NZ has scope to accelerate infrastructure spending to close gap sooner, IMF says

Wednesday 4th July 2018

New Zealand's government has a strong enough balance sheet to close the nation's infrastructure deficit sooner, which the International Monetary Fund says would generate long-term economic gains.

The global body of 189 member countries, set up to foster international monetary cooperation, gave local policymakers a pass mark, saying "prudent macroeconomic policies" led to solid economic growth with a favourable outlook, albeit with some risks on the horizon. The formal report on New Zealand, known as an Article IV Consultation, followed a visit by IMF officials earlier this year where they noted the Crown's balance sheet was strong enough to increase capital spending if a bigger tax-take than anticipated proved to be structural.

Today, IMF executive directors "encouraged using stronger structural revenues to increase spending on infrastructure, human capital development, and other public services that would raise potential output" and that the strong fiscal discipline meant there was no need to repay debt faster than planned.

New Zealand's capital spending programme warranted a separate report by the international body, which noted "it is not clear from a long-term perspective if all of New Zealand infrastructure needs will be met", with an Oxford Economics' report estimating New Zealand's infrastructure investment gap was about 0.3 percent of gross domestic product per year. If that was closed, IMF officials estimate New Zealand's long-term real GDP could gain by between 0.65 percentage points and 0.8 percentage points.

"Closing the gap has quantifiable benefits, not just because it is a short-term stimulus to aggregate demand, but because of longer-lived effects on productivity, benefiting all sectors of the economy," the report said. New Zealand has boosted infrastructure spending in recent years, and "there is scope to expand if further to reduce its (admittedly small, but probably understated) infrastructure gap to match other advanced economies, and possibly help with regional development concerns."

The IMF report said funding that spending through deficits provides greater economic gains than raising consumption or income taxes, which limits consumer spending power. It also recommends using public private partnerships as a means to tap private sector expertise in improving the quality of infrastructure.

Areas ripe for investment include rail, electricity, and three waters infrastructure, alongside greater regional investment where economic gains are potentially greater.

Finance Minister Grant Robertson noted the IMF's comments on infrastructure gap, despite the increased spending.

"Since the IMF’s report was finalised, we have announced a record ten-year nationwide transport infrastructure investment through the government policy statement on land transport, with a $4 billion spend this year up from $3.6 billion last year and rising to $4.7 billion in 10 years’ time," Robertson said. "We are also continuing our work to develop innovative financing mechanisms for new infrastructure like roads and housing."

The IMF also acknowledged the government's policy agenda to support productive, sustainable and inclusive growth as a means to stoke greater productivity, something the international agency noted had remained a struggle with low per capita income or GDP growth.

The report said the hike in minimum wage will have minimal impact on the labour market in the current strong growth environment, although they might be larger in a downturn, and recommended greater needs-based targeting in the government's cornerstone fees free tertiary education policy.

The IMF said the research and development tax credit may be "an efficient instrument to support R&D spending in the business sector" and that tax reform of residential real estate could encourage greater corporate investment and productivity in general.

It also said the $1 billion provincial growth fund should help regions benefit from income gains in line with urban centres, and could potentially be "an appropriate tool to relieve pressures on the major urban areas by encouraging movement of populations into the regions."

(BusinessDesk)

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