John Key is lowering public expectations that the Government can deliver on its promise to have its books back in surplus by 2014-15.
In his "state-of-the-nation" speech yesterday, the Prime Minister said the Government remained committed to the target, but he put the odds of achieving it only as a "reasonable probability".
It depended on the outcome of the turmoil going in Europe and whether the effect of the debt crisis spilt over into a global recession. Global recession would have an impact on New Zealand and even slower growth than present forecasts would mean lower tax revenue, making a surplus harder to achieve.
The Prime Minister made his comments during what has become an annual state-of-the-nation speech to the Waitakere Business Club.
The promise to return to surplus by 2014-15 after a succession of deficits since 2009 has been a centrepiece of the Government's fiscal plans and was written into last year's Budget. It was also a centrepiece of National's re-election campaign in November with Mr Key occasionally suggesting surplus could be achieved earlier than the 2014-15 financial year.
Mr Key said yesterday that revised forecasts to be released on February 16 would show New Zealand was still on track for a surplus in 2014-15 but it had been cut from $1.45 billion forecast in the Pre-Election Economic and Fiscal Update to between $300 million and $500 million.
"If the international outlook worsens between now and the Budget we may have to do more than we are currently anticipating to reach our surplus target," he said. "If the absolute worst happened and there was a major shock to the global economy, the Government would look at whether retaining that surplus target would actually harm the economy by forcing a sharp reduction in demand.
"But outside that scenario, we remain firmly committed to our target for surplus in 2014-15."
The forecasts will be revised again for the May Budget.
Mr Key said afterwards that the first things to go if something had to give would be the allocation for new Budget spending allocations, which are already relatively small: $800 million a year for the next two Budgets and $1.2 billion in the third year.
He said sticking to the target for surplus by 2014-15 was important for New Zealand's credibility with international markets and a loss of credibility was hard to reverse.
"I still think it is a reasonable probability we will get there. That's our goal and that's because in the end, New Zealand needs to have strong Crown accounts to protect ourselves from future shocks. We don't know when the next natural disaster might come. We do know that when countries have built up a lot of government debt, it puts them in a weaker position to combat that."
Mr Key outlined the Government's four main priorities this term:
* Responsibly manage the Government's finances.
* Build a more competitive and productive economy.
* Deliver better public services to New Zealanders within a tight budget.
* Rebuild Christchurch after the earthquakes.
Labour leader David Shearer said Mr Key's speech was clearly trying to soften up New Zealanders for more economic decline - and blaming it on the global economic crisis rather than National's own economic management.
"He's dropped a billion dollars since his last forecast, so we are now on much shakier ground than we were before. His speech really is a series of excuses of why we are not going to be able to get to where we want to, in the space of time he'd set out."
He thought it was highly unlikely New Zealand would return to surplus by 2014-15 under National's plans.
Meanwhile, Maori Party co-leader Pita Sharples said he was disappointed at "obvious omissions" from Mr Key's speech.
There was nothing said about the wellbeing of the country's peoples. There was no mention of poverty despite the Government setting up a ministerial committee on poverty under the confidence and supply agreement with the Maori Party.
"The Treaty was not mentioned once - even though we have already begun to review the constitution of Aotearoa. And there was no reference to Maori in his speech."
The Government acknowledged Maori only when it suited them - "we are the tangata whenua".