The International Monetary Fund has recommended New Zealand introduce a comprehensive capital gains tax and reform superannuation settings to address mounting fiscal pressures from rising pension costs.
The proposals feature in the IMF's latest official mission report, based on interviews conducted between 18 June and 1 July with Finance Minister Nicola Willis, Reserve Bank Governor Anna Breman, Treasury Secretary Iain Rennie, and representatives from think tanks, unions and business groups. The mission was led by Yan Carrière-Swallow, Deputy Division Chief at the IMF's Asia and Pacific Department.
The mission identified growing NZ Superannuation expenditure as creating fiscal strain and called for a staged reform programme covering both pension settings and KiwiSaver. On the revenue side, the fund suggested new measures including a tax on capital gains and changes to land value taxation.
On retirement savings, the mission suggested boosting KiwiSaver participation through higher contribution rates and expanded membership.
The IMF noted that expenditure restraint alone could impact the quality and delivery of public services given rising age-related spending costs. The report said persistent budget discipline over multiple budgets would be required to reach surpluses, particularly given pressures from NZ Super payments and Defence Force obligations.
"An adjustment strategy that includes a broader set of expenditure and revenue measures would distribute the effort across fiscal instruments, strengthen the credibility of the fiscal anchor, and help reduce distortions in the tax system," the report stated.
The mission supported the Government's efforts to contain operating costs and improve public sector efficiency. The Government announced in May it would target $2.4 billion in savings through public service reform, involving the reduction of almost 9000 positions over 3 years.
But the fund cautioned that workforce reductions should be phased and focused on priorities to safeguard the most valuable functions, maintain the capacity to deliver programmes, and ensure savings prove lasting. The mission recommended periodic cost-benefit assessments of government programmes to identify further efficiency opportunities.
The IMF assessed New Zealand's targeted, temporary response to the fuel price shock as being in line with international best practice. "The measure effectively supports vulnerable households with children while prices are elevated, preserving price signals that incentivise energy demand adjustment - which helps prevent shortages from occurring - and its modest cost avoids creating inflationary pressures and preserves fiscal space," the report said.
The mission found that economic recovery had been pushed back by the oil price shock and heightened uncertainty. Inflation is expected to stay temporarily above the Reserve Bank's 1% to 3% target band.
Before the Middle East conflict escalated, recovery was uneven across sectors and regions. Services were expanding steadily, but labour market conditions were loosening, wage growth was slowing, and construction and manufacturing remained subdued.
The report noted the economy faced repeated shocks including geoeconomic fragmentation, trade disruptions, and natural disasters, which posed risks to growth and inflation.
The IMF said maintaining strong policy settings was important including a flexible exchange rate regime, strong fiscal buffers and a credible central bank. The mission said restoring fiscal reserves was necessary given external turbulence and persistent deficits since the Covid pandemic.
About half of New Zealand's public debt is held by non-residents. "About half of the public debt is held by non-residents, which supports market liquidity in the context of a shallow pool of domestic savings, but amplifies the sensitivity of New Zealand's sovereign yields to shifts in global financial conditions," the report said.
The IMF recommended structural reforms as necessary to improve productivity and living standards and strengthen resilience. "Conversely, a stronger transmission of monetary accommodation, or productivity gains from structural reforms could support a quicker rebound," the mission noted.