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### Viewing cable 08WELLINGTON337, NEW ZEALAND'S GRIM PRE-ELECTION ECONOMIC

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08WELLINGTON337 | 2008-10-14 21:51 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Wellington

`

    VZCZCXRO5674
    RR RUEHAG RUEHCHI RUEHDF RUEHFK RUEHHM RUEHIK RUEHKSO RUEHLZ RUEHNAG
    RUEHPB RUEHRN RUEHROV
    DE RUEHWL #0337/01 2882151
    ZNR UUUUU ZZH
    R 142151Z OCT 08
    FM AMEMBASSY WELLINGTON
    TO RUEHC/SECSTATE WASHDC 5473
    INFO RUEHNZ/AMCONSUL AUCKLAND 1759
    RUEHBY/AMEMBASSY CANBERRA 5281
    RUEHDN/AMCONSUL SYDNEY 0733
    RHHMUNA/CDR USPACOM HONOLULU HI
    RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
    RUEHSS/OECD POSTS COLLECTIVE
    RUCPDOC/USDOC WASHDC 0256
    RUEATRS/DEPT OF TREASURY WASHDC
    RUEHRC/DEPT OF AGRICULTURE WASHDC
    RUCNMEM/EU MEMBER STATES COLLECTIVE

` `

    UNCLAS SECTION 01 OF 03 WELLINGTON 000337

    SENSITIVE
    SIPDIS

    STATE FOR EAP/ANP AND EEB, STATE PASS TO USTR, PACOM FOR
    J01E/J2/J233/J5/SJFHQ

    E.O. 12958: N/A
    TAGS: ECON ETRD PGOV PREL NZ
    SUBJECT: NEW ZEALAND'S GRIM PRE-ELECTION ECONOMIC
    FORECAST

    Ref A)  WELLINGTON 168,  B) WELLINGTON 159

    WELLINGTON 00000337  001.2 OF 003

    ¶1. (U) Summary:  New Zealand's economy contracted
    dramatically since the release of the May 2008 Budget
    projections, resulting in budget deficits twice as large
    as forecasted due primarily to two quarters of negative
    growth and growing current account deficits.  GNZ
    officials however, maintain that the downturn in the
    economy is not directly linked to the global credit
    crisis.  Finance Minister Michael Cullen's message to
    voters following the release of the bad economic news was
    that thanks to his fiscal prudence, New Zealand is better
    placed to weather the economic downturn than a lot of
    other countries.  Some analysts feel Cullen may have
    exacerbated the economic downturn through tax cuts and
    increased government spending to bolster the Labour
    Government's re-election prospects.  The grim economic
    forecast caused National Party leader John Key to
    reformulate his tax cut program to NZ$47 per week for the
    average wage earner beginning in April 2009 and dropping
    the originally planned cuts for upper income earners.
    End Summary.

    NZ Treasury Warns of Severe Economic Downturn
    ---------------------------------------------

    ¶2. (U)  The GNZ is required under the Fiscal
    Responsibility Act to produce the Pre-Election Fiscal
    Update (PREFU) which reflects the Treasury's view of the
    government's fiscal position based on information
    received up to August 28th prior to the general election.
    In the PREFU released October 6, Treasury officials said
    the New Zealand economic outlook had deteriorated badly
    since the May budget was released, which meant reducing
    government revenue forecasts and recalculating increased
    government costs (see Ref A).  Cash deficits -- the net
    amount after all infrastructure funding and payments to
    the New Zealand Superannuation Fund are made -- are
    predicted to balloon from around NZ$5.9 billion a year in
    2008/9 around NZ$7.3 billion a year in 2012/13.  The
    Government's operating balances are predicted to fall
    into deficit for the first time since 1994 reaching
    NZ$3.2 billion by 2012/2013.  Treasury Secretary John
    Whitehead said forecast scenarios had Government debt
    increasing from 17.4 percent of GDP to 24.3 percent by
    ¶2013.  Mr. Whitehead said that despite the fact that the
    Pre-Election Fiscal and Economic Update was completed
    before the international financial crisis had become even
    sharper, the Treasury's near-term economic forecasts
    would remain largely the same.  Tax revenue was predicted
    to be NZ$3.1 billion less than anticipated in the budget
    due to the reduced government revenues resulting from the
    recession, along with an increase in subsidies for
    programs like early childhood education (NZ$200 million
    per year) and the growing popularity of the KiwiSaver
    plan (additional NZ$280 million per year).  The slowdown
    is expected to continue through the middle of next year
    with unemployment predicted to rise to 5.1 percent from
    the current 3.9 percent.

    Government Figures Show Trend Towards Red
    -----------------------------------------

    ¶3. (U)  Key figures from the Government's economic report
    (Pre-Election fiscal) include:

    -- Gross government debt to rise from 17.4 percent of GDP
    to 24.3 per cent by 2013 against the Government's target
    of 20 per cent of GDP on average.

    -- Growth expected to be only 0.1 percent by March 2009
    before lifting to 1.8 percent and then 3.3 percent in the
    following two years.

    -- The budget deficit forecast to be $64 million next
    year rising to $1.7 billion by 2010 and staying in
    deficit for 10 years.

    WELLINGTON 00000337  002.2 OF 003

    -- A cash surplus of NZ$2 billion in the year to June
    falling to a projected cash deficit of NZ$5.9 billion in
    2008/2009 and further deficits over the next four years
    rising to NZ$7.3 billion by 2012. In the May budget cash
    deficits were forced to average NZ$3.5 billion.

    -- Kiwi dollar expected to decline in value by 22.7
    percent by 2013.  The Kiwi dollar slipped to a five-year
    low of US57.85c this month.

    -- 90-day interest rates falling from 8.8 percent to 6.3
    percent by 2013.

    -- NZ$496 million is all that is left in next year's
    budget for new spending.

    -- Unemployment tipped to rise above 5 per cent by 2010.

    -- Inflation forecast to rise to 4.5 percent by March
    2009 before falling back to just under 2.5 percent.

    -- Tax revenue for the next three years to be lower on
    average by around $900 million.

    ¶4. (SBU)  Finance Minister Michael Cullen's message to
    voters following the release of the bad economic news was
    that thanks to his "fiscal prudence," New Zealand is
    better placed to weather the economic crisis than a lot
    of other countries but he ignored the impact of his binge
    spending on the limited options left has to address the
    economic downturn.  Having been pilloried for running
    huge surpluses in past years, he feels vindicated that
    the money went into strengthening the Government's books
    for the inevitable rainy day which has now arrived.
    Cullen said that had he known earlier in the year how bad
    things would get, he would have taken a "more cautious"
    approach to cutting taxes.  Some analysts feel Cullen
    may, in fact, have exacerbated a poor economic outlook by
    delivering tax cuts and increased government spending in
    the lead up to the November 8 election (see Ref B).
    Probably for that reason, he avoided baiting National too
    heavily about their proposed budget rollout, instead
    letting the budget figures speak for themselves and
    waiting for the National Party's response detailing their
    plan for tax cuts and how National intended to pay for
    them.

    ¶5. (U)  Despite having to explain why the government's
    books looked worse than predicted, Cullen said now was
    the not time for "a slash and burn response" to
    government spending, or more tax cuts.  He said the
    Government was maintaining a steady and prudent approach,
    and should continue to do so.  He signaled that any post-
    election government would have to take a closer look at
    revenue forecasts and increases in government spending.
    The tough times meant there would have to be a review of
    "low priority" spending to fund "more productive" new
    initiatives.

    National's Tax Cut Policy
    -------------------------

    ¶6. (U)  Opposition National Party leader John Key had to
    reformulate his election promise of delivering greater
    tax cuts to businesses and wage earners following the
    grim economic forecast.  Key said that, if elected, he
    will deliver a three-tier personal tax system with the
    highest rate no more than 33% on income over NZ$50,000.
    Key proposes cuts in personal tax rates beginning 1 April
    2009 of NZ$47 per week for the average wage earner.  He
    dropped the originally planned cuts for wealthier tax
    payers.  This last move preempts Labour accusations that
    National remains the party of the well-to-do.  To head
    off the criticism that it would have to take the fiscal
    axe to cherished programs to pay for this, National has
    pledged to make no cuts to frontline public services and
    no cuts to superannuation entitlements or eligibility
    requirements.  National says it can make its plan

    WELLINGTON 00000337  003.2 OF 003

    affordable by making changes to KiwiSaver.  It will
    reduce the minimum contribution for employees and
    employers from 4 percent to 2 percent, discontinue tax
    credits to employers, and cap the Government contribution
    at $NZ1,040 a year, or 2 percent.
    National's Kiwisaver Move Presents Risk
    ---------------------------------------
    ¶7. (U) To help fund National's tax cut program, Key wants
    to trim down government and employer contributions to the
    enormously popular KiwiSaver program.  National's
    KiwiSaver changes would remove altogether a tax credit
    the Government currently pays to employers to help them
    pay a contribution into employees saving accounts -
    saving NZD3 billion. Instead of being forced to
    contribute 4 per cent of an employee's gross salary into
    KiwiSaver in future years, however, employers under
    National would have to give only 2 per cent.  Labour
    immediately jumped on the proposed changes and Cullen
    accused National of "savaging KiwiSaver" and providing a
    disincentive for saving by reducing the standard
    contribution.  By and large, political analysts thought
    that National tax package was "good politics" because it
    did not ignore the middle class and assisted those who
    have not received any assistance from Labour.  Analysts
    also acknowledged that even those low-income earners not
    assisted in a significant way by National's proposed tax
    program already receive considerable financial assistance
    through existing programs which National has pledged to
    retain, such as the Working for Families scheme.
    However, they acknowledged that changing the KiwiSaver
    scheme represents a political risk for National.
    Kiwisaver is very popular with New Zealanders - 800,000
    members since Labour promoted it in 2007 - and analysts
    believe that any changes National proposes could alienate
    a huge block of the voting population.

    ¶8. (SBU) Comment:  The next New Zealand government
    following the November 8 general election will inherit a
    brittle economy mired in red ink due in part to Finance
    Minister Cullen's binge spending which produced now
    projected cash deficits of $NZ5.9 billion.  National
    miscalculated the impacts of the economic downturn and
    has been forced to reformulate its tax cut program meant
    to entice potential voters away from Labour.  Regardless
    of which party prevails on November 8, the recent
    economic data will limit either party's ability to
    stimulate the economy and end the current recession.

    MCCORMICK

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