data on management skills is not available, we have relied on the International Institute for Management Development (IMD) World Competitiveness Yearbook. This asks business executives to rate management quality in their countries. This approach is not entirely satisfactory as perceptions may be biased, but it may provide some insight.

The IMD ranks perceived availability of management skills in New Zealand lower than in Australia, the UK and many OECD countries.⁵⁵

4.1.2 Advanced Skills

Highly skilled and educated people are crucial to innovation. They create and embody knowledge and ideas, and they help facilitate the uptake of ideas from overseas and within New Zealand.

New Zealand's proportion of adults with a bachelor's degree was slightly above the OECD average in 2004. The proportion of the population with a bachelor's degree or higher and the proportion of the population with a tertiary qualification or higher have both grown since 1997, while the proportion of the population with no qualification has declined.

4.1.3 Basic Skills - Literacy and Numeracy

Adult literacy measures the ability of adults to use information effectively.

Recent studies have suggested that literacy is positively and significantly associated with employment outcomes.⁵⁶ Improving basic literacy skills is also likely to be important for lifting overall labour productivity.

The International Adult Literacy Survey (IALS)⁵⁷ in 1996 ranked New Zealand above the OECD median on prose literacy, but below the median on document and quantitative literacy.⁵⁸

4.1.4 Upskilling the Current Labour Force

Knowledge and skills can accumulate outside formal education through self-training and workplace training and experiences. New Zealand has the highest number of hours of continuing education and training per adult according to the IALS 2000, but the IMD Survey ranks⁵⁹ New Zealand below many OECD countries in the emphasis given to employee training.

4.1.5 Ensuring New Entrants to the Workforce are Skilled - Educational Attainment

The skills of New Zealand's future workforce will depend on the skills of new entrants.

New Zealand's university graduation rates are high by OECD standards and are increasing.⁶⁰ According to the Times Higher World University Rankings, our best university is similar in quality to the median leading universities in OECD countries, suggesting that the quality of our university education is likely to be comparable with the OECD average.

New Zealand exceeds OECD norms in the number of science graduates, but falls well short in the number of engineering graduates. Many people graduate in fields that are not obviously connected to productivity growth. We trail well behind the OECD average in PhD graduations.

At the secondary school level, the picture is mixed. While our 15-year-olds perform above average on reading, scientific and mathematics literacy according to the Programme for International Student Assessment (PISA) measure, our 13- to 14-year-olds score below average on America's Trends in International Mathematics and Science Studies (TIMSS) measure.⁶¹ The proportion leaving secondary school qualified to enter university is increasing, but the participation rate in education for 15- to 19-year-olds is well below the OECD average and is declining.⁶² Moaori and Pasifika educational attainment is still well below average, although improving.⁶³

Figure 4.1 Perceived availability of competent senior managers, 2004 and 2006

Source IMD World Competitiveness Yearbook 2006, Graph 3.2.21

→ Full size version of Figure 4.1 [167 kB JPG]

4.1.1 Management and Leadership Skills. Survey results from the IMD indicate there is perceived to be a shortage of competent senior managers in the New Zealand labour market (we are 22nd out of 24 countries).

Figure 4.2 Percentage of adult population with bachelor's degree as the highest qualification, 2001 and 2004

Source OECD, Education at a Glance 2006

→ Full size version of Figure 4.2 [176 kB JPG]

4.1.2 Advanced Skills. The percentage of New Zealand adults with bachelor's degree⁶⁴ as the highest qualification is higher than the OECD average, and is improving (we are 11th out of 24 countries).

Figure 4.3 Distribution of population aged 25-64 years by highest qualification, 1991-2006

Source Statistics New Zealand, Household Labour Force Survey

→ Full size version of Figure 4.3 [153 kB JPG]

The proportion of the adult population with a tertiary qualification has increased, from 52 per cent in 1997 to 59 per cent in 2006. This growth has come primarily from an increase in the number of degrees and postgraduate qualifications.⁶⁵

Figure 4.4 Percentage of adult population with higher skills (level 3 or above), 1996⁶⁶

Source OECD Literacy in the Information Age 2000, Table 2.2

→ Full size version of Figure 4.4 [86 kB JPG]

4.1.3 Basic Skills – Literacy and Numeracy. In 1996 (the most recent year for which data is available), New Zealand ranked above the OECD median on prose literacy (we are 7^th out of 15 countries), but below the OECD on document literacy (13 out of 15) and quantitative literacy⁶⁷ (12 out of 15), according to the International Adult Literacy Survey (IALS).

Figure 4.5 Hours of continuing education and job-related training per adult, 1994-1998

Source OECD Literacy in the Information Age 2000

→ Full size version of Figure 4.5 [135 kB JPG]

4.1.4 Upskilling the Current Labour Force. New Zealand has the highest number of hours of continuing education and training per adult from 1994 to 1998 (the most recent year for which data is available) in the 17 countries that participated in the IALS survey.

Figure 4.6 University graduation rates, 2001 and 2006

Source OECD, Education at a Glance 2003 & 2006, Table A3.1

→ Full size version of Figure 4.6 [160 kB JPG]

New Zealand's university graduation rate is among the top in the OECD and the rate has been improving⁶⁸ (we are 2nd out of 20 countries). "University graduation rate" is defined as the number of students completing university degrees for the first time as a percentage of the age group normally completing university degrees.

Figure 4.7 Quality of leading universities,⁶⁹ 2006

Figure 4.7 Quality of leading universities, 2006

Source The Times Higher World University Ranking, 2006, Figure 4.55; Forfas, Annual Competitiveness Report 2006.

→ Full size version of Figure 4.7 [108 kB JPG]

On this measure, the quality of New Zealand's best university is similar to that of the median leading universities in the OECD but well behind the best. The performance score (100 = best) is awarded based on peer review from academics and graduate recruiters, staff to student ratio, research citations and a university's success in attracting international staff and students.

Figure 4.8 Science and engineering graduates per million population, 2003

Source OECD Education at a Glance, Table A3.5; Treasury Aremos database; MED calculations

→ Full size version of Figure 4.8 [165 kB JPG]

New Zealand has a high number of science graduates (4 out of 22) but a low number of engineering graduates (14 out of 22) as a proportion of the population, relative to the OECD average (6 out of 22 for total science and engineering graduates). 2003 is the most recent year for which data is available.

Figure 4.9 ⁷⁰Domestic bachelor's graduates by field of study, 1999 and 2005

Figure 4.9 Domestic bachelor's graduates by field of study, 1999 and 2005

Source Education Counts (Ministry of Education website)

→ Full size version of Figure 4.9 [107 kB JPG]

The pattern of domestic students graduating (excluding foreign students) by field of study has shown little absolute change between 1999 and 2005. "Creative arts" experienced the greatest percentage increase (37 per cent). "Agriculture, environment and related studies" experienced the greatest percentage decrease (52 per cent).

Figure 4.10 PhD graduates per million population, 2002

Source OECD Science, Technology and Industry Outlook 2006, Figure 3.5

→ Full size version of Figure 4.10 [140 kB JPG]

New Zealand has a low number of PhD students graduating as a proportion of the population, compared with other OECD countries (we are 18th out of 22 countries). The number of New Zealand science PhD graduates is slightly higher than the OECD average, but the number of engineering PhD graduates is much lower.

Figure 4.11 PISA scientific, mathematical and reading literacy of 15-year-olds, 2003

Source OECD, Learning for Tomorrow's World

→ Full size version of Figure 4.11 [151 kB JPG]

The performance of New Zealand's 15-yearolds is towards the top of the OECD in terms of scientific (we are 5th out of 23 countries), mathematics (8 out of 23) and reading (4 out of 23) literacy, according to PISA.

Figure 4.12 TIMSS science and mathematics achievement of eighth grader (equivalent to 13- to 14-year-olds in New Zealand)

Source IEA's TIMSS 2003 International Report on Achievement in Mathematics Cognitive Domains: Findings from a Development Project

→ Full size version of Figure 4.12 [152 kB JPG]

New Zealand's 13- to 14- year-olds' mathematics (we are 11th out of 12 countries) and science (8 out of 12) achievement is a little lower than in most European countries according to TIMSS.⁷¹

Figure 4.13 Percentage of school leavers with university entrance standard vs school leavers with little or no qualification

Source Education Counts (Ministry of Education website)

→ Full size version of Figure 4.13 [106 kB JPG]

The percentage of school leavers with little or no qualification has had a notable drop since (and probably associated with) the introduction of NCEA.⁷² There was also a significant increase in the percentage leaving school with university entrance standard.

Figure 4.14 Education enrolments at ages 15-20, 2004

Source OECD, Education at a Glance 2006, Table C1.3

→ Full size version of Figure 4.14 [106 kB JPG]

New Zealand has lower enrolment rates for 15- to 20-year-olds than the OECD average. This indicates that New Zealand students are more likely to leave school early and are less likely to be enrolled in tertiary education and training at ages 15–19.

4.2 Infrastructure

Key Points

Appropriate infrastructure has a positive effect on the economy as a whole by contributing to increasing productivity levels and maintaining New Zealand as an attractive country in which to do business.
The quality of much of New Zealand's infrastructure appears to be at or below the OECD average.
New Zealand's information and communications technology (ICT) infrastructure quality appears to be below that of most OECD countries, but recent improvements in certain areas (such as broadband subscriptions) are encouraging.
New Zealand's transport infrastructure quality appears to be slightly below the OECD average, but is equivalent to that of many countries with dispersed populations such as Norway, Finland and Australia.
The perceived quality of energy infrastructure is low in comparison with other key countries, but is improving.

Introduction

Infrastructure lies at the heart of economic and social development. It provides the foundation for virtually all modern-day activity, constitutes a major economic sector in its own right, and contributes significantly to raising living standards and quality of life.

The economic benefits of infrastructure have been the subject of debate for a number of decades. A broad consensus now exists that an appropriate level of public infrastructure has a positive productive effect on economies, in both the short and long term. Further, the evidence suggests that, over the long term, public investment in infrastructure encourages greater levels of private investment.⁷³

The quantity and quality of infrastructure affects the functioning of firms, and also the functioning of the wider economy, in a number of ways. Infrastructure investment can make it easier for labour and materials to get to where they are used, thereby increasing productivity. It can also allow new opportunities to emerge and it can facilitate urban agglomeration.

Appropriate infrastructure has a positive effect on the economy as a whole, particularly in terms of_increasing productivity levels and maintaining New Zealand as an attractive country in which to do business.

This chapter provides a picture of New Zealand's infrastructure, including its overall quality, transport infrastructure, ICT infrastructure, energy infrastructure and water usage.

In contrast to most of the other chapters in this report, many of the following infrastructure indicators are survey-based and reflect public perceptions of the adequacy of New Zealand's infrastructure. This reliance on survey-based data was unavoidable; it was not possible to find more consistent and objective quantitative measures of infrastructure quality in a number of key areas. However, survey-based findings should be interpreted with care. Especially in a small country such as New Zealand, public perceptions and attitudes may sometimes be at odds with the harder evidence that is available. For this reason, we have attempted to include more quantitative measures where possible.

4.2.1 Overall Performance

Overall, New Zealand is perceived to have lower-quality infrastructure than most high-income countries. We ranked 34th of the 125 countries included in the latest Global Competitiveness Report prepared by the World Economic Forum (WEF), below the majority of OECD countries. New Zealand respondents rated an inadequate supply of infrastructure as the second most problematic factor for doing business in New Zealand.

However, these survey-based findings contrast with OECD estimates of the levels of public capital stock per capita across a range of countries. On that measure, New Zealand ranks 5th of a selection of 21 OECD countries.

4.2.2 ICT

The perception-based data suggests that the quality of New Zealand's ICT infrastructure is below that of most high-income countries.

The harder data is mixed, but overall supports the conclusion that the quality of New Zealand's ICT infrastructure places us in the lower half of the OECD. New Zealand's overall levels of current investment in ICT appear to be above the OECD average. New Zealand's broadband subscription rate remains below the OECD average, but our recent growth in broadband subscription rates is higher than average. The statistics in this chapter do not refer to the quality or cost-effectiveness of broadband, and recently announced changes are expected to have a positive influence on these factors.

Mobile subscription rates are above the OECD average, although prepaid mobile costs are high by international standards.

4.2.3 Transport

Overall, New Zealand is considered to be around the middle of the OECD, in terms of perceived quality of road and port infrastructure. New Zealand cities are a little less congested than Australian cities (see Chapter 6 for more details on congestion). However, New Zealand compares favourably with developed nations with a similarly dispersed population profile. New Zealand has a large number of airports per capita. New Zealand does not appear to do well in terms of public transport infrastructure, although there is not a large amount of data to provide an objective ranking in this area (see Chapter 6 for more information).

4.2.4 Energy

Both the quality of energy infrastructure and the quality of the electricity supply are perceived to be lower than in most other OECD nations. It is not clear how well these perceptions reflect reality. A 2006 Forfas report indicates that New Zealand is in the upper half of the 12 OECD countries surveyed in terms of energy quality based on price, security of supply and access. In contrast, we ranked 19th out of 24 OECD countries on the perceptions based World Economic Forum Survey.⁷⁴ Energy prices in New Zealand have increased only slightly in real terms over the past 25 years - however, residential prices have increased significantly over the past five years, while commercial electricity prices have remained lower. Industrial energy prices are low, with only a slight increase observable over the past few years. Approximately 65 per cent of New Zealand's electricity production capacity is derived from renewable sources, placing New Zealand second in the OECD in terms of this ranking.

New Zealand's energy intensity measures the rates of energy supply to gross domestic product (GDP). It is relatively high compared with those of other nations. This is likely to reflect our mix of industries and geography.

4.2.5 Water

New Zealand does moderately well in this area. We are particularly well off in terms of the amount of water available for use, and are average in the general quality and accessibility of water infrastructure.

Figure 4.15 Perceived overall infrastructure quality, 2006

Source WEF Global Competitiveness Report 2006–2007, 2.01

→ Full size version of Figure 4.15 [99 kB JPG]

4.2.1 Overall Performance. The perceived overall quality of New Zealand's infrastructure is relatively low.

Figure 4.16 Public capital stock per person in thousands (USD), 2000

Source Forfas, Annual Competitiveness Report 2006

→ Full size version of Figure 4.16 [94 kB JPG]

New Zealand's level of public capital stock per person⁷⁵ is 5^th highest of 21 OECD nations.

Figure 4.17 ICT investment as a percentage of gross fixed capital formation, 1995 and 2003

Source OECD database on Capital Services, 2006

→ Full size version of Figure 4.17 [134 kB JPG]

4.2.2 ICT. New Zealand's level of ICT investment as a percentage of gross fixed capital formation has increased from 14.9 per cent in 1995 to 19.6 per cent in 2002 and places New Zealand in the upper half of the OECD (we are 7th out of 21 countries).

Figure 4.18 Broadband subscribers per hundred inhabitants, 2006

Source OECD Broadband Statistics 2006

→ Full size version of Figure 4.18 [150 kB JPG]

New Zealand's broadband subscription rates are lower than the OECD average (we are 20th out of 24 countries). DSL technologies are used to provide a higher proportion of broadband services in New Zealand than in most other OECD countries.

Figure 4.19 Percentage increase in broadband subscription rates, 2004-2006

Source OECD Broadband Statistics 2006

→ Full size version of Figure 4.19 [92 kB JPG]

New Zealand's broadband subscription rates trebled from 2004 to 2006. This growth rate is well above the OECD average (New Zealand is second out of 14 countries) and most other comparable nations.

Figure 4.20 Number of websites per thousand inhabitants, 2002

Source OECD Communications Outlook 2003; NationMaster 2007

→ Full size version of Figure 4.20 [83 kB JPG]

The number of websites per thousand inhabitants in New Zealand is ahead of other nations such as Australia, Finland and Ireland (we are 7th out of 12 countries). However it is significantly lower than in high-scoring countries such as Denmark. This statistic can be considered an innovation measure.

Figure 4.21 Mobile phone subscribers per hundred inhabitants, 2005

Source OECD ICT Indicators 2006

→ Full size version of Figure 4.21 [112 kB JPG]

The number of mobile phone subscribers in New Zealand is higher than the OECD average (we are 6th out of 24 countries). This measure includes mobile subscribers and people using prepaid cards.

Figure 4.22 Mobile telephone costs (prepaid), 2005

Source IMD Competitiveness Yearbook 2006, Table 4.2.05

→ Full size version of Figure 4.22 [90 kB JPG]

New Zealand's prepaid mobile costs (calculated at 2005 exchange rates) are higher than in many other nations (we are 21st out of 24 countries).

Figure 4.23 Perceived quality of telephone and fax infrastructure, 2006

Source WEF, Global Competitiveness Report 2006–2007, Table 2.08

→ Full size version of Figure 4.23 [114 kB JPG]

The perceived quality of telephone and fax infrastructure in New Zealand is slightly below that of other OECD nations (we are 18th out of 24 countries). New Zealand is of equal rank to countries such as Australia but slightly behind other countries in the OECD.

Figure 4.24 Perceived quality of air transportation, 2006

Source IMD Competitiveness Yearbook 2006, Table 4.1.11

→ Full size version of Figure 4.24 [107 kB JPG]

4.2.3 Transport. The perceived quality of air transportation is similar to the OECD average (New Zealand is 12th out of 24 countries). This indicator is based on business surveys asking whether the quality of air transportation deters or encourages business development.

Figure 4.25 Perceived quality of port infrastructure, 2006

Source Global Competitiveness Report, WEF, 2006–2007, Table 2.03

→ Full size version of Figure 4.25 [106 kB JPG]

New Zealand's perceived quality of port infrastructure is similar to the average in OECD countries surveyed (we are 13th out of 24 countries). This indicator is based on an international survey asking people their perceptions of the quality of port infrastructure.

Figure 4.26 Airports per million people, 2006

Source NationMaster Statistics, online at Nation Master [link to external website].

→ Full size version of Figure 4.26 [79 kB JPG]

New Zealand has the second-highest number of airports per million population out of a selection of countries and the third-highest in the OECD. This is ahead of countries with similarly dispersed populations such as Finland and Norway.

Figure 4.27 Perceived quality of energy infrastructure, 2006

Source IMD Competitiveness Yearbook 2006, Table 4.1.15

→ Full size version of Figure 4.27 [112 kB JPG]

4.2.4 Energy. New Zealand is ranked below other OECD nations in terms of the perceived quality and reliability of energy infrastructure. Although New Zealand is approximately level with Ireland and the UK, we rank below other comparable nations (New Zealand is 23rd out of 24 countries).

Figure 4.28 Electricity prices in New Zealand (2006 prices)

Source New Zealand Energy Data File 2007, available online at the MED website.

→ Full size version of Figure 4.28 [116 kB JPG]

Over the past 15 years, real residential electricity prices have increased and commercial prices have decreased, but average real prices have not changed significantly.⁷⁶

Figure 4.29 Energy intensity, 2004

Source OECD in Figures, 2006/07

→ Full size version of Figure 4.29 [78 kB JPG]

New Zealand is above most comparator nations in terms of energy intensity (we are 12th out of 13 countries). This is likely to reflect our mix of industries and geography. Our energy intensity compares favourably with other countries with a similarly dispersed population such as Canada and Finland. Energy intensity is the total primary energy supply divided by GDP.

Figure 4.30 Renewable electricity as a percentage of total electricity production, 2004

Source International Energy Agency, Renewables Information 2007

→ Full size version of Figure 4.30 [101 kB JPG]

New Zealand is ranked 2nd in terms of renewable electricity production, with approximately 65 per cent of New Zealand's electricity capacity coming from renewable sources. This is based on a sample of 13 OECD nations.

Figure 4.31 Public waste water plants (percentage of population connected), 2005

Source OECD in Figures, 2006/07

→ Full size version of Figure 4.31 [97 kB JPG]

4.2.5 Water. New Zealand is in the mid-range (we are 9th out of 23 countries) in terms of public waste water connections, with 80 per cent of households connected to waste water plants.

Figure 4.32 Water withdrawal as a percentage of gross annual availability, 2005

Source OECD in Figures, 2006/07

→ Full size version of Figure 4.32 [85 kB JPG]

New Zealand ranks ahead of most countries in terms of water withdrawal capacity (we are 4th out of 23 countries), with our percentage of withdrawal below 3 per cent. This figure shows the amount of water used as a percentage of gross annual availability (an estimate of all usable water).

4.3 Tax and Regulation

Key Points

New Zealand's tax and regulatory settings influence the incentives for businesses and workers to locate or undertake additional economic activity in New Zealand.
New Zealand is second in the world for overall ease of doing business. However, there is scope for further improvement in certain sub-indicators, particularly: ease of employing workers; ease of enforcing contracts; ease of closing a business; and ease of dealing with licences.
New Zealand's competition and employment regulations are very efficient by OECD standards (within the top seven).
New Zealand's total tax burden, measured by our tax to GDP ratio (35 per cent), is around the OECD median.
The share of total taxes collected from personal and corporate income in New Zealand is high by OECD standards because New Zealand does not have a social security tax on wages and salaries, which is common in OECD countries. As a result, our tax on wages and salaries (including social security taxes and parts of income tax) is relatively low, whereas our tax on income from capital (taxes on corporate profits, interest, etc) is relatively high by OECD standards.
New Zealand's corporate tax rate is similar to rates in Australia and the UK, but high relative to some small economies (particularly Singapore, Ireland and Chile).
Across the working population, New Zealand's average tax wedge on personal income is relatively low compared with other OECD countries, even when the combined effect of income tax and GST is taken into account. However, there is variation in incentives to work more.
New Zealand's tax law is very easy to comply with.

Introduction

New Zealand's tax and regulatory settings influence the incentives for businesses and workers to locate or undertake additional economic activity in New Zealand. It is important for New Zealand to maintain internationally competitive tax and regulatory policies in order to attract and encourage globally competitive firms and skilled workers.

Regulation matters for productivity and growth because it directly affects how markets, and the firms in those markets, operate and allocate resources. Regulation provides a framework for the effective operation of markets and constrains anti-competitive practices. Regulation is also used to encourage innovation, to achieve public health and safety objectives, and to secure desirable social and environmental outcomes. Poor-quality regulation can constrain growth by creating incentives for socially unproductive activities and by increasing the costs of doing business.

The fundamental purpose of taxation is to finance government expenditure. Beyond this primary purpose, modern tax systems should be designed to promote economic growth and to be equitable⁷⁷ and simple.⁷⁸

The revenue requirements of the tax system will be determined, to varying extents, by the government's service and income-redistribution objectives. Because taxes and regulations are imposed for specific reasons, there is no ideal amount of taxation. Likewise, because regulation (either through statute or through common law) is necessary to a modern economy, less regulation is not necessarily better.⁷⁹ Rather, both should be appropriate to the social and economic objectives of the country. The challenge then is to make sure that the taxation and regulation that is in place is as effective as possible.

4.3.1 Ease of Doing Business

Well-designed business regulation should aim to improve the functioning of markets and promote other objectives, while imposing the least possible compliance costs on firms. The World Bank measures the quality of regulation through its ease of doing business index, which averages each country's percentile rankings on 10 topics. This index provides an overall indicator of the relative quality of regulation.

According to the World Bank index, New Zealand has a very business-friendly regulatory environment. We perform well overall, and in a number of specific areas, although other countries do better on some indicators.

4.3.2 Quality of Product Market and Competition Regulation

Good regulation is important to promoting innovation.

The OECD's product market regulation index measures the degree to which regulation promotes or inhibits competition in product markets. It is a composite index comprising the degree of state ownership and control, barriers to entrepreneurship, and barriers to trade and investment. In 2003, New Zealand's performance on this index was among the highest in the OECD.

One component of the product market regulation index measures barriers to competition, which itself is a composite index made up of legal barriers and antitrust exemptions. New Zealand was 7th lowest in the OECD in terms of barriers to competition in 2003.

4.3.3 Quality of Employment Regulation

Effective labour markets are essential for achieving higher sustainable growth and low unemployment, and for ensuring that the benefits of growth are shared as widely as possible.

The efficiency of employment regulation is evaluated by the World Bank in its rigidity of employment index. This is a composite index that looks at the difficulty of hiring, dismissal and changing hours worked. New Zealand is the 5th lowest (most efficient) in the OECD on this index. Although it is marginally easier to hire workers in Australia than in New Zealand, both countries are similar in terms of the ease of dismissing workers.

The number of days lost to strikes, or work stoppages, per thousand employees can be used as a rough indicator of labour market relations. Strike figures are difficult to interpret as they are very sensitive to isolated large-scale strikes, even when averaged over five years. Nevertheless, New Zealand's strike figures appear to be close to the OECD median, and quarterly information collected by Statistics New Zealand shows work stoppages trending down over the past 15 or so years, and stabilising.

4.3.4 Total Tax Burden

Tax revenue as a percentage of GDP is a measure of New Zealand's overall tax burden relative to other countries and across time. New Zealand's tax to GDP ratio (35 per cent) is close to the OECD average.

4.3.5 Tax Structure

The structure of tax revenue and how it is spent are important to economic performance. While the evidence is mixed, in New Zealand, it seems likely that taxes on income from capital (tax on corporate profits, interest, etc) tend to be more detrimental to growth than (in order of decreasing impact on growth) taxes on wages and salaries, consumption, wealth and land.⁸⁰

In 2004, of New Zealand's tax revenue:

16.8 per cent was collected from corporate income tax (a tax on income from capital), compared with an unweighted OECD average of 9.6 per cent;
44.4 per cent was collected from personal income tax⁸¹ (which taxes both wages and salaries, and income from capital), compared with an unweighted OECD average of 24.6 per cent; and
none was collected from social security taxes (a tax on wages and salaries), compared with an unweighted OECD average of 25.9 per cent.

New Zealand's share of revenue from consumption taxes, including goods and services tax (GST), is around the OECD average. However, in New Zealand, a higher proportion of consumption taxes are raised from GST compared with other OECD countries: New Zealand collects 25 per cent of total revenue from GST, compared with the OECD average of 19.1 per cent. GST's comprehensive coverage makes it an efficient way to raise revenue without distorting saving decisions.

New Zealand's current corporate tax rate (33 per cent) is 4.6 percentage points above the OECD average, and below the United States' rate but above that of other small economies such as Denmark (28 per cent), Finland (26 per cent) and Ireland (12.5 per cent). A recently announced three percentage point reduction should bring New Zealand more in line with Australia and the UK from April 2008.

Even after accounting for GST, the average tax wedge on wages and salaries is moderate. However, the effective tax rate can be high for some workers because income from Working for Families tax credits can decline when wage income increases.⁸²

New Zealand tax law is easy to comply with. PricewaterhouseCoopers⁸³ rates New Zealand 10th in the world and 3rd in the OECD in terms of ease of paying taxes. For corporate and consumption taxes, we have the 2nd equal least time required to comply.

4.3.6 Environmentally Related Taxes

Environmentally related taxes are one way of making polluters pay for the negative externalities (costs to third parties) caused by pollution or other negative environmental impacts. New Zealand has relatively low taxes on pollution compared with other OECD countries. In addition to addressing environmental concerns, environmental taxes raise revenue that can be used to reduce other taxes. However, environmental concerns can also be effectively addressed by other policy approaches, such as tradable permit schemes. New Zealand plans to introduce a comprehensive greenhouse gas emissions trading scheme from 2008.

Figure 4.33 Ease of doing business index (lower = better) 2007

Source World Bank, 2007, Ease of Doing Business 2007 [176 kB XLS].

→ Full size version of Figure 4.33 [134 kB JPG]

4.3.1 Ease of Doing Business. New Zealand is a close second to Singapore in the World Bank ease of doing business index.

Figure 4.34 Ease of doing business index, (lower = better) 10-category breakdown, 2007

Source World Bank, 2007, Ease of Doing Business 2007 [176 kB XLS].

→ Full size version of Figure 4.34 [130 kB JPG]

Of the 10 subcategories of the World Bank's ease of doing business index, New Zealand was a top performer in four: ease of starting a business, ease of registering property, ease of getting credit and strength of protecting investors. We are around 10th on the remaining six sub-categories.

Figure 4.35 Product market regulation and competition index,⁸⁴ 1998 and 2003

Figure 4.35 Product market regulation and competition index, 1998 and 2003

Source Conway, P., V. Janod and G. Nicoletti, Product Market Regulation in OECD Countries, 1998 to 2003, 2005, OECD Economics Department Working Paper No 419

→ Full size version of Figure 4.35 [152 kB JPG]

4.3.2 Quality of Product Market and Competition Regulation. New Zealand's product market regulation is among the most favourable in the OECD for promoting competition (we are 7th out of 24 countries). However, Denmark, Iceland and Ireland have improved more rapidly and now have better regulation than we do.

Figure 4.36 Barriers to competition index,⁸⁵ 1998 and 2003

Figure 4.36 Barriers to competition index, 1998 and 2003

Source Conway, P., V. Janod and G. Nicoletti, Product Market Regulation in OECD Countries, 1998 to 2003, 2005, OECD Economics Department Working Paper No 419

→ Full size version of Figure 4.36 [126 kB JPG]

New Zealand has the 7th lowest regulatory/ legal barriers to competition in the OECD. In 1998, New Zealand achieved 2nd place.

Figure 4.37 World Bank rigidity of employment index,⁸⁶ 2006

Figure 4.37 World Bank rigidity of employment index, 2006

Source World Bank, 2007, Doing Business website.

→ Full size version of Figure 4.37 [125 kB JPG]

4.3.3 Quality of Employment Regulation. The World Bank considers New Zealand's employment regulation to be very flexible by world standards (we are 4th out of 23 countries). Australia has dramatically reduced its rigidity of employment index since 2003 and is now more flexible than New Zealand.

Figure 4.38 Days lost to strikes per thousand employees

Source Hale, Dominic, 2007, "International Comparisons of Labour Disputes in 2005," Economic & Labour Market Review, Vol 1, No 4, April 2007

→ Full size version of Figure 4.38 [110 kB JPG]

New Zealand's strike figures are below the OECD average (New Zealand is 9th out of 21 countries) and close to the OECD median. Days lost to strikes per thousand employees is a rough indicator of labour market relations and the quality of labour market regulation.

Figure 4.39 Central and local government tax revenue as a percentage of GDP, 2004⁸⁷

Source OECD Revenue Statistics 2006, Table A

→ Full size version of Figure 4.39 [168 kB JPG]

4.3.4 Total Tax Burden. New Zealand's total (central plus local government) tax to GDP ratio (35 per cent) is on the OECD median (we are 12th out of 24 countries). The Nordic countries have the highest ratios.

Figure 4.40 Central government tax revenue as a percentage of GDP, New Zealand, 1995-2007

Source NZ Treasury Tax Outrun Data Revenue; RBNZ Nominal GDP historical series

→ Full size version of Figure 4.40 [118 kB JPG]

New Zealand's central government tax to GDP ratio dipped from nearly 35 per cent in 1995/96 to slightly under 31 per cent in 1999/2000 before returning to 35 per cent in 2006/07. The increases since 2001 have come primarily from higher corporate tax revenues, resulting from increased business profitability.

Figure 4.41 Breakdown of tax revenue by source, 2004

Source OECD Revenue Statistics 2006, Table 7

→ Full size version of Figure 4.41 [149 kB JPG]

4.3.5 Tax Structure. New Zealand, Australia and Denmark have high proportions of tax revenue from labour and corporate income (around 60 per cent) compared with the rest of the OECD (average of 34.2 per cent). New Zealand and Australia are the only countries in the OECD without social security taxes.

Figure 4.42 corporate tax rates (total central and local), 2000-2006

Source OECD Tax Database, combined central and sub-central corporate income tax rate

→ Full size version of Figure 4.42 [102 kB JPG]

New Zealand's current corporate tax rate is 4.6 per cent above the OECD average (we are 22nd out of 30 countries). A recently announced 3 per cent reduction should bring New Zealand into line with Australia and the UK from April 2008.

Figure 4.43 Effective marginal tax rates on individuals, single income earner, New Zealand, 2008

Source IRD. Includes: Tax ACC earner premium, Working for Families tax credit. Excludes: accommodation supplement, welfare benefits. Assumes: single earner family, any children are aged under 13

→ Full size version of Figure 4.43 [108 kB JPG]

Workers with children face higher marginal effective tax rates. This occurs because Working for Families tax credits decline with increases in wage income.

Figure 4.44 Revenue from environmental taxes for pollution control as a percentage of GDP

Source Consumption Tax – Trends VAT/GST and excise rates, trends and administration issues

→ Full size version of Figure 4.44 [169 kB JPG]

4.3.6 Environmentally Related Taxes. New Zealand has relatively low taxes on pollution compared with other OECD countries.

4.4 Macroeconomic Foundations

Key Points

GDP growth rate volatility has decreased since the 1980s and early 1990s, but is higher for New Zealand than for comparator countries.
While inflation is still within the target band, it has increased since 2003.
New Zealand's high government surpluses compensate to some extent for low savings elsewhere in the economy and provide a buffer against shocks.
New Zealand's real long-term interest rate has been reducing along with global interest rates since the early 1990s, but is higher and more volatile than in most of the benchmark economies.
New Zealand's terms of trade have increased since 2003, increasing national income.
New Zealand's current account deficit and level of external liabilities have increased since the 1980s and are larger than in all of our comparator economies.
New Zealand's real effective exchange rate has been more volatile than that of comparator countries.

Introduction

Policies that ensure stable and sustainable macroeconomic conditions are important for economic growth.⁸⁸ Macroeconomic instability creates uncertainty for businesses and households, and can make long-term planning difficult, with adverse impacts on investment, savings and labour productivity. Conversely, well-designed fiscal and monetary policies can facilitate growth by reducing uncertainty, lowering interest rates and improving resilience to shocks.

Macroeconomic stability can be measured by the degree of peak-to-trough cyclicality in key macroeconomic variables, such as GDP growth, inflation, interest rates and the exchange rate.⁸⁹ Sustainability is often associated with the levels of certain macroeconomic variables, such as spending, external indebtedness and current account deficits, and whether these levels can persist without inhibiting long-term growth.

4.4.1 GDP Growth Volatility

Volatility in GDP growth (fluctuations in GDP growth rates) may increase investor uncertainty, with negative consequences for the trend growth in GDP per capita. Furthermore, under volatile conditions, job turnover tends to be higher, reducing the opportunity for workers to accumulate skills and knowledge on the job.

Volatility can be approximated by the standard deviation of average GDP growth. Since the 1980s, GDP growth volatility has decreased for New Zealand as well as for the OECD overall. We still remain higher by comparison. This is likely to reflect the fact that, in comparison with the many larger economies in the OECD, New Zealand is a small, open, commodity-exporting economy.

4.4.2 Inflation and Inflation Volatility

Inflation is commonly measured by the annual percentage change in the consumer price index (CPI). Low and stable inflation means consumers and producers can depend on prices to reflect economic value, and so reduce uncertainty in the economy. By improving the environment for private sector decisions, low and stable inflation may also result in higher and more stable output growth. In recent years, most OECD countries have achieved low inflation, and New Zealand is no exception. While inflation has increased since 2003, it still falls within the pack of benchmark economies and within New Zealand's target band. The reduction in the inflation rate has coincided with reduced inflation volatility. New Zealand's inflation volatility is now less than the OECD median, a considerable improvement on that seen in the 1980s.

Given the recent boom in the housing market, an index of house prices is also a useful indicator of inflation in this sector of the economy. The Economist has surveyed house price changes in 20 economies. New Zealand house prices have increased by a smaller percentage than the survey average, from 1997 to 2006, although this may be in part a reflection of the period chosen.

4.4.3 Fiscal Aggregates

General government spending in New Zealand has decreased since the late 1980s. As a percentage of GDP it now lies at 38.3 per cent, less than the OECD average of 40.8 per cent.⁹⁰ Government spending can have a positive effect on economic growth by, for example, increasing infrastructure and providing education. However, high levels of spending may also reduce private sector investment and overall productivity levels. Spending must normally be financed by taxation and borrowing, which can also affect private sector investment and labour supply.

The fiscal balance represents the difference between government current spending and revenue. In recent years, New Zealand has experienced higher financial surpluses⁹¹ than the benchmark OECD economies and the OECD median. It lies at 4.4 per cent of GDP, larger than those of all the benchmark economies except for Denmark. This provides a substantial buffer against shocks, and offsets low saving elsewhere in New Zealand.

4.4.4 Interest and Exchange Rates

Investment and trade are sensitive to interest and exchange rate movements. While these movements help an economy to adjust to economic shocks, excessive exchange rate and interest rate volatility may reduce domestic activity and international trade.

New Zealand's real long-term interest rate is high but has been reducing with global interest rates since the early 1990s. However it remains higher than the OECD median, and more volatile. Furthermore, both the level and volatility of our real effective exchange rate have increased since the mid-1980s. Because the real effective exchange rate⁹² affects the foreign competitiveness of domestic products, this results in a fall in the competitiveness of New Zealand's exports and import substitutes.

4.4.5 Terms of Trade

New Zealand's terms of trade have recently increased. An increase in the terms of trade means the price of exports has risen relative to the price of imports, which raises national income. Less volatile terms of trade also enhance economic growth through lowering transaction costs and facilitating more efficient planning decisions. Australia's terms of trade have increased dramatically in recent years.

4.4.6 Overall External Position

New Zealand's level of external liabilities has increased since the 1980s. A current account deficit arises when a country spends more than it earns, or (equivalently) when it invests more than it saves. This difference needs to be financed by a net inflow of capital. New Zealand's current account deficit increased between mid-2001 and 2005, giving us the largest deficit of the benchmark economies used in this study. In part, this reflects the recent relatively strong economic cycle.

The current account can be broken down into two components: the goods and services balance and the investment income balance. New Zealand's current account deficit is the result of a large persistent deficit in net investment income, together with a deficit in goods and services.

The level of net external liabilities (net equities held by foreigners and debt owed to foreigners) is the stock resulting from previous current account deficits. New Zealand's large net liability position reflects the fact that New Zealand has been running current account deficits over many years. As a percentage of GDP, this stock is greater than each of the benchmark economies, positioning us at the bottom end of the OECD.

Table 1 Summary of key macroeconomic indicators

Source OECD Factbook 2007; OECD, Main Economic Indicators

→ Full size version of Table 1 [236 kB JPG]

New Zealand's real GDP growth, inflation rate and real interest rates have been similar to the OECD median over the past 10 years. In contrast, the volatility of the real exchange rate and the size of the current account deficit have been much larger than the OECD median.

Figure 4.45 Real GDP growth

Source OECD Factbook 2007

→ Full size version of Figure 4.45 [183 kB JPG]

4.4.1 GDP Growth Volatility. Real GDP growth has been more volatile for New Zealand than for comparator countries from 1981 to 2005. However, volatility is not so great as it was in the 1980s and early 1990s. Average GDP growth is similar to that of benchmark OECD economies.

Figure 4.46 Inflation rate (growth rate in CPI)

Source OECD Factbook 2007

→ Full size version of Figure 4.46 [150 kB JPG]

4.4.2 Inflation and Inflation Volatility. In recent years, New Zealand and most OECD countries have achieved low inflation. Furthermore, inflation volatility has reduced considerably in New Zealand and in benchmark economies.

Figure 4.47 National house price index change, 1997-2006

Source Economist 7 December 2006, The Economist [link to external website].

→ Full size version of Figure 4.47 [149 kB JPG]

In an Economist survey of national house price changes between 1997 and 2006, New Zealand ranked slightly below average for the group of 16 OECD economies.⁹³

Figure 4.48 General government total outlays as a percentage of GDP

Source OECD Economic Outlook 81 database

→ Full size version of Figure 4.48 [130 kB JPG]

4.4.3 Fiscal Aggregates. New Zealand has a similar level of government spending as a percentage of GDP to most OECD countries.

Figure 4.49 General government financial balance as a percentage of GDP

Source OECD Economic Outlook 81 database

→ Full size version of Figure 4.49 [161 kB JPG]

New Zealand has run higher financial surpluses than the benchmark economies and the OECD average since 2001. High surpluses contribute to economic resilience and national savings.

Figure 4.50 Real interest rate (10-year annual government bond yield less inflation rate)

Source OECD Financial Indicators, Main Economic Indicators 2007

→ Full size version of Figure 4.50 [169 kB JPG]

4.4.4 Interest and Exchange Rates. Between 1990 and 2005, New Zealand's real interest rate declined as it has in the benchmark economies, but it is still relatively high.

Figure 4.51 Real effective exchange rate

Source OECD Financial Indicators, Main Economic Indicators 2007

→ Full size version of Figure 4.51 [137 kB JPG]

New Zealand's real effective exchange rate has been more volatile than for comparator countries and has been increasing since late 2001, resulting in a fall in the competitiveness of our economy's exports since then.

Figure 4.52 Terms of trade

Source Statistics New Zealand; Reserve Bank of Australia: Bulletin, Table G04

→ Full size version of Figure 4.52 [86 kB JPG]

4.4.5 Terms of Trade. New Zealand's terms of trade have increased in recent years, reflecting an increase in export prices relative to the price of imports. Australia has experienced a far greater increase since 2003. Since 2006, New Zealand's terms of trade have also increased.

Figure 4.53 Current account balance as a percentage of GDP

Source OECD Factbook 2007

→ Full size version of Figure 4.53 [145 kB JPG]

4.4.6 Overall External Position. New Zealand's current account deficit (the difference between saving and investment) is larger than that of all of the benchmark economies, and has widened recently.

Figure 4.54 Net external liability, 2006

* Using the latest data available given data in year 2005 are unavailable

Source IMF

→ Full size version of Figure 4.54 [70 kB JPG]

New Zealand's net external liabilities are among the highest in the OECD.

⁵³ The discussion focuses on educational attainment. This reflects the relatively good availability of statistics in this area, compared with other equally important aspects of human capital (such as management capability).

⁵⁴ For example, Porter, M. and C. Ketels, The skills and productivity challenge: A summary of the evidence base for the SSDA's strategic plan 2003-2006, 2003, United Kingdom.

⁵⁵ For more detailed information on New Zealand management capability, see Statistics New Zealand's Business Practices Survey. Available online at the Statistics New Zeland website.

⁵⁶ For example, see The Connection between Literacy and Work: Implication for Social Assistance Recipients, Human Resources and Social Development Canada.

⁵⁷ The adult literacy and numeracy statistics here came from the IALS' Literacy in Information Age published in 2000. A new survey was conducted in 2006, and its preliminary results are to be published in January 2008.

⁵⁸ Prose literacy, according to the IALS definition, measures "the knowledge and skills needed to understand and use information from text". Document literacy refers to "the knowledge and skills required to locate and use information contained in various forms such as timetables, graphs, charts, and forms". Quantitative literacy measures "the knowledge and skills required to apply arithmetic operations, either alone or sequentially, to numbers embedded in printed materials, such as calculating savings from a sale advertisement or working out the interest required to achieve a desired return on an investment".

⁵⁹ IMD World Competitiveness Yearbook 2006, Figure 3.2.09.

⁶⁰ This high rate is in part due to the number of mature students.

⁶¹ Data from the Ministry of Education indicates that New Zealand's performance on TIMSS and PISA measures has been steady.

⁶² Retention of Students in Senior Secondary Schools by the Ministry of Education. Avaialble online at the Education Counts website.

⁶³ School leavers with no qualification statistics, Ministry of Education, New Zealand. Available online at the Education Counts website.

⁶⁴ Short-term and vocational qualifications are excluded. Also excluded are people with postgraduate degrees, for whom internationally comparable data is not available. 2001 figures also include advanced degrees.

⁶⁵ These figures are based on highest qualifications, so they do not count the number of other tertiary qualifications held in addition to degrees and postgraduate qualifications.

⁶⁶ International Adult Literacy Surveys (IALS) are only undertaken periodically, and results for the new Adult Literacy and Life Skills (ALL) Survey 2006 will not be available until after the publication of this report. The Ministry of Education will be publishing in January 2008 the results of New Zealand's performance in the 2006 survey.

⁶⁷ Prose literacy, according to the IALS definition, measures "the knowledge and skills needed to understand and use information from text". Document literacy refers to "the knowledge and skills required to locate and use information contained in various forms such as timetables, graphs, charts, and forms". Quantitative literacy measures "the knowledge and skills required to apply arithmetic operations, either alone or sequentially, to numbers embedded in printed materials, such as calculating savings from a sale advertisement or working out the interest required to achieve a desired return on an investment".

⁶⁸ This high rate is in part due to the number of mature students, who are counted even though they do not form part of the "age group normally completing university degrees".

⁶⁹ There are concerns about the validity of this ranking, reflecting the difficulties in comparing universities across countries. See Van Raan, A., Challenges in Ranking of Universities, 2005, [201 kB PDF].

⁷⁰ There are differences in the way graduates are allocated to subject classifications between Figures 4.8 and 4.9.

⁷¹ We cannot fully ascertain the difference in results between TIMSS and PISA. One suggested explanation is that the two studies target different population groups. TIMSS targets 8th graders, or Year 9 equivalent in New Zealand (13- to 14-year-olds), whereas PISA looks at 15-year-olds regardless of grade/year level. TIMSS's assessment also focuses on curriculum-related tasks, while PISA is more literacy-based. For more details about the differences between TIMSS and PISA, see D. Hutchison and I. Schagen's presentation "Comparisons Between PISA and TIMSS - Are We the Man with Two Watches". Comparisons Between PISA and TIMSS –Are We the Man with Two Watches? [289 kB PDF].

⁷² National Certificate of Educational Achievement.

⁷³ Refer to the MED paper Linkage between Infrastructure and Economic Growth, 2003, available on the MED website.

⁷⁴ Forfas Electricity Benchmarking Analysis 2006 [link to external website]. We have been unable to verify the integrity of the statistic. New Zealand scored 4.8 out of a possible rank of 7, for the perceived overall quality of our infrastructure under a recent World Economic Forum (WEF) survey. This rank was lower than that of the majority of OECD countries. The OECD ranking was 19 out of 24.

⁷⁵ This includes most forms of public (government) infrastructure, such as transportation systems, water treatment plants, schools, fire stations, police buildings and courthouses.

⁷⁶ The International Energy Agency (IEA) monitors electricity prices for OECD countries. In 2006, industrial energy prices for New Zealand were in the cheapest quartile among the 17 OECD countries that provided comparable data, while residential electricity prices were in the cheaper half.

⁷⁷ Social preferences for equity can influence the design of the tax system by, for example, shaping the progressiveness of the personal income tax system, or the relative importance of different tax bases.

⁷⁸ Simplicity is an important principle in tax design because it tends to make tax compliance cheaper and easier.

⁷⁹ McMillan, J., Reinventing the Bazaar, 2002, and North, D. C., Understanding the Process of Economic Change, 2005.

⁸⁰ For a fuller discussion, see Grimes, A., Economic Growth and the Size and Structure of Government: Implications for New Zealand, 2003, Motu Working Paper #03-10. Of course other considerations, such as promoting equity, are also important in designing taxes.

⁸¹ Around 44 per cent of total personal income tax collected in New Zealand comes from only 9 per cent of taxpayers who earn NZ$70,000 or above per annum. In Australia, according to 2004/05 figures, 12.1 per cent of taxpayers earned AU$70,000 or above per annum and contributed to 46.8 per cent of total income tax collected. See Australia Government Budget website and the New Zealand Treasury website.

⁸² Effective marginal tax rates on individuals measure the percentage of a $1 increase in income that is lost to income tax and income tests on government payments and services.

⁸³ PricewaterhouseCoopers Paying Taxes - The Global Picture, available online at the International Finance Corporation website.

⁸⁴ The degree to which product market regulation promotes competition is measured using a composite index comprising the degree of state ownership and control (29 per cent), barriers to entrepreneurship (31 per cent) and barriers to trade and investment (41 per cent).

⁸⁵ This is a composite index made up of legal barriers (30 per cent) and antitrust exemptions (70 per cent).

⁸⁶ The World Bank measures rigidity of employment using a composite index of the difficulty of hiring, of dismissal and of changing hours worked.

⁸⁷ The recently published provisional estimates showed that total tax to GDP ratio was 36.6 per cent in New Zealand in 2005, 14th highest of the 24 countries measured. See the OECD's Revenue Statistics - Special Feature: Taxes Paid on Social Transfer 1965-2005.

⁸⁸ The proceedings of a recent macroeconomic policy forum held by The Treasury and the Reserve Bank of New Zealand (Buckle, B. and A. Drew (eds), Testing stabilisation limits in a small open economy, 2006, Treasury and RBNZ) are a good source of further reading on New Zealand's macroeconomic policy framework.

⁸⁹ In Table 1 on page 94 and elsewhere, we have used the annual standard deviation as a proxy for this peak to trough cyclicality. We use the term "volatility" to describe the peak to trough cyclicality in what follows.

⁹⁰ Measures of government spending must be interpreted with care. As well as taking into account all levels of government, size of government comparisons need to take account of structural differences, such as compulsory private retirement schemes, rather than the public provision of pensions funded from general taxation.

⁹¹ The financial balance includes the operating balance and net investment expenditures, whereas the fiscal balance reported in the Crown accounts and budget documents is simply the operating balance. Thus, the financial balance presented here for New Zealand will be less positive than the headline fiscal balances.

⁹² The nominal effective exchange rate (NEER) is a weighted average of major bilateral nominal exchange rates, with weights based on the trade shares, reflecting the relative importance of each currency in the effective exchange rate basket. The real effective exchange rate is obtained by adjusting the NEER for inflation differentials between the countries whose currencies are included in the basket.

⁹³ The Economist survey comprised 20 economies. South Africa, Singapore, China and Hong Kong were not included in the average shown in the diagram above.

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Printed: 24/11/2009