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RR RUEHNZ
DE RUEHWL #0396/01 1440637
ZNR UUUUU ZZH
R 240637Z MAY 06
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 2815
INFO RUEHBY/AMEMBASSY CANBERRA 4416
RUEHNZ/AMCONSUL AUCKLAND 0755
RUCPDOC/USDOC WASHDC 0052
RUEATRS/DEPT OF TREASURY WASHDC
RHHMUNA/CDR USPACOM HONOLULU HI//JO1E/J2/J233/J5/SJFHQ//
RHHJJAA/JICPAC HONOLULU HI//ONN/OT/OTS//

UNCLAS SECTION 01 OF 03 WELLINGTON 000396 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP-DRICCI AND EB 
STATE PASS TO USTR FOR BWEISEL 
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/ABENAISSA 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN NZ
SUBJECT: NEW ZEALAND GOVERNMENT UNVEILS CAUTIOUS BUDGET 
 
REF: A. WELLINGTON 344 (NOTAL) 
     ¶B. CANBERRA 697 (NOTAL) 
     ¶C. 2004 WELLINGTON 849 (NOTAL) 
 
(U) Sensitive but unclassified - protect accordingly. 
 
¶1. (SBU) Summary: New Zealand's Labour government maintained 
its image for tightfistedness by delivering a 2006-7 budget 
with an anticipated surplus and no tax relief.  Most of the 
government's new spending will go to the health sector and 
road improvements and deliver on Labour's 2005 campaign 
promises, including increased welfare and interest-free 
student loans.  Demands for even bigger budget spending may 
grow louder, however, as New Zealand faces an economic 
slowdown this year, following five years of strong growth. 
Economists view the budget as fiscally sound and unlikely to 
affect New Zealand's relatively high interest rates or the 
value of its dollar, which the government has been talking 
down in hopes of spurring exports.  But the budget does 
little to improve New Zealand's lagging competitiveness.  It 
also was immediately denounced by the opposition for lacking 
Australian-style tax cuts despite the big surplus.  End 
summary. 
 
An equitably sliced pie 
----------------------- 
¶2. (U) In his seventh budget since Labour regained power, 
Finance Minister Cullen on May 18 announced a NZ $52.3 
billion (US $32.5 billion, NZD 1.00 = USD .6221) spending 
plan for 2006-7, a 3.5 percent increase from the current 
fiscal year.  It includes NZ $2.2 billion in new spending, a 
small rise from the $2 billion in new spending provided in 
the current budget. 
 
¶3. (SBU) The budget reflects Labour's philosophy of 
redistributing income to ensure a "fairer society," with the 
public sector providing a social safety net.  The largest 
outlay of new capital spending -- NZ $1.3 billion over five 
years -- is to cover the rising costs of road building and to 
speed up completion of major highway projects.  For the first 
time, the government will be spending more on roads than it 
collects in gas taxes and vehicle registration fees, 
according to Cullen.  The health sector -- which accounts for 
21 percent of all government outlays -- will receive a NZ 
$750 million injection of new spending in each of the next 
four years, raising its annual expenditure to NZ $10.6 
billion (an 8.5 percent rise from the current year).  Next 
year's increase in new health spending will be a slightly 
smaller boost than the current year's. 
 
¶4. (SBU) The budget's other big-ticket items fulfill the 
Labour Party's campaign promises from the September 2005 
election:  More low- to middle-income families will receive 
support payments (called "tax relief" by the government) at a 
cost of NZ $1.85 billion over the next four years.  The 
budget also allocates NZ $1 billion over the next four years 
to pay for interest-free student loans. 
 
¶5. (U) Deals hammered out with Labour's support parties also 
increased appropriations, including spending for the hiring 
of 1,000 more police, as promised to Winston Peters, foreign 
minister and the leader of New Zealand First.  As a result of 
Labour's agreement with United Future leader Peter Dunne (and 
now minister of revenue), he and Cullen are preparing a 
review of business taxation, with likely reductions expected 
to be introduced in April 2008. 
 
¶6. (U) There are no immediate tax cuts, either for businesses 
or individuals, despite a NZ $8.5 billion operating surplus 
(equivalent to 5.4 percent of GDP) forecast for the fiscal 
year ending June 2006.  Cullen has designated some of the 
surplus to cover capital expenditures and contributions to 
the Superannuation Fund, to pre-fund a public pension plan 
that is expected to reach NZ $10 billion in assets this year. 
 Cullen cited a desire to prepare New Zealand to care for an 
aging population and an anticipated economic slowdown as 
reasons why there was no room for tax cuts.  The budget 
surplus is expected to drop to NZ $5.8 billion in 2006-7 
after accumulating over the previous five years. 
 
Still no tax cuts 
 
WELLINGTON 00000396  002 OF 003 
 
 
----------------- 
¶7. (U) Hoping to draw attention to Australia's recently 
proposed income tax cuts (ref B), the opposition National 
Party labeled the New Zealand government's plan a "Bondi 
budget" in reference to the famous Sydney beach.  National 
argued that the lack of tax relief will accelerate an 
existing brain drain from New Zealanders moving to Australia. 
 An estimated net 20,400 New Zealanders left for Australia in 
the year to April 2006.  The Labour government's resistance 
to tax relief was an issue in last year's election campaign 
and almost cost it the election.  New Zealand's top tax rate 
is 39 percent, applied on the incomes of the 12 percent of 
New Zealanders who earn more than NZ $60,000 a year (about US 
$37,000).  Only 5 percent of taxpayers paid the higher rate 
when it was enacted by the Labour-led government in 2000. 
The New Zealand Inland Revenue Department predicts that 
increased government revenues may allow for tax cuts before 
the 2008 election. 
 
¶8. (U) Meanwhile, the New Zealand Treasury is forecasting 
that economic growth will slow to about one percent in the 
year to March 2007 -- a sharper downturn than Treasury 
predicted six months ago (ref C) -- due largely to the 
previously high New Zealand dollar, higher interest rates and 
gas prices and, hence, slower consumer spending.  The 
downturn gives Cullen justification for years of fiscal 
conservatism:  Having stockpiled surpluses during five years 
of economic expansion, his government now can afford to boost 
spending as the economic clouds darken.  "The fool who spends 
on the upturn will find himself broke on the downturn," 
Cullen told Parliament.  Since 2000, real GDP growth has 
averaged 3.6 percent annually, with a peak performance of 4.8 
percent in 2004.  Treasury expects growth to rebound in the 
year to March 2008 to more than 3 percent as the New Zealand 
dollar dips in value and spurs agricultural exports. 
 
¶9. (SBU) Economists see the 2006-7 budget as cautious and 
adding little stimulus to the economy.  The government can 
increase spending because of the operating budget surplus and 
low government debt relative to GDP.  Gross debt is expected 
to fall to 23 percent of GDP by June 2006, down from a level 
of more than 60 percent of GDP in the early 1990s.  The net 
debt level -- the government's financial assets offset by the 
gross debt -- should drop to 6.7 percent of GDP.  When the 
government's pension fund is included, its financial assets 
exceed its liabilities. 
 
For defense and foreign aid 
--------------------------- 
¶10. (U) The budget sets aside NZ $72.8 million in new funding 
for defense operating expenses, as the second installment in 
the government's 10-year, NZ $4.6 billion program to 
modernize New Zealand's defense infrastructure and increase 
its military personnel.  The budget also allocates an 
additional NZ $305 million for defense hardware for the next 
fiscal year, the third installment of a 10-year, NZ $3 
billion capital replacement and upgrade project.  The defense 
appropriations for 2006-7, including the new spending, are 
equivalent to about one percent of GDP and compose about 2.5 
percent of all government appropriations.  Septel will look 
at the defense budget in greater detail. 
 
¶11. (U) Official development assistance remains at 0.27 
percent of GNI this year but rises to 0.28 percent in 2007-8, 
with assistance totaling NZ $1.4 billion over the next four 
years. 
 
Comment 
------- 
¶12. (SBU) Clouds forming over a fair-weather economy are 
giving the government some cover, as it keeps a tight rein on 
spending and refuses to countenance tax cuts -- even in the 
face of continuing budget surpluses.  Proceeding cautiously 
to ensure economic and political stability, Labour also is 
playing to its core constituents with increases in social 
spending.  However, the tax-cut debate continues, and 
National's dire warnings that more New Zealanders may vote 
with their feet -- to Australia -- still could get traction. 
The budget also does little to address New Zealand's lagging 
competitiveness or long-term economic growth.  More spending 
on the health sector, welfare and student loans 
 
WELLINGTON 00000396  003 OF 003 
 
 
redistributes, rather than creates, national wealth.  Still 
to be seen is whether a possible 2008 cut in the business tax 
will prompt businesses to boost capital investment and raise 
productivity, which holds the key to New Zealand's long-term 
economic growth. 
 
Budget forecast 
--------------- 
¶13. (U)           Annual avg pct change, year ending 
                  March 31, unless otherwise indicated 
 
                  Actual      Est.        Forecast 
                  2005        2006  2007  2008  2009  2010 
 
Consumption 5.7   4.3   1.8         1.1   2.3   2.5 
--public (1)      5.2   5.9   5.6         2.2   3.9   3.4 
--private         5.8   3.8   0.7         0.8   1.9   2.3 
 
Investment  7.8   6.0   -4.6        -0.2  4.8   4.6 
 
Exports           3.9   0.1   1.0         5.6   5.0   3.8 
Imports           13.7  5.1   -1.0        -0.9  3.4   3.7 
 
GDP               3.7   2.1   1.0         3.3   3.5   3.1 
Unemployment(2)3.9      3.8   4.7         4.7   4.4   4.5 
CPI inflation(3)2.8     3.3   3.4         2.4   2.0   2.0 
 
Current account 
--NZD million -11062-14462-13925-12188-11383-11035 
--pct of GDP      -7.4  -9.3   -8.8 -7.3  -6.5   -6.0 
 
90-day bank 
bill rate (4)     6.9   7.6   7.0   6.3   6.0   5.8 
 
Spending (5) 
--NZD million     46234 50445 52254  55158  57973 60527 
--pct of GDP      30.6  31.9  31.8   32.6   32.5   32.4 
 
Revenue (5) 
--NZD million     52065 56652 56190 57781 59728   64157 
--pct of GDP      34.5   34.2   34.4  33.9  33.3  34.1 
 
Operating Balance (6) 
--NZD million     6247   8486  5768  4343  3561    5412 
--pct of GDP      4.1   5.4   3.6   2.6   2.0   2.9 
 
Superannuation Fund (6) 
--end year 
NZD million 6555  10015 12739  15826  19335 23251 
--pct of GDP      4.3   6.4    8.0   9.4   10.8   12.4 
 
(1) Forecast for public consumption is influenced by 
government defense spending. 
(2) Rate in March quarter, seasonally adjusted. 
(3) Annual percentage change. 
(4) Average for March quarter. 
(5) Core Crown accounts; excludes some items such as Crown 
entities and state-owned enterprises.  For year ending June 
¶30. 
(6) For year ending June 30. 
McCormick