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### Viewing cable 08WELLINGTON163, NEW ZEALAND ECONOMY LOOMING AS MAIN ELECTION ISSUE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08WELLINGTON163 | 2008-05-14 03:59 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Wellington

`

    VZCZCXRO3529
    OO RUEHDT RUEHPB
    DE RUEHWL #0163/01 1350359
    ZNR UUUUU ZZH
    O 140359Z MAY 08
    FM AMEMBASSY WELLINGTON
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 5235
    INFO RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE PRIORITY
    RHHMUNA/CDR USPACOM HONOLULU HI PRIORITY

` `

    UNCLAS SECTION 01 OF 03 WELLINGTON 000163

    SENSITIVE
    SIPDIS

    STATE FOR EAP/ANP

    E.O. 12958: N/A
    TAGS: ECON PGOV KDEM NZ
    SUBJECT: NEW ZEALAND ECONOMY LOOMING AS MAIN ELECTION ISSUE

    ¶1.  (SBU)   Summary.  With poor economic news for consumers
    likely to continue up to the New Zealand election later this
    year, the political party that can win voters' confidence
    that it can address Kiwis' mounting financial woes will
    likely emerge as the winner in 2008.  PM Helen Clark,
    however, has tried to downplay the role of the economy in the
    election, offering that in uncertain times voters will stay
    with the party in power.  Worried over rising costs to
    consumers, however, PM Clark rolled back elements of the
    government's planned Emissions Trading Scheme (ETS) to soften
    its immediate impact.  Finance Minister Cullen will deliver
    the budget to Parliament on May 22, but is warning that the
    much-awaited and long debated tax cuts will be small due to
    lower revenue forecasts coupled with government expenditures
    for other programs designed to win votes.  National leader
    John Key so far has chosen not to outline an economic policy
    to address New Zealanders' concerns over lower purchasing
    power, rocketing fuel prices, rising mortgage rates, and
    mounting personal credit debt to pay bills -- preferring
    instead to let Labour take the heat for the moment and wait
    until Cullen rolls out the budget message before enunciating
    a detailed National response.  End Summary.

    It's the Economy in 2008
    ------------------------

    ¶2.  (U)  Political pundits have predicted since last year
    that tax cuts would emerge as the dominant issue in the 2008
    elections, and there has been growing pressure within the
    Labour Party on Finance Minister Cullen to provide a tax cut
    that would ease the strain on household budgets and put money
    in voters' pockets in time for the election.  Last month's
    Labour Party discussions on election strategy indicated that
    Labour needs to get the tax cut package right if Clark is to
    realize a fourth term as Prime Minister.  Labour nearly was
    voted out in 2005 as a result of a popular backlash against
    the minuscule tax cuts that provided between 67 cents NZ and
    10 dollars NZ per week.  The recent announcement in Australia
    of PM Rudd's tax cuts package of an average of 25-50 dollars
    per week will put significant pressure on Cullen to come up
    with a similar proposal.

    ¶3.  (U)  Economic news in New Zealand continues to focus on
    the negative trends facing consumers and households, and will
    give Labour an even greater imperative to deliver relief to
    voters through tax cuts.  The government has sought to allay
    fears by noting that New Zealand's economy is well-placed to
    sail through the negative overseas economic winds, and that
    the underlying economy remains sound, as Reserve Bank
    Governor Alan Bollard continues to stress.  But the slowing
    economy, job losses, increased interest rates to curb
    inflation, and household debt averaging about double the
    annual disposable income all add up to a great deal of stress
    on New Zealanders, who had become accustomed to a significant
    stretch of good economic growth through much of the decade.
    The economic picture is growing even more gloomy.  New
    Zealand farmers experienced drought conditions in the early
    part of 2008 that cost the industry an estimated NZ 1.2
    billion and helped raise dairy prices.  New Zealand's
    exporters are also continuing to hurt over the pressure from
    the high New Zealand dollar.  The economy in 2008 is expected
    to grow by only 1-2 percent, with the risk of a minor
    recession in 2008 ever more likely.

    ¶4.  (U)  Prime Minister Helen Clark has sought to minimize
    the role that the economy may play in the election.  At the
    Labour Congress's diplomatic reception in April, the PM spoke
    with the diplomatic corps about her recent trip to China to
    sign the historic Free Trade Agreement.  Following her
    remarks, one diplomat turned the subject to the election and
    asked the PM if the economy would be a major factor in
    voters' minds, and if so, how was the government preparing to
    respond.  Clark said that she did not believe the economy
    would be influential in determining the electoral outcome.
    She noted that the economic picture -- largely the result of
    international financial markets -- was unsettling, but added
    that in uncertain times, the voters would prefer to have a
    steady and tested hand (i.e., Labour) at the helm.
    Emissions Trading Scheme (ETS) Too Costly
    -----------------------------------------

    ¶5.  (U)  In the midst of the gloomy financial news, economic
    forecasters have warned that the ETS could have a significant
    negative economic impact on New Zealand's economy:  22,000
    jobs gone by 2012, wages down $2.30 per hour by 2025, and a
    cost to households of $600 per year by 2012, rising to $3000
    - $5000 per year by 2025.  In short, analysts concluded that
    the government's plan -- while laudable in terms of
    transforming New Zealand into one of the world's first

    WELLINGTON 00000163  002 OF 003

    sustainable, carbon-neutral economies -- is overly ambitious
    and too costly to New Zealanders when New Zealand's overall
    greenhouse gas emissions are relatively minor.        .

    ¶6.  (U)  The PM, cognizant that the growing body of negative
    economic news does not help her polling figures, announced on
    May 6 that the government would delay bringing transport
    fuels into the ETS from 2009 to 2011.  She also rolled back
    the start date for the phasing out of free allocations for
    heavy-emitting industries from 2013 to 2018.  The Green Party
    responded to the weakening of the ETS by threatening to end
    support for the ETS, arguing that the government is placing a
    higher premium on returning to office rather than tackling
    climate change.  The Maori Party has also come out against
    the government's plan, meaning that Labour will once again
    need the support of the opposition National Party -- just as
    it needed National on the controversial anti-smacking
    legislation as well as the China FTA -- if the legislation is
    to pass Parliament.  National, however, has indicated that
    the draft legislation will require a number of revisions if
    it is to be acceptable to National, and the ETS remains under
    discussion within the Parliament select committee.

    National's Plan for the Economy
    -------------------------------

    ¶7.  (SBU)  Despite regular media reports profiling working
    families and the enormous financial strains they are facing
    in their household budgets, National has offered few
    specifics on how its policies would help alleviate some of
    the economic pressures facing voters.  Key only recently
    announced a broad outline of how National would manage the
    economy:  personal tax cuts, lowering of interest rates,
    addressing bloated government bureaucracy and
    over-regulation, improving education, and infrastructure
    investments.  One National MP has told us that John Key is
    waiting until Finance Minister Cullen's budget speech to
    Parliament on May 22 before responding in greater detail on
    the economy.  At the moment, the bad economic news is
    Labour's to address, and National does not want to give any
    of its ideas away for fear the government might incorporate
    them into its own planning or re-focus attention away from
    the bad economic news to an attack on National policies.

    ¶8.  (U)  John Key has predicted that the economy will be the
    defining issue of the 2008 election.  Polling data in late
    2007 indicated that the pessimism felt among New Zealanders
    over the economy reached levels not seen since 1991.
    Thirty-three percent of voters in an April 2008 Fairfax Media
    poll trusted Labour to manage the economy while 46 percent
    had wanted to give the job to National.  April polling also
    shows that the top two issues uppermost in voters' minds
    going into the election this year will be tax cuts and the
    economy.  The economic situation plays well into National's
    oft-cited concern over the number of Kiwi workers heading to
    Australia, attracted in part by higher wages, lower taxes and
    perceived better living standard.  April 2008 figures for
    departures over the past year to Australia hit 30,000 -- the
    highest since 2001.

    May 22 is the Budget Date
    -------------------------

    ¶9.  (U)  The country's attention on May 22 will be focused on
    Parliament, where Finance Minister Cullen will make public
    his long-awaited budget, which all analysts agree must
    include some tax cut measures.  Following years of government
    surpluses, Labour has been accused of overtaxing voters and
    behaving miserly with taxpayers' money.  Cullen, long known
    to be opposed to tax cuts and a firm believer that the
    government is a better manager of the public's money than the
    public, has refused to offer much clarity to how large a tax
    cut package he is considering.  As financial pressures on the
    public have grown during 2008, however, fear within Labour
    has grown that the government's prospects for a fourth term
    will hinge on a tax cut plan that will provide palpable
    relief to wage earners before the election.

    ¶10.  (U)  Cullen has ruled out a tax-free threshold for
    low-income earners, but said that his budget would show
    serious government management of "the harsh edges of economic
    pressure points," even if the government cannot compensate
    for them entirely.  The Finance Minister has tried to lower
    expectations regarding the government's strategy, warning
    that he will not present "a big-bang budget."  One tax
    analyst recently proposed a social dividend payment worth
    between $500 - $1,000 for eligible families, something Cullen
    has not ruled out.  National has promised that its tax
    proposals would be more generous than those offered by

    WELLINGTON 00000163  003 OF 003

    Labour; the government has agreed but warned that National
    would pay for its tax generosity through lowered social
    spending -- much as National did in the early 1990s when it
    slashed social benefits, says the government.

    ¶11.  (SBU)  Labour has 1.5 billion dollars set aside on the
    government books for tax cuts, which most people agree will
    not be enough for a noticeable impact on households so should
    be viewed as a minimal figure.   Earlier in 2008 Cullen
    promised a three-year program of cuts, but the timing for the
    cuts remains a question mark.  Most analysts agree that
    Labour must provide some tangible relief before an election.
    Cullen has also repeatedly stressed that tax cuts would need
    to meet several criteria, e.g., not contributing to
    inflation, not exacerbating social inequalities, not reducing
    government services, and no borrowing.  In the current
    economic environment, it is difficult to see how the
    government will pay for the tax cuts without borrowing money
    -- not necessarily for the cuts themselves but to meet
    capital commitments for other projects previously funded by
    tax revenue.

    Comment
    -------

    ¶12.  (SBU)  As price rises for fuel and basic foodstuffs have
    continued to crimp middle-class budgets, internal government
    statistics show that even greater pressures are being placed
    on lower income wage earners, which constitute Labour's base.
     While Clark would like the election to hinge on leadership
    qualities (where she has an edge), even the Prime Minister
    can no longer ignore the economy as a major factor that will
    play into voters' minds come election time.  One indication
    that the government is looking at this issue more carefully
    is the rollback on the ETS implementation.  While analysts
    agree that Cullen will need to announce a tax cut plan of
    meaningful proportions, it is unclear from where the money
    will come.  Helen Clark earlier in the year proposed a
    half-billion package of new social spending spread over five
    years; the rail system buyback announced last week will cost
    the taxpayers over a billion dollars, and FM Peters wants to
    increase MFAT's budget by $600 million over five years.  Not
    yet mentioned, but it will be, the National Health Plan needs
    a significant cash infusion.  Any tax break for voters must
    be factored into these commitments, and in a year that will
    likely see the economy slow to 1-2 percent growth.  How the
    Finance Minister gets the numbers to add up will be closely
    watched on May 22.  No one will watch more closely than Helen
    Clark.  End Comment.
    MCCORMICK

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