New Zealand WT/TPR/S/216/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. During the period under review (2003-09), New Zealand has remained among the more open 
economies in the world as far as international trade and foreign investment are concerned.  Prudent 
macroeconomic management coupled with continued liberalization and restructuring, facilitated real 
GDP growth, which averaged a steady 3.2% a nnually between 2003/04 and 2007/08 (Table I.1).  
Growth has been fuelled by domestic consumption,  which grew by an average of 4.5% annually 
during the same period and also to an extent by improved terms of trade.  However, growth is 
expected to contract in 2008/09 due to the recession in the first two quarters.  Inflation as measured by 
the consumer price index (CPI) averaged 2.7%, wh ich was within the Reserve Bank of New Zealand's 
(RBNZ) medium-term target range of 1-3%1, while unemployment declined from 4.5% to 3.6% 
during the review period.  As a result of ec onomic growth, GDP per capita rose from NZ$34,596 
(US$21,221) in 2003/04 to NZ$41,984 (US$31,889) in  2007/08.  New Zealand maintained its ranking 
in the high category of the UN human development index, ranking 19th out of 177 countries in 2005.2  
Furthermore, New Zealand ranked 24th out of 134 in terms of competitiveness3 and was also ranked as 
the least corrupt country in the wo rld by Transparency International.4 
Table I.1 
Selected macroeconom ic indicators, 2003-08  
  2003/04 2004/05 2005/06 2006/07 2007/08 
National accounts  (Percentage change)  
Real GDP, expenditure based (at 1995/96 prices) 4.0 3.9 2.9 2.8 2.3 
Consumption 6.2 4.9 4.6 3.1 3.4 
Private consumption 6.6 5.1 4.6 2.8 3.2 
Government consumption 4.9 4.2 4.9 4.0 4.3 
Gross fixed capital formation 13.0 9.7 5.3 -0.5 4.2 
Exports of goods and non-factor services 0.9 4.6 0.0 3.1 2.9 
Imports of goods and non-factor services 12.7 12.5 4.2 -1.6 9.6 
XGS/GDP (%) (at current market price) 29.1 28.9 27.8 29.1 28.9 
MGS/GDP (%) (at current market price) 28.8 29.7 30.2 30.6 29.7 
Unemployment rate (%) 4.5  3.8  3.7  3.7  3.6  
Prices and interest rates  (Per cent)  
Inflation (CPI, % change) 1.5  2.8  3.3  2.5  3.4 
Base lending ratea 9.77  11.11  12.12  12.48  13.45  
Six months deposit ratea 5.17  6.42  6.79  7.18  8.24  
Money credit (end period)b  (Percentage change)  
M1 12.6 0.7 -1.8 3.4 2.4 
M2 7.5 6.2 7.1 12.1 -0.1 
M3 7.3 6.3 9.8 12.8 6.4 
Credit to private sector (households) 9.5 13.2 7.3 13.5 11.5 
Exchange ratec      
US$/NZ$ (annual average) 0.613  0.674  0.692  0.657  0.760  
Real effective exchange rate (% change) 11.5  5.6  4.1  -6.2  8.2  
Nominal effective exchange rate (% ch ange) 11.7  5.2  3.2  -7.0  8.2  
Table I.1 (cont'd) 
                                                      
1 Annual CPI exceeded the target range in 2005/06 and 2007/08. 
2 UNDP (2008). 
3 World Economic Forum (2008). 
4 Transparency International (2008).  WT/TPR/S/216/Rev.1 Trade Policy Review 
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  2003/04 2004/05 2005/06 2006/07 2007/08 
  (Per cent of GDP, unless otherwise indicated)  
Government budget (end-June fiscal year)      
Revenue 32.3  33.6  35.2  34.5  34.3  
Tax revenue 30.3  31.2  32.2  31.7  31.5  
Expenditure 29.3  39.5  31.2  32.0  31.7  
Operating balance before gains and losses 3.9  4.7  4.5  3.5  3.1  
Gross sovereign-issued debt 25.2  23.3  22.7  21.8  21.0  
External sector      
Current account balance  -4.8 -6.8 -9.3 -8.3 -8.0 
Net merchandise trade  -0.9 -1.5 -2.6 -1.7 -1.0 
Merchandise exports 20.8 20.7 20.1 21.5 21.7 
Merchandise imports 21.6 22.2 22.7 23.2 22.7 
Services balance 1.1 0.7 0.3 0.2 0.1 
Capital account 0.5 0.1 -0.2 -0.3 -0.4 
Financial account 3.9 7.2 9.1 7.9 8.5 
Direct investment 1.2 2.3 4.0 6.2 -0.2 
Reserve assets -1.7 0.6 -3.1 -4.1 -3.2 
Terms of trade (June 2002 = 1,000) 1,057.0 1,105.0 1,069.0 1,117.0 1,247.0 
Merchandise exports (% change) -5.2 7.1 1.5 12.8 8.7 
Merchandise imports (% change) 0.9 10.2 7.0 7.8 5.2 
Service exports (% change) -2.6 5.3 0.0 2.8 0.8 
Service imports (% change) -1.0 11.8 5.7 3.0 2.4 
Official reserve assets (NZ$ million, e nd-March) 10,092. 6 8,827.6 14,596.0 20,380.8 24,538.4 
Total external debt (NZ$ billion;  end-March) 148.9 162.9 181.2 192.8 219.5 
Debt service ratiod 10.0 11.7 13.1 15.1 16.7 
a Calculations are based on monthly averages: July-June. 
b M1 includes notes and coins held by th e public plus chequeable deposits, minus inter-institutional chequeable deposits, and 
minus central government deposits.  M2 consists of M1 pl us all non-M1 call funding minus inter-institutional non-M1 call 
funding.  M3 consists of notes  and coins held by the public plus NZ dollar funding minus inter-M3 institutional claims and minu s 
central government deposits. 
c Calculations are based on monthly averages: April-March. d Debt service in per cent of exports of goods and services. 
Note: Data shown in this table are based on Apr il to March figures, unless otherwise indicated. 
Source : Statistics New Zealand online inform ation.  Viewed at:  http://www.stat s.govt.nz/;  New Zealand Treasury online 
information.  Viewed at:  http ://www.treasury.govt.nz/;  and data  provided by the authorities. 
2. The New Zealand economy faces structural challenges that are both short-term and long-term 
in nature.  Growth has been led by domestic demand, which has resulted in a negative household 
savings rate.5  Consequently, the ratio of household debt  to disposable income is approximately 
160%6 and the current account deficit reached 8.6% of GDP for the year ended 30 September 2008.  
However, net household wealth has also risen signi ficantly during the review period.  Comparatively 
low productivity is another issue;  despite growi ng at approximately 1.1% per year between 2000 and 
2007, labour productivity in New Zealand lagged that  of the United States by approximately 45%, and 
was 25% lower than the OECD average.7  As a result of lacklustre productivity growth, the standard 
of living in New Zealand was 16% below the OECD average.8  New Zealand's aging population and 
the associated increase in fiscal e xpenditure are also a concern. 
                                                      
5 New Zealand has one of the lowest household savings rates in the OECD. 
6 OECD (2007c). 
7 OECD (2008b). 
8 OECD (2007c). New Zealand WT/TPR/S/216/Rev.1 
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3. International trade plays an important role in New Zealand's economy, with total trade in 
goods and non-factor services rising to 58.6% of GDP  in 2007/08 from 57.9% in 2003/04.  Foreign 
direct investment has remained robust during the period under review and inward FDI rose from 
nearly 3% of GDP in 2003/04 to 7.5% in 2006/07, but declined to 2.4% of GDP in 2007/08.  Outward 
FDI declined from 1.7% to 1.3% of GDP between 2003/04 to 2006/07, before nearly doubling to over 
2.5% of GDP in 2007/08.  New Zealand also appears to be well integrated into the world economy.9  
(2) RECENT ECONOMIC DEVELOPMENTS  
4. After a recent peak of 4% in 2003/04, real GDP  growth has been decelerating and was 2.3% 
in 2007/08 and is expected to contract by 0.6% in 2008/09.10  Rising house and commodity prices 
resulted in wealth and income effects, which in turn fuelled domestic cons umption between 2003-05.  
Furthermore, large migration inflows contributed to the domestic demand growth during the period.  
However, the growth resulted in a scarcity of  resources as capacity utilization reached unprecedented 
highs, while unemployment fell to historic lows.  Th e resource constraint coupled with a tightening of 
monetary policy (section (3) below), and a rea lization that the housing market had become 
significantly overvalued, resulted in a slowdown in  real GDP growth.  The recent global financial 
crisis has compounded the growth slowdown.   
5. The share of agriculture in GDP declined fro m 2003/04 to 2004/05 and its share in total 
employment declined.  Further more, poor weathe r adversely affected dairy production in 2007/08.  
The shares of manufacturing in GDP and in total em ployment have remained static.  The share of 
services in GDP has also remained steady, at approximately 70% between 2003/04 and 2004/05 
(Table I.2), while services share in total employme nt rose slightly between 2003/04 and 2006/07.  The 
share of construction rose from 4.7% of GDP in 2003/04 to 4.8% in 2007/08, and its share in total employment rose from 7.4% to 8.4%.  The growth  in construction activity was due to the housing 
boom in the country. 
6. The slowdown in GDP growth is also relate d to declining productivity growth in the 
economy, with multifactor, labour and capital produc tivity growth all dropping markedly since 2000 
(Table I.3).  The decline in productivity growth  would tend to have an adverse effect on the 
competitiveness of New Zealand's enterprises.  For an economy such as New Zealand raising 
productivity growth so as to improve its intern ational competitiveness is one of its greatest 
medium-term challenges.  Roughly half of the aver age annual growth of 3.3% since 2000, is due to 
increased capital inputs, whose productivity declined  slightly.  Increased labour inputs accounted for 
more than one third of this growth, although la bour productivity growth declined as less productive 
workers were absorbed in to the labour force.  Growth in multifactor productivity in the measured 
sector
11 has accounted for only 0.4 of a percentage point of average annual growth since 2000, 
compared with 1.9 percentage points previously.  Plausible reasons for the decline in multifactor 
productivity include, inter alia,  low levels of research and devel opment, high cost of credit, and a 
high exchange rate.  Multif actor productivity reflects, inter alia,  economies of scale, and 
technological progress, one of the main dete rminants of productivity growth, and thus 
                                                      
9 According to the Foreign Policy Globalization Index Rankings, New Zealand ranked in the top 20 in 
2006 and 2007.  Foreign Policy online information, "Globalization Index Rankings".  Viewed at:  
http://www.foreignpolicy.com/st ory/cms.php?story_id=4030#rankings [16 October 2008]. 
10 Treasury (2008b). 
11 The measured sector excludes industries or sectors such as government administration and defence, 
health, education, residential and commercial property services, business services, personal and other 
community services, whose real value-added is measured  in the national accounts largely using input methods, 
such as number of employees. WT/TPR/S/216/Rev.1 Trade Policy Review 
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competitiveness, in the long run.  Additionally, New Zealand runs the risk of a downgrade to its credit 
rating if structural changes are not undertaken to improve productivity. 
Table I.2 
Basic economic indicators, 2003-08 
  2003/04 2004/05 2005/06 2006/07 2007/08 
Real GDP (NZ$ million, 1995/96 prices)      
Expenditure based 122,075.0  126,781.0  130,508.0  134,118.0  137,247.0  
Production based 120,813.0  125,366.0  129,082.0  131,449.0  135,507.0  
Current GDP (NZ$ million)a 139,938.0  149,948.0  157,334.0  165,764.0  178,056.0  
GDP per capita at current market price (NZ$) 34,596.0  36,561.0  37,930.0  39,484.0  41,984.0  
GDP per capita at current market price (US$) 21,221.2  24,653.1  26,240.0  25,941.0  31,899.4  
 (Annual percentage change) 
GDP by economic activity at constant 
1995/96 prices      
Agriculture 13.3 -3.3 6.5 0.3 -2.0 
Forestry, fishing and mining -9.4 -3.9 -1.4 -1.1 24.4 
Manufacturing 3.6 3.1 -1.5 -2.0 1.0 
Electricity, gas and water 0.4 5.4 -4.4 3.0 -4.3 
Construction 10.3 6.7 4.4 -1.8 4.4 
Services 3.6 4.5 4.1 3.2 3.8 
Wholesale trade 1.9 6.8 2.6 0.0 4.2 
Retail, hotels and restaurants 5.3 6.1 4.5 2.8 3.1 
Transport, storage and communication 3.8 6.1 2.8 2.2 5.2 
Finance, insurance an busine ss activities 3.2 3. 7 5.3 3.9 3.9 
Government administration and defence 5.3 6.1 5.9 7.9 5.4 
Personal and community services 3.7 2.3 2.3 2.8 2.3 
 (Per cent) 
Share of GDP, current prices      
Agriculture 5.4 5.1 .. .. .. 
Forestry and fishing 0.9 0.9 .. .. .. 
Mining 1.0 1.1 .. .. .. 
Manufacturing 14.6 14.7 .. .. .. 
Electricity, gas and water 2.7 2.7 .. .. .. 
Construction 4.7 5.2 .. .. 4.8 
Services 70.7 70.4 .. .. .. 
Wholesale and retail trade 13.3 12.9 .. .. .. 
Restaurants and hotels 1.8 1.9 .. .. .. 
Transport, storage and communication 7.2 7.1 .. .. .. 
Finance, insurance and busin ess activities 14.5 14.4 .. .. .. 
Real estate 6.1 6.1 .. .. .. 
Government administration and defence 4.2 4.2 .. .. .. 
Education, cultural and recreational services 6.5 6.4 .. .. .. 
Health and social work 6.7 6.9 .. .. .. 
Ownership of dwellings 6.6 6.4 .. .. .. 
Otherb 3.9 4.0 .. .. .. 
Share of sector in total employment 
(end-March)      
Agriculture, forestry and fishery 7.9 7.4 7.2 7.1 7.2  
Mining and quarrying 0.2 0.2 0.3 0.3 0.3  
Manufacturing 14.4 14.4 13.4 13.1 12.7  
Electricity, gas and water 0.5 0.5 0.4 0.4 0.4  
Construction 7.4 7.6 7.9 8.8 8.4  
Table I.2 (cont'd) New Zealand WT/TPR/S/216/Rev.1 
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  2003/04 2004/05 2005/06 2006/07 2007/08 
Services 69.4 69.8 70.5 70.0 70.5  
Wholesale and retail trade 18.0 17.7 17.6 17.3 17.7  
Hotels and restaurants 4.8 4.7 4.8 4.7 4.9  
Transport, storage and communication 5.9 5.9 5.5 5.5 5.4  
Finance and insurance 2.9 3.0 3.3 3.3 3.3  
Real estate and business ac tivities 10.3 10.9 11.4 11.5 11.5  
Education 7.9 8.0 7.8 7.7 7.8  
Health and community services 9.0 9.0 8.9 9.3 9.3  
Other services 10.5 10.6 11.2 10.8 10.6  
Other 0.2 0.2 0.3 0.4 0.5  
.. Not available. 
a Expenditure based. 
b GST on production plus import dutie s minus finance service charge. 
Note:  Data provided are based on April to March figures.  
Source : Statistics New Zealand online inform ation.  Viewed at:  http://www.stat s.govt.nz/;  and data provided by the 
authorities.  
7. Continued domestic demand pressure, coupled  with capacity constraints and rising 
international oil prices, resulted in persistent in flationary pressure with the CPI breaching the RBNZ's 
medium-term target in 2005/06 and 2007/08.  The CPI reached an 18-year high of 5.1% in 
September 2008, and has been above the RB NZ target range since December 2007.12  However, CPI 
declined to 3.4% in December 2008 (year on year) due to the economic slowdown.13  Inflation during 
the review period has been driven mainly by non-tr adeable inflation, which has averaged 4.1% since 
December 2003.14 
Table I.3 
Productivity growth, 1990-2008 
(Per cent) 
 Output (A) Labour input 
(B) Labour 
productivity 
(A-B) Capital input 
(C) Capital 
productivity 
(A-C) Multifactor 
productivitya 
1990-1997 3.3 0.8 2.5 2.0 1.2 2.0 
1997-2000 2.9 0.1 2.8 2.4 0.5 1.9 
2000-latest 3.3 2.2 1.1 3.8 -0.5 0.4 
a Growth in MFP is a weighted average of growth in labour and capital productivity. 
Source:  Treasury (2008), New Zealand's Productivity Performance .  Viewed at:  http://www.treasury.govt.nz/publications/ 
research-policy/tprp/08-02/tprp08-02.pdf [20 October 2008].  
                                                      
12 RBNZ online information.  Viewed at: http:// www.rbnz.govt.nz/statistics/econind/a3/ha3.xls 
[27 October 2008]. 
13 RBNZ online information.  Viewed at: http://w ww.rbnz.govt.nz/statistics/econind/a3/data.html 
[4 February 2009]. 
14 Tradeable inflation concerns goods whose pri ces are determined on the world market, while 
non-tradeable inflation co ncerns goods whose prices are determined in the domestic market (Statistics 
New Zealand, undated). WT/TPR/S/216/Rev.1 Trade Policy Review 
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(3) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policies 
8. The RBNZ, the central bank, is responsible for conducting monetary policy in New Zealand.  
The objective of monetary policy is to maintain  price stability "without unnecessary instability in 
output, interest rates and the exchange rate".  Under section 8 of the Reserve Bank of New Zealand 
Act 1989, the RBNZ has statutory authority to control inflation, the specifics of which are set out in the Policy Target Agreement (PTA), between the Gove rnor of the RBNZ and the Minister of Finance.  
Under the recent PTAs (the latest was signed in D ecember 2008), the target was to keep inflation, as 
measured by CPI, between 1%-3% on average over the medium term.
15  The main instrument 
available to the RBNZ to implement monetary  policy is the Official Cash Rate (OCR).16  Funding for 
the RBNZ is agreed through the Reserve Bank of New Zealand Funding Agreement, a five-yearly 
agreement between the Governor and the Minister of Finance that specifies the amount of RBNZ's 
revenues that may be retained by the bank to meet ope rating costs;  the remainder is to be surrendered 
to the Government.  The last such agreement was signed in April 2005 and expires in June 2010.   
9. Between January 2004 and mid 2007, the RBNZ pursu ed a tight monetary policy, raising the 
OCR 13 times from 5% in December 2003 to 8.25% in July 2007.  Sustained growth in domestic 
demand, which continued to be in excess of avai lable capacity, resulted in inflationary pressures 
prompting the RBNZ to tighten monetary policy.  Domestic demand was driven mainly by household 
spending, which was fuelled by a strong housing market.17  However, with the New Zealand economy 
slowing down, the RBNZ eased monetary policy for the first time in five years in July 2008, reducing 
the OCR by 0.25% to 8%.  The onset of the global financial crisis prompted  the RBNZ to further cut 
interest rates;  it has since reduced the OCR a fu rther four times to its current level of 3% in 
March 2009.   
10. Since July 2003, the NZ dollar has exhibited cons iderable volatility (Chart I.1).  It appreciated 
by over 22% between July 2003 and May 2005, bu t between May 2005 and July 2006 it depreciated 
by over 14%.  From July 2006 to March 2008, it appreciated from US$0.62/NZ$ to a historic high of 
US$0.8/NZ$;  however, since then the NZ dollar has been depreciating and was US$0.55/NZ$ in 
January 2009.  The reason for the appreciation was the large differential between interest rates in 
New Zealand and offshore interest rates, which resulted in "carry trade".18  According to the IMF, the 
exchange rate began to declin e on account of weak economic da ta released in 2005, which the 
markets interpreted as an indication that the monetary tightening cycle was at an end.  In addition, the 
issuance by supranational organizations and Japanese security houses of New Zealand dollar-
denominated Uridashi dried up in March 2005.19  This together with reduced demand by New Zealand 
banks for funds, in line with the cooling ec onomy, also contributed to the depreciation.20  T h e  
                                                      
15 The CPI target range has remained unchanged since September 2002.  Furthermore, if the CPI is 
outside, or expected to be outside the specified medium-term target range , the RBNZ must explain in its Policy 
Statements under Section 15 of the RBNZ Act 1989, why this is the case and what measures it plans to take to 
keep inflation consistent with the target range. 
16 The OCR was introduced in 1999.  The RBNZ pa ys interest on settlement account balances and 
charges interest on overnight borrowing at rates related to the OCR;  there is no set limit on the amount of cash 
the RBNZ can lend or borrow at rates related to the OCR (RBNZ online information, "What is the Official Cash 
Rate".  Viewed at:  http://www.rbnz.govt.nz/monpol/about/0072140.html [28 October 2008]. 
17 RBNZ (2005). 
18 The term "carry trade" refers to investors borrowing in low-yielding and lending in high-yielding 
currencies. 
19 These are foreign bonds sold to Japanese retail buyers (such as households) who take advantage of 
the interest rate differentials ("carry trade"). 
20 IMF (2006) and (2007). New Zealand WT/TPR/S/216/Rev.1 
 Page 7 
 
 
depreciation since March 2008 has been due to lower re lative interest rate expe ctations and global risk 
aversion due to the prevailing credit crunch.  Between 2003 and early 2008, the real effective exchange rate (REER) appreciated by nearly 20%;  however, since then it has reverted to 2003 levels. 
115.0120.0125.0130.0135.0140.0145.0
2003Q1
2003Q22003Q32003Q42004Q12004Q2
2004Q3
2004Q4
2005Q12005Q22005Q32005Q42006Q12006Q22006Q32006Q42007Q1
2007Q2
2007Q3
2007Q4
2008Q12008Q22008Q30.550.600.650.700.750.800.85Chart I.1
Exchange rates, 2003-08
Source :   IMF (2008) , International Financial Statistics, December.Nominal effective
 exchange rate
(left-hand scale)Real effective exchange rate
(left-hand scale)
US$/NZ$a
(right-hand scale)Index 2000=100US$/NZ$
a               Period averages.
 
(ii) Fiscal policy 
11. Under the Public Finance Act 1989, the Minister of Finance is required to issue two fiscal 
responsibility documents.  These form the basis of th e Government's fiscal policy and budgets.  The 
Budget Policy Statement has a short-term focus and sets out the Government's policy, goals and priorities for the next budget;  the Fiscal Strategy  Report sets out the Government's long-term fiscal 
strategy.  These requirements enhance the transpar ency and predictability of the budget process and 
fiscal policy. 
12. New Zealand has registered a fiscal surplus every year of the review period (Table I.1) and it 
was 3.1% of GDP in 2007/08.  Despite the fiscal surplus averaging nearly 4.4% of GDP per annum 
between 2003/04 and 2005/06, the authorities considered  the fiscal stance to be broadly neutral.  
However, it has turned expansionary since then:  the strong fiscal performan ce has increased pressure 
on the Government to bring the fiscal position more in to line with its medium-term target of a surplus 
that is less than 2% of GDP, which is considered to be expansionary by the authorities.  This is to be 
achieved through cutting taxes and increasing spending.   Concrete steps taken in this regard are 
personal income tax cuts amounting to 0.8% of GDP, and increased spending focused on improving 
productive capacity by addressing infrastructure bottlenecks.   WT/TPR/S/216/Rev.1 Trade Policy Review 
Page 8 
 
 
13. Revenue as a share of GDP rose from nearly 32.3% in 2003/04 to 34.3% in 2007/08.21  
Revenue growth was driven by a stronger than e xpected economic growth and buoyant corporate tax 
revenue.  Tax revenue rose from 30.3% of GDP to 31.5% of GDP in the same period (Table I.1). 
14. Expenditure grew from 29.3% of GDP in 2003/04 to 31.7% of GDP in 2007/08;  within 
expenditure, government spending on health increased from 5.7% of GDP to 6.3%.  Other 
expenditures, such as social security, financing cost s, and education remained static as a proportion of 
GDP during the period.  As a result of running a fi scal surplus over a sustained period, New Zealand's 
gross sovereign-issued debt declined from 25.2% of GDP in 2003/04 to 21% of GDP in 2007/08. 
(4) STRUCTURAL MEASURES  
(i) Tax reforms 
15. Tax reform in New Zealand is focused on de livering growth through an improved business 
and investment climate and higher productivity, as well as ensuring that the growth dividends are fairly distributed.  In this regard, the Govern ment announced the Business Tax Reform in the 2007 
budget.
22  Under the reform, the company tax rate w as reduced from 33% to 30%;  the tax rate for 
widely held savings vehicles and for portfolio investment entities was reduced to the same level.23  
Furthermore, the R&D tax credit is to  be abolished from end-April 2009.  
16. Tax reform in 2008 focused on providing re lief to households and ensuring a fairer 
distribution of wealth.  Under th e 2008 personal tax package, the lowest tax rate will be 12.5% 
(reduced from the current 15%), and the tax thres hold, at which the second lowest rate of 21% 
applies, will increase from the present NZ$9,500 to NZ$14,000.24  An independent earner tax credit 
will also be introduced from April 2009 (Chapter III). 
(ii) Financial sector reforms 
17. Financial sector reform and restructuring has continued during the period under review 
(2003-09).  Consequently the capital adequacy ratio, the non-performing loans ratio, and the 
profitability and productivity of the banking sector impr oved (see also Chapter IV).  To mitigate the 
risks inherent in the banking sector, the Govern ment took a number of measures including the 
implementation of the Basel II capital adequacy requirements, formation of the Trans-Tasman 
Council on Banking Supervision, and adoption of the New Zealand International Reporting Standards 
(NZ IFRS) (see Chapter IV). 
18. Nonetheless, banks remain vulnerable due to la rge external refinancing needs coupled with 
the recent depreciation of the NZ dollar.25  Difficulties with external financing led the Reserve Bank 
to broaden the range of its domestic liquidity opera tions over 2007-08, in a similar manner to other 
central banks around the world.  The New Zealand G overnment acted to ensure continued confidence 
in the banking sector by following internati onal actions and instituting a retail and wholesale 
                                                      
21 Tax revenue spiked in 2005/06 due to a change in the accounting treatment of provisional tax, which 
resulted in a one-off, non-cash increas e in tax revenue of NZ$1.8 billion. 
22 The Business Tax Reform will cost the Government NZ$3.4 billion over four years 
(Treasury, 2007a). 
23 A widely-held savings vehicle is a collective investment vehicle such as a unit trust or a 
superannuation fund. 
24 Treasury (2008a). 
25 Approximately 33% of the banks' funding is from non-resident sources, and the majority has a 
maturity of a year or less (IMF, 2008). New Zealand WT/TPR/S/216/Rev.1 
 Page 9 
 
 
guarantee scheme for qualifying financial institutions  in late 2008.  In addition, the RBNZ introduced 
(for the first time ever) deposit guarantees up to NZ$1 million.  
19. In addition to funding pressures, a large portion of the banks' assets are tied up in mortgages, 
which also leaves them vulnerable to a decline in asset prices (particularly residential property).  
Falling asset prices and increased difficulty with lo an servicing (due to the economic downturn) are 
likely to result in a deterioration in the banks ' asset quality and a rise in non-performing loans.26 
However, the authorities have stated that these deteri orations are not expected to be of the scale seen 
recently in other major economies, and are not expect ed to threaten the solvency position of the New 
Zealand banks. 
20. Additionally, non-bank financial in stitutions and the insurance sect or are to be regulated and 
supervised by the RBNZ from 2009 and 2010, respectiv ely.  The new regulations stipulate conditions 
for governance, risk management, and licensing.  The reforms consolidate regulation of banks and 
non-bank deposit takers into the same institution and update the re gulation pertaining to non-bank 
institutions and insurers. 
(iii) Pension reform 
21. New Zealand has a rapidly aging population, and the old-age dependency ratio is expected to 
more than double from approximately 18% in 2006 to 42% in 2050.27  As a result of this demographic 
change, government spending on pensions and hea lthcare is projected to increase significantly.  
According to the New Zealand Long-term Fis cal Position statement issued in June 200628, 
government expenditure on health services is project ed to rise from 5.8% of GDP in 2005 to 12.4% in 
2050.29  Furthermore, pension payments as a proportion of GDP are projected to rise from 4% to 9% 
over the same period.30  To ensure fiscal sustainability, the Government set up the New Zealand 
Superannuation Fund (NZSF) in October 2001.  The NZSF allows the Government to partially 
pre-fund pensions in the futu re and smooth taxes over time.31  Based on a funding rule, a proportion of 
the annual fiscal surplus is invested in the NZSF;  the NZSF had a net worth of NZ$14.2 billion at end-June 2008, which is projected to increase to NZ$32.2 billion in 2013.
32  NZSF investments are 
determined by an independent board:  currently 48% of the fund is invested in global (including 
Australian and New Zealand) securities;  17% in Au stralian and New Zealand fixed income assets;  
10% in property;  20% in private markets;  and 5% in commodities.33  
22. In July 2007, the Government introduced th e KiwiSaver scheme to supplement the state 
pension system.  Some aspects of the scheme we re modified by the Taxation (Urgent Measures and 
Annual Rates) Bill 2008, tabled in Parliament on 8 December 2008 and "passed under urgency";  
most of the changes take effect from April 2009.   The scheme is a work-b ased savings scheme that 
allows employees to contribute a minimum of 2% of  their earnings to approved savings schemes.  
                                                      
26 RBNZ (2008b). 
27 The old-age dependency ratio represents people over the age of 65 compar ed to the working age 
population. 
28 Treasury (2006). 
29 Treasury (2006). 
30 IMF (2008). 
31 As mentioned, the fiscal outlay on account of pensions was 4.1% of GDP in 2005, through the 
NZSF, the Government increased pension funding to 5.3% of GDP in 2006 and wants to continue gradually increase pension expenditure to 7.5% of GDP in 2050, as opposed to the Long-Term Fiscal Policy statement's 
projections of an increase on nearly 5% over the same  period.  Information provided by the authorities. 
32 Treasury (2008e). 
33 NZSF online information.  Viewed at:  http ://www.nzsuperfund.co.nz [28 January 2009]. WT/TPR/S/216/Rev.1 Trade Policy Review 
Page 10 
 
 
These contributions are matched by compulsory employer contributions (capped at 2% from 
1 April 2009) and member tax credits (capped at NZ$20 per week).34  Savings are locked in until the 
age of 65 when participants become eligible for state pensions.35  All new employees are 
automatically enrolled in the scheme, but can opt out;  existing employees, self-employed, and 
unemployed individuals can also opt in.  Incentives provided by the Government include a 
NZ$1,000 lump sum payment into each account, a me mber tax credit of up to NZ$20 per week, and 
eligibility to apply for a first-home deposit subsidy subject to certain criteria.  Members can also apply 
to withdraw part (or all) of their savings to help  buy their first home, subject to certain eligibility 
requirements. 
(5) BALANCE OF PAYMENTS  
23. New Zealand's current account deficit was a bout NZ$14.2 billion (or 8% of GDP) in 2007/08 
(year ending in March) up from NZ$6.7 billion (4.8% of  GDP) in 2003/04 (Table I.4).  This reflected 
a widening of the gap between gross national savi ng and gross domestic investment.  The growing 
current account deficit during the review period was due mainly to increasing domestic consumption, 
which was funded by overseas borrowing because of a shortfall in domestic saving.  The investment 
income deficit rose with the increased cost of servicing the growing stock of overseas debt.   
Table I.4 
Balance of payments, 2003-08 
(NZ$ million)  
  2003/04 2004/05 2005/06 2006/07 2007/08 
Current account -6,718.0 -10,268.0 -14,592.0 -13,785.0 -14,211.0 
Goods and services balance 403.0 -1,196.0 -3,707.0 -2,451.0 -1,556.0 
Trade balance -1,192.0 -2,230.0 -4,104.0 -2,828.0 -1,745.0 
Exports 29,054.0 31,114.0 31,582.0 35,636.0 38,719.0 
Imports 30,246.0 33,344.0 35,685.0 38,464.0 40,464.0 
Services balance 1,595.0 1,034.0 397.0 377.0 189.0 
Receipts 11,604.0 12,223.0 12,226.0 12,566. 0 12,672.0 
Transportation 2,234.0 2,231.0 2,385.0 2,678.0 2,762.0 
Travel 7,178.0 7,486.0 7,289.0 7,359.0 7,249.0 
Communication 328.0 331.0 361.0 224.0 287.0 
Construction 54.0 60.0 43.0 10.0 11.0 
Finance and insurance 104.0 151.0 162.0 155.0 153.0 
Computer and information 221.0 265.0 273.0 294.0 291.0 
Royalties and licence fees  191.0 146.0 153. 0 184.0 211.0 
Other business 914.0 1,089.0 1,172.0 1,273.0 1,218.0 
Personal and cultural 252.0 310.0 241.0 239.0 320.0 
Government 129.0 142.0 149.0 149.0 171.0 
Payments 10,009.0 11,189.0 11,829.0 12,189.0 12,483.0 
Transportation 3,470.0 3,926.0 3,987.0 4,116.0 4,057.0 
Travel 2,900.0 3,503.0 3,836.0 3,949.0 4,227.0 
Communication 319.0 344.0 417.0 304.0 286.0 
Table I.4 (cont'd) 
                                                      
34 Before the amendment in December 2008, employees had to contribute either 4% or 8% of their 
earnings to approved savings schemes and were provided incentives such as a fee subsidy to help cover part of 
the cost of the annual management fees charged by thei r scheme provider.  Employer s also received a tax credit 
in respect of their compulsory contributions.  The fee subsidy and employer tax cred it will be discontinued from 
1 April 2009. 
35 Withdrawals are allowed after three years for the purc hase of a first home and in cases of hardship or 
ill health. New Zealand WT/TPR/S/216/Rev.1 
 Page 11 
 
 
  2003/04 2004/05 2005/06 2006/07 2007/08 
Construction 7.0 30.0 42.0 85.0 125.0 
Finance and insurance 416.0 484.0 493.0 440.0 491.0 
Computer and information 231.0 324.0 384.0 404.0 429.0 
Royalties and licence fees  807.0 790.0 784. 0 776.0 764.0 
Other business 1,565.0 1,571.0 1,679.0 1,900.0 1,870.0 
Personal and cultural 135.0 66.0 57.0 64.0 75.0 
Government 159.0 143.0 149.0 150.0 161.0 
Income balance -7,359.0 -9,383.0 -11,081.0 -11,964.0 -13,387.0 
Credit 2,406.0 2,648.0 1,826.0 2,791.0 3,707.0 
Debit 9,765.0 12,031.0 12,907.0 14,755.0 17,094.0 
Current transfers  237.0 311.0 196.0 630.0 732.0 
Credit 1,431.0 1,556.0 1,665.0 1,957.0 2,094.0 
Debit 1,194.0 1,245.0 1,469.0 1,328.0 1,362.0 
Capital and fina ncial account 6,209.0 10,948.0 13,918.0 12,646.0 14,303.0 
Capital account 723.0 108.0 -327.0 -458.0 -773.0 
Financial account 5,486.0 10,840.0 14,245.0 13,104.0 15,076.0 
New Zealand investment abroad 8,371.0 3,192.0 -3,869.0 10,979.0 12,405.0 
Direct investment 2,442.0 365.0 -3,849.0 2,201.0 4,508.0 
Portfolio investment 2,979.0 1,425.0 -377.0 3,808.0 1,523.0 
Other investment 623.0 2,315.0 -4,494.0 -1,774.0 611.0 
Reserve assets 2,327.0 -913.0 4,851.0 6,744.0 5,763.0 
Foreign investment in New Zealand 13,857.0 14,032.0 10,376.0 24,083.0 27,481.0 
Direct investment 4,077.0 3,878.0 2,416.0 12,464.0 4,207.0 
Portfolio investment 7,431.0 4,262.0 2,905.0 4,092.0 14,538.0 
Other investment 2,349.0 5,892.0 5,055.0 7,527.0 8,736.0 
Net errors and omission 509.0 -680.0 673.0 1,140.0 -93.0 
Note:  Data shown in this table are based on April to March figures.  
Source :  Statistics New Zealand online info rmation.  Viewed at:  http://www.st ats.govt.nz/; and data provided by the 
authorities. 
24. On the other hand, the capital and financial account surplus grew from NZ$6.2 billion in 
2003/04 to NZ$14.3 billion in 2007/08.  The increase in the capital and financial account surplus was 
mainly on account of large inflows of foreign direct  investment (in 2006/07), portfolio investment (in 
2007/08) as well as an increas e in other investments.36  As the capital and financial account surplus 
has been consistently higher than the current ac count deficit, foreign exchange reserves have 
increased, from NZ$9.1 billion in March 2003 to NZ$19.3 billion in December 2008.37  The reserves 
represent approximately four months of import cove r (at the prevailing exchange rate) and 16% of 
New Zealand's short-term external debt.38  
                                                      
36 Other investment comprises primarily loans and deposits, plus trade finance and other instruments 
that are not classified to direct or portfolio investment.  The key drivers of the surges in other investments came 
from bank funding from abroad in the form of loans and contributions from the non-bank corporate sector, 
partly related to M&A activity.  
37 RBNZ online information, "New Zealand's official re serve assets and other fore ign currency assets".  
Viewed at:  http://www.rbnz.go vt.nz/statistics/extfin/e1/data.html [10 November 2008]. 
38 Short-term debt refers to debt with a maturity of one year or less.  New Zealand has one of the 
OECDs highest levels of foreign debt as a proportion of GDP. WT/TPR/S/216/Rev.1 Trade Policy Review 
Page 12 
 
 
(6) DEVELOPMENTS IN TRADE  
25. The ratio of New Zealand's total trade (exports  and imports) in goods and non-factor services 
to GDP increased slightly from 57.9% in 2003/04 to  58.6% in 2007/08 (Table I.1) reflecting higher 
fuel imports due mainly to higher global oil prices.  
(i) Composition of trade 
26. Between 2003 and 2008, the share of manufactures  in exports declined, due mainly to the 
drop in the share of machinery and transport e quipment, chemicals and other semi-manufactures 
(Chart I.2, Table AI.1).  On the other hand, the share of primary products in exports rose over the same period, due mainly to fuels and food, both of  which benefited from higher international prices 
(although these have experienced a sharp decline recen tly) and thus improved terms of trade.  Imports 
of primary products, particularly fuel, also rose over the period, while imports of manufactures (particularly automotive products) declined (Table AI.2). 
(ii) Direction of trade 
27. The main destinations for New Zealand's expor ts in 2008 were Australia (23.3%), the EC-27 
(12.8%), the United States (10.2%), and Japan (8 .4%).  Since 2003, the shares of the EC-27, the 
United States, and Japan have declined, while Aust ralia's share has risen, possibly reflecting trade 
diversion owing to ANZERTA (Chart I.3, Table AI.3).
39  New Zealand's major import suppliers in 
2008 were Australia (18.0%), the EC-27 (15.7%), Chin a (13.3%), and the United States (9.5%).  The 
shares of Australia, EC-27, and the United States have declined since 2002, while China's share has 
shown a marked increase (Table AI.4). 
(7) TRENDS AND PATTERNS IN FOREIGN DIRECT INVESTMENT  
28. Inward foreign direct investment (FDI) showed a slight increase during the review period, 
from NZ$4.1 billion in 2003/04, to NZ$4.2 billion in 2007/08.  However, during 2006/07 inward FDI 
rose to NZ$12.5 billion (approximately 7.5% of GDP) (Table I.5).  This increase, of over 350%, was 
led by a surge in investment from Australia.  A key driver of the FDI inflow was merger and 
acquisition activity, plus capital restructuring of New Zealand subsidiaries of foreign direct investors.  
The restructuring was both in the banking sector and the non-bank corporate sector.   Australia 
continues to be the largest overseas investor in New Zealand followed by the United States and the 
United Kingdom.40  
29. Between 2002 and 2007, outward FDI was volatile (Table I.6).  In 2007, outward FDI was 
NZ$1.9 billion, of which over 44% went to the Un ited States, on account of merger and acquisition 
activity in the corporate sector.  Australia acc ounts for nearly 55% of New Zealand's outward FDI 
stock, followed by the United States with nearly 11.5%. 
 
                                                      
39 Dee and Gali (2005), pp. 133-170. 
40 The authorities were unable to pr ovide FDI data disaggregated by industry as such data would not 
pass New Zealand's confidentiality laws. New Zealand WT/TPR/S/216/Rev.1 
 Page 13 
 
 
Chart I.2
Product composition of merchandise trade, 2003 and 2008
2003 2008
(a)    Exports (f.o.b.)
Other 
consumer goods
9.4
Manufactures
31.5
Total:   US$16.5 billion Total:  US$30.6 billion  
(b)    Imports (c.i.f.)
Office machines & 
telecommunication 
equipment
9.3Chemicals
11.6Transport 
equipment 
19.1Manufactures
77.8
Other electrical 
machines  3.5
Non-electrical 
machinery
9.0Other mining
2.4Textiles & clothing
5.1Other
1.1
Other electrical 
machines  3.3Agricultural raw materials
8.6
Other semi-
manufactures 
9.3Transport
 equipment  
13.0
Chemicals
11.3Manufactures
68.0
Non-electrical
machinery
9.6
Total:   US$18.6 billion Total:   US$34.4 billion Per cent
Manufactures
25.3
Mining
11.2
Other consumer goods  
9.5Other
0.8Electrical 
machines  4.5Other
5.0
Other semi-
manufactures
6.0Food
50.0
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer goods 
10.6
Mining
21.1Other 
consumer goods 
7.5
Other semi-
manufactures
7.8
Other semi-
manufactures
10.0Food
47.2
Mining
5.0
Agriculture
9.9
Mining
11.8Chemicals 
6.2Chemicals
5.1Other 
4.4
Other mining
3.4Fuels
17.7Non-electrical 
machinery  3.5Non-electrical
machinery  3.6
Agriculture
9.0
Textiles & clothing
4.2
Office machines &
telecommunication
equipment
7.9Fuels
9.4Agriculture
58.6Electrical machines
3.1
Agricultural raw materials
12.0Agriculture
59.2
 WT/TPR/S/216/Rev.1 Trade Policy Review 
Page 14 
 
 
Chart I.3
Direction of merchandise trade, 2003 and 2008
2003 2008
(a)    Exports (f.o.b.)
Other Asia  
16.9
Asia
57.8
Total:  US$16.5 billion Total:  US$30.6 billion
(b)    Imports (c.i.f.)
Other Asia  
10.3
EC27
19.7EC27
15.7
Japan
8.1Korea, Rep. of  2.7Other
3.4United States
9.5
Total:  US$18.6 billion Total:  US$34.4 billionPer cent
Asia
60.4Other Asia  
19.6
Middle East
4.2Other
3.5
China
13.3United States
14.5
Other Asia  
8.2United States
10.2
Source :  UNSD, Comtrade database.Thailand  2.7EC27
12.8
Middle East
2.5
Asia
61.8Asia
58.4
Malaysia  2.3
Middle East
4.0EC27
16.4
Korea, Rep. of
3.5Other
3.2
Other America
5.7
Australia
18.0Australia
21.5
Australia
23.3
Korea, Rep. of  2.7Australia  
22.6
Malaysia  4.1Other America
5.3
China  
5.9 Korea, Rep. of
3.2
Other America
2.8Other America
2.7
China
9.0China
4.8
Singapore
4.6Middle East
6.9
Japan
11.7United States
11.8Other
3.3Japan
11.0Japan
8.4
Americas
12.2 Americas
14.6Americas
15.9Americas
19.8
Africa
3.5
 New Zealand WT/TPR/S/216/Rev.1 
 Page 15 
 
 
Table I.5 
Inflows of foreign direct investment, 2003-08 
(NZ$ million)  
 2003/04 2004/05 2005/06 2006/07 2007/08 
Total inflows 4,077 3,878 2,416 12,464 4,207 
By origin      
EC -4,747 -11 -1,027 1,282 535 
Australia 5,796 3,913 4,998 7,460 2,439 
Bermuda -109 -12 .. 42 -14 
United States 1,337 674 -959 1,887 376 
Canada 157 115 -265 36 437 
Switzerland -63 -38 -73 .. .. 
Singapore 28 151 21 19 384 
Japan 43 165 -23 65 135 
Hong Kong, China -21 -70 -263 88 -69 
.. Not available. 
Source:  New Zealand Statistics online informati on.  Viewed at:  http://www.stats.govt.nz/. 
Table I.6 
Outflows of foreign direct investment, 2003-08 
(NZ$ million)  
  2003/04 2004/05 2005/06 2006/07 2007/08 
Total outflows 2,442 365 -3,849 2,201 4,508 
By origin      
EC -4 -250 1,651 559 776 
Australia 1,942 233 -2,955 1,381 954 
Bermuda .. .. .. .. 246 
United States 402 -72 -28 630 1,991 
Canada .. .. 11 5 -8 
Hong Kong, China -94 .. -29 .. 134 
.. Not available. 
Source:  New Zealand Statistics online informati on.  Viewed at:  http://www.stats.govt.nz/.  
(8) OUTLOOK  
30. New Zealand has undergone a long period of ec onomic expansion due to  robust consumption 
growth, which was underpinned by increasing wealth  and income effects.  However, economic 
growth has slowed down recently and the econo my was in a shallow recession for the first 
three quarters of 2008.  Nonetheless, the economy's fundamentals remain strong.  In the short term, 
the Government needs to mitigate the risks and vulne rability of the economy (especially the financial 
sector) on account of the global financial crisis.  Fu rthermore, in order to revive growth, business and 
investor confidence, which declined due to fa lling asset prices and the global economic slowdown, 
needs to be restored.41  The global slowdown will also adversely affect international commodity 
prices and thus New Zealand's exports, although the recent depreciation of the exchange rate should 
alleviate the negative impact.   
31. The Government aims to lift incomes in Ne w Zealand by increasing economic growth. It 
wants innovative businesses to compete in the world and people to benefit from higher skills and 
incomes and better quality public services.  Whether New Zealand is able to achieve these objectives 
                                                      
41 Treasury (2008e). WT/TPR/S/216/Rev.1 Trade Policy Review 
Page 16 
 
 
is dependant on its ability to raise productivity.  Accordingly, budgetary funding for training and 
education has been increased, as have tax incentiv es, while budgetary expenditure is focused on 
projects aimed at removing infrastructure bottlenecks and capacity constraints.  Another impediment 
to growth sustainability in the longer-term is the hi gh level of household debt, owing to the decline in 
the savings rate, which has resulted in sustained cu rrent account deficits.  To encourage savings the 
KiwiSaver scheme was introduced, and ta x incentives have been initiated.