A new report by the Organisation for Economic Cooperation and Development (OECD) argues New Zealand to favour a capital gains tax, and lift the retirement age.

The OECD's latest economic survey of New Zealand, published today, said lacklustre growth reflected structural shortcomings of the economy. As the 2000s progressed, the main sources of rising prosperity had increasingly become commodity-based terms of trade improvements, credit-fuelled capital gains on property, and rising government spending, the OECD said.

Its report focused on ways to improve product market regulation and competition, and took a detailed look at the housing sector and environmental policy. New Zealand's living standards had for some time tracked persistently below the OECD average, mainly because of poor labour productivity, the report said.

Generous universal public pension and student loan schemes may reduce the incentive for households to save, while the tax system biased investment decisions by distorting market signals.

Raising the retirement age, while slowing the pace in benefit payments, could provide large fiscal savings, increase potential output and boost household savings rates, the report said.

With nominal interest income and dividends taxed, the absence of a capital gains tax raised the relative returns to assets with good prospects for price appreciation, which tended to favour property and farm investments.

While the Government had addressed some of the distortions that prolonged the housing boom, it could further reduce the bias towards housing investment relative to other assets by introducing a comprehensive realisation-based tax on capital gains.

Excluding primary residences from tax would diminish the effectiveness of such a tax, but partial exemption or rollover relief could act as a second best solution to facilitate public acceptance.

In the absence of a capital gains tax, the tax of alternative savings could be lowered to level the investment playing field, and more limits could be put on the extent to which property investment losses could be deducted for tax purposes, the OECD report said.

Such measures should be accompanied by higher property or land taxes that could be designed to achieve the same objectives as a tax on imputed rent.

Supply constraints were also seen as contributing to the housing boom, partly due to increasingly restrictive land use regulations.

The lengthy report also said regaining regulatory best practice and improving management of the Government's assets could boost productivity growth.

Increasing government interventions in network sectors had reduced market transparency and stability, distorting competition and increasing risks to investors.

Examples included the ultra fast broadband initiative, which was never subject to a full cost/benefit analysis, and the government's "kiwi share" in Telecom, which may restrain competition and should be eliminated.

If the Government went ahead with partial privatisation of state-owned electricity generators, then entrepreneurship, corporate governance and market transparency would be enhanced, but continued progress toward full privatisation would be needed to reap the full productivity benefits, the report said.

It also noted that policies to pursue inclusive economic growth with sound environmental effects were essential to secure natural advantages in international competition. More efficient water and land management should be a priority.

(Source NZ Herald, NZPA)