## 1nzlea2024001

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### Growth and recent developments
- New Zealand recovered strongly from the pandemic, but growth has slowed and two technical recessions occurred in 5 quarters.
- Monetary policy and labor market:
  - RBNZ hiked rates by 525 bps cumulatively between October 2021 and May 2023 and has kept the Official Cash Rate (OCR) at 5½ percent.
  - Average hourly earnings grew at 6.9 percent y/y in 2023Q4.
- Growth and demand composition (2023):
  - GDP growth: 0.6 percent y/y in 2023.
  - Private investment: -2.6 percent.
  - Government consumption: -1.1 percent.
  - Household consumption: 0.3 percent.
  - Record net migration: 126,000 persons in 2023; GDP per capita declined in 2023 despite migration.
- Inflation:
  - CPI inflation peak: 7.3 percent y/y in 2022Q2.
  - CPI inflation: 4.0 percent y/y in 2024Q1.
  - Non-tradable inflation and trimmed (proxy for core) inflation are more persistent.
- External sector:
  - Current account deficit narrowed to 6.9 percent of GDP in 2023Q4.
  - Primary income deficit increased due to higher interest on New Zealand’s negative net international investment position.
- Housing and rents:
  - Housing prices rose 44 percent from 2020Q1 to 2021Q4, then partially unwound by 13 percent through 2023Q2 and have stabilized.
  - Rents up 5 percent y/y in February 2024 and 16 percent higher than in January 2020.

### Outlook and staff projections
- Growth:
  - Real GDP expected to expand by 1 percent in 2024.
  - Growth expected to return to 2 percent (implicitly in 2025) as monetary policy eases and external conditions improve.
- Inflation and monetary policy:
  - Inflation expected to fall below the upper bound of the RBNZ target range in 2024Q3.
  - Staff expect the OCR has peaked at 5½ percent and will remain there until 2024Q3 before a gradual cycle of policy rate cuts.
- Labor market:
  - Unemployment rate expected to peak at 5.4 percent in 2025.
- External:
  - Current account deficit projected to gradually return to its historical average of around 4 percent of GDP over the medium-term.
- Credit and housing:
  - Private sector credit growth expected to grow by 4 percent in 2024.
  - Household debt expected to fall less rapidly from its 2021 peak under the baseline.

### Key risks and scenarios
- Monetary policy miscalibration:
  - Premature loosening could de-anchor inflation expectations; overly tight policy could cause a larger-than-anticipated domestic demand decline and a protracted downturn.
- Global fragmentation and external shocks:
  - Escalation of global tensions or slower growth among trading partners (notably China) could reduce commodity and services exports, widen the current account deficit, and raise inflation via supply disruptions.
- Natural disasters and climate shocks:
  - A shock similar to the 2023 Cyclone Gabrielle could lower growth, raise inflation through higher insurance premiums, and elevate financial sector risks for homeowners.
  - Responses would involve monetary and targeted fiscal measures calibrated to inflation dynamics and fiscal space.
- Risk matrix highlights (selected likelihoods and impacts):
  - Deepening geoeconomic fragmentation: Likelihood: High; Expected Impact: Medium.
  - Extreme climate events: Likelihood: Medium; Expected Impact: High.
  - Monetary policy miscalibration: Likelihood: Medium; Expected Impact: Medium.

### Fiscal stance, Budget 2024 guidance, and debt dynamics
- Fiscal position and objectives:
  - Structural fiscal deficit has arisen from spending programs and entitlements.
  - Government debt at end-2023: gross 46 percent of GDP; net 19 percent of GDP.
  - Authorities’ fiscal objectives in March 2024 Budget Policy Statements: (i) restrict operating allowances to bring operating balance back into surplus; (ii) reduce core Crown expenditure to 30 percent of GDP; (iii) put net core Crown debt on a downward trajectory toward 20-40 percent of GDP.
- Staff recommendations:
  - Restore an operating surplus in the 4-year forecast period of Budget 2024, underpinned by efficacious caps on operating allowances.
  - Staff view a negative fiscal impulse to the order of 1.5 percent of GDP as appropriately aligned with RBNZ’s disinflation objectives.
- Recent fiscal drivers and numbers:
  - Primary expenditure increased by NZ$5.6 billion in Budget 2023’s spending package.
  - Benefit payments increased by NZ$3.5 billion (mainly due to indexation to wage growth).
  - NZ$1.7 billion in North Island weather-related outlays.
  - Cyclically adjusted primary deficit: 2.8 percent of GDP.
- Budget 2024 tax and offset items (NZ$ mln as presented):
  - Proposed pre-election tax cut items: Adj. PIT brackets:8,985; Expanded PIT credits:3,103; Adj. real estate taxes:2,313; Others:206.
  - Possible funding and savings items: Foreign buyer tax:(2,958); Removing commercial building depreciation:(2,100); Other taxes:(1,208); Bureaucracy savings:(2,376); Climate dividend:(2,289); Stopping Labour programs:(2,119); Contractor savings:(1,600).
- Annex V baseline public debt projections (percent of GDP):
  - Public debt: 2022: 47.2; 2023: 45.9; 2024: 47.5; 2025: 48.8; 2026: 48.9; 2027: 48.8; 2028: 47.6; 2029: 45.9; 2030: 44.7; 2031: 43.6; 2032: 42.5.
  - Memo real GDP growth (percent): 2022: 2.4; 2023: 0.6; 2024: 1.0; 2025: 2.0; 2026: 2.4; 2027–2032: 2.4 each year.
  - Memo inflation (GDP deflator; percent): 2024: 3.0; 2025: 2.7; 2026: 2.5; 2027: 2.0; 2028: 1.9; 2029–2032: about 2.2 or 2.2.
- Staff commentary: public debt projected to peak around 50 percent of GDP in 2025 before gradually declining as planned consolidation takes place.

### Monetary policy, framework, and operational capacity
- Current stance and outlook:
  - OCR: 5½ percent since May 2023; staff consider it significantly above RBNZ neutral indicators.
  - Monetary policy transmission lag for New Zealand: six to nine quarter lag.
  - IMF staff projection: policy cuts may be warranted in 2024 in the baseline; if inflation surprises on the upside, tight stance should be prolonged into 2025.
- Institutional and operational buffers:
  - RBNZ received NZ$1.8 billion in capital in 2023 and a standing indemnity for up to NZ$5 billion to cover losses from bond purchases.
  - Foreign currency reserves and intervention capacity increased to NZ$19 billion.
  - Remit change (December 2023): reverted RBNZ Remit to a single mandate of maintaining price stability; Monetary Policy Statement must include a timeframe over which inflation is expected to return to the target midpoint.
- Data and measurement:
  - Introduction of the Selected Price Index (SPI) covering 44 percent of the CPI basket; Stats NZ has no immediate plans to expand SPI into a full monthly CPI.
  - Authorities still do not produce a monthly CPI index; this hampers formulation of monetary policy.

### Housing, construction, and supply-side reforms
- Housing supply and costs:
  - Construction has not kept up with population growth; affordability issues remain severe despite price correction in 2021-23.
  - Changes in zoning laws previously boosted housing supply; additional land use restriction reforms are essential.
  - Infrastructure needs: transport and water infrastructure investment required; local councils face funding and capacity constraints.
- Tax and regulatory levers:
  - A land value tax and comprehensive capital gains tax recommended to incentivize efficient land use and fund infrastructure.
- Construction cost drivers: higher material costs, limited scale economies, earthquake-resilience requirements.

### Financial sector risks, macroprudential policy, and DTA implementation
- Household and banking indicators:
  - Household debt: 165 percent of disposable income in 2023Q2.
  - Loan arrears increased to 0.4 percent of total loans but remain very low.
  - Non-performing loans ticked up for agriculture and businesses; banking system remains well-capitalized, liquid, and highly profitable.
- Macroprudential stance and proposals:
  - Current stance: assessed appropriate given declining leverage and tepid housing price increases; planned 12-month review warranted.
  - RBNZ macroprudential proposal (January 2024) summary:
    - activate debt-to-income (DTI) restrictions and ease loan-to-value ratio (LVR) settings somewhat for owner-occupiers and investors;
    - allow banks to give 20 percent of their residential loans to owner-occupiers with a DTI greater than 6 and to investors with a DTI greater than 7;
    - new LVR settings would allow banks to give 20 percent (from 15 percent) of owner-occupier lending to borrowers with an LVR greater than 80 percent, and 5 percent of investor lending to borrowers with an LVR greater than 70 percent (from 65 percent).
  - Deposit Takers Act (DTA) implementation:
    - creates a depositor compensation scheme (DCS) for up to NZ$100,000 per customer per deposit-taker (estimated to cover around 93 percent of depositors);
    - DCS comes into effect from mid-2025.
  - Commerce Commission assessment of banking competition to conclude in August 2024.

### AML/CFT, governance, and transparency
- AML/CFT updates:
  - New Zealand is in Asia/Pacific Group on Money Laundering’s enhanced follow-up process.
  - Ministry of Justice reviewed the AML/CFT Act with strengthened regulations entering into force in three stages from 2023-2025.
  - June 2024 amendments will address gaps in customer due diligence (CDD) obligations and enable application of a risk-based approach.
  - Recommendation: strengthen implementation of the risk-based approach to CDD in the financial and real-estate sectors.
- Beneficial ownership transparency and National Risk Assessment remain priorities.

### Productivity, digital infrastructure, and labor market
- Productivity findings:
  - Since 2000, productivity gains largely driven by capital accumulation; multifactor productivity has remained stagnant.
  - Slow productivity growth contributed to a rapid increase in unit labor costs.
- Policy recommendations:
  - Expand R&D tax credits and scale up government R&D investment.
  - Increase public investment to close the infrastructure gap and maintain capital stock.
  - Improve education outcomes and use immigration to address skills shortages; boost post-graduate attainment.
- Digital infrastructure (September 2023 metrics):
  - Mobile phone penetration rate (MCI index): exceeded 119 percent.
  - Number of mobile subscriptions: approximately 6.10 million by end-September 2023.
  - New Zealand mobile download speed: 67.77Mbps; global average: 49.25Mbps; New Zealand ranks 39th in mobile download speed.
  - Prices for high-usage mobile bundles surged by 23.2 percent between 2018-22.
  - GSMA assessment: a 10 percent increase in mobile penetration could correspond to a 1 percent uplift in GDP; baseline 5G penetration gains could contribute NZ$25 billion to GDP by 2029; aligning with median could yield an additional NZ$11 billion.

### Climate vulnerability, adaptation, and emissions policy
- Exposure and recent events:
  - New Zealand highly vulnerable to climate change and natural disasters; following North Island events total insurance claims came to NZ$3.5 billion.
  - Central government committed NZ$380 million for flood protection works related to Cyclone Gabrielle.
- Policy recommendations:
  - Implement the 2023 Infrastructure Action Plan and the 2022 National Adaptation Plan; invest in adaptation infrastructure; limit residential zoning in high-risk areas; rebuild fiscal buffers; continue climate stress-testing of the financial sector.
  - ETS reforms recommended: reduce available units, price agricultural emissions, and strengthen incentives for gross emissions reductions.
  - Treasury estimates fiscal cost of offshore mitigation ranging from NZ$3.3 billion to NZ$23.7 billion depending on scale and price of offsets.
- Authorities’ stance: committed to adaptation and mitigation goals; remain committed to pricing agricultural emissions by 2030 and to using international emissions reductions that meet high environmental integrity standards.

### External position and sectoral notes
- Current account and EBA assessments:
  - 2023 CA balance: -6.9 percent of GDP.
  - Cyclical adjustment (ppt of GDP): +0.4; Adjusted CA balance: -6.5 percent of GDP; COVID-19 adjustment for incomplete recovery in tourism: +1.0; COVID-19 adjusted CA balance: -5.5 percent of GDP.
  - Norm (for CA model): -1.8 percent of GDP; CA gap: -3.7 percent of GDP.
  - EBA CA model implies a currency overvaluation of around 17½ percent (applying elasticity of -0.21 to the CA gap).
  - EBA REER index equation: +9.6 percent; REER level equation: +0.9 percent.
  - ES Model REER gap: +12.9 percent; CA Model REER gap: +17.6 percent.
- Annex III mechanisms:
  - Large CA deficits financed by portfolio inflows and FDI totaling about 6 percent of GDP in 2023.
  - Favorable valuation effects slowed NIIP deterioration in 2023; these effects have started to reverse as interest rates retreated from peaks.
  - RBNZ rebuilt FX intervention capacity to NZ$19 billion (4⅔ percent of GDP).

### Staff appraisal — near-term outlook and prioritized reforms
- Near-term macro outlook:
  - Policy-induced slowdown continues; real GDP growth expected to remain below long-term trend in near term.
  - Headline inflation projected to return below 3 percent in the second half of 2024, permitting some monetary easing and recovery of growth in 2025.
- Fiscal policy recommendations (summary):
  - Budget 2024 should deliver a tight near-term fiscal stance and provide a comprehensive consolidation strategy for the medium term.
  - Calibrate tax relief measures to be fiscally neutral in 2024 to avoid upside pressure to inflation.
  - Contain operating expenses and use upside revenue surprises to reduce debt.
- Monetary and financial stability assessment:
  - Monetary policy is appropriately tight and should remain restrictive until disinflation is assured.
  - Financial stability risks appear contained; current macroprudential proposals including DTI introduction align with IMF staff advice.
- Structural reform priorities (summary):
  - Reform land use restrictions and address local infrastructure funding to boost housing supply.
  - Use land value and capital gains taxes to incentivize efficient land use.
  - Increase public investment in R&D, infrastructure, and maintenance of public capital stock.
  - Use immigration and improved education outcomes/skills matching to boost productivity.
  - Invest in adaptation infrastructure and price agricultural emissions to meet emissions targets.

*Source: IMF staff report chapter “1. Growth Has Slowed” and associated staff report excerpts (1nzlea2024001).*

### 1. Growth Has Slowed  ___________________________________________________________________________ 26

### 1. Growth Has Slowed

### Context
- New Zealand recovered strongly from the pandemic, but longstanding structural issues persist even as growth has slowed.
- Tight policies have created softness in economic activity with two technical recessions (i.e., two consecutive quarters of negative growth) in 5 quarters.
- A structural fiscal deficit has arisen from spending programs and entitlements.
- Strong net migration is supporting economic growth, but infrastructure and housing supply have not kept up.

### Recent developments and headline indicators
- Monetary policy and labor market:
  - The Reserve Bank of New Zealand (RBNZ) hiked rates by 525 bps cumulatively between October 2021 and May 2023 and has kept the Official Cash Rate (OCR) at 5½ percent.
  - Average hourly earnings grew at 6.9 percent y/y in 2023Q4.
- Growth and demand composition (2023):
  - GDP growth: 0.6 percent y/y in 2023.
  - Private investment: -2.6 percent.
  - Government consumption: -1.1 percent.
  - Household consumption: 0.3 percent.
  - Record net migration: 126,000 persons in 2023; GDP per capita declined in 2023 despite migration.
- Inflation:
  - CPI inflation peak: 7.3 percent y/y in 2022Q2.
  - CPI inflation: 4.0 percent y/y in 2024Q1.
  - Trimmed (proxy for core) and non-tradable inflation are more persistent.
- External sector:
  - Current account deficit narrowed to 6.9 percent of GDP in 2023Q4 (still above long-run average).
  - Primary income deficit increased due to higher interest on New Zealand’s negative net international investment position.
- Housing and rents:
  - Housing prices rose 44 percent from 2020Q1 to 2021Q4, then partially unwound by 13 percent through 2023Q2 and have stabilized.
  - Rents up 5 percent y/y in February 2024 and 16 percent higher than in January 2020.

### Outlook and projections
- Growth:
  - Real GDP is expected to expand by 1 percent in 2024.
  - Growth expected to return to 2 percent (implicitly in 2025) as monetary policy eases and external conditions improve.
- Inflation and monetary policy:
  - Inflation expected to fall below the upper bound of the RBNZ target range in 2024Q3.
  - Staff expect the OCR has peaked at 5½ percent and will remain there until 2024Q3 before a gradual cycle of policy rate cuts.
- Labor market:
  - Unemployment rate expected to peak at 5.4 percent in 2025.
- External:
  - Current account deficit projected to gradually return to its historical average of around 4 percent of GDP over the medium-term.
- Credit and housing:
  - Private sector credit growth expected to grow by 4 percent in 2024.
  - Household debt expected to fall less rapidly from its 2021 peak under the baseline.

### Key risks and scenarios
- Monetary policy miscalibration:
  - Premature loosening could de-anchor inflation expectations; overly tight policy could cause a larger-than-anticipated domestic demand decline and a protracted downturn.
- Global fragmentation and external shocks:
  - Escalation of global tensions or slower growth among trading partners (notably China) could reduce commodity and services exports, widen the current account deficit, and raise inflation via supply disruptions.
- Natural disasters and climate shocks:
  - A shock similar to the 2023 Cyclone Gabrielle could lower growth, raise inflation through higher insurance premiums, and elevate financial sector risks for homeowners.
  - Responses would involve monetary and targeted fiscal measures calibrated to inflation dynamics and fiscal space.

### Policy recommendations and priorities
- Macroeconomic stance:
  - Until inflation is sustainably on a path to low inflation, the fiscal-monetary policy mix needs to remain restrictive.
  - Budget 2024 should adopt a tight fiscal stance and a credible medium-term consolidation plan to restore the surplus and deliver on the fiscal sustainability program via expenditure rationalization and careful use of revenue policies.
  - Monetary and macroprudential policies are appropriate and should remain agile.
- Fiscal specifics and calibration:
  - Fiscal consolidation was put off in FY23/24 by policy decisions, indexation, and one-off spending related to Cyclone Gabrielle.
  - Primary expenditure increased by NZ$5.6 billion in Budget 2023’s spending package; benefit payments increased by NZ$3.5 billion (mainly due to indexation to wage growth); NZ$1.7 billion in North Island weather-related outlays.
  - Cyclically adjusted primary deficit: 2.8 percent of GDP.
  - Staff view a negative fiscal impulse to the order of 1.5 percent of GDP as appropriately aligned with RBNZ’s disinflation objectives.
- Budget 2024 considerations:
  - The new government’s planned PIT relief and other tax measures should be calibrated, timed, and funded to be fiscally neutral to avoid upside pressure to inflation.
  - Proposed pre-election tax cut items (NZ$ mln): Adj. PIT brackets:8,985; Expanded PIT credits:3,103; Adj. real estate taxes:2,313; Others:206.
  - Possible funding and savings items (NZ$ mln): Foreign buyer tax:(2,958); Removing commercial building depreciation:(2,100); Other taxes:(1,208); Bureaucracy savings:(2,376); Climate dividend:(2,289); Stopping Labour programs:(2,119); Contractor savings:(1,600).
- Structural reforms:
  - Bold structural policies are needed to address long-standing issues: housing reforms, productivity-enhancing improvements, labor policies, and urgent climate change adaptation and mitigation action.
  - Investment in adaptation infrastructure and property-level mitigation measures are recommended to reduce climate-related macrofinancial risks.
- Macroprudential and financial stability:
  - Monitor mortgage lending given high interest rates and housing market developments; stress-testing of major shocks is advised to build confidence in financial system resilience.

*Source: IMF staff report chapter “1. Growth Has Slowed”*

### 12.      The authorities’ Budget 2024 fiscal strategy should also signal a strong commitment

### 12.      The authorities’ Budget 2024 fiscal strategy should also signal a strong commitment

### Fiscal sustainability and consolidation imperative
- Government debt at end-2023: gross 46 percent of GDP; net 19 percent of GDP (Annex V).
- Debt trajectory: increased more rapidly than in many advanced economies in recent years and will continue upward absent decisive consolidation as the interest-growth differential becomes less favorable.
- Authorities’ fiscal objectives in March 2024 Budget Policy Statements:
  - (i) restrict operating allowances to bring operating balance back into surplus;
  - (ii) reduce core Crown expenditure to 30 percent of GDP;
  - (iii) put net core Crown debt on a downward trajectory toward 20-40 percent of GDP.
- Staff recommendation: restore an operating surplus in the 4-year forecast period of Budget 2024, underpinned by efficacious caps on operating allowances throughout the forecast period to avoid further delays in consolidation.
- Rationale: strengthen policy credibility, preserve policy space for long-term investment and shock response, and help narrow the gap between government savings and investment to support external adjustment (Annex III).

### Expenditure policy priorities
- Recent spending drivers: personnel, interest, insurance, and transfers and social benefits (covering most pandemic and cost-of-living relief spending) have increased sharply over the past five years (Annex VIII).
- Expenditure consolidation should be expenditure-led, targeting:
  - rationalization of outlays in the priority areas above while protecting high-value infrastructure and support to the most vulnerable;
  - efficiency gains in health services and superannuation reforms to address increasing New Zealand Superannuation costs;
  - spending to address housing and productivity challenges.
- Policy tool: rigorous cost and benefit analysis of government spending programs to ensure efficiency, value-added, and alignment with strategic fiscal goals.
- Note on net debt concept: this net debt concept differs from the GFS general government (GG) net debt concept used by the IMF; main difference is net core Crown debt excludes assets held by New Zealand Superannuation.

### Revenue strategy and tax reform opportunities
- Structural revenue weakness noted due to slower productivity growth.
- Recent dynamics: “bracket creep” has increased PIT revenue but eroded households’ disposable income amid higher costs of living and borrowing.
- Policy change under consideration: adjustment to PIT thresholds (unchanged since 2010) to partially offset fiscal drag and make PIT marginally more progressive.
- Reform opportunities highlighted:
  - broaden the tax base to more comprehensively capture capital gains to make income taxes more progressive and generate revenue for long-term fiscal challenges;
  - consider a well-designed land value tax to promote efficient land use and fund infrastructure investment;
  - comprehensive tax policy reform could create fiscal space for potential allowance for corporate equity and/or additional R&D tax incentives to promote investment and productivity, noting New Zealand's relatively high corporate income tax rate.
- Context: New Zealand already has one of the most efficient GST systems; its relatively flat PIT rate scale and lack of a comprehensive capital gains tax have contributed to worsening wealth inequality and intergenerational equity issues.

### Authorities’ fiscal views and intended measures
- Authorities agree with staff on tight fiscal stance and medium-term consolidation.
- Intended financing of planned personal income tax relief via reprioritizations, reductions in expenditure and new revenue measures so it does not add to debt.
- Authorities view package as not expected to be inflationary under current circumstances.
- Authorities recognize need to eliminate structural fiscal deficits in the budget forecast period; a specific timeframe for returning to surplus will be set out in the May Budget.
- Focus to reach surplus: capping government expenditure growth through more constraining operating allowances to help bring core Crown expenditure towards 30 percent of GDP across the medium-term.
- Recent measures: revert benefit indexation from wage to inflation and better targeted employment supports through closer monitoring.
- Authorities do not plan major tax reforms and are instead pursuing regulatory reforms to promote investment and productivity growth.
- Note on operating balance definition: operating balance refers to the New Zealand Treasury’s GAAP concept of operating balance before gains and losses (OBEGAL), which differs somewhat from the GFS concept of operating balance calculated by IMF staff.

### Monetary policy stance and outlook
- Current stance: OCR has remained at 5½ percent since May 2023, significantly above RBNZ indicators for the neutral rate.
- Inflation and labor indicators:
  - non-tradables inflation 5.8 percent y/y;
  - average hourly earnings grew by 6.9 percent y/y;
  - trimmed inflation has fallen slower than headline CPI, indicating disinflation is not yet broad based.
- Drivers: persistence of non-tradable inflation, a positive output gap, low unemployment, high wage growth; supply constraints and high net migration contributing to house price and rental cost increases.
- IMF staff projection: policy cuts may be warranted in 2024 in the baseline scenario of declining domestic demand, softening global inflation, and rising unemployment.
- Alternative scenario: if inflation surprises on the upside (price and wage stickiness or demand effects from high net migration), the current tight stance should be prolonged into 2025 in line with the current RBNZ unconstrained OCR path.
- Policy implementation note: monetary policy transmission lag for New Zealand is six to nine quarter lag; policymakers should remain nimble.

### Monetary framework and operational capacity
- Remit change: in December 2023 government reverted the RBNZ Remit to a single mandate of maintaining price stability; short-term policy impact expected limited because price stability objective was already stipulated previously.
- Charter revision: Monetary Policy Statement must include a timeframe over which inflation is expected to return to target midpoint and reasons for the timeframe.
- Additional buffers and capacities:
  - RBNZ received NZ$1.8 billion in capital in 2023 and a standing indemnity for up to NZ$5 billion to cover losses from bond purchases;
  - Foreign currency reserves and intervention capacity increased to NZ$19 billion.
- Data improvements: introduction of the Selected Price Index (SPI) covering 44 percent of the CPI basket; Stats NZ has no immediate plans to expand SPI into a full monthly CPI.

### Housing supply, construction costs, and recommended reforms
- Housing supply shortfall: construction has not kept up with population growth; affordability issues remain severe despite price correction in 2021-23.
- Effective measures: changes in zoning laws have boosted housing supply previously; additional land use restriction reforms are essential.
- Infrastructure needs: investment in transport and water infrastructure to support urban development; local councils need to address funding and capacity constraints.
- Taxes as incentives: a land value tax and comprehensive capital gains tax would encourage more efficient land use.
- Construction cost drivers: higher cost of construction materials, limited scale economies, and earthquake-resilience requirements.

### Financial sector risks and policy settings
- Household sector: household debt 165 percent of disposable income in 2023Q2; loan arrears increased to 0.4 percent of total loans but remain very low.
- Sector vulnerabilities: lower meat and dairy prices plus higher debt servicing costs raise agriculture sector vulnerability; hybrid work lowered office demand affecting commercial real estate.
- Banking system: non-performing loans ticked up for agriculture and businesses, but system remains well-capitalized, liquid, and highly profitable due to higher net interest margins.
- Macroprudential stance: assessed appropriate given declining leverage, tepid housing price increases, and mortgage rate declines; planned 12-month review of macroprudential settings is warranted.
- RBNZ macroprudential proposal (January 2024):
  - propose to activate debt-to-income (DTI) restrictions and ease loan-to-value ratio (LVR) settings somewhat for owner-occupiers and investors;
  - proposal details: allow banks to give 20 percent of their residential loans to owner-occupiers with a DTI greater than 6 and to investors with a DTI greater than 7;
  - new LVR settings would allow banks to give 20 percent (from 15 percent) of owner-occupier lending to borrowers with an LVR greater than 80 percent, and 5 percent of investor lending to borrowers with an LVR greater than 70 percent (from 65 percent).
- Other measures: location-based DTIs could be considered later to account for regional differences; Commerce Commission assessment of banking competition to conclude in August 2024.
- Deposit Takers Act (DTA) implementation:
  - creates single regulatory framework and a depositor compensation scheme (DCS) for up to NZ$100,000 per customer per deposit-taker (estimated to cover around 93 percent of depositors);
  - DCS comes into effect from mid-2025;
  - consultations on DCS prudential standards and proportionality framework will develop regulatory standards; a proportionate approach to rule-making is needed to support competition and address concerns of smaller deposit-takers.

*Source: 1nzlea2024001 - 12.      The authorities’ Budget 2024 fiscal strategy should also signal a strong commitment*

### 25.      Efforts to strengthen the AML/CFT framework are ongoing. New Zealand is in

### 1nzlea2024001 - 25.      Efforts to strengthen the AML/CFT framework are ongoing. New Zealand is in

### AML/CFT, beneficial ownership, and risk assessment
- Ongoing efforts to strengthen the AML/CFT framework; New Zealand is in Asia/Pacific Group on Money Laundering’s enhanced follow-up process.
- The Ministry of Justice reviewed the AML/CFT Act with strengthened regulations entering into force in three stages from 2023-2025.
- In June 2024 amendments will address gaps in customer due diligence (CDD) obligations and enable the application of a risk-based approach.
- Legislative improvements to the Companies Act are being considered; further efforts are needed to enhance transparency of beneficial ownership.
- The ongoing National Risk Assessment will evaluate risks and can further inform a risk-based approach to the sector.
- Recommendation: authorities should strengthen implementation of the risk-based approach to CDD in the financial and real-estate sectors.

### Authorities’ views on housing, local infrastructure, and financial sector
- Authorities agreed boosting the housing supply should be a priority and that less restrictive land use policies are needed.
- They identified a need for additional local infrastructure and noted existing local government property tax can be used to fund new local infrastructure.
- Authorities are considering additional measures underpinned by more user revenues and will review how to align incentives on local councils and communities to support urban growth; one option is to share GST receipts from new housing development with councils.
- Authorities concurred with staff’s assessment of financial sector developments and highlighted an active stress testing agenda, including a climate stress test and a general insurance stress test in 2024.

### Productivity and structural policies
Findings
- Since 2000, productivity gains have been largely driven by capital accumulation; multifactor productivity (through innovation, technology adoption, education, or reallocation) has remained stagnant.
- Slow productivity growth has contributed to a rapid increase in unit labor costs, undermining competitiveness.
- Digital infrastructure is critical given the small size of the ICT sector and considerable productivity gains associated with technology firms.

Policy recommendations to boost productivity
- Promote innovative investment by expanding R&D tax credits and other support measures, promote their take-up, and scale up government investment on R&D.
- Increase public investment to close the infrastructure gap and maintain existing capital stock.
- Provide a more predictable infrastructure pipeline to encourage construction companies to expand implementation capacity.
- Improve education outcomes and use immigration to address skills shortages; boost post-graduate attainment.

### Labor market and inclusiveness
- Unemployment is near historic lows, but long-term unemployment rates and Māori unemployment rates remain high.
- Active labor market policies and expanded training opportunities can help make the labor market more inclusive.
- In 2024 the minimum wage in New Zealand is going to increase only by 2 percent y/y; after years of rapid increases, the minimum wage relative to the median wage remains among the highest in advanced economies and may create headwinds to employment of low-skilled workers.
- Recommendation: minimum wage increases should be commensurate with productivity growth.

### Climate vulnerability, adaptation, and emissions policy
Findings
- New Zealand is highly vulnerable to climate change, climate shocks and natural disasters due to heavy reliance on agriculture.
- Following last year’s North Island weather events, total insurance claims came to NZ$3.5 billion, an order of magnitude larger than any previous weather-related losses and comparable to risks from major earthquakes.
- This resulted in substantial increases in insurance premiums, destroyed capital, and damaged infrastructure.
- The central government committed new spending on flood protection works and launched an inquiry into adaptation funding and community relocation from high-risk areas.

Policy recommendations on adaptation and mitigation
- Implement the 2023 Infrastructure Action Plan and the 2022 National Adaptation Plan to ensure sufficient spending on adaptation infrastructure, limit residential zoning in high-risk areas, address data gaps in climate vulnerability, rebuild fiscal buffers, and continue stress-testing the financial sector.
- Significant reforms to the Emissions Trading Scheme (ETS) are necessary to meet domestic and international targets (including New Zealand’s first Nationally Determined Contribution (NDC) under the Paris Agreement and the 2050 Net Zero goal): reduce the number of available units in the scheme, price agricultural emissions, and strengthen incentives for gross emissions reductions within the ETS.
- Given the ambition of New Zealand’s first NDC, the use of international mitigation is likely to be required; environmental integrity risks and relative costs should be considered.
- New Zealand Treasury estimates the fiscal cost of offshore mitigation ranging from NZ$3.3 billion to NZ$23.7 billion depending on the scale of emissions gap and the price of international offsets.

Authorities’ stance
- Authorities emphasized commitment to adaptation and mitigation goals, noting climate change is a major economic and fiscal transition.
- They remain committed to pricing agricultural emissions by 2030, arguing more time is needed for green technological progress in the sector.
- Authorities aim to use international emissions reductions that meet high environmental integrity standards in line with Article 6 of the Paris Agreement.

### Staff appraisal — near-term outlook, fiscal and monetary stance, and reform priorities
Near-term macro outlook
- Policy-induced slowdown continues; in the near term, real GDP growth is expected remain below its long-term trend as lagged impact of monetary policy tightening suppresses domestic demand.
- Improving external conditions should provide some support to growth and narrow the trade deficit, especially through tourism.
- Headline inflation is projected to return below 3 percent in the second half of 2024, which would allow for some monetary easing and lead to a recovery of growth in 2025.
- Risks to the outlook are broadly balanced; the external position in 2023 remained weaker than implied by medium-term fundamentals and desirable policies.

Fiscal policy recommendations
- Budget 2024 should deliver a tight fiscal stance in the near term and provide a comprehensive consolidation strategy for the medium term.
- Calibrate funding, timing, and parameters of tax relief measures to be fiscally neutral in 2024 to avoid upside pressure to inflation.
- Commit to containing operating expenses and using upside revenue surprises to reduce debt.
- Base spending reforms on comprehensive cost-benefit analysis and address long-term aging-related fiscal pressures while preserving outlays on high-value infrastructure and support to the most vulnerable.

Monetary and financial stability assessment
- Monetary policy is appropriately tight and should remain restrictive to ensure a timely return of inflation to target; the OCR remains significantly above the RBNZ’s neutral rate suite of indicators.
- Continued vigilance is needed as the economy slows and unemployment rises.
- Financial stability risks appear contained: non-performing loans have ticked up but remain low; the banking system remains well-capitalized, liquid, and profitable.
- Current proposals to revise macroprudential settings are appropriate; the introduction of the debt-to-income (DTI) restriction aligns with earlier IMF staff advice.
- The Deposit Takers Act is a welcome step to harmonize regulation for bank and non-bank deposit takers and to introduce deposit insurance.

Structural reform priorities (summary)
- Reform land use restrictions and address local infrastructure funding needs to boost housing supply and construction.
- Use land value and capital gains taxes to incentivize more efficient land use.
- Increase public investment in R&D, new infrastructure, and maintenance of the existing public capital stock to address slow productivity growth.
- Use immigration and improved education outcomes/skills matching to address skills shortages and boost productivity.
- Invest in adaptation infrastructure, limit residential zoning in high-risk areas, address data gaps, rebuild fiscal buffers, and implement additional reforms (including pricing agricultural emissions) to achieve emissions targets.

*Source: 1nzlea2024001 - 25. Efforts to strengthen the AML/CFT framework are ongoing. New Zealand is in (PDF).*

### 39.      It is recommended that the next Article IV consultation be held on the standard 12-

### 1nzlea2024001 - 39.      It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Growth, output, and migration
- Real GDP growth has "slowed markedly" in recent periods.  
- Consumption and investment declined in 2023 while net exports supported growth.  
- High migration led real GNI per capita to decline.  
- Annual migration flows have been at their highest level since records began in 1986.  
- Recent recovery in exports has been primarily driven by a continued recovery in tourist arrivals, which remain 20 percent below pre-pandemic levels as of 2023.

### Inflation, labor market, and monetary policy
- Headline inflation "has started to fall rapidly although remains well above target."  
- Inflation expectations are "falling and remain strongly anchored."  
- Unemployment has started to rise amid slowing labor force participation.  
- Official cash rate raised by 525 bps since 2021 and is now "well above the suite of neutral OCR indicators."  
- Short-term rates have stabilized while long-term rates have started to fall.  
- IMF staff note that "Monetary policy should remain restrictive until output and employment gaps fall" (Past recommendation), and the RBNZ maintained rates unchanged at 5½ percent.

### External sector and current account
- The current account deficit remains large: 2023 CA balance of -6.9 percent of GDP.  
- Cyclical adjustment (percentage point of GDP): +0.4.  
- Adjusted CA balance (percent of GDP): -6.5.  
- COVID-19 adjustment for incomplete recovery in tourism: +1.0.  
- COVID-19 adjusted CA balance (percent of GDP): -5.5.  
- Norm (for CA model, percent of GDP): -1.8.  
- CA gap (percent of GDP): -3.7.  
  - Contribution of identified policy gaps: -0.6.  
  - Unexplained residuals: -3.1.  
- IIP-stabilizing CA/GDP ratio (for ES model, percent of GDP): -2.8.  
- Assumed current account elasticity: -0.21.  
- External Balance Assessment (EBA) CA regression model implies a currency overvaluation of around 17½ percent (text table result applying elasticity of -0.21 to the CA gap).  
- EBA REER index and level regressions suggest real effective overvaluation in 2023:  
  - REER index equation (percent): +9.6.  
  - REER level equation (percent): +0.9.  
- ES Model results:  
  - CA gap (Adjusted CA less IIP-stabilizing CA percent of GDP): -2.7.  
  - REER gap (positive implies real overvaluation, percent): +12.9.  
- CA Model REER gap (percent): +17.6.  
- Despite the large current account deficit, the NIIP deteriorated only marginally in 2023, reflecting increased RBNZ reserve asset holdings and valuation effects.

### Fiscal policy and public finances
- North Island weather events and indexation and finance costs have kept budget deficits large and delayed fiscal consolidation.  
- As discretionary spending (including one-off weather-related outlays) rolls off, fiscal stance tightens with impulse turning negative in FY2024/25.  
- With projected deficits, government debt ratio is projected to peak in FY 2025/26 before trending down, while remaining one of the lowest across OECD countries.  
- Past Fund recommendations and authorities' actions:  
  - Authorities prioritized reconstruction efforts; Budget 2023 spending package, indexation of benefit payments, and one-off North Island weather events outlays lead to a projected positive fiscal impulse in FY23/24.  
  - Fiscal consolidation is envisaged from FY24/25 anchored by the authorities’ new fiscal strategy; the new government has identified expenditure rationalization as a priority and created fiscal space to fund planned tax cuts.

### Housing market, household balance sheets, and financial stability
- After a prolonged correction, house prices are now "stabilizing."  
- The price decline helped improve affordability metrics.  
- Rental prices are increasing given strong population growth, and sales are mirroring the pickup in house prices.  
- Residential investment remains weak and the number of new building consents issued is low.  
- House prices declined but remain high by international comparison; household debt remains elevated as the debt servicing ratio increases.  
- Household debt increased relative to assets due to the fall in house prices.  
- High loan-to-value ratio lending has ticked up, driven by new mortgages for investors, owner occupiers, and first-time homebuyers.  
- The share of outstanding interest-only loans continues to decline and is below its pre-pandemic level.  
- Banking sector indicators: banks remain well capitalized; profitability remains close to historical norms; core funding ratio is well above regulatory minimum; household credit growth is slowing while deposits shift away from transaction balances; banks are largely tapping the domestic market for wholesale funding needs; banks’ exposure to the housing sector remains high.

### Climate and environmental risks
- Mean temperatures are approximately 1C higher than the 1960s.  
- The country faces significant risks from weather shocks and natural disasters, but overall has lower risks and is better prepared than comparator countries.  
- The carbon spot price fell sharply in 2023 due, in part, to carbon unit overhang, but recovered to around NZ$70 in end 2024Q1.  
- The ETS has helped keep emissions constant since 2008; recent gains have come through LULUCF, while agriculture and energy sectors represent the bulk of emissions.  
- Past Fund recommendations and actions:  
  - NZ$380 million committed for flood protection works related to Cyclone Gabrielle; inquiry launched into adaptation funding and community relocation.  
  - An ETS review concluded in August 2023 with proposals to incentivize gross emissions reductions, but the review has been indefinitely halted and plans to include agricultural emissions pricing pushed to 2030.  
  - Legislation passed to repeal the Natural and Built Environment Act and Spatial Planning Act; other environmental incentives including the Clean Car discount were dropped.

### Structural and policy reform priorities
- Recommended priorities (past recommendations and IMF commentary):  
  - Promote innovation and digitalization, especially among marginalized groups.  
  - Expand housing stock; reforms to legislation including the Resource Management Act would help (though the new government has repealed earlier reforms to harmonize local planning regimes).  
  - Infrastructure spending should reduce the infrastructure gap and support transition to net zero; $2bn climate infrastructure fund announced in 2023, but some major infrastructure projects (Auckland light rail) have been canceled.  
  - Macroprudential stance: a tightening of macroprudential restrictions "is not called for at this time," though RBNZ has proposed to activate DTI while easing LVR requirements.  
  - Cost-of-living support should be targeted and temporary, focused on vulnerable households and viable businesses.

*Source: IMF staff compilation from the provided New Zealand country material.*

### 2.      Based on the results of the EBA CA model, staff assesses the external position in 2023

### 2.      Based on the results of the EBA CA model, staff assesses the external position in 2023

### External position assessment (EBA CA model)
- Staff assesses the external position in 2023 to be weaker that the level implied by medium-term fundamentals and desirable policies.
- Results of other models support this assessment.
- The current account model is calibrated to global and domestic policy variables and employs multilateral consistency adjustments to account for the temporary but extraordinary impact of the pandemic.
- Econometric specifications of large-scale interactions between trade and capital flows can be limiting in explanatory power and out-of-sample properties; there may be shortcomings in some conclusions.
- Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate.
- The current account deficit is expected to narrow over time, but temporary factors may continue affecting the external balance adjustment process over the next few years and constitute a source of vulnerability that merits careful monitoring.

### Annex III — Persistence of New Zealand’s Current Account Deficit
Findings:
- New Zealand’s current account deficit remains large at 6.9 percent of GDP in 2023Q4.
- Exports fell sharply during the pandemic as international tourism and education halted under travel restrictions and global demand collapsed.
- The initial export fall was offset to a great extent by a sharp contraction in imports as the domestic economy fell into a recession.
- The trade deficit started to widen sharply starting 2021 as New Zealand rebounded more strongly than other peer advanced economies.
- Tourist arrivals only started to recover in mid-2022 and remain about 20 percent below pre-pandemic levels as of end-2023.
- Unfavorable terms of trade, as dairy and meat prices suffered from weakened global demand (notably from China—New Zealand’s largest export market), have delayed the current account adjustment.

Mechanisms behind persistence:
- The pandemic widened the government’s savings-investment (S-I) balance (automatic stabilizers and discretionary relief measures), which was almost completely offset by an increase in the private sector’s S-I balance during lockdowns.
- In 2021–22 private savings drawdown and recovery in private investment were not matched by a proportional adjustment in the government’s S-I balance, widening the aggregate S-I balance and the current account deficit.
- Delay in fiscal consolidation due to policy decisions, indexation, and one-off weather events–related spending contributed to a slower current account adjustment.

### Financing, NIIP, and primary income dynamics
- The large current account deficits have been financed by portfolio inflows and an increase in FDI, which together amounted to about 6 percent of GDP in 2023.
- Higher interest rates have increased the cost of servicing foreign liabilities, reflected in a widening primary income account deficit.
- New Zealand’s net international investment position (NIIP) benefited from favorable market price changes and other valuation changes, which helped slow its deterioration despite large current account deficits.
- These favorable valuation effects have started to reverse as interest rates retreated from their peaks.
- While interest rates are expected to fall further, the repricing of New Zealand’s net external liabilities (with a relatively long average residual maturity) is expected to take time, delaying adjustment in the primary income account.
- Large positive BOP net errors and omissions (NEOs) may also explain in part the disconnection between large current account deficits and more sanguine NIIP developments; Stats NZ has started to address these NEOs through improved survey data.

### Exchange rate, reserves, and FX intervention capacity
- The nominal exchange rate has depreciated under large current account deficits; the adjustment in the real exchange rate was attenuated by high inflation.
- Nominal depreciation has not interrupted rapid disinflation in tradable goods.
- The RBNZ updated its foreign reserves management and co-ordination framework in December 2022 and has taken actions to start rebuilding its FX intervention capacity to NZ$19 billion, or 4⅔ percent of GDP, for potential use in disorderly market conditions marked by exceptional exchange rate volatility unjustified by economic fundamentals.
- RBNZ’s intervention capacity measures its reserve assets less FX liabilities falling due in the next 12 months.
- Re-establishing a dollar liquidity swap line with the Federal Reserve (including on a temporary basis) could mitigate FX liquidity risks, as RBNZ did during the global financial crisis and the pandemic period.

### Annex IV — Dairy sector (“White Gold”) and dairy–oil price correlation
Dairy sector importance and statistics:
- The dairy industry accounts directly for almost 5½ percent of domestic output and 2 percent of the total employment.
- The sector provides a total of 55,000 jobs, with 38,462 on farming and 16,325 in dairy processing (Sense Partners report).
- Over the last two decades, the dairy sector (primary sector) experienced a yearly average 1.5 percent increase in employment (and 3.2 percent a year since 2019), contrasting with a 3.6 percent decline in manufacturing jobs; dairy processing jobs surged 92 percent.
- Employment in dairy farming has remained relatively stable, with a slight decrease of 3.8 percent in jobs since 2000.
- Dairy products account for more than a quarter of New Zealand’s total exports and are estimated at NZ$20 billion in 2023.
- More than 90 percent of the milk produced in the country is processed for exports.
- Around 90 percent of Fonterra’s revenue comes from outside New Zealand.
- Fonterra produces 30 percent of the world's dairy exports and is the primary seller at Global Dairy Trade (GDT) auctions, accounting for around 99 percent of the whole milk powder sold on the platform.
- GDT auctions attract almost entirely foreign participants, with 30 percent from North Asia (including China representing the major bids).

Price dynamics and correlation with oil:
- Global dairy prices are set in GDT auctions held every two weeks using uniform price bidding (single-round sealed-bid auction); final prices reflect market supply-demand equilibrium at the auction time.
- Dairy supply is relatively predictable; price shocks mostly come from the demand side.
- Dairy prices have been volatile and are important determinants for New Zealand’s dairy export earnings and trade balance.
- Dairy and crude oil prices are highly correlated possibly because both have price-insensitive supply and are sensitive to global business cycles and demand shocks.
- Oil price pass-through to dairy can occur via production costs (fertilizer, feed, transportation, storage) and energy-intensive manufacturing processes for refined dairy products.
- Coincidence of unrelated supply shocks (e.g., OPEC decisions, droughts, changes in production quotas, new drilling technologies) can drive co-movements in dairy and oil prices.
- The strong correlation can form a natural hedge for New Zealand, contributing to relatively stable terms of trade compared to other commodity exporters, and oil futures market pricing can inform balance of payments projections.

### Annex V — Sovereign debt and debt sustainability framework
Key assessment:
- The overall risk of sovereign stress is low, reflecting a relatively low level of vulnerability in the near-term and low levels of vulnerability in the medium- and long-term horizons.
- Long-term risks remain relatively low, but fiscal challenges stemming from age-related expenditure on health and social security have started to materialize and will feed into debt dynamics.
- Medium-term risks are assessed as low on the basis of the strength of institutions, the depth of the investor pool, and the credibility of macroeconomic policies and institutions.
- Commentary notes New Zealand has a split AA+ sovereign credit rating (Aaa from Moody's and AA+ from S&P and Fitch).
- Post-pandemic recovery was stronger than most advanced economies, though momentum is slowing under tightened monetary policy.
- Tax revenues exceeded pre-pandemic levels, and withdrawal of Covid-related stimulus contributed to lowering overall expenditure.
- Fiscal consolidation is expected in the medium term but will be slower following North Island weather events (NIWE; flash floods in January and cyclone Gabrielle in February 2023); rebuilding needs imply debt is expected to rise thru 2025 before gradually declining.
- Medium-term liquidity risks analyzed by the GFN Financeability Module are low.
- Over the longer run, New Zealand should continue reforms to tackle risks from population aging and climate change; timing of risk materialization and authorities’ planned measures will influence risk containment.

*Source: 1nzlea2024001 - 2.      Based on the results of the EBA CA model, staff assesses the external position in 2023*

### Annex V. Figure 3. Public Debt Structure Indicators

### Annex V. Figure 3. Public Debt Structure Indicators

### Debt Composition and Structure
- Debt by Currency (percent of GDP): charts indicate shares of Foreign currency, Local currency, Local-linked; commentary: "The share of FX debt in overall debt is very low and index-linked bonds also make a small share (less than 5 percent) of total outstanding debt."
- Public Debt by Holder (percent of GDP): categories shown include External private creditors, External official creditors, Domestic other creditors, Domestic commercial banks, Domestic central bank.
- Public Debt by Governing Law, 2022 (percent): categories shown include Domestic law, Foreign law ex. multilateral, Multilateral.
- Debt by Instruments (percent of GDP): categories include Marketable debt, Nonmarketable debt.
- Public Debt by Maturity (percent of GDP): maturity buckets shown are ≤ 1 year, 1-5 years, > 5 years. Residual maturity noted as "6. years" (as shown).

### Key Commentary on Public Debt Path
- "Public debt in New Zealand increased following the pandemic, but is expected to decline in the medium term following the planned consolidation over the forecast period."
- "The share of FX debt in overall debt is very low and index-linked bonds also make a small share (less than 5 percent) of total outstanding debt."

### Baseline Scenario: Public Debt and Contributors (Percent of GDP unless indicated otherwise)
- Public debt (actual and projections): 2022: 47.2; 2023: 45.9; 2024: 47.5; 2025: 48.8; 2026: 48.9; 2027: 48.8; 2028: 47.6; 2029: 45.9; 2030: 44.7; 2031: 43.6; 2032: 42.5.
- Change in public debt: 2022: -0.3; 2023: -1.3; 2024: 1.6; 2025: 1.3; 2026: 0.1; 2027: -0.1; 2028: -1.3; 2029: -1.7; 2030: -1.2; 2031: -1.1; 2032: -1.1.
- Contribution of identified flows: 2022: 0.3; 2023: 0.7; 2024: 1.5; 2025: 0.4; 2026: -0.6; 2027: -1.0; 2028: -1.7; 2029: -1.7; 2030: -1.3; 2031: -1.3; 2032: -1.2.
- Primary deficit: 2022: 2.7; 2023: 2.3; 2024: 1.8; 2025: 0.7; 2026: -0.2; 2027: -1.0; 2028: -1.7; 2029: -1.7; 2030: -1.3; 2031: -1.3; 2032: -1.2.
- Noninterest revenues (percent of GDP): 2022: 37.7; 2023: 36.9; 2024: 37.3; 2025: 37.8; 2026: 38.3; 2027: 38.5; 2028: 38.7; 2029: 38.7; 2030: 38.6; 2031: 38.7; 2032: 38.7.
- Noninterest expenditures (percent of GDP): 2022: 40.4; 2023: 39.2; 2024: 39.1; 2025: 38.6; 2026: 38.1; 2027: 37.5; 2028: 37.0; 2029: 37.0; 2030: 37.3; 2031: 37.4; 2032: 37.5.
- Automatic debt dynamics: 2022: -1.9; 2023: -0.9; 2024: 0.3; 2025: 0.1; 2026: 0.0; 2027: 0.4; 2028: 0.4; 2029: 0.4; 2030: 0.3; 2031: 0.3; 2032: 0.3.
- Real interest rate and relative inflation: 2022: -0.8; 2023: -0.6; 2024: 0.8; 2025: 1.0; 2026: 1.2; 2027: 1.5; 2028: 1.6; 2029: 1.5; 2030: 1.4; 2031: 1.4; 2032: 1.4.
  - Real interest rate: 2022: -0.9; 2023: -0.6; 2024: 0.8; 2025: 1.0; 2026: 1.2; 2027: 1.5; 2028: 1.6; 2029: 1.5; 2030: 1.4; 2031: 1.4; 2032: 1.4.
  - Relative inflation: 2022: 0.0; 2023: 0.0; 2024: 0.0; 2025: 0.0; 2026: 0.0; 2027: 0.0; 2028: 0.0; 2029: 0.0; 2030: 0.0; 2031: 0.0; 2032: 0.0.
- Real growth rate (percent): series includes 2022: -1.1; 2023: -0.3; 2024: -0.5; 2025: -0.9; 2026: -1.2; 2027: -1.1; 2028: -1.2; 2029: -1.1; 2030: -1.1; 2031: -1.1; 2032: -1.0. (table formatting shows fragmentation but preserves shown values)
- Other identified flows: 2022: -0.5; 2023: -0.7; 2024: -0.7; 2025: -0.4; 2026: -0.4; 2027: -0.4; 2028: -0.4; 2029: -0.4; 2030: -0.3; 2031: -0.3; 2032: -0.3.
- Contingent liabilities: 2022–2032: 0.0 (each year shown as 0.0).
- Other transactions: same series as Other identified flows (2022: -0.5; 2023: -0.7; ...).
- Contribution of residual: 2022: -0.7; 2023: -2.0; 2024: 0.1; 2025: 0.9; 2026: 0.7; 2027: 0.9; 2028: 0.4; 2029: 0.0; 2030: 0.2; 2031: 0.2; 2032: 0.2.
- Gross financing needs: 2022: 5.9; 2023: 7.3; 2024: 8.9; 2025: 7.8; 2026: 7.2; 2027: 6.6; 2028: 6.6; 2029: 7.0; 2030: 7.5; 2031: 7.0; 2032: 7.8.
  - of which: debt service: 2022: 3.9; 2023: 5.7; 2024: 5.7; 2025: 5.4; 2026: 7.8; 2027: 7.9; 2028: 8.8; 2029: 9.1; 2030: 9.2; 2031: 8.7; 2032: 9.4.
  - Local currency debt service: same as above for debt service; Foreign currency debt service: 0.0 across years shown.
- Memo variables:
  - Real GDP growth (percent): 2022: 2.4; 2023: 0.6; 2024: 1.0; 2025: 2.0; 2026: 2.4; 2027: 2.4; 2028: 2.4; 2029: 2.4; 2030: 2.4; 2031: 2.4; 2032: 2.4.
  - Inflation (GDP deflator; percent): 2022: 5.5; 2023: 5.7; 2024: 3.0; 2025: 2.7; 2026: 2.5; 2027: 2.0; 2028: 1.9; 2029: 2.2; 2030: 2.2; 2031: 2.2; 2032: 2.2.
  - Nominal GDP growth (percent): 2022: 8.0; 2023: 6.4; 2024: 4.1; 2025: 4.6; 2026: 4.9; 2027: 4.4; 2028: 4.4; 2029: 4.6; 2030: 4.4; 2031: 4.4; 2032: 4.4.
  - Effective interest rate (percent): 2022: 3.6; 2023: 4.4; 2024: 4.8; 2025: 4.9; 2026: 5.0; 2027: 5.3; 2028: 5.4; 2029: 5.5; 2030: 5.6; 2031: 5.6; 2032: 5.6.

### Staff Commentary on Baseline
- "Public debt is projected to peak around 50 percent of GDP in 2025 before gradually declincing, as the planned fiscal consolidation takes place under th authorities' fiscal strategy that mandates a returning of operating surplus, and among stable economic conditions."
- "Medium-term risks are low, reflecting New Zealand's low historical volatility, low terminal debt and institutional strength, as well as a large and stable banking sector, little FX debt and low GFN to GDP."

### Realism of Baseline Assumptions and Forecast Track Record
- Forecast track record windows shown for t+1, t+3, t+5 with comparator group: "Public debt to GDP; Primary deficit; r - g."
- Color code percentiles applied (> 75th percentile; 50-75th percentile; 25-50th percentile; < 25th percentile).
- Commentary: "The strong post-pandemic recovery has raised tax revenues while Covid-19 expenditure has been withdrawn, with savings repurposed for other spending. The staff projections in recent years are more closely aligned with the outturns, notwithstanding unpredictable shocks like the North Island weather events. Moving forward, the primary balance is projected to improve by the end of the medium term, albeit at a slower pace, and sustain small overall surpluses, helping debt stabilize. Factors such as New Zealand's fiscal institutional framework including its long-term objectives of low debt and small surpluses, a historical track record of running surpluses and containing its debt levels, as well as the exit from Covid-19 stimulus measures, provides credibility towards achieving sustained primary surpluses in the medium term."

### Medium-Term Risk Analysis (Key Metrics and Findings)
- Debt fanchart module:
  - Fanchart width: 25.8 (percent of GDP).
  - Debt fanchart index (DFI): 0.8.
  - Terminal debt-to-GDP x institutions index: 8.2.
  - Probability of debt non-stabilization (percent): 0.2.
  - Risk signal: Low (per note definitions).
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 7.4 (percent of GDP).
  - Banks' claims on the gen govt (pct bank assets): 4.4.
  - Chg. In banks' claims in stress (pct banks' assets): 1.2.
  - GFN financeability index (GFI): 4.3.
  - Risk signal: Low (per note definitions).
- Final assessment:
  - "Prob. of missed crisis, 2023-2028, if stress not predicted: 0.0 pct."
  - "Prob. of false alarms, 2023-2028, if stress predicted: 78.4 pct."
- Commentary: "Both medium-term tools point to low levels of risk, alluding to mitigating fundamentals such as low historical volatility, strong institutional frameworks alongside fiscal rules, low terminal debt, and low gross financing needs alongside a stable banking sector and availability of domestic financing. The Debt Fanchart Module shows that debt is on a declining and stabilizing path while the GFN module shows that gross financing needs are consistently low. A natural disaster scenario (such as the recent Cyclone Gabrielle) raises debt in the short term but it returns to a declining path in the medium term."

### Long-Term Risk Analysis (Summary Points)
- Under alternative long-term scenarios (Custom baseline, Baseline extension, Baseline with t+5, Baseline with t+5 and DSPB*, Historical 10-year average, Custom), gross financing needs and public debt remain relatively low and stable.
- Custom scenario summary numbers shown: Real GDP growth: 2.4%; Primary Balance-to-GDP: 0.5%; Real depreciation: -2.0%; Inflation (GDP deflator): 2.0% (as displayed under "Alternative Baseline Long-term Projections (including Custom scenario)").
- Commentary: "Under different long-term scenarios, gross financing needs and public debt remain relatively low and stable. Sustained primary surpluses in the long-term will gradually reduce gross financing needs. In a custom scenario with a smaller long-term primary surplus, or a historical scenario with a small primary deficit, gross financing needs remain stable, between 6 and 8 percent of GDP, while gross debt peaks at around 50 percent of GDP."
- Demographics and health cost scenarios:
  - Scenarios include Baseline: Custom; Health (Demographics); Health (Demographics + ECG*).
  - Commentary: "New Zealand's long-term fiscal challenges stem from an aging population, which is expected to increase healthcare costs. The fiscal impact of population aging can be more prominent in a scenario where it is compounded by excess growth of healthcare costs. Under these scenarios, gross financing needs and public debt are projected to reach higher levels but remain relatively low compared to other advanced economies."
- Note: DSPB: DebtStabilizing Primary Balance. ECG: Excess CostGrowth of Health.

### Risk Assessment Matrix — Selected Risks, Likelihoods, Expected Impacts, and Policy Recommendations
- Monetary policy miscalibration:
  - Likelihood: Medium.
  - Expected Impact: Medium. "A premature loosening of monetary or fiscal policy could cause inflation to become de-anchored or trigger a domestic wage-price spiral. On the other hand, an excessively tight monetary stance could generate a protracted downturn and generate pockets of distress in the household mortgage sector."
  - Policy Recommendations: "Keep policy on a nimble footing, paying close attention to data. Monetary policy decisions should focus on the inflation outlook and capacity constraints, while addressing financial volatility with macroprudential and financial stability tools. Effective communication will be key especially given the recent change in RBNZ mandate."
- Abrupt global slowdown or recession in China:
  - Likelihood: Medium.
  - Expected Impact: Medium. "Sharper-than-expected slowdown in China would lead to lower demand for New Zealand key goods exports and tourism... Weaker export growth and terms of trade, and lower government revenues would dampen overall growth and lead to pressure on the exchange rate to depreciate."
  - Policy Recommendations: "Combined monetary and fiscal policy easing would be needed to respond to a global recession. The scale of intervention should be calibrated based on inflation dynamics and fiscal space. Lower imported inflation would allow for an earlier loosening of monetary conditions."
- Deepening geoeconomic fragmentation:
  - Likelihood: High.
  - Expected Impact: Medium. "Geopolitical tensions could impact New Zealand’s export performance and availability of imported inputs resulting in lower growth and higher inflation."
  - Policy Recommendations: "Strengthen the rules-based multilateral trading system and deepen international and regional economic cooperation."
- Systemic financial instability:
  - Likelihood: Medium.
  - Expected Impact: Medium. "The banking system could be affected because it’s globally integrated. Loan book credit quality is overall strong and well-monitored, notwithstanding small increases in NPLs, but further increases cannot be discounted."
  - Policy Recommendations: "Stand ready to use liquidity windows in the event funding stress. Continue to monitor banks’ balance sheets."
- Unexpectedly large or disorderly housing market disruptions:
  - Likelihood: Medium.
  - Expected Impact: Medium. "Significant declines in housing prices alongside tightening of financial conditions would adversely affect household wealth and consumption and could expose pockets of financial vulnerabilities."
  - Policy Recommendations: "Adjust interest rates if the correction puts inflation on a rapid path to the RBNZ’s target. Adjust macroprudential policies."
- Extreme climate events:
  - Likelihood: Medium.
  - Expected Impact: High. "Stronger and more frequent economic disruptions. Larger fiscal costs related to disaster recovery and adaptation. Higher insurance premiums and associated risks."
  - Policy Recommendations: "Combined monetary, fiscal policy easing; review medium-term fiscal framework to explicitly build in buffers for this risk going forward. Build adaptation infrastructure (e.g., flood defenses) and property-level mitigation measures. Conduct climate risk stress testing of financial sector."
- Cyberthreats:
  - Likelihood: Medium.
  - Expected Impact: Medium. "An escalation of attacks could destabilize banks and affect critical facilities, slowing the recovery and disrupting financial markets."
  - Policy Recommendations: "Preventative investment in strengthening critical infrastructure; fast liquidity provision in case of financial market disruptions."

*Source: IMF staff estimates and projections as presented in the Annex figures and commentary.*

### Annex VII. Follow-Up on Key Recommendations of the 2017 FSAP

### Annex VII. Follow-Up on Key Recommendations of the 2017 FSAP

### Financial Stability and Financial Sector Resilience
- Increase RBNZ resources for the supervision and regulation of banks, insurance companies, and FMIs (ST).
  - Update: In process. A new funding agreement signed with the Minister of Finance in June 2020 provided the RBNZ with increased funding for the next five years, in part to support a more intensive supervisory model.
  - Staff numbers have increased significantly in the financial policy area over the past several years, with a significant supervisory and a smaller policy footprint now established in Auckland.
  - Frontline supervision is supported by dedicated Risk Specialists, Licensing & Authorizations and Resolution & Recovery functions.
  - This process is ongoing with further investment likely required post 2025.

- Strengthen cooperation and collaboration arrangements with Australian authorities (ST).
  - Update: In process. Managed through the Trans-Tasman Council on Banking Supervision (TTBC), whose remit covers insurers and other entities in addition to banks.
  - Actions: hypothetical bank crisis simulation exercise (September 2017); communications coordination exercise (2019); workstreams for cyber incident coordination; entity-specific Crisis Management Groups.
  - Legal and operational changes: RBNZ Act contains a new cooperation function including ‘overseas central banks and relevant international institutions’; trans-Tasman cooperation provision (s.68A) carried into the Deposit Takers Act (DTA).
  - Semi-annual supervisory colleges between RBNZ Prudential Supervision/Specialist Supervision and APRA for information exchange, coordination, and staff secondment/exchange.

- Clarify responsibilities of the Treasury and RBNZ on financial sector issues to reinforce the role of RBNZ as prudential regulator and supervisor (ST).
  - Update: In process. Governance and prudential regulation options examined in Phase 2 Review of the RBNZ Act.
  - Key changes: new financial stability objective for the RBNZ introduced in the RBNZ Act 2021.
  - Requirement: Minister of Finance to issue a Financial Policy Remit; first Remit was issued 30 June 2022.
  - The RBNZ Act designates a government department to formally monitor the RBNZ; the Minister appointed the Treasury in the monitor role.
  - The DTA clarifies the Minister’s role in crisis management and deposit taker resolution frameworks.

- Issue enforceable standards on key risks, governance, risk management, and controls (ST).
  - Update: In process. Prudential requirements for deposit takers will be set through ‘standards’ as a secondary legislative instrument; scope broadly aligns with Basel Core Principles (BCPs).
  - IPSA already uses standards for licensed insurers; review underway with expectation to introduce new standards for governance and risk management, but legislation not expected to be in force before 2026.

- Review and extend the enforcement regime, including eliminating ministerial consent for directions (MT).
  - Update: In process. The DTA will expand the enforcement toolkit (e.g., enforceable undertakings and remedial notices) and removes the requirement for Ministerial consent to issue directions.
  - Actions: An Enforcement Framework has been developed and published; dedicated Enforcement team resources have been increased.

- Initiate on-site programs to test the three-pillar approach and directors’ attestations (ST).
  - Update: In process. A deep dive on-site thematic review team was formed in 2018 covering deposit taking and insurance sectors.
  - Thematic reviews included conduct and culture of banks and life insurers, role of the appointed actuary, bank liquidity and governance.
  - The DTA empowers the RBNZ to undertake on-site inspections of deposit takers; operationalization (frequency/scope) is for the RBNZ to decide.
  - Current IPSA review will consider on-site inspection power for the insurance sector.

- Refine Financial Markets Authority (FMA) supervision:
  - a) Direct monitoring of aspects of asset management relevant to financial stability (I).
    - Update: In process. FMA published findings of a thematic review of liquidity risk management practices in July 2021; preparing industry guidance based on IOSCO recommendations for consultation later in 2023.
    - FMA published a sector risk assessment on the Managed Investment Schemes sector in January 2023.
    - Completed thematic projects/guidance related to demonstrating value for money and maturing industry approach to ESG labels and claims.
  - b) Ensuring quality of Financial Markets Supervisors (I).
    - Update: In process. Relicensing process concluded in early 2023; current license duration is five years (second re-licensing round).
    - Licence conditions were strengthened where required; FMA reviewing ongoing oversight approach.
    - Strong engagement maintained through operational meetings, sector forums, and attendance at Boards. In 2020–2021 supervisors were required to identify MIS sector risks and report back to the FMA.
  - c) Enhancing insurance intermediary and conduct regulation and supervision (I).
    - Update: In process. New financial advice regime came into effect on March 15, 2021; full licensing of financial advice providers completed in March 2023.
    - FMA established an implementation program in anticipation of the Conduct of Financial Institutions Bill and the Insurance Contracts Bill.

- Expand the FMA's regulatory perimeter to include custodians and oversight of wholesale asset managers (ST).
  - Update: In process. FMA received outsourced thematic on custodial arrangements and is progressing work on whether to recommend establishing a regulatory regime for custodians.
  - FMA is refreshing guidance for custodians under the FMC regime.
  - FMA conducted a thematic review of wholesale investor exclusions under FMC legislation and has issued public warnings and ongoing investigations where non-compliance was found.

- Adopt and implement proposed Financial Market Infrastructures (FMI) legislation (I).
  - Update: Completed. The Financial Market Infrastructures Act (FMI Act) was enacted in May 2021.
  - Financial Market Infrastructure Regulations 2023 were made on 22 May 2023.
  - Standards for designated FMIs were issued on 27 July 2023.

- Adopt CPSS-IOSCO PFMI through detailed secondary legislation; change FMI self-assessment frequency from three to two years (ST).
  - Update: In process. FMI Act enables PFMI implementation via legally binding standards; RBNZ and FMA issued standards in July, 2023.
  - Intended change: frequency of FMI self-assessments to move from three to two years once standards are in place.

- Ensure designated nonfinancial businesses and professions are subject to AML/CFT requirements (MT).
  - Update: Completed. AML/CFT Amendment Act 2017 fully in effect.
  - Coverage: lawyers, conveyancers and businesses providing trust and company services (from July 1, 2018); accountants (from October 1, 2018); real estate agents (from January 1, 2019).

- Expand data collection and modeling for credit risk in CRE and corporate portfolios (MT).
  - Update: In process. Annual stress testing program implemented since 2020 including solvency and liquidity stress tests for banks and insurers; 2022–2023 focus on climate change.
  - Models developed for ongoing assessment of risks to dairy lending.
  - Data collection expanded: a ‘New credit flows’ survey now collects monthly new lending data on all business lending and interest rates; breakdowns include commercial property, disaggregated into investment property; and residential and commercial property.
  - Work progressing toward collecting loan level data from banks to enable more in-depth sectoral risk analysis.

### Macroprudential Framework
- Strengthen arrangements for macroprudential policy: increase communication, transparency of adjustment process, and maintain accountability without jeopardizing decision-making independence (C).
  - Update: In process. RBNZ published a review of LVR experience in 2019 and a framework document clarifying purpose and strategy for macroprudential tools.
  - Current actions: updating the framework and developing guidance notes on individual macroprudential tools; publication delayed until after implementation of the DTI framework and consultation on its calibration.
  - Financial Policy Remit enables the Minister to articulate government policy priorities relevant to systemic risk.
  - DTA: macro-prudential powers subject to same general framework as other standard-setting powers; lending-standard tools (e.g., LVRs and DTIs) need to be empowered through regulation.
  - The current Macro-Prudential Policy MoU will be superseded by the Financial Policy Remit and the standard-setting process.

- Introduce DTI measures in the macroprudential toolkit (I).
  - Update: Completed. Following RBNZ advice in 2021, the Minister of Finance agreed to add DTI restrictions to the toolkit.
  - DTI restrictions were formally added to the toolkit in April 2023.

- Implement DTI measures if LVR changes do not reduce housing sector risks (I).
  - Update: In process. RBNZ consulted stakeholders on possible DTI limits in late 2022.
  - DTI framework published in April 2023. Banks have 12 months to update systems for the new framework ahead of possible implementation.
  - In January 2024, RBNZ released a consultation document on the calibration of the DTI limits prior to implementation.
  - Note: Whether intervention is needed will depend on assessment of financial stability risks at the time.

- Increase capital buffer requirements to reflect concentration in four banks (I).
  - Update: Completed. The 2019 Capital Review required banks to raise minimum capitalization from 10.5 percent of risk-weighted assets to 18 percent for the four large banks and 16 percent for the remaining smaller banks in seven years, starting from by July 2020.
  - Timing: Start date pushed out to July 2022 in the context of the COVID-19 response.
  - Status: The first step up in capital requirements has taken effect with the part-introduction of the D-SIB capital requirement.

### Crisis Readiness, Management, and Resolution
- Strengthen domestic crisis management arrangements by reaching ex-ante agreement on roles, responsibilities, processes, prepositioning, mobilization, logistics, communications plans, and testing through simulation exercises (MT).
  - Update: In process. Phase 2 Review of the RBNZ Act examined options to enhance the crisis management regime; most developed with reference to 2017 FSAP recommendations.
  - The DTA designates the RBNZ as the Resolution Authority with a broader range of powers.
  - A Depositor Compensation Scheme (DCS) will be introduced.
  - The DTA obliges the Reserve Bank to issue a Statement of Approach to Resolution, describing intended cooperation with other departments and engagement with the Minister.
  - The DTA clarifies the Minister’s role in crisis management and deposit taker resolution frameworks.
  - An amendment to the Public Finance Act 1989 included in the DTA will enable the Government to act quickly and use public funds in a financial crisis.

- Reconsider deposit insurance or introduce limited depositor preference for legal certainty for the de minimis exemption in OBR (MT).
  - Update: Partially done. The DTA will introduce a depositor compensation scheme with a NZ$100,000 limit per person per institution, funded by a levy on deposit takers, with a Government backstop.
  - Expected start: to begin in mid-2025.

- Revise the RBNZ Act to provide greater clarity and certainty in resolution, including inserting objectives, clarifying sole resolution authority, and requiring accountability reporting (MT).
  - Update: In process. The DTA states the RBNZ is the resolution authority and will include clear objectives and functions while widening resolution powers.
  - Provisions: “no creditor worse off” provisions and obligations to regularly report on conduct of a resolution.
  - Ministerial consent: retained for triggering all resolutions to align with existing New Zealand statutory management regimes; requirement for Ministerial consent before directions has been removed.

C = continuous; I (immediate) = within one year; ST (short-term) = 1–3 years; MT (medium-term) = 3–5 years.

*Sources: IMF (2017), New Zealand, Financial Sector Assessment Program—Financial System Stability Assessment; and New Zealand authorities.*

### 2.      Like in many other advanced economies, revenue as a share of GDP has remained

### 2.      Like in many other advanced economies, revenue as a share of GDP has remained

### Revenue trends and tax composition
- Personal income tax (PIT) bracket creep (increase in the average tax rate as wage grows) helped offset somewhat a lower corporate income tax (CIT) during the pandemic and inadvertently led to an increasing trend in the tax wedge on labor income since the PIT thresholds were last adjusted in 2010.
- Bracket creep has accelerated since 2022, owing to a robust nominal wage growth.
- The share of direct taxes in total tax revenue rose from 63 percent to 66¾ percent over the past decade.

### Government expenditure developments since the pandemic
- Government expenditure increased sharply during the pandemic as a result of the government’s large-scale income support to households and businesses.
- The initial COVID-19 related spending started to wind down in 2021, but a Delta variant outbreak prompted a second major lockdown in 2021-22 and contingent extension of income support measures (focusing on wage subsidies and targeted support to severely affected firms), delaying fiscal consolidation.
- Additional drivers keeping expenditure above pre-pandemic levels:
  - Rehabilitation and reconstruction efforts following the North Island weather events in early 2023.
  - Cost-of-living support to households following a surge in inflation.
  - Rapid wage growth since 2022 increased the public wage bill, including through indexation of benefit payments.
  - Expanded social benefits to tackle inequality and support the most vulnerable.

### Debt dynamics and interest-growth differential
- The delay in fiscal consolidation has led to a sharper increase in New Zealand’s government debt, although debt remains lower than most advanced economies.
- Pre-pandemic factors that supported debt reduction included historically strong fiscal discipline and a low-for-long interest rate environment that reduced the interest-growth differential to negative territory.
- The interest-growth differential is projected to turn positive in the near term, working against debt reduction and making debt dynamics more adverse.

### Fiscal objectives and policy recommendations
- Authorities’ fiscal objectives (as stated):
  - Restrict operating allowances in line with bringing operating balance back into surplus.
  - Reduce Core Crown expenditure to 30 percent of GDP.
  - Put net Core Crown debt on a downward trajectory toward 20-40 percent of GDP.
- Key policy priorities:
  - Expenditure rationalization focused on areas of highest efficiency gains.
  - Structure transfers and subsidies to avoid distortions and inefficient spending.
  - Carefully calibrate social benefits to tackle inequality and population aging.
  - Conduct a thorough review of New Zealand’s redistributive policies, including progressivity of the tax system.
  - Revisit the role of taxes in economic activity and their effect on economic incentives.
  - Seize opportunities to mobilize more revenue (plausible based on a cross-country comparison) to finance long-term fiscal challenges.
- Note: This net debt concept differs from the GFS general government (GG) net debt concept used by IMF staff; the main difference is that net Core Crown debt excludes assets held by New Zealand Superannuation.

### Annex IX — Digital infrastructure and connectivity: key findings
- New Zealand is considered a global "leader" in mobile connectivity (GSMA definition) with high mobile and fixed broadband penetration rates and high-speed advanced mobile network coverage.
- As of September 2023:
  - Mobile phone penetration rate (MCI index) exceeded 119 percent, up from 100 percent in 2007.
  - Number of mobile subscriptions climbed to approximately 6.10 million by end-September 2023, up from 5.947 million reported as of June 30, 2022.
- However, progress has stalled:
  - The MCI has been on a flat trajectory since 2015; New Zealand fell toward the median within its comparative group.
  - Declining growth momentum is evident in 2014-22 compound annual growth rate (CAGR) and sequential cumulative rate (SCR).

### Digital infrastructure bottlenecks and affordability
- Primary challenges: digital infrastructure (especially mobile download speed) and affordability (mobile data and smartphone prices).
- Speed and ranking:
  - New Zealand mobile download speed: 67.77Mbps.
  - Global average mobile download speed: 49.25Mbps.
  - New Zealand ranks 39th in mobile download speed.
- Affordability:
  - Cost of accessing mobile data and voice services accounts for 0.53 percent of the monthly GNI per capita—below the United Nations' target of 2 percent and comparable to the peer median.
  - The average price for a high-consumption mobile data and voice basket, as a percentage of monthly GNI per capita, increased between 2018-22.
  - Prices for high-usage bundles in New Zealand surged by 23.2 percent between 2018-22; in Australia they fell by 46 percent, with a group-wide decrease of 12 percent.
  - New Zealand has the lowest mobile data usage and a high Average Revenue Per User (ARPU), indicating high mobile data costs relative to usage.

### Subscription trends and drivers
- New Zealand experienced an approximate 1 percent annual decline in mobile subscription growth from 2018-22.
- Contributing factors: stringent lockdown measures leading to historically low migration, tapering natural population increase (notably among those born between 2006 and 2011), and pandemic-related demographic effects.
- Policy implication: enhance mobile internet service accessibility through more affordable internet plans and smartphones.

### 5G adoption outlook and potential economic gains
- 5G adoption appears uncertain and potentially slower than in peer economies:
  - New Zealand's projected 4G sunset: penetration decline to 28 percent by 2029 (slowest among peers).
  - Comparison peers: Australia's expected 4G penetration of 16 percent and the median of 17 percent by 2029.
  - New Zealand is anticipated to reach 90 percent 5G penetration by 2029, lagging the median expectation of 112 percent among other advanced economies.
- Economic potential of 5G:
  - GSMA econometric assessment: a 10 percent increase in mobile penetration could correspond to a 1 percent uplift in GDP.
  - A baseline increase in 5G penetration could contribute an additional NZ$25 billion to New Zealand's GDP level by 2029.
  - Aligning 5G penetration with the median country rate could yield a further NZ$11 billion increase to baseline GDP.
  - 5G offers speeds "10 to 100 times faster than 4G" and up to tenfold reductions in latency, enabling technologies such as AR/VR and interactive, large-scale language models that could elevate labor productivity, especially in ICT-related sectors.

### Infrastructure developments: tower ownership and sharing
- July 2022 transactions: Spark and Vodafone NZ sold significant shares of passive mobile tower assets to external investors, marking a transformative period for the tower industry.
- Objectives and benefits of infrastructure sharing:
  - Support expansion of digital infrastructure and new site developments, including co-location, improving rural coverage.
  - Enhance affordability through cost savings, balance sheet optimization, and reduced redundancy.
  - Distribution of network expansion costs across market participants can yield considerable capital expenditure savings.
- Context: New Zealand is one of the last advanced economies to introduce tower companies in the mobile sector; the fixed broadband sector was previously supported by "The Rural Broadband Initiative (RBI)."

### Annex X — International best practices for monetary and fiscal policy coordination
- Coordination between fiscal and monetary authorities is critical, especially when central bank measures carry fiscal implications (non-conventional liquidity support, large-scale asset purchases).
- In New Zealand:
  - The Reserve Bank of New Zealand (RBNZ) implemented large-scale asset purchase (LSAP) program and a funding for lending program (FLP) in the wake of the pandemic.
- Central bank balance sheet and quasi-fiscal risks:
  - The ‘core’ central bank balance sheet does not necessarily have fiscal components; however, crisis-related quasi-fiscal activities can create financial risks from assets and liabilities.
  - Crisis responses can expose central banks to private credit claims, issuance of short-term interest-paying debt, rising policy rates, and implicit subsidies to counterparties.
- Fiscal backstops and governance:
  - Central bank crisis interventions require a fiscal backstop or credible recapitalization mechanism (government deposits, guarantees, an SPV, or loss provisioning).
  - In New Zealand, the government has periodically provided additional capital to the Reserve Bank and an indemnity to cover losses on LSAP bond holdings.
  - Strong central bank and fiscal governance is needed: legal mandates authorizing crisis interventions, clear disclosure, proper accounting treatment of risks, and ex-post impact assessments.
- Oversight versus independence:
  - External oversight, monitoring, and data-sharing arrangements are important given risks to the public sector balance sheet.
  - Oversight must be balanced against preserving central bank operational autonomy.
  - The fiscal authority should have input on the design and implementation of central bank operations with quasi-fiscal components when it provides an explicit backstop, without undermining independence.

*Source: 1nzlea2024001 (IMF staff report excerpt).*

### 6. Clear coordination between the central bank and the fiscal authority is necessary,

### 6. Clear coordination between the central bank and the fiscal authority is necessary,

### Coordination rationale and recommended frameworks
- Countries benefit from both coordination on specific interventions and from adopting a comprehensive sovereign asset liability management framework to better manage the fiscal risks from crisis interventions.
- Coordination on debt management is particularly beneficial in the case of large central bank purchases of government securities.
- Different institutional arrangements can improve and formalize coordination, either through creation of new structures or leveraging existing bodies—particularly where central banks also have macroprudential authority.
- Coordination mechanisms can range from formalized structures (e.g., a financial stability committee (FSC)) to informal regular meetings between the central bank governor and the Minister of Finance, exchange of letters or opinions, participation in joint working groups, or technical committees advising the central bank’s Monetary Policy Committee.
- Design principle: coordination mechanisms must be aptly and adequately designed to fit their specific purpose — some means may facilitate co-decision-making while others are longstanding practice but not necessarily the most effective.

### Institutional developments and mandates
- The number of central banks with an explicit financial stability mandate (including a macroprudential oversight function) is steadily increasing (Figure 2).
- A macroprudential mandate tends to bring more institutionalized forms of coordination with government, including through a formalized FSC.
- Other common coordination modalities include informal meetings, letters/opinions, joint working groups, and technical committees; their effectiveness depends on legal frameworks and specific design.

### Transparency and IMF guidance
- Regardless of chosen monetary–fiscal coordination mechanisms, they should be properly institutionalized and sufficiently transparent.
- Central banks, given their degree of autonomy, should ensure transparency over formal and informal coordination.
- The IMF’s Central Bank Transparency Code (CBT) includes detailed best practice levels allowing central banks to tailor transparency on crisis interventions to stakeholders (fiscal authority, financial institutions, public).
- CBT review reports identify critical findings relating to transparency over central bank–government coordination particularly in the areas of:
  - macroprudential policy,
  - relations with domestic financial agencies,
  - relations with government in general.
- Given the host of central bank interventions in recent years and potential significant fiscal risk during interventions and wind-downs, central banks should actively pursue best practices in transparency.

### New Zealand—assessment of coordination and disclosures
- New Zealand maintains strong coordination and appropriate operational mechanisms between fiscal and monetary authorities.
- The New Zealand Treasury maintains good coordination with the Reserve Bank through close communication (for instance via memoranda of understanding) and is able to advise the government on appropriate policies.
- The Reserve Bank provides timely disclosures of its use of resources through transparency of regular monetary policy operations, use of unconventional instruments, and periodic reviews of its frameworks (e.g., Review and Assessment of the Formulation and Implementation of Monetary Policy; periodic review of the Remit and Charter).
- The authorities have discussed coordination practices between Treasury and the Reserve Bank with the IMF during regular bilateral surveillance and have sought IMF staff advice to ensure compliance with best international practices.
- The IMF has evaluated aspects of monetary and fiscal policies for New Zealand (such as estimating the fiscal costs of the LSAP; see Annex X of the 2023 New Zealand Article IV Staff Report).
- The IMF’s CBT Code for New Zealand could help evaluate the effectiveness of coordination mechanisms further.

### Data and disclosure-related points relevant to surveillance
- The authorities still do not produce a monthly CPI index which hampers the formulation of monetary policy.
- New Zealand has started a monthly Selected Price Index which includes prices on 44 percent of the full CPI basket.
- The net errors and omissions (NEO) in Stats NZ's Balance of Payments statistics were large and positive for four consecutive quarters as of September 2023; Stats NZ has been working to identify possible causes and resolve data issues.
- Staff assessment: the data provided to the Fund is adequate for surveillance, with ongoing enhancements to data quality and range; while GFS format fiscal data are provided only on a yearly basis, New Zealand Treasury's published GAAP format fiscal data at higher frequencies enable adequate assessment of fiscal policy.

*Source: 1nzlea2024001 - 6. Clear coordination between the central bank and the fiscal authority is necessary, (selected content from the New Zealand: Staff Report for the 2024 Article IV Consultation).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1nzlea2024001.pdf_