Fran O'Sullivan: Big challenges face weakened Labour

On Saturday night Helen Clark's relentless grimace said it all. Her downbeat admission ("this is not a time for triumphalism") underscored that this political analyst par excellence had just spent a nail-biting five hours weighing conflicting trends since polls closed.

As votes mounted, it would have been clear to her that the country had swung (2.8 per cent) towards the centre-right. Not enough to ensure National's Don Brash got first chance to form a government. But an overall majority for centre-right parties nevertheless (50.2 per cent to 48.8 per cent on the party vote).

New Zealand is polarised.

Clark's caucus is now dotted with rejects. She would have been shocked as fully 20 per cent of her electorate MPs were voted out. They survive merely because the Labour Party offered all sitting MPs - bar John Tamihere - list rankings. There are no obvious rising stars among the newbies apart from Shane Jones.

It is not as if Clark's putative allies have done much better.

The Greens, Jim Anderton's Progressives, New Zealand First and United Future have been all but decimated. They scored either just above the 5 per cent margin or had to rely on their leader winning a seat to get into power. Only Clark's "last cab off the rank" - the Maori Party - can claim legitimacy through winning four electorate seats.

This is the testing hand Clark has been dealt as she prepares to lead New Zealand into the most difficult economic times she has confronted in her six years at Prime Minister.

Brash gets 24 fresh faces to join him on the opposition benches: lawyers, diplomats, a top doctor and teacher. It is a highly skilled professional group, which will enable National to present a regenerated urban image and will give it more time to rub off the rough policy edges (particularly on race and immigration) that disturbed National liberals of old and other aspirational city-based New Zealanders who might otherwise have voted their way.

Commentators have portrayed this election as "the one to lose".

But Clark's new regime (never has the slogan "voters get the country they deserve" seemed more apt) must confront head on some tricky challenges.

Clark should not be deflected from this as she reaches across party lines (I'm talking here about National and Act - as well as her putative allies) to ensure a broad constituency for fundamental changes to keep pace with 21st century realities.

It will not be enough to simply play to Labour's core constituencies this time round.

First up - Ensuring the economy reaches a soft-landing

The economy is coming off 4 per cent average growth rates, the current account deficit has ballooned, inflation is rising and the currency is faltering (partially as a result of the election outcome). In some respects it is a victim of growth. Capacity constraints have hit employers hard as a shortage of skilled workers is felt.

But New Zealand shares this problem with Australia, where some commentators are crowing that the re-election of a left-leaning Government here, which fails to countenance tax cuts, will push more skilled Kiwis across the Tasman into the arms of higher- paying employers.

Clark must make the skills shortage, higher productivity rates and higher wages a national challenge for her Cabinet. She needs a healthy Government-business dialogue to ensure that employers front up to their responsibilities on this score.

The NZ Institute is examining some disturbing realities about the abilities of New Zealand exporters and companies to foot it overseas and evolving policy proposals that must become a priority if we are to overcome the myth that this is an export-led nation.

Tax cuts must also go onto the agenda. It it not simply a matter of satisfying the wants of the 50.2 per cent of centre-right voters. If New Zealand wants to be a player in the war for global talent, it must tax less. The Economist recently reported that a raft of former Eastern European Soviet-bloc countries are posting top personal tax rates well below 30 per cent. In the Asian region, rates are also coming down, and Australia is in the midst of a national debate geared towards reducing federal taxes. This is where real competition lies for investment and talent, not just the OECD bloc of developed nations.

The savings push - where Labour's caretaker Finance Minister Michael Cullen has made useful inroads - needs to be ramped up before we are swamped with household debt. Partial privatisation of state-owned assets would help to stimulate a savings culture through the expansion of popular capitalism, and the NZ Superannuation Fund could usefully be deployed to invest in major infrastructure onshore.

Cullen needs to take a more aggressive strategic approach or make way for someone else to build a more upbeat agenda as Finance Minister (Phil Goff?)

Second - Securing New Zealand's place in the world

The most critical challenge facing the Clark Government is to strengthen damaged bilateral ties with the United States.

Labour Cabinet ministers from the PM down have put the thorn back into the Bush Administration's paw with their election claims: Clark's repetition that the Iraq War was wrong, Trevor Mallard's malicious claim that Washington was pulling National's strings, through to Phil Goff's sallies on the nuclear issue.

The Bush team will dismiss some of this as mere election politicking.

But the heated rhetoric will just make it that more difficult when, and if, the Clark Cabinet decides to accept Washington's invitation to "hold a conversation" on regional security issues, as indeed it should if it wants to make good on its previous commitment to chasing stronger economic ties with the US.

Clark will clearly have to front this initiative herself, but she may want to bring forward Cullen, who has not been tarnished on this front, or even United Future's Peter Dunne, a former chairman of Parliament's Foreign Affairs committee, to join a dialogue. The Australian bilateral relationship also needs work. Leaving Cullen alone to manage without Prime Ministerial interference would be a start.

The real issue is finding a replacement for Goff as he builds his domestic profile (Cullen?) and getting Clark to temper her practice of dominating all major international initiatives at the expense of her foreign minister. Not an easy task when her sights are set on an international job. But right now her attention is needed at home.

Third - Making globalisation work to NZ's advantage

New Zealand's key challenge in the current World Trade Organisation round is to get a good outcome for agriculture liberalisation.

This is largely in the WTO's lap but still requires strong management. Agriculture, however, is not the end of the story. There needs to be much more emphasis on trade in services if New Zealand is to transform itself further up the value chain.

Clark also needs to think about grooming a successor for Trade Negotiations Minister Jim Sutton, who has lived out of a suitcase for six years. Sutton is offside with farmers. His trade advisory group rarely meets. He has too much on his plate.

The major vulnerability Clark faces is the China free trade negotiations. Next month substantive issues will go on the negotiating table when Beijing sends a team to Wellington.

The Greens and NZ First have made the FTA a bogey and can be expected to challenge its impact on NZ's manufacturing base. This will require careful domestic negotiations at coalition level if the deal is not to be sandbagged and the Government laid open to attack by National list MP Tim Groser, a former top-flight WTO official.

Fourth - Gearing up for success

Ensuring New Zealand has sufficient modern infrastructure to underpin growth is a real worry.

The Herald's pre-election Mood of the Boardroom survey showed nearly 94 per cent of CEO respondents were concerned about the future of the country's energy supply, with 90 per cent ranking the nation's roading network as the major infrastructure issue that concerned them.

Clark's Cabinet postponed potentially controversial debate on the future of Auckland's electricity supply until after the election. Excuses have run out. The Cabinet must confront urgent realities over Auckland's future supply.

Greens co-leader Rod Donald has invited 40 business players to meet the Greens in Wellington on Tuesday to try to get their position across and remove opposition to their inclusion in Clark's fourth Cabinet. It will be a clash of ideologies.

Business also wants the new Government to speed up implementation of roading projects and move on broadband penetration. Labour's David Cunliffe has tried to paint himself as industry's friend, conveniently glossing over the fact that the previous Cabinet rejected his predecessor's proposal to outright wipe Telecom's local loop monopoly.

If Clark can grasp these four challenges, she will not waste her historic third term. If she can't, better to hand over to the National rookies before her three years are up.