John Key has defended his party's planned program of tax cuts, after Treasury numbers released today showed the economic outlook has deteriorated badly since the May budget.
The numbers have seen Treasury reducing its revenue forecasts and increasing its predictions of costs such as benefits.
Cash deficits - the bottom line after all infrastructure funding and payments to the New Zealand Superannuation Fund are made - is predicted to blow out from around $3 billion a year to around $6 billion a year.
Mr Key said National anticipated that the figures would be bad but thought "even Michael Cullen could do better than this".
But he said his party would proceed as planned with the announcement of their tax strategy on Wednesday and he said there would be tax cuts.
"It's not about playing the blame game, the facts are that after nine years of Labour Government we are now staring down the barrel of a deficit," Mr Key said.
Mr Key said National would be looking at Treasury's numbers and declined to comment if the tax cuts will still be in the vicinity of $50 a week.
"We're in the process of updating our models as we speak," Mr Key said.
National's finance spokesman Bill English said the state of the books was an indictment on Dr Cullen's handling of the economy.
"New Zealand can no longer afford Michael Cullen and Labour's big-spending low-growth policies," Mr English said.
"The figures outlined in the Prefu are a bit worse than we expected, and we are currently digesting them. However, National is not content to run a decade of deficits.
"But slamming the brakes on at this point would make things worse. The way out is to control the growth of Government spending and grow the economy. That will require a fresh approach."
Finance Minister Dr Michael Cullen today admitted the international credit crisis overtook "what we thought we knew", in revealing the Government would run a massive account deficit for the next five years.
He noted that for the first time since he became finance minister he was having to explain why the books looked worse than predicted.
"What we thought we knew, even five short months ago, has been overtaken by events," Mr Cullen said.
"Let us be clear. The dramatic scale and speed with which international financial markets have moved in recent weeks have been extraordinary."
Dr Cullen said the Treasury "would be the first to admit that there are risks around the numbers because we cannot know how the most recent financial market volatility will practically effect real output - either here or abroad."
He blamed "skyrocketing global oil and food prices over the past 18 months" as well as rising international credit costs for the impact on the housing market and business here.
The most common measure of the health of the Government's books makes grim reading with operating balances after bookkeeping adjustments predicted to fall into deficit for the first time since 1994 reaching $3.2 billion by 2012/2013.
Treasury Secretary John Whitehead said forecast scenarios had Government debt increasing from under 20 per cent of GDP to about 25 per cent by 2012.
Mr Whitehead said since the Pre-Election Fiscal and Economic Update was completed the international financial crisis had become even sharper, creating even more risks. But despite this, if Treasury had been finalising its predictions today they would remain largely the same.
Tax revenue was predicted to be $3.1 billion less than predicted in the budget and costs had increased due to the popularity of KiwiSaver and the take up of subsidised early childhood education.
Since the budget the economic outlook had deteriorated even more than feared with households and businesses coming under pressure.
The slowdown would continue until the middle of next year with unemployment picked to rise to 5.1 per cent.
Dr Cullen said the Government's reduction of debt levels over the past nine years had left New Zealand in a strong financial position ahead of the challenging international economic times.
"This is a time of unprecedented challenge for the global economy," Dr Cullen said.
"The rainy day has now arrived."
Dr Cullen said the international credit crisis meant there were still real risks of serious harm to the New Zealand economy.
Despite that, Dr Cullen said now was the not time for "a slash and burn response" to government spending, or more tax cuts.
He said the Government was maintaining a steady as she goes, prudent approach.
Dr Cullen signalled an incoming government would have to look at forecast increases in spending such as the large boost signalled to the Foreign Affairs Ministry.
The tough times meant there would have to be review of such "low priority" spending to fund more productive new initiatives.
Dr Cullen said he had been told that both New Zealand and Australia's banking systems were sound and would emerge in better shape than many others around the world.
He was not too concerned at the increase in debt to 25 per cent of GDP and believed it could be trimmed back towards his 20 per cent target in the medium term.
- NZHERALD STAFF, NZPA