The Government is spending more money than it has and is "mortgaging our children" to finance spending increases, says ACT finance spokesman Roger Douglas.
In response, the children are leaving New Zealand for higher paying jobs in Australia.
In his speech to the Orewa Rotary Club today, Sir Roger said the international finance crisis was not to blame for New Zealand's recession.
New Zealand was already in a "bad economic situation" and the financial crisis "has simply made that situation worse".
Households have continued to spend outside their means, mortgaging their homes to pay for consumer products, and now many families will struggle to pay the interest on their debts, he said.
The Government has followed suit - borrowing to fund spending and tax cuts - and is also in debt.
"When international credit is particularly tight, the Government has announced plans to borrow and spend on infrastructure projects.
"We have now been put on notice that our credit rating may be downgraded."
Sir Roger said New Zealand needed lower spending and lower taxes.
Unless both measures are adopted our children will have to pay back the borrowed money, and interest, in the future, he said.
"The Government is now mortgaging our children for the next round of spending increases."
Citizens have become more concerned with "dividing the pie rather than growing it" and politicians "merely mirror the sentiment" of voters.
Sir Roger outlined his solution in the form of a new income tax system.
He wants a tax system where an individual's first $30,000 would be tax-free, above that they would be taxed at a flat rate.
The flat rate, and company tax, would be reduced to 15 per cent over the next 15 years.
Families with children would receive their first $50,000 tax-free with an increased tax-free threshold based on the number of children.
Families would be guaranteed a minimum income boosted by tax credits if they earned below the threshold.
The flip-side is that individuals would have to foot the bill for their own retirement, healthcare and insurance.
Sir Roger said people would "be expected" to take out catastrophic health insurance, covering emergencies, and injury, sickness and job loss insurance.
They would then be "free to choose" other insurance coverage.
"Some say this system will help the wealthy. It will. But not as much as it will help the poor."
People would be able to chose whether to opt into the new system or remain in the old one.
The system offered a new approach to help New Zealand increase productivity and combat the current economic climate, Sir Roger said.
It is similar to flat tax and guaranteed minimum income policies Sir Roger championed in the 1980s.
"It's time to quit fiddling with cents and start looking at dollars; we must shift our focus from the short-term and start looking at the big picture."