The commission backed a "substantial clarification" in statutory objectives, a stronger role for spatial planning; timely, fairer and comprehensive review of plans by independent hearings panels; more tools for councils to fund infrastructure; and better stewardship of the planning system.
Sherwin said that although urban planning could help boost the benefits of cities, too often the connection between planning rules and the well-being of communities was weak or difficult to justify.
Further, he said, the supply of infrastructure and zoned land was failing to keep pace with demand in New Zealand's fast-growing cities, and the natural environment was being degraded.
"Planning is inherently contested territory and difficult trade-offs sometimes have to be made," he said.
"Our current planning system tends to be adversarial and reactive to the views of well-resourced and mobilised groups rather than the majority."
Councils needed more tools and greater flexibility to gather views from a range of community interests, he said, and use the results for different planning purposes.
A future system required a "more restrained" approach to land-use regulation - and councils needed to allow people greater scope to decide how to best use their land, subject to requirements for protecting the natural environment and Maori Treaty interests.
The commission recommended the appointment of independent hearings panels to check that plans met legislative requirements, to hear from residents and stakeholders and to resolve remaining conflicts of views about plans.
The Environment Court would continue to have a role in hearing appeals on points of law.
"What we need is a responsive system that aims to deal with the growth in demand for urban capacity, and with competing citizen interests and values," Sherwin said.
Finance Minister Steven Joyce welcomed the report and said ministers would carefully review its findings and recommendations.
"As New Zealand becomes more economically successful and our population grows we need better and more responsive planning for growth and more investment in the infrastructure that supports that growth," Joyce said.
"The Government has made a number of changes to existing planning and funding tools over recent years.
"These include the National Policy Statement on Urban Capacity, the proposed Urban Development Authority legislation, the Housing Infrastructure Fund, and the current round of RMA reforms, all of which progress some of the areas of work the Productivity Commission identifies.
"However in this report the Government asked the Productivity Commission to take a blue skies approach and provide a longer-term view at what a future planning system could look like.
"The Government will respond formally to the Productivity Commission's recommendations in due course.
"We would like to acknowledge the commission's time and effort in considering this issue, and the wide engagement it has had with individuals, local authorities and firms throughout New Zealand and Australia in the inquiry," Joyce said.
Environmental Defence Society chief executive Gary Taylor welcomed the report, which he said book-ended the society's own recent report that found the system was not producing good environmental outcomes.
"The commission has recommended a new act that would contain separate objectives and principles for the built and natural environments," Taylor said.
"Crucially, it acknowledges the need for clear environmental limits to apply everywhere."
Taylor said the EDS favoured the appointment of a royal commission on resource management.
"The way forward must be depoliticised, have huge integrity and focus on our country's needs over the next 30 years."
Labour's RMA spokesman, MP David Parker, said the party approved of calls for better spatial planning and for creating competitive land markets, which would stop land bankers driving up land prices and strangling Auckland.
He also called for a way to finance infrastructure that would take the burden off councils, such as a bond or targeted rate levied on developers. He said the Government had always had those options under the RMA but had chosen not to implement them.
"Just about all the things they call for could have been done under RMA."
Five key recommendations from the report
• Make a distinction, within a single statute, between the built and natural environments with clear objectives and principles for each.
• Provide clearer protective limits for the natural environment within which development can occur, and a more flexible and adaptive approach to addressing the cumulative effects of development.
• Set stronger expectations for the active protection of Maori Treaty interests in the built and natural environments, through a national policy statement.
• Make clear provision for development in urban areas, subject to clearly articulated limits.
• Include more responsive rezoning through the use of predetermined price triggers to signal when land markets are out of balance and rezoning is needed.
