VZCZCXRO5674
RR RUEHAG RUEHCHI RUEHDF RUEHFK RUEHHM RUEHIK RUEHKSO RUEHLZ RUEHNAG
RUEHPB RUEHRN RUEHROV
DE RUEHWL #0337/01 2882151
ZNR UUUUU ZZH
R 142151Z OCT 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5473
INFO RUEHNZ/AMCONSUL AUCKLAND 1759
RUEHBY/AMEMBASSY CANBERRA 5281
RUEHDN/AMCONSUL SYDNEY 0733
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHSS/OECD POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC 0256
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 WELLINGTON 000337 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP AND EEB, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PGOV PREL NZ
SUBJECT: NEW ZEALAND'S GRIM PRE-ELECTION ECONOMIC 
FORECAST 
 
Ref A)  WELLINGTON 168,  B) WELLINGTON 159 
 
WELLINGTON 00000337  001.2 OF 003 
 
 
¶1. (U) Summary:  New Zealand's economy contracted 
dramatically since the release of the May 2008 Budget 
projections, resulting in budget deficits twice as large 
as forecasted due primarily to two quarters of negative 
growth and growing current account deficits.  GNZ 
officials however, maintain that the downturn in the 
economy is not directly linked to the global credit 
crisis.  Finance Minister Michael Cullen's message to 
voters following the release of the bad economic news was 
that thanks to his fiscal prudence, New Zealand is better 
placed to weather the economic downturn than a lot of 
other countries.  Some analysts feel Cullen may have 
exacerbated the economic downturn through tax cuts and 
increased government spending to bolster the Labour 
Government's re-election prospects.  The grim economic 
forecast caused National Party leader John Key to 
reformulate his tax cut program to NZ$47 per week for the 
average wage earner beginning in April 2009 and dropping 
the originally planned cuts for upper income earners. 
End Summary. 
 
NZ Treasury Warns of Severe Economic Downturn 
--------------------------------------------- 
 
¶2. (U)  The GNZ is required under the Fiscal 
Responsibility Act to produce the Pre-Election Fiscal 
Update (PREFU) which reflects the Treasury's view of the 
government's fiscal position based on information 
received up to August 28th prior to the general election. 
In the PREFU released October 6, Treasury officials said 
the New Zealand economic outlook had deteriorated badly 
since the May budget was released, which meant reducing 
government revenue forecasts and recalculating increased 
government costs (see Ref A).  Cash deficits -- the net 
amount after all infrastructure funding and payments to 
the New Zealand Superannuation Fund are made -- are 
predicted to balloon from around NZ$5.9 billion a year in 
2008/9 around NZ$7.3 billion a year in 2012/13.  The 
Government's operating balances are predicted to fall 
into deficit for the first time since 1994 reaching 
NZ$3.2 billion by 2012/2013.  Treasury Secretary John 
Whitehead said forecast scenarios had Government debt 
increasing from 17.4 percent of GDP to 24.3 percent by 
¶2013.  Mr. Whitehead said that despite the fact that the 
Pre-Election Fiscal and Economic Update was completed 
before the international financial crisis had become even 
sharper, the Treasury's near-term economic forecasts 
would remain largely the same.  Tax revenue was predicted 
to be NZ$3.1 billion less than anticipated in the budget 
due to the reduced government revenues resulting from the 
recession, along with an increase in subsidies for 
programs like early childhood education (NZ$200 million 
per year) and the growing popularity of the KiwiSaver 
plan (additional NZ$280 million per year).  The slowdown 
is expected to continue through the middle of next year 
with unemployment predicted to rise to 5.1 percent from 
the current 3.9 percent. 
 
Government Figures Show Trend Towards Red 
----------------------------------------- 
 
¶3. (U)  Key figures from the Government's economic report 
(Pre-Election fiscal) include: 
 
-- Gross government debt to rise from 17.4 percent of GDP 
to 24.3 per cent by 2013 against the Government's target 
of 20 per cent of GDP on average. 
 
-- Growth expected to be only 0.1 percent by March 2009 
before lifting to 1.8 percent and then 3.3 percent in the 
following two years. 
 
-- The budget deficit forecast to be $64 million next 
year rising to $1.7 billion by 2010 and staying in 
deficit for 10 years. 
 
 
WELLINGTON 00000337  002.2 OF 003 
 
 
-- A cash surplus of NZ$2 billion in the year to June 
falling to a projected cash deficit of NZ$5.9 billion in 
2008/2009 and further deficits over the next four years 
rising to NZ$7.3 billion by 2012. In the May budget cash 
deficits were forced to average NZ$3.5 billion. 
 
-- Kiwi dollar expected to decline in value by 22.7 
percent by 2013.  The Kiwi dollar slipped to a five-year 
low of US57.85c this month. 
 
-- 90-day interest rates falling from 8.8 percent to 6.3 
percent by 2013. 
 
-- NZ$496 million is all that is left in next year's 
budget for new spending. 
 
-- Unemployment tipped to rise above 5 per cent by 2010. 
 
-- Inflation forecast to rise to 4.5 percent by March 
2009 before falling back to just under 2.5 percent. 
 
-- Tax revenue for the next three years to be lower on 
average by around $900 million. 
 
¶4. (SBU)  Finance Minister Michael Cullen's message to 
voters following the release of the bad economic news was 
that thanks to his "fiscal prudence," New Zealand is 
better placed to weather the economic crisis than a lot 
of other countries but he ignored the impact of his binge 
spending on the limited options left has to address the 
economic downturn.  Having been pilloried for running 
huge surpluses in past years, he feels vindicated that 
the money went into strengthening the Government's books 
for the inevitable rainy day which has now arrived. 
Cullen said that had he known earlier in the year how bad 
things would get, he would have taken a "more cautious" 
approach to cutting taxes.  Some analysts feel Cullen 
may, in fact, have exacerbated a poor economic outlook by 
delivering tax cuts and increased government spending in 
the lead up to the November 8 election (see Ref B). 
Probably for that reason, he avoided baiting National too 
heavily about their proposed budget rollout, instead 
letting the budget figures speak for themselves and 
waiting for the National Party's response detailing their 
plan for tax cuts and how National intended to pay for 
them. 
 
¶5. (U)  Despite having to explain why the government's 
books looked worse than predicted, Cullen said now was 
the not time for "a slash and burn response" to 
government spending, or more tax cuts.  He said the 
Government was maintaining a steady and prudent approach, 
and should continue to do so.  He signaled that any post- 
election government would have to take a closer look at 
revenue forecasts and increases in government spending. 
The tough times meant there would have to be a review of 
"low priority" spending to fund "more productive" new 
initiatives. 
 
National's Tax Cut Policy 
------------------------- 
 
¶6. (U)  Opposition National Party leader John Key had to 
reformulate his election promise of delivering greater 
tax cuts to businesses and wage earners following the 
grim economic forecast.  Key said that, if elected, he 
will deliver a three-tier personal tax system with the 
highest rate no more than 33% on income over NZ$50,000. 
Key proposes cuts in personal tax rates beginning 1 April 
2009 of NZ$47 per week for the average wage earner.  He 
dropped the originally planned cuts for wealthier tax 
payers.  This last move preempts Labour accusations that 
National remains the party of the well-to-do.  To head 
off the criticism that it would have to take the fiscal 
axe to cherished programs to pay for this, National has 
pledged to make no cuts to frontline public services and 
no cuts to superannuation entitlements or eligibility 
requirements.  National says it can make its plan 
 
WELLINGTON 00000337  003.2 OF 003 
 
 
affordable by making changes to KiwiSaver.  It will 
reduce the minimum contribution for employees and 
employers from 4 percent to 2 percent, discontinue tax 
credits to employers, and cap the Government contribution 
at $NZ1,040 a year, or 2 percent. 
National's Kiwisaver Move Presents Risk 
--------------------------------------- 
¶7. (U) To help fund National's tax cut program, Key wants 
to trim down government and employer contributions to the 
enormously popular KiwiSaver program.  National's 
KiwiSaver changes would remove altogether a tax credit 
the Government currently pays to employers to help them 
pay a contribution into employees saving accounts - 
saving NZD3 billion. Instead of being forced to 
contribute 4 per cent of an employee's gross salary into 
KiwiSaver in future years, however, employers under 
National would have to give only 2 per cent.  Labour 
immediately jumped on the proposed changes and Cullen 
accused National of "savaging KiwiSaver" and providing a 
disincentive for saving by reducing the standard 
contribution.  By and large, political analysts thought 
that National tax package was "good politics" because it 
did not ignore the middle class and assisted those who 
have not received any assistance from Labour.  Analysts 
also acknowledged that even those low-income earners not 
assisted in a significant way by National's proposed tax 
program already receive considerable financial assistance 
through existing programs which National has pledged to 
retain, such as the Working for Families scheme. 
However, they acknowledged that changing the KiwiSaver 
scheme represents a political risk for National. 
Kiwisaver is very popular with New Zealanders - 800,000 
members since Labour promoted it in 2007 - and analysts 
believe that any changes National proposes could alienate 
a huge block of the voting population. 
 
¶8. (SBU) Comment:  The next New Zealand government 
following the November 8 general election will inherit a 
brittle economy mired in red ink due in part to Finance 
Minister Cullen's binge spending which produced now 
projected cash deficits of $NZ5.9 billion.  National 
miscalculated the impacts of the economic downturn and 
has been forced to reformulate its tax cut program meant 
to entice potential voters away from Labour.  Regardless 
of which party prevails on November 8, the recent 
economic data will limit either party's ability to 
stimulate the economy and end the current recession. 
 
MCCORMICK