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PP RUEHNZ
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P 220649Z MAY 07
FM AMEMBASSY WELLINGTON
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RUEHNZ/AMCONSUL AUCKLAND PRIORITY 1319
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UNCLAS SECTION 01 OF 03 WELLINGTON 000386 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR, STATE FOR EAP/ANP, EB, INR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV PREL NZ
SUBJECT: NEW ZEALAND'S 2007 BUDGET NOT LIKELY TO PRODUCE 
POLITICAL DIVIDENDS 
 
REF: WELLINGTON 351 
 
1) (U) SUMMARY: New Zealand's political punditry has given 
Labour's 2007 Budget a tepid response. While many wage 
earners may decide the Budget's centerpiece, a national 
pension saving scheme - KiwiSaver, could provide them some 
benefit, the majority of voters will likely be indifferent or 
resent another year of no relief in their personal tax rates. 
New Zealand faces major economic challenges, including an 
overvalued exchange rate that hinders imports, high interest 
rates that inhibit investments, and a ballooning trade 
deficit (reftel). The Government argues that tax cuts would 
exacerbate these problems, but its new budget is unlikely to 
reverse these trends. Nor will it reverse the Government's 
sliding poll ratings, as New Zealanders are likely to 
question why Labour has once again failed to provide them 
with any immediate material benefits despite the Government's 
huge operating surplus. End summary. 
 
Budget Basics 
------------- 
 
¶2. (U) On May 17th New Zealand's Minister of Finance, Dr. 
Michael Cullen released the Labour Government's 2007 Budget, 
which he promised will address both short-term economic 
imbalances (current account deficit, higher inflation and 
high exchange rate) along with medium-term challenges 
(improve low household savings rates and stimulate 
investment). The Budget's two main initiatives are the 
"KiwiSaver" superannuation (pension) top up plan and a set of 
cautious reductions in business taxes. KiwiSaver (first 
proposed in 2005) is a scheme designed to help improve 
household savings and to provide New Zealanders with 
additional retirement funds supplementing the current 
national superannuation fund. 
 
¶3. (U) With the 2007 Budget, KiwiSaver now becomes a reality 
when the next fiscal year starts on July 1. As an incentive 
to encourage broad participation in the scheme, the 
government will kick start each new member's account with a 
NZ$1,000 (USD $730) contribution and provide a tax credit of 
up to NZ$20 per week (about NZ$1040 per year per individual). 
In an unexpected wrinkle, from 1 April 2008 employers of all 
KiwiSaver participants will be required to contribute to the 
accounts. The compulsory employer contributions will start at 
1% of participating employees' salaries and increase by 1% 
each year until 2012, when the compulsory employer 
contribution will reach 4%. Employers will receive up to 
NZ$20 per week per employee in tax credits for their 
contributions. GNZ estimates that the cost in deferred 
Government revenue will be approximately NZ$3 billion over 
four years, with NZ$1.6 billion going to employees as tax 
credits and NZ$1.4 billion in tax credits for employers. 
Goldman Sachs further estimates KiwiSaver will generate 
increased overall savings of between NZ$5 and NZ$7 billion a 
year by 2013. The hope is that with this large pool of 
domestic capital, New Zealand's reliance on foreign capital 
and the overall cost of capital will be reduced, giving New 
Zealand investors a greater ownership stake in the economy. 
 
¶4. (U) The second important aspect of the Budget is a change 
to business taxes, the most important feature being the 
reduction in the corporate tax rate from 33% to 30%.  This 
will partly offset the cost of KiwiSaver to employers.  It 
will in addition set the NZ corporate tax rate at the same 
rate as Australia's in an effort to help prevent New 
Zealand's businesses from jumping across the Tasman. For the 
first time, businesses investing in research and development 
(R&D) can now receive a 15% tax credit in the hope of 
stimulating much needed domestic productivity growth. The 
cost to the Government for this measure is estimated at NZ 
$630 million in deferred revenue over four years. Another new 
feature will grant individuals a 33% tax rebate for 
charitable contributions to "qualified donee organizations." 
This measure is expected to cost NZ$65 million in deferred 
tax over four years. There are also new tax exemptions for 
active income derived from active business activity (e.g., 
manufacturing, industrial activity) for New Zealand 
controlled foreign companies to help them globalize at a 
lower tax and compliance cost (worth NZ$112.5 million over 
 
WELLINGTON 00000386  002 OF 003 
 
 
four years) making them more internationally competitive. 
 
¶5.  The Government claims these measures will encourage New 
Zealanders to save rather than spend, which Labour says would 
decrease inflation and interest rates.  But many analysts say 
the need for NZ Reserve Bank's tighter monetary policy will 
persist because of high overall consumer demand - especially 
for housing. Economists also predict that overall economic 
growth will continue to slow in part by the Kiwi dollar 
exchange rate, now at a 23-year high and forecast to remain 
high through March 2009. The GNZ reports growth in GDP at 
1.7% for the year as of March 2007 and forecasts growth of 
2.6% through March 2008. This is well below the 4% target 
originally set by the Labour government in 2001. 
 
¶6. (U) On the expenditure side of the Budget, the media has 
focused primarily on the GNZ's scheme to improve New 
Zealand's transportation infrastructure. The GNZ will make 
NZ$145 million available in capital funding for highway 
construction and upgrades and NZ$500 million in funds for the 
electrification of Auckland's rail network and improvements 
to Wellington extant network. The funding includes an 
additional regional fuel tax, subject to voter approval, 
which in Auckland's case will mean an additional 10 cents per 
liter on petrol and diesel. This provision is Labour's 
admittedly perfunctory nod to the Green's demand for a carbon 
tax on gasoline. For a complete list of both tax and 
expenditure specifics enumerated in the 2007 Budget see: 
www.treasury.govt.nz 
 
Cullen yields to political reality 
---------------------------------- 
 
¶7. (U) Dr. Cullen, a reluctant tax cutter at best, decided to 
signal that personal tax cuts may occur in next year's (the 
2008 "pre-election") Budget, a move seen as purely a 
political decision rather than an economic one. Labour 
probably hoped it could keep the lid on this proposed 2008 
election "sweetener" until after Cullen unveiled the current 
Budget - his eighth. But Labour's hemorrhaging support in two 
recent consecutive political opinion polls apparently 
startled long-serving Cabinet ministers -particularly Prime 
Minister Helen Clark, who remembers that National almost won 
the 2005 elections by promising universal tax cuts. The fact 
that Cullen has finally been forced to concede (however 
reluctantly) that a Labour Government will cut personal taxes 
(later rather than sooner) will be enough to keep his restive 
colleagues on his side, at least for now. 
 
¶8. (U) Even if Dr. Cullen finally accedes to tax cuts next 
year, this measure alone may not guarantee the sort of 
political insurance the Labour Party needs to return it to 
power for a fourth term. Labour has hung its hat on 
distributing benefits only to those in society it deems most 
in need, especially lower and middle income families with 
children. The Government also argues that extensive tax cuts 
will push up inflation and interest rates.  The Government's 
challenge is that the opposition National Party has touched a 
nerve with voters by claiming that the electorate should be 
able to make its own spending decisions and all taxpayers 
deserve lower taxes.  Labour knows there is mounting 
impatience among the electorate for tax relief after years of 
bulging surpluses. (Note: This year's cash surplus amounts to 
NZ$1.7 billion.) More than one analyst has observed that 
Cullen reneged this year on the very small tax cuts he had 
promised in last year's budget.  The public restiveness is 
reflected in the latest 3 News-TNS poll taken before the 
Budget announcement, in which 58 percent of those surveyed 
said Cullen should be sacked if he did not deliver tax cuts 
and 66 per cent wanted the top tax rate threshold of 39 per 
cent (i.e., NZ$60,000 (approx. US$45,000) and above which 
reflects the top 12%) lowered. Cullen has countered by saying 
the TV3 poll hadn't asked the right question, which would be 
to ask people if they wanted a substantial tax cut that 
pushed up mortgage rates or led to cuts to health and 
education spending. 
 
National Party and Greens critical of Budget 
-------------------------------------------- 
 
 
WELLINGTON 00000386  003 OF 003 
 
 
¶9. (U) Predictably, in a robust response to Cullen,s Budget 
address to Parliament, National Party leader John Key labeled 
the 2007 Budget a "cruel hoax". He stated that costs incurred 
by businesses by paying into employees KiwiSaver schemes will 
ultimately outweigh and lower any cuts in corporate tax 
rates. Moreover, Key asserted, middle income New Zealanders 
will not benefit from the KiwiSaver incentives because their 
current high debt levels, rising interest rates, and lack of 
disposable income have made them cash strapped and unable to 
save.  Bosses are also unlikely to offer raises knowing that 
they will have to kick in to employee KiwiSaver accounts. 
 
¶10. (U) The Green Party complained that Budget 2007 failed to 
deliver the necessary environmental benefits to make New 
Zealand more sustainable and ultimately carbon neutral. 
Environment Minister David Benson-Pope and Climate Change 
Minister David Parker proclaimed that the carbon neutral 
pledge in the Budget was a "bold and exciting" environmental 
program and noted that more money has been allocated to 
address sustainability concerns than ever before. National's 
Key, who himself is trying to improve his own party's green 
credentials, also argued that the Budget was not green 
enough. Key has noted that the oft-used Clark slogan of 
'carbon neutrality', which Clark established as one of her 
goals for New Zealand in the unspecified future, was missing 
from the Budget. 
 
¶11. (SBU) Comment: Although not expressly stated, it appears 
that Labour's strategy in the lead-up to next year's election 
is that it will have begun solidifying its base of support by 
paying out at least NZ$1,000 to each wage earner who opens a 
KiwiSaver account in 2007. They may then reduce the personal 
tax rates in the 2008 Budget as the second traunche of 
government largesse to further strengthen voter support but 
these measures alone may be perceived by Kiwi voters as too 
little too late. End comment. 
 
 
Keegan