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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

UNCLAS SECTION 01 OF 03 WELLINGTON 000163 
 
SENSITIVE 
SIPDIS 
 
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 
 
WELLINGTON 00000163  002 OF 003 
 
 
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 
 
WELLINGTON 00000163  003 OF 003 
 
 
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