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By Gyles Beckford
7 Min Read
WELLINGTON, Nov 1 (Reuters) – New Zealand’s economy is stuttering as it struggles to pick up pace after its longest recession in more than 30 years, with consumers still wary in the face of low wage growth, high unemployment, and the uncertainty posed by the fragility of the global recovery.
Following is a summary of key New Zealand political risks:
New Zealand’s public finances remain pressured as the global crisis and recession continue to pinch revenue, forcing hefty government borrowing to finance the shortfall. The coalition government needs to maintain a tight grip on its fiscal position with ratings agencies hovering. New Zealand’s economic fortunes have improved and there is no imminent risk of a downgrade, but the country’s debt level and the constraints it places on policy remain a key theme.
What to watch:
— National debt NZTFRY=ECI and government finances NZTFR=ECI data. The National Party-led government will update its economic and fiscal forecasts in mid-December but already the Finance Minister has said revenue for the new fiscal year is running below expectations and the May budget forecasts will be pared back. That will likely add pressure for more restraint in official finances and reduce chances for any quicker return to budget surpluses.
— The May budget delivered wide ranging personal tax cuts which are calculated to offset a rise in the indirect goods and services tax, but they are forecast to be a net cost to the government.
— The New Zealand dollar NZD=D4 and debt prices <0#NZBMK=> NZDIRS, remain vulnerable to any hint the New Zealand government’s fiscal position is weaker than forecast.
Long awaited changes for the tax system came into effect on Oct. 1, with wide ranging income tax cuts, lower company tax, closing of loopholes favouring property investment, and a rise in the value-added goods and services tax (GST). [ID:nSGE64I07B]
It was the most comprehensive reform of the tax system in more than 20 years, but still steered away from the politically difficult capital gains and land taxes.
It will likely take some time for the full impact to show through, but any signs that low income families are getting little or no benefit from the tax cuts, or indeed are being hurt by the rise in GST, may crimp National’s high political ratings and lead to infighting among its smaller coalition partners.
What to watch:
— National’s poll ratings. An election is not due until late 2011 but National has shown itself to be sensitive to public opinion.
The centre-right National Party has been at pains to hold the political centre ground and offend as few voters as possible. Accordingly it has maintained remarkably high poll ratings NZPOLL. However, it has reversed or diluted several policies in the face of public discontent.
A plan to allow more exploration and mining of metals in national parks and reserves has been scrapped; plans to revamp foreign land ownership rules to encourage overseas investment are set to be sent for further study with the prospect that restrictions will not be loosened as suggested; plans to tighten drink driving laws by reducing the alcohol-blood level have been sent for further study over the next two years — beyond the date of the next election.
The government also has to balance the varying demands of its three smaller coalition parties. The three have pledged to support National on key matters of supply and confidence, ensuring its political survival, but much of the rest of National’s political programme depends on negotiation on individual policies, which at times means compromise and delay.
What to watch:
— The government is expected to last its three-year term but at times may struggle to enact policies, or be forced to make concessions which are unpopular with its support base in order to get laws passed.
— Reform of the law over control of the coastal foreshore and seabed has caused divisions within one of the coalition parties, the Maori Party, and may have further repercussions upon the government’s relations ith the indigenous Maori people.
— Any extension of the emissions trading scheme which is seen as out of kilter with what is happening internationally.
A bid by Hong Kong-based Natural Dairy Holdings Ltd 0462.HK to enter the New Zealand dairy sector by buying a group of farms currently up for sale is still under review. It says it wants to spend as much as NZ$1.5 billion to buy more farms and set up its own processing plants.
China’s Bright Dairy and Food 600597.SS plans to take a 51 percent stake in small scale milk producer Synlait Ltd, which has prompted concerns about foreign ownership of such a vital economic sector. The dairy sector accounts for more than a quarter of New Zealand’s exports, and over 7 percent of GDP.
Foreign ownership of farmland strikes at the heart of agricultural New Zealand’s national identity. The issue has already stirred passions and led to a well organised and financed campaign to limit foreign ownership. The government has said it will tighten rules on overseas land ownership to ensure the national interest is protected, which may be seen at odds with its free-market credentials and bilateral trade agreements.
What to watch:
— Rejection of applications. The Overseas Investment Office has authority to approve small-scale applications but will seek government approval on any sensitive deals.
— The detail of an ongoing review of foreign ownership rules and the definition of what is regarded as an asset that should be retained in local ownership in the national interest.
National governs with the support of three small parties; the centrist United Future, the Maori Party, and the right wing, free market ACT Party. They have all promised support on key confidence and financial measures, and all have been given minor ministerial posts and policy concessions.
However, both the Maori and ACT parties have experienced internal ructions. The former has disciplined and demoted one of its lawmakers because he campaigned against a government policy, while the ACT Party has suffered factional fighting and the resignation of one lawmaker.
Neither party would walk away from their support deal with National, but the governing party will start to look at the electoral costs it might suffer next year from their problems.
What to watch:
— Any overt policy changes favouring the small parties designed to bolster their electoral standing amongst their supporters and the broader voting public.
— Conversely, any moves by National to distance itself from them, which might lead to policy difficulties and even conflict as election day approaches. (Editing by Daniel Magnowski)
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