The Budget next month will map a credible path back to a fiscal surplus, Finance Minister Bill English said yesterday.
Responding to a report from the Organisation for Economic Co-operation and Development (OECD), Mr English said that in particular, the OECD recommended a faster improvement in the country's fiscal position, which would take the pressure off monetary policy.
"The OECD points out this would allow interest rates to remain low for longer and create room for the exchange rate to ease," he said.
"All of this would support the economic adjustment - which is already under way - to build faster growth from savings, exports and productive investment, rather than excessive borrowing and increases in government spending."
Mr English did not comment on the parts of the report which argued New Zealand should favour a capital gains tax and lift the retirement age - both issues having been put off limits by Prime Minister John Key.
The OECD's latest economic survey of New Zealand, published yesterday, said lacklustre growth reflected the economy's structural shortcomings.
As the 2000s progressed, the main sources of rising prosperity had increasingly become commodity-based terms of trade improvements, credit-fuelled capital gains on property, and rising government spending, the OECD said.
Its report focused on ways to improve product market regulation and competition, and took a detailed look at the housing sector and environmental policy. New Zealand's living standards had for some time tracked persistently below the OECD average, mainly because of poor labour productivity, the report said.
Generous universal public pension and student loan schemes might reduce the incentive for households to save, while the tax system biased investment decisions by distorting market signals.
Raising the retirement age, while slowing the pace in benefit payments, could provide large fiscal savings, increase potential output and boost household savings rates, the report said.
With nominal interest income and dividends taxed, the absence of a capital gains tax raised the relative returns to assets with good prospects for price appreciation, which tended to favour property and farm investments.
While the Government had addressed some of the distortions that prolonged the housing boom, it could further reduce the bias towards housing investment relative to other assets by introducing a comprehensive realisation-based tax on capital gains.
Excluding primary residences from tax would diminish the effectiveness of such a tax, but partial exemption or roll-over relief could act as a second-best solution to facilitate public acceptance.
In the absence of a capital gains tax, the tax of alternative savings could be lowered to level the investment playing field, and more limits could be put on the extent to which property investment losses could be deducted for tax purposes, the OECD report said.
Such measures should be accompanied by higher property or land taxes
