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Cablegate: New Zealand Economy Looming As Main Election Issue

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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

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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

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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

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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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