NEW ZEALAND'S 2009 BUDGET - SEEKING SECURITY IN UNCERTAIN

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