NZ may be better off breaking up some big businesses: OECD
Monday, 6 May 2024
Big businesses, including the country’s supermarket duopoly, may need to be broken up to improve competition and boost the country’ lagging productivity, the Organisation for Economic Co-operation and Development has advised.
Its latest study, released on Monday, forecasts economic growth and Kiwis incomes would begin to pick-up next year, after a slow-down this year, as long as there weren’t any major shocks such as an extended slowdown in China or worsening wars overseas.
But it joined the Treasury in sounding the alarm over the country’s declining productivity growth, which it said remained weak compared to other members of the OECD.
The Paris-based body, whose membership comprises 38 of the world’s most-developed nations, publishes a report on the New Zealand economy once every two years.
The Treasury warned last week it might need to review its assumptions about future productivity growth after noting that had fallen from 1.4% annually between 1993 and 2013 to average only 0.2% over the last 10 years.
The OECD has previously suggested tougher competition policy could help the country get on a better track, but appeared to significantly up its rhetoric on Monday.
“Productivity remains substantially below the OECD frontier, partly due to insufficient competition,” it said.
“In some sectors, market concentration can be so high that regulation will not suffice to improve competition enough, and structural solutions such as break-ups, although as a measure of last resort, could be warranted.”
It identified the supermarket industry as one in which forced break-ups could be justified, saying it was not clear that current reforms such as a supermarket wholesale regime imposed by the former government last year would be sufficient.
Stronger measures, such as a break-up of Foodstuffs and Woolworths NZ, for example via a “forced sell-up of brands”, could eventually prove warranted but would be intrusive and complex, it advised, while avoiding mentioning the businesses by name.
“We very much characterise it as a tool of last resort but something that should be considered carefully in a sort of strategy of gradual escalation,” OECD senior economist David Haugh said.
It described the country’s banks as very profitable despite low levels of risk-taking which it said meant their profits “should be lower than overseas”.
The OECD appeared to back the Commerce Commission in its difference of opinion with the Reserve Bank over whether the central bank’s regulations might be contributing to a lack of competition in that industry.
It described the Reserve Bank’s supervision of banks as very strict and possibly coming “at the cost of weaker differentiation and innovation” in the industry.
The OECD also joined the International Monetary Fund (IMF) in reiterating its call for major tax reform, advising the Government to broaden the tax base by looking again at the taxation of capital gains in language that was similar to that it has used previously.
Most capital gains from shares, owner-occupied residential property and land were not taxed in New Zealand, it noted.
“To ensure the tax system is not overly distorting saving and supporting broader growth, capital gains taxation reform should be done as part of a wider review of tax settings for saving,” it advised.
The IMF similarly called again in March for New Zealand to introduce a comprehensive tax on capital gains, while also saying it should “increase the progressivity of income tax”, which means widening the gap between lower and higher tax rates.
Tax policy reforms were needed to promote investment and productivity growth and bring in additional revenue, the IMF said in its report.
That advice was brushed off at the time by Prime Minister Christopher Luxon, who said the Government did not believe a comprehensive capital gains tax was a good idea.
Finance Minister Nicola Willis said the coalition government “agrees with a great deal of what the OECD says and we disagree with a few things”.
“We're embarking on the programme of tax reform we were voted to deliver and we are prioritising personal income tax reduction.”
The OECD made extensive comments on the country’s education system in its report, saying “declining school education performance and ongoing inequity” were a serious threat to the country’s prosperity.
Willis suggested the OECD and the Government were singing the same tune on education.
“Education minister Erica Stanford used pretty much the same language as the OECD last when she outlined the Government's education priorities last week,” she said.
Those priorities were “a clear a curriculum, a better approach to literacy and numeracy, smarter assessment and improved teacher training, stronger learning support and greater use of data”, Willis said.
Reforms to land-use planning and “a long-term energy strategy” were needed to help New Zealand adapt to climate change, the OECD said.
The Emissions Trading Scheme should be amended to reduce the country’s reliance on planting pine forests to hit its emissions-reduction targets, it said in advice that appeared to align with concerns voiced by climate change commissioner Rod Carr.
“Native forests grow more slowly but are potentially a much longer-lived store of carbon that Pinus radiata forests,” it said.
“Aside from their biodiversity benefits, native forests are perhaps the only way to create a centuries-long carbon sink and an important asset for New Zealand”.
Willis said the OECD’s analysis of the country’s economy reinforced the importance of bringing government spending under control.
“It also reinforces our approach of fully-funding planned income tax relief through offsetting revenue and spending measures,” she said.
The OECD is no stranger to dishing out advice that governments of the day may not want to hear.
It said in its 2022 Economic Survey of New Zealand that the superannuation age needed to rise from 65 to keep the Government’s post-Covid debt levels down to a sustainable level — advice that was swiftly rejected by then Finance Minister Grant Robertson.