FACTBOX-Key political risks to watch in New Zealand

WELLINGTON May 31 (Reuters) - New Zealand's economy is picking up pace as emerges from the longest recession in more than 30 years, but the recovery is patchy with consumers still wary in the face of low wage growth, high unemployment, and the global uncertainty posed by the euro zone's fiscal woes.

Following is a summary of key New Zealand political risks:

* PUBLIC DEBT AND POLICY CONSTRAINTS

New Zealand's public finances remain pressured as revenue continues to feel the pinch from the global crisis and recession, forcing hefty government borrowing to finance the shortfall. The government needs to maintain a tight hold on its fiscal position with ratings agencies hovering in the background. 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's May 20 budget offered continued restraint in official finances and did not bring forward its return to budget surpluses as some analysts had expected, although planned borrowing was scaled back.

-- The budget did deliver 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 fiscal cost.

-- Views of ratings agencies. The budget was not enough to tempt Fitch to remove its negative outlook on New Zealand. [ID:nWLF004657]

-- The New Zealand dollar NZD=D4 and debt prices <0#NZBONDS=RNZL> NZDIRS, remain vulnerable to any hint the New Zealand government's fiscal position is weaker than forecast.

* TAX REFORM

The budget unveiled the long-awaited changes for the tax system, and the government delivered the expected 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 sweeping reform of the tax system in more than 20 years, but still steered away from the politically difficult capital gains and land taxes.

The main tax changes come into effect on Oct. 1, and it will likely take some time for the full impact to show through. Any signs that low-income families are getting little or no benefit from the tax cuts, and indeed are being hurt by the rise in GST may crimp National's high political ratings and lead to infighting among its minor support parties.

What to watch:

-- National's poll ratings. An election is not due until late 2011 but the party is sensitive to public opinion.

-- Any demands for remedial action from the minor support parties for their respective political constituencies.

* GOVERNMENT EFFECTIVENESS

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 and seemed almost immune to criticism. However, it has suggested possible mining or exploration in national parks and reserves; been accused of riding roughshod over public opinion on several local council issues without due process; and implemented an emissions trading scheme at real cost to businesses and households, when most of New Zealand's trading partners have not.

In addition it has been balancing the varying demands of the three smaller partners. 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 comes down to negotiation on specific policies. This leads at times to compromise and delays.

What to watch:

-- The government is expected to last its three-year term but at times may struggle to push through pieces of policy, or be forced to make concessions which are unpopular with its support base in order to get laws passed.

-- The outcome of talks with the indigenous Maori people over control of the foreshore and seabed may be difficult and test relations with one of its support parties, the Maori Party.

-- A hardline approach to such issues as mining in national parks may entrench opposition and cut government popularity.

-- Any extension of the emissions trading scheme which is seen as out of kilter with what is happening internationally.

* FOREIGN INVESTMENT RULES

Hong Kong-based Natural Dairy Holdings Ltd (0462.HK) has announced plans to enter the New Zealand dairy sector by buying a group of farms currently up for sale. It says it wants to spend as much as NZ$1.5 billion to buy more farms and set up its own processing plants. The dairy sector is economically vital to New Zealand, providing a quarter of exports and more than 7 percent of gross domestic product, and the prospect of anything other than token foreign ownership of dairy farms and processing plants will excite strong passions and debate and ultimately political pressure about the "national interest". The government may be forced to make sensitive decisions that will test its free-market credentials and bilateral trade agreements.

What to watch:

-- The Overseas Investment Office has authority to approve small-scale applications but will likely seek government approval on any application seen as sensitive. The government has ordered a review of overseas investment rules to look at making them more streamlined and practical and to encourage foreign investment. (Editing by Andrew Marshall)