OECD urges NZ bank deposit insurance

The OECD has urged NZ to adopt a deposit guarantee scheme to limit depositers' losses in the event of bank failure. Photo / Michael Craig

Latest economic survey report warns open bank resolution policy may be insufficient to prevent bank runs.

The OECD is urging New Zealand to adopt a deposit insurance scheme to limit depositors' losses in the event of a bank failure.

An alternative policy called open bank resolution (OBR), which the Reserve Bank is working on and which would impose a haircut on depositors and other bank creditors, is a "very novel idea", OECD economist Alexandra Bibbee said as the Paris-based organisation released its latest Economic Survey of New Zealand.

"Every country in the OECD has deposit insurance, except New Zealand," she said, "We recommend it as [a] safety valve even if you have OBR."

OBR might not be enough to prevent bank runs in all circumstances because, as soon as it was applied to one bank, depositors might fear contagion to other banks.

The OECD also recommends higher capital buffers for the four big banks, which are considered too big to fail.

It has repeated its call for a capital gains tax, arguing that the lack of one exacerbates income inequality (which in New Zealand is above OECD norms), reinforces a bias towards speculative investment in housing and undermines housing affordability.

It considers the tax treatment of petroleum exploration unnecessarily generous.

It also notes that fuel taxes in New Zealand are low by OECD standards and calls for a toughening of the rules of the emissions trading scheme so as to impart a meaningful carbon price signal, though it supports the continued exclusion of agricultural emissions from the scheme.

The OECD says being small and remote is part of the explanation for New Zealand's relatively low productivity and incomes.

To help mitigate that, good telecommunications infrastructure is essential and it is not impressed by the current state of regulation and competition policy around ultra-fast broadband and the legacy copper network.

It recommends a focus on lifting "weightless" exports, for example, in the information technology sector. Such exports represent only about a fifth of services exports, which in turn are only about a quarter of total exports, in a country where trade flows are low by OECD standards, relative to the size of the economy.

"New Zealand is one of the few countries not to have a research and development tax credit," OECD economist Calista Cheung said.

In addition tax treatment of patents is comparatively stringent, in not allowing the accelerated depreciation of patent assets and in taxing the entire proceeds of patent sales as income.

The survey was completed before the Budget, which foreshadowed some tax relief for R&D-intensive start-up firms, and an increase in funding for R&D grants.

The OECD survey also argues that another part of the explanation for New Zealand's relatively low productivity levels is a skills deficit.

It is struck by a high drop-out rate from the education system. "According to the Ministry of Education almost one in five New Zealand students leaves secondary school without formal qualifications. For Pasifika students it is one in four and for Maori one in three."

It also notes that the likelihood that a tertiary student is the child of highly educated parents is higher than in any other OECD country and the proportion of the young who are not in employment, education or training has gone from being below the OECD average in 2001 to above it 10 years later.

"You've got a lot of latent talent there, untapped human potential," Bibbee said.

The OECD report recommends investing more resources into working with schoolchildren who are failing.

"We put a lot of stress on early intervention but it's never too late. You should never give up on them," Bibbee said. "Your welfare reforms recognise that if a young adult is out of the school system and out of the job market the aim is not to get them into any kind of job quickly, but to tackle the education problem even at their age," she said. "But it is more efficient to start early."