Act MP and former Finance Minister Sir Roger Douglas is urging the National Government to stop its borrow-and-spend response to the global recession.

"We cannot spend our way out of a recession and we cannot borrow our way out of debt," he said.

"The idea that we should increase spending when our debts are large is lunacy," he said.

"We need to insist that the Government stops spending so much of our money."

Sir Roger said that while it was important to maintain confidence, there was little to be confident about.

"When the Government is financing its spending through a massive expansion of public debt, and when the average household has lost thousands on the sharemarket or in finance companies, then there is little to be confident about," he said.

Sir Roger, who led the economic reforms of the Fourth Labour Government in the 1980s, returned to Parliament last year in the Act Party which supports National on confidence and supply.

But he challenged in Parliament the Government's response to the economic crisis which will see borrowing increase by $40 billion over three years.

Sir Roger said New Zealand was borrowing to fund its expenditure with the balance of payments deficit - the measure of income flows between New Zealand and the rest of the world - was 8.9 per cent of GDP.

Misplaced confidence had played a major part in the creation of the economic crisis.

"People got caught up in a bubble mentality, believing that house prices would continue to soar, that finance companies would never collapse, and that Government could massively increase spending, with no additional burden on the taxpayer.

"How would continuing this exercise in self-delusion help us to start living within our means."

Borrowing and spending would ultimately require higher taxes.

He said that having managed New Zealand through an economic crisis, "I understand the importance of being honest about our economic prospects."

In 1984 New Zealand had been effectively bankrupt "and no amount of optimism would have changed that fact".

National understood the problem "but they seem intent on continuing to blame everything on Labour's poor economic management", he said.

"But National is now in Government - it has a duty to do what is necessary to build confidence. That means it must stop spending beyond its means. If we do not do this then future generations will be crippled with debt repayments."