14 Dec 2010

PM warns Government books in worse shape

9:13 am on 14 December 2010

The Prime Minister is warning the Government's books are in worse shape than forecast.

The Budget in May forecast a $13 billion cash deficit for this financial year, but John Key says the release of the half-yearly economic and fiscal update on Tuesday will reveal a much bigger deficit.

Mr Key says the tax take is lower than expected and the Government has also had to absorb on its books the cost of the Canterbury earthquake.

He would not detail by how much the deficit will blow out, but the cost of September's 7.1-magnitude quake to the Government is conservatively estimated to be $1.5 billion.

In the first four months of this financial year, the tax take is down $1.1 billion.

Mr Key says people are spending less than forecast, but that is good because they are saving more.

BERL consultancy firm chief economist Ganesh Nana says the picture is bleak for the public sector and Government spending, because curbing spending is the only way to pay for the tax cuts October.

"We said at the time that those tax cuts were not affordable unless the economy turned around quickly, and unfortunately we've been proved right," he said.