The Finance Minister is sticking by the Government's target of returning the Budget to surplus by the 2014-15 financial year, despite the deficit blowing out to a record $18.4 billion.
Bill English says once the effects of the earthquakes in Christchurch and Canterbury are removed, the Government's books are improving and the deficit should be halved in the current fiscal year and a surplus achieved by 2014-15.
Mr English says the deficit for the year to June is unusually large due to the significant costs of the earthquake recovery fund and an updated assessment of Earthquake Commission costs.
He says the Treasury will issue the pre-election fiscal and economic update on 25 October.
Westpac bank chief economist Dominick Stephens says spending cuts or higher world growth will be needed to achieve that target. He says turmoil on world markets means higher growth than what is already being forecast by the Treasury is unlikely.
But Council of Trade Unions economist, Bill Rosenberg says spending cuts would be counter-productive. He says the Government's tax switch - lower personal rates and higher GST - is creating a bigger hole in the Government's books than first thought.
$1.7 billion more than Budget forecast
The Crown's operating deficits before taking into account gains and losses on its investments was $18.4 billion in the year to June.
Radio New Zealand's economics correspondent says that is $1.7 billion more than forecast in the Budget in May and $400 million more than the $18 billion deficit suggested by the Minister of Finance in August.
Government revenue was $1.4 billion more than May's forecasts, but expenditure was $3 billion higher, due mainly to higher costs at the Earthquake Commission.
Core Crown expenses were lower than Budget forecasts due to less spending by the Canterbury quake recovery fund, because of delays in assessing damage.
On 30 September, Fitch lowered New Zealand's credit rating by one notch to AA, citing the country's rising debt and persistent and widening current account deficits. Standard and Poor's downgraded the country's rating one notch from AA+ to AA later the same day