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Cablegate: New Zealand's 2008 Budget - Too Little, Too Late.

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RR RUEHAG RUEHCHI RUEHDF RUEHFK RUEHHM RUEHIK RUEHKSO RUEHLZ RUEHNAG
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DE RUEHWL #0168/01 1440633
ZNR UUUUU ZZH
R 230633Z MAY 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5242
INFO RUEHNZ/AMCONSUL AUCKLAND 1673
RUEHBY/AMEMBASSY CANBERRA 5179
RUEHDN/AMCONSUL SYDNEY 0677
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
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RUCPDOC/USDOC WASHDC 0230
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
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UNCLAS SECTION 01 OF 03 WELLINGTON 000168

SENSITIVE
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STATE FOR EAP/ANP, EB, INR, STATE PASS TO USTR, PACOM FOR
J01E/J2/J233/J5/SJFHQ

E.O. 12958: N/A
TAGS: ECON PGOV EFIN NZ
SUBJECT: NEW ZEALAND'S 2008 BUDGET - TOO LITTLE, TOO LATE.

Ref A) WELLINGTON 163
Ref B) WELLINGTON 159

WELLINGTON 00000168 001.2 OF 003


1. (SBU) Summary. The New Zealand Labour Party's 2008 Budget
offered social expenditures and tax cuts in a last ditch appeal to
voters in this election year where Labour lags badly in recent polls
(see Ref A). It includes a three-year program of personal tax cuts,
starting with an average rebate of NZ$20 beginning just prior to
this year's election (scheduled no later than November 15). The
Opposition National Party criticized the size and timing of the tax
cuts, but now faces calls to detail its own fiscal game plan for the
country. For Labour, this budget represents the last remaining
deliverable to persuade voters to return it to office. However, it
is probably too little, too late. End Summary.

Cullen's Tax Cuts: Too Little Too Late?
----------------------------------------

2. (U) New Zealand Finance Minister, also Deputy Prime Minister,
Dr. Michael Cullen unveiled in his annual Budget speech to
Parliament on May 22 a NZ$10.6 (US$8.25) billion package of tax cuts
to be rolled out over the next three years. The Government
estimates the budget's tax cuts and higher government spending will
equate to 2.3 percent of gross domestic product (GDP) over the
course of the fiscal year. Cullen told Parliament that his
three-year program will deliver between NZ$12 and NZ$28 a week more
in take home pay from October this year, rising to between NZ$22 and
NZ$55 a week by April 2011. These long anticipated tax cuts will
cost the government about NZ$1.5 billion in first year and escalate
to NZ$10.6 billion in total by 2011.

3. (U) Inflation adjustments to the Working for Families
entitlements (welfare benefits for families) will also be brought
forward from April 1 next year to October 1 this year. The net
effect would give a two-income couple with three children under age
13 and combined earnings of NZ$65,000 an additional NZ$45 a week
beginning October 1, 2008 and increasing to NZ$90 a week by April
2011. For retirees, the New Zealand Superannuation Fund benefits
will add $45.88 for a married couple and $23.84 for a single person
living alone on pension.

The Budget: Something for Everybody
-----------------------------------

4. (U) The Government of New Zealand has projected it will collect
NZ$61.9 billion in revenue in the 2008/9 fiscal cycle, which amounts
to approximately 33.4 percent of total GDP (NZ$185 billion or US$145
billion). The three largest sources of this revenue are individual
income taxes amounting to NZ$27.2 billion, GST of NZ$11.9 billion
and corporate taxes of NZ$9.6 billion. The Government will spend
the NZ$61.9 billion in 2008/09 as follows:

-- Health NZ$12.6 billion
-- Education NZ$10.5 billion
-- Social Security & welfare NZ$9.2 billion
-- NZ Superannuation Fund (pension scheme) NZ$7.8 billion
-- Primary services NZ$5.7 billion
-- Core government services NZ$3.4 billion
-- Law and order NZ$3.1 billion
-- Transport & communications NZ$2.8 billion
-- Economic & industrial services NZ$2.4 billion
-- Defense NZ$1.7 billion

COMMENT: This list reflects the priority this government has placed
on social expenditures over economic development and national
security throughout its tenure in office. END COMMENT.

5. (U) Highlights in the Budget intended to garner the favor of
voters include:
-- NZ$3 billion for improved health services over four years; NZ$2
billion of which will go to district health boards to cover the
increased costs for goods and services and population increases.
-- NZ$1.8 billion for teachers' salary increases over five years
(NZ$619 million in 2008).
-- NZ$215 million to hire 762 additional teachers over four years to
reduce class sizes to one teacher per 15 students.
-- NZ$690 million for Toll rail operations -- the previously
announced NZ$665 million purchase price plus $25m to cover the costs
of lease arrangements and staff presented as an improvement in the

WELLINGTON 00000168 002.2 OF 003


transport sector. See Ref B.
-- NZ$500 million effort to improve high-speed broadband in urban
areas and extend its reach into rural regions.
-- NZ$189.5 million to hire 1,000 additional policemen.

Reaction by Business
--------------------

6. (U) Roger Kerr, Executive Director of the New Zealand Business
Roundtable reacted to the 2008 Budget saying, we "called for all
high [personal] income tax rates to be reduced and aligned with the
company tax rate of 30 percent as a step in the right direction."
Instead, the government widened rather than flattened the tax scale
by reducing only the bottom personal tax rate, and the threshold
adjustments did little to improve incentives for productive
activity. The government focused on short-term relief to household
budgets. Expressing a position, which may be taken up by the
National Party, Kerr went on to say, "with greater spending
discipline and growth-oriented tax changes, much larger tax
reductions could have been implemented without putting at risk
inflation and a sound fiscal position." He further warned that
government spending as a share of the economy is forecast to rise
rather than fall (by around 1.5 percent of GDP between 2008 and
2010), indicating that the true ongoing tax burden is rising rather
than falling.

Reserve Bank May Keep Interest Rates High
------------------------------------------

7. (U) The cuts in personal income tax rates may amount to a zero
sum benefit if the Reserve Bank of New Zealand (RBNZ) continues its
current tight monetary policy. Initially many local economists had
been predicting the Reserve Bank of New Zealand (RBNZ - NZ's central
bank) would begin cutting the official cash rate (OCR now 8.25%) by
September '08, amid growing evidence of a sharp economic slowdown
but those same economists are now forecasting that the cuts could be
much more "stimulatory" (inflationary) than had been anticipated.
The RBNZ had been expecting only NZ$1.5 billion in tax cuts to take
effect in April next year leading to possible reduction in the OCR
by September '08, but economists now expect the OCR will remain high
until at least March '09.

Support Parties Got Their Share
-------------------------------

8. (U) In terms of voting blocs, it is possible that the
beneficiaries will not be Labour, but rather its key support
parties. Although New Zealand First's Winston Peters wanted more
tax concessions and policies to support local industry, he will take
credit for increases to superannuation and increased support for
older New Zealanders. The Greens wanted to hold back on tax cuts
and instead bolster social spending. However, they will nonetheless
take credit for budget allocations for energy efficiency and
environmental cleanup.

National Party Slams Budget
---------------------------

9. (U) Opposition leader John Key reacted to the 2008 budget by
criticizing Labour's economic stewardship over its nine years in
office and its failure to offer tax cuts before now. Key argued
that Labour had accumulated large surpluses by overtaxing New
Zealanders over the past nine years and reminded voters that no
finance minister in New Zealand history has had the opportunity to
cut taxes like Cullen. Key is confident that New Zealanders will
see Cullen's decision to finally deliver tax cuts just prior to the
election as "the desperate and cynical move it is". Key also focused
on size of the tax cut for the average wage earner - NZ$20 a week -
which he criticized as too small to offset rising living costs. He
called the cuts too little even to buy the average Kiwi family one
more block of cheese every week.

10. (U) Key resisted calls by Labour to make known the exact size
of National's own tax cut program. He did state that tax cuts are a
top priority for National and that it would "reprioritize"
government spending, without providing more details about which of
Labour's policies it would discard. Key acknowledged that National
will need to present its own budgetary vision before it faces
credibility issues of its own. Key said he would probably wait

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until the start of the election campaign before unveiling its own
economic package. Despite its criticism, National voted in support
of the Budget as it passed in an urgency session in Parliament on
May 23. National agreed that a vote against any sort of fiscal
relief for voters at this time would be politically damaging.

COMMENT: Budget Still Not A Vote Winner
---------------------------------------

11. (SBU) The 2008 Budget was uniformly regarded by media political
analysts as a bold budget of its sort, particularly for the
traditionally parsimonious Cullen. It will not, however, be a
sufficient spark to reignite Labour's flagging political fortunes.
(Note: The May 17 Fairfax Media poll showed National had a 27-point
lead over Labour. End Note). Now that Labour have shown its
budgetary cards, they will try to pressure Key to state clearly not
only the scale of any tax cuts National will make but also, and most
critically, how they will be paid for. Key will delay responding as
long as possible, knowing that the longer National stays silent, the
longer the media and voters will focus on Labour's shortcomings.
End Comment.

MCCORMICK

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