Treasury is calling for a radical policy shake-up across the board, including reform of retirement income and tax settings, the return of interest on student loans and bigger class sizes, in changes aimed at boosting the economy.

In its briefing to incoming ministers, released today, Treasury said lifting growth and productivity would require reforms in "education, welfare, tax, regulation, science and innovation, infrastructure and the management of natural resources".

As well as a firm commitment to returning the Government's books to surplus by 2014/15 and reducing net debt to 20 per cent by 2020, it said reforming "retirement income settings" could help as part of a "wide and ambitious" reform programme.

It also called for a smaller, more effective and responsive state sector, including greater innovation and contestability in service delivery.

Early childhood education should be targeted to children in low-income households, and school teacher quality should be improved, funded by "consolidation of the school network and increasing student/teacher ratios".

It also calls for the interest on student loans to be reintroduced and for tertiary funding to be targeted to younger students and higher level qualifications.

On welfare, it calls for contracting out of services where appropriate, simplification of the benefit payments and alignment with work expectations.

Treasury said personal and company taxes should be cut, funded by more base-broadening of the tax system and/or cuts to low value spending.

Science and innovation policy should be focused on "firm-led research and development and commercialisation".

Infrastructure investment should be focused on a "realistic and confidence-building plan for Auckland transport, including network pricing - effectively flexible motorway tolls - and other demand management tools.

The Resource Management Act should be reformed further to ensure appropriate consideration of economic objectives and incentives for better local level planning.

There should also be market structures put in place to facilitate more efficient use of water.

The short term costs of the Emissions Trading scheme should be reduced, it said.

On the broader economic front, Treasury said growth in New Zealand's trading partners was below the main scenario set out in the pre-election update but "some way from the downside scenario", which centred on a worse crisis in Europe.

Much weaker growth was still a risk, though.

But in the long run, the demand from the growing middle classes in Asia would keep New Zealand's commodity export prices high.

It said the impact of weaker economic conditions had been most visible in the incomes of the top 20 per cent of households, which had seen average incomes decline between 2006/07 and 2009/10. That was due to falls in earnings from self-employment.

"For other households gross income from wages and salaries, investment and self-employment was broadly static on average over the same period," Treasury said.

But disposable income had increased, as a result of the tax switch and higher government transfers.

It warned that the Government would face a balancing act if global events worsened to the point that the its fiscal credibility was at risk.

Then "further discretionary fiscal tightening may be necessary", but that should be aimed at minimising the short term impact of reductions in demand in the economy while generating credible savings over time.

On tax, it did not make a specific recommendation for change. But it pointed to the improvement in savings that followed the switch to higher consumption tax (GST) in Budget 2010.

It said the real effective tax rate on some types of capital income remained high and there was a wide range of rates that applied to different investment types.

"Treasury is continuing to examine a range of options for taxing capital more evenly, and at lower rates," it said in the briefing.