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The Great Divide
The Nuclear Free legislation passed in 1986 and was considered a great success during the tenure of the Lange Premiership. However, New Zealand's role in ANZUS was suspended, along with the United State's commitment to New Zealand's defence.

In early 1987 the corporatization of state assets was deeply unpopular this did not however, prevent Labour from winning the general election against National's energetic brawler, Jim McLay. The likeliest challenger was Jim Bolger, but he declined. Returning to his position as Shadow Foreign Minister. This in effect paralyzed the National Party, making their return to government in the 1990 election unlikely. Like the National Party Labour suffered serious slits as tax reforms along with a package of partial asset sales caused internal disapproval within the caucus, the attempt to cut the top rate of personal tax was scaled back from the 66 - 48% cut to a 66 - 52%. A broad based indirect tax was universally rejected by both unions and Labour MP's. Whilst Lange had sympathies with such arguments, he bypassed both sections of the Labour movement and sided with his Finance Minister, after much cabinet infighting a 8% GST was agreed. But fell short of the proposed 10.1% recommended by treasury. Education reform was stalled as the PPTA threatened the government. Other union actions included the Fletcher Challenge strike as employers attempted to bargain harder. His second term didn't only consist of disaster, in 1987 the Department of Conservation was created along with various breeding programs for endangered birds along with significant emphasis on Māori land claims.

In May 1988 the sale of 49.7% of Air New Zealand narrowly passed through cabinet, the secret deals and maneuvering enraged many left-wing Labour MP's, not least Helen Clark and Margaret Wilson, who initially were converts but appeared to return to their radical routes. Other sales included 51.7% of Telecom Corporation New Zealand, 29.4% of forestry, 19.8% of Radio New Zealand, 50% of the National Film Unit, whilst others were to be reviewed. In order to create an environment of continuity Lange appointed Jim Anderton to a senior position in the government review of assets and Helen Clark to State Housing and Health. In a clear break with Caygill he rejected plans for user-pays in high decile schools. By September of that year he was confronted by Caygill in several meetings in a state of incandescent rage. By December suffering severe angina, he called a press conference sacking Richard Prebble after confrontations within the cabinet room. Lange later noted the bitterness within cabinet. The feud continued throughout the next few weeks as each attempted to rally support within the government. Concerned about Lange's declining health, Geoffrey Palmer suggested resignation was the best course of action. Lange was exasperated at the suggestion and intended to hold on. In the following days Lange collapsed in his office and was bedridden, and thereafter many Labour MP's suggested the only credible alternative was Geoffrey Palmer. Later, on the 1st of January David Lange traveled to government house and offered his resignation to the governor-general, which was agreed.



With Labour now in crisis the National Party too chose a new spokesman, the media broadcaster turned politician, Lockwood Smith stood for the National leadership against Jim McClay, winning candidly. As a urban Liberal, Smith struggled to keep the Conservative element under his wing. Because he was young some MP's we're skeptical of his leadership and his affinity for centrism. However, his famous cheshire smile and his charisma appealed to the electorate.

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