The Government faces a $12.6 billion debt hole over the next five years as ballooning cash deficits grow faster than the Crown's borrowing programme.
It faces a cumulative $44.4 billion cash deficit over the next five years, according to The Treasury's half-year economic fiscal update.
It will also raise $31.8 billion through its bond programme over the next five years.
Treasury said this deficit will have to be made up "either by raising debt, or reducing financial assets." After peaking this year with a cash deficit of $15.6 billion, the Crown's cashflow is expected to break even by 2015.
The cash deficit is $2.3 billion higher than forecast in the 2010 budget.
The shortfall comes from a dwindling tax take after the Government's tax switch in this year's budget with the subdued recovery weighing on the corporate tax take, while households focused on repaying debt amid an increase in GST.
The cost of the 7.1 magnitude Canterbury earthquake and the bill to help bail-out owners of leaky homes added to the red ink.
"The road to surplus has not fundamentally altered, we're still on track to reach surplus in 2015/16," Finance Minister Bill English told a media conference in Wellington. "The government would prefer we hadn't had the one-off costs, but that's what it's here to do."
The Government will ramp up its bond programme by $1 billion to $13.5 billion, and bring forward $10 billion worth of issuance to the 2012/13 year from 2014/15.
That increases the government's forecast peak in net debt by one percentage point to 28.5 per cent of gross domestic product in 2015, but is still smaller than the administration's programme announced in the 2009 budget.
The Government's operating balance before gains and losses is forecast to post its biggest deficit this financial year at $11.1 billion, and isn't expected to post a surplus of note until the 2016 financial year.
Gains from government-owned financial institutions, such as the New Zealand Superannuation Fund and ACC's investment portfolio, are expected to help cut the deficit faster.