Government finances have deteriorated by a further $1 billion, leaving ministers scrabbling for hundreds of millions in savings to meet Prime Minister John Key's pledge to get back into surplus by 2014/15.
Finance Minister Bill English yesterday told the Wellington Chamber of Commerce that returning to surplus by 2014/15 was a big challenge that would require tight control over spending for the foreseeable future.
The scale of the challenge was highlighted in preliminary Budget estimates ministers have received.
"They revealed a $1 billion deterioration in preliminary forecasts of the operating balance before gains and losses in 2014/15, compared to the Budget policy statement in February.
"In other words, the preliminary Budget estimates showed a $640 million deficit in 2014/15, compared to the $370 million surplus predicted in the BPS."
The deterioration was because of factors including the effect of lower global growth on New Zealand's short-term growth forecasts and a subsequent reduction in tax revenue.
"We're also seeing downward revisions to expected New Zealand Super Fund revenue and state-owned enterprise profits, and an expected rise in finance costs and higher earthquake costs."
But "ministers remain focused on staying on track to surplus in 2014/15", Mr English said.
As recently as February's Budget policy statement, the Government said it still had an $800 million allowance for new spending.
But that is now likely to be swallowed up completely by the latest deterioration in the books and Mr Key and Mr English are now talking about a near-zero Budget next month with no new spending.
Yesterday, Mr English said it would be "very close" to a zero Budget, and there would be little new net government spending between now and 2015/16.
After his speech, Mr English came close to acknowledging the possibility the Government might miss its 2014/15 surplus target.
"We're not going to have a big surplus. If we can get to near surplus or somewhere around there I think that will be an achievement."
Labour's finance spokesman David Parker said the Government's signalling of a zero Budget showed it had failed to deliver on its economic growth promises.
"Just five months after the election another $1 billion has disappeared from the Government's books because the economy isn't growing. It's no surprise to me that so many families are struggling. One leads to the other."
Mr Parker said the 2014/15 surplus target was an appropriate one which Labour would have pursued as well.
But the bigger issue was that "structural imbalances in the economy have not been solved and this Budget speech indicates the Government has no adequate plan to address them".By Adam Bennett Email Adam