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RR RUEHAG RUEHCHI RUEHDF RUEHFK RUEHHM RUEHIK RUEHKSO RUEHLZ RUEHNAG
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DE RUEHWL #0125/01 1490648
ZNR UUUUU ZZH
R 290648Z MAY 09
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5880
INFO RUEHNZ/AMCONSUL AUCKLAND 1977
RUEHBY/AMEMBASSY CANBERRA 5520
RUEHDN/AMCONSUL SYDNEY 0851
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHSS/OECD POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC 0307
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 04 WELLINGTON 000125 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP, EEB, INR, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV NZ
SUBJECT: NEW ZEALAND'S 2009 BUDGET - SEEKING SECURITY IN UNCERTAIN 
TIMES 
 
WELLINGTON 00000125  001.2 OF 004 
 
 
 
¶1. (SBU)  Summary:  Six months following the general election, the 
governing National Party delivered its first budget to the New 
Zealand Parliament on May 28.  Finance Minister (FM) Bill English 
said the goal of the Budget was to achieve security in uncertain 
times and promised not to cut current government benefits or other 
social welfare entitlements.  By the time of the general election in 
November 2008, New Zealand had been in recession for almost a year 
and is set to experience its sixth successive quarter of 
contraction.  The National Party maintains that their first Budget 
represents the first steps on the long road to raising the country's 
productivity and economic performance, closing the income gap with 
Australia while avoiding a costly credit-rating downgrade by 
Standard & Poor's.  However, the Government will still need to 
borrow to finance Budget deficits expected to continue until 2018. 
End Summary 
 
Reaction to Budget 
------------------ 
 
¶2. (SBU)  The two most controversial provisions in the Budget which 
drew criticism from the opposition Labour Party are the cancellation 
of the next two rounds of personal tax cuts, expected to save NZ$900 
million a year and freezing contributions to the Superannuation Fund 
(national pension plan).  FM English said the cuts would not be 
restored "until future economic conditions permit."  Annual 
contributions to the Superannuation Fund in the past averaged NZ$2 
billion annually but are now expected to be suspended for the next 
11 years with only a minimum contribution of NZ$250 million this 
year. 
¶3. (SBU)  Labour leader Phil Goff focused his reaction to the Budget 
on tax cuts, jobs, lack of superannuation payments and "undue" 
influence of foreign credit rating agencies.  He labeled National as 
"dishonest" for campaigning on the promise of tax cuts only to 
discard them once in office.  He also claimed that the Budget lacked 
any initiatives to address NZ's growing unemployment.  Goff asserted 
that the Budget's "decade of deferrals" of payments to the New 
Zealand Superannuation Fund is the death knell for publicly funded 
retirement for future generations of New Zealanders.  He accused the 
Government of shaping the Budget to satisfy international credit 
rating agencies, whose acumen and track record he openly questioned. 
 United Future leader and Minister of Revenue Peter Dunne endorsed 
the Budget as "prudent for the times".  Architect of the free market 
economic reforms of the 1980s, ACT Party finance spokesman Sir Roger 
Douglas critiqued the Government for spending too much money in the 
Budget while the Progressive Party leader Jim Anderton faulted the 
Government for not spending enough. 
¶4. (SBU)  The business community applauded the Budget's restraint on 
government spending and its emphasis on productivity.  Although 
disappointed that the tax cuts were rescinded, business leaders 
welcomed the Budget as necessarily cautious and risk-free.  However, 
some Kiwi exporters saw in the Budget little evidence of initiatives 
to support economic growth and local export industries.  Unions 
acknowledged that it was always going to be a tight budget, but 
nonetheless criticized it for not doing enough to stimulate 
employment opportunities and invest in skills.  Some union leaders 
asserted that the Budget represented a continuation of the 
Government's restructuring of the public sector and more job cuts in 
this sector will inevitably follow. 
 
Major Provisions of the 2009 Budget 
----------------------------------- 
 
¶5. (U)  The major budget provisions that are receiving most public 
scrutiny include: 
 
--No cuts to current government benefits or other social welfare 
entitlements. 
 
--Personal tax cuts "deferred to avoid further increasing debt". The 
GNZ hopes to save around NZ$900 million a year to 2011. 
 
--Superannuation Fund commitments frozen, with only a NZ$250 million 
minimum contribution this year.  Annual contributions of about NZ$2 
billion to this fund will not now occur until the Government's books 
are next in surplus - not expected for the next 11 years. 
 
--Budget 2009 includes net new operating spending of NZ$1.45 billion 
 
WELLINGTON 00000125  002.2 OF 004 
 
 
a year for the next four years targeted mainly at infrastructure 
spending which is considerably less than in recent years.  The major 
areas in the budget targeted for increased spending over the next 
year include: health care, education, transport, law and order, 
broadband, R&D, home insulation and Maori benefits. 
 
New Zealand's Current Economic Reality 
-------------------------------------- 
 
¶6. (U)  Over the next four years, the GNZ's gross debt is forecast 
to reach NZ$78.5 billion, an increase of NZ$34.25 billion (i.e., 
equals 38.7 percent of GDP, a level Standard & Poor's (S&P) rating 
agency considers to be well enough under control to warrant an 
upgrade).  Following the delivery of the Budget, S&P affirmed New 
Zealand's AA+ rating and returned it to stable, rather than the 
negative watch it put it on in January 2009.  The GNZ's operating 
balance for 2009-10 is a projected NZ$7.7 billion deficit, followed 
by NZ$9.2 billion deficit in 2010-11, a NZ$9.5 billion deficit in 
2011-12 and an NZ$8.4 billion deficit in 2013. 
 
¶7. (U)  Low GDP growth is projected for the next four years of 1.7 
percent, 1.8 percent, 2.9 percent and 4 percent respectively which 
will continue to negatively affect jobs and Government revenue. 
Unemployment over the next four years is forecast to peak at 8 
percent in September 2010.  The NZ Treasury's debt management office 
is expecting to issue up to NZ$8.5 billion in bonds in the 2009-10 
financial year. 
 
¶8. (U)  The NZ Treasury forecasts the number of people unemployed to 
rise by 100,000 over the next couple of years and the unemployment 
rate to climb from 5 percent currently to 8 per cent by September 
next year - adding another 70,000 people to the unemployment roll. 
Improved Productivity Initiatives 
--------------------------------- 
 
¶9. (U)  FM English said the 2009 Budget's broad themes include 
creating a government sector that provides better services and 
delivers better value for taxpayers aims; getting debt under 
control; creating new and sustainable jobs.  He asserted that these 
initiates will lift productivity, improve competitiveness and 
sharpen New Zealand's future economic performance which follows the 
advice contained in the recent OECD country survey and the 
recommendations of the credit rating agencies like S&P and Moodys. 
 
¶10. (U)  GNZ productivity initiatives fall into three broad areas: 
 
-- improving the businessenvironment and removing roadblocks to 
growth 
-- investing in productive infrastructure 
-- improving the way government works. 
 
¶11. (U)  The GNZ hopes to improve the business environment thorough 
review of government regulation affecting business and investment. 
The GNZ will look to streamlining and simplifying the Resource 
Management Act, reforming the Building Act, changing the Overseas 
Investment Act and reviewing current telecommunications regulations. 
 A review of the electricity industry will also begin next month. 
 
¶12. (U)  GNZ will also review a range of environmental legislation, 
including all aspects of water management.  In each case, it will 
redesign the legislation to allow quick and efficient decisions 
allowing productive investment.  The review is under the purview of 
the Regulatory Reform Taskforce overseen by the Minister for 
Regulatory Reform, Rodney Hide (ACT Party - coalition member). 
 
¶13. (U)  The Government hopes to pick up the pace of infrastructure 
investment and over the next three years and plans extensive 
investment in transport, housing and electricity 
transmission/generation.  The GNZ has created the National 
Infrastructure Unit to provide a coherent framework for investments 
supported by an advisory board with private and public sector input. 
 By the end of 2009 the GNZ hopes to deliver the first national 
infrastructure plan. 
 
¶14. (U)  GNZ wants to lift overall public sector productivity 
because the government is directly responsible for a quarter of all 
economic activity in NZ.  The Budget calls for greater 
accountability for public service entities and makes them an 
 
WELLINGTON 00000125  003.2 OF 004 
 
 
integral part in lifting national productivity by insisting that 
taxpayers' money be used more effectively.  Increased funding in the 
Budget has been set aside on a five-year timetable for improving 
public services requiring them to show demonstrable improvements. 
 
2009 Funding Initiatives 
------------------------ 
 
¶15. (U)  Budget 2009 includes new net operating spending of NZ$1.45 
billion a year for the next four years targeted mainly at 
infrastructure spending which is considerably less than in recent 
years.  New spending in the past five years has averaged around 
NZ$2.8 billion a year.  The major areas in the budget targeted for 
increased spending over the next year include: health care, 
education, transport, law and order, broadband, R&D, home insulation 
(weather proofing/energy saving) and Maori benefits. 
 
Health Care Expenditures 
------------------------ 
 
¶16. (U)  The Budget provides for NZ$750 million a year in new 
capital and operating spending within the health sector, or NZ$3 
billion in total from 2009 to 2013.  This includes NZ$139 million 
for subsidized medicines, NZ$46 million to devolve some hospital 
services to primary care and NZ$90 million to improve age care 
facilities and respite care for those being cared for at home.  The 
Budget also provides NZ$70 million for up to 800 additional health 
professionals to increase services for New Zealanders needing 
elective surgery. GNZ will create 60 new medical training places and 
50 extra places for general practitioner training, at a combined 
cost of NZ$43 million. 
 
Education 
--------- 
 
¶17. (U)  Over the current year and the following four years, the 
Budget includes more than NZ$1.34 billion in new operating spending 
and NZ$340 million in new capital spending to deliver on the 
Government's election commitments.  Schools funding will continue to 
increase to pay for increased teacher numbers and salaries.  NZ$523 
million increase for the "21st century school building program" will 
build new schools, modernize existing schools and expand capacity. 
 
¶18. (U)  A further NZ$36 million has been provided to support 
improvements in numeracy and literacy standards and NZ$51 million 
has been allocated so more students can access support from the 
Ongoing and Reviewable Resourcing Schemes.  Early childhood 
education will receive nearly NZ$70 million more over the next four 
years. 
 
Transportation 
-------------- 
 
¶19. (U)  The Government is increasing investment in the state 
highway network by about NZ$1 billion over the next three years, 
through changes in the National Land Transport Fund.  Budget 2009 
includes NZ$115 million to fund Kiwi Rail's (national rail service) 
purchase of 20 new locomotives and to provide it with access to 
working capital.  In Budget 2009 we are announcing an additional 
NZ$90 million of operating support for Kiwi Rail. 
 
Law and order 
------------- 
 
¶20. (U)  The Budget provides more than NZ$900 million in operating 
and capital funding over the next four years for initiatives across 
the justice sector.  Police will receive NZ$183 million to provide 
600 more Police by 2011 -half of them will be in Manukau (South 
Auckland).  The Budget also funds tougher anti-money laundering 
measures, so that New Zealand will meet its international 
commitments. 
 
Broadband 
--------- 
 
¶21. (U)  The Government will spend NZ$290 million in 2009 to start 
the NZ$1.5 billion to start the "broadband in 75 percent of NZ 
policy."  The funding includes a NZ$200 million capital allowance, 
 
WELLINGTON 00000125  004.2 OF 004 
 
 
NZ$48 million for investment in rural broadband infrastructure and 
NZ$34 million to make schools broadband-ready. 
 
Research and Development 
------------------------ 
 
¶22. (U)  The Budget includes new initiatives of NZ$321 million for 
research, science and technology.  This includes increased funding 
to the CRI Capability Fund, the Marsden Fund, Health Research and 
the introduction of NZ$1 million for Prime Minister's Prizes for 
Science.  Also allocated is NZ$190 million over the next four years 
for a new Primary Growth Partnership. When fully operating in 
2012/13, the partnership will see the Government investing NZ$70 
million a year in primary sector innovation. It will be matched 
dollar for dollar by industry. 
 
Upgrade home insulation 
----------------------- 
 
¶23. (U)  As part of its Memorandum of Understanding (MOU) with the 
National-led Government, the Green Party is credited for developing 
a scheme to fund the improvement in home insulation which will 
contribute to energy saving and improved health.  More than 180,000 
homes built before 2000 will have access to grants for insulation 
and "clean" (non-polluting) heating upgrades over the next four 
years.  Most households will be eligible for grants of up to 
NZ$1,800.  NZ$323 million is set aside for this program, including 
NZ$244 million of new spending. 
 
Maori Benefits 
-------------- 
 
¶24. (U)  Pursuant to its coalition agreement with the National 
Party, the Maori Party has secured a boosts in funding to support 
families (whanau) vulnerable during the recession.  Whanau Social 
Assistance Services will receive NZ$32 million and the Maori 
Economic Taskforce gets NZ$10 million. 
 
Comment 
------- 
 
¶25. (SBU)  FM English has managed in this year's Budget to carefully 
incorporate the advice of the OECD and the major credit rating 
agencies while maintaining a steady level of social funding.  The 
new spending is carefully targeted to stimulate efficiency and 
productivity so that NZ will emerge from the recession in a stronger 
position.  While the critics may rail that there is undue outside 
influence, the reality remains that this year's Budget has prevented 
NZ from sliding further in the arrears.  End comment. 
 
KEEGAN