Prime Minister John Key has confirmed the government is abandoning plans to spend an extra $800 million in this year's Budget because of the cost of the Christchurch earthquake.
Speaking on Q+A yesterday, Mr Key said much of that new spending was originally tagged for health and education. The government still expected to inject new funds into those areas - but warned they would now have to come from cuts in other areas rather than through new funding.
The decision means bad news for government departments and services which were already struggling to hold onto their previous levels of funding.
However, the government intends to borrow $5 billion to help pay its share of the estimated $10 billion cost of the earthquake.
Mr Key said borrowing remained the best option to fund it. Although the Green Party favours a disaster levy, yesterday Mr Key repeated the government's strong preference not to impose a levy, saying it could be counterproductive by further dampening any economic recovery.
He said there was no significant chunk of spending that could be cut from elsewhere to cover the cost.
Mr Key said the Japan earthquake would also hit New Zealand's economy in the short term because it was our fourth largest trading partner. However, problems with food contamination and crop destruction in Japan meant the demand for New Zealand produce could grow in the longer term.
Earlier this month the government moved to merge the Ministry of Fisheries and Agriculture with projected annual savings of $10 million.
It has hinted further changes are ahead. Departments under danger include the Womens' Affairs ministry which the government has refused to rule out ditching, saying that all departments are under scrutiny.
The government has ruled out re-introducing interest to student loans, but other issues remain on the table - including changes to Working for Families entitlement for higher income earners.
National has already significantly cut back on new spending each year - first to $1.1 billion a year after its first year in office and then to $800-900 million for next year.
Last week, finance minister Bill English said the estimated $10 billion cost of the quake meant the government would have to borrow more over the next two years, delaying a forecast return to a surplus by a year - until 2015/16. The government deficit was now expected to be about $16 billion, compared to the December forecast of $11 billion. Crown debt was expected to rise above 30 per cent of GDP by 2014 - up from the current 14 per cent and the December
forecast of 28 per cent.
Mr English said it was appropriate to borrow for the short term cost because it was "impractical" to find short-term, large-scale savings in public spending.