Tax revenue fell short of Budget forecasts by $1.1 billion or more than 8 per cent in the first three months of the Government's financial year, as the recovery from recession proves slower than the Treasury expected.

The Government's operating deficit, before gains and losses, for the September quarter was $3.7 billion or $2.2 billion wider than projected in the Budget.

The Budget forecast an operating deficit of $8.6 billion for the full year and a cash deficit of $13.3 billion.

Most of the variance can be explained by a $2 billion rise in the Earthquake Commission's expenses from the Canterbury earthquake.

The commission estimates its final cost will be $1.5 billion as it has a thick tranche of reinsurance above that amount. However, the Government will also bear some of the costs of restoring critical local government infrastructure, and those costs have yet to be reliably estimated.

Of more concern as an indicator of the economy's performance is the $1.1 billion undershoot in tax revenue.

Overall it was up 5 per cent on the same period last year, including a 7 per cent rise in PAYE.

But GST revenue was only 2 per cent higher than in the September 2009 quarter, to be $564 million or nearly 16 per cent below Budget forecasts.

The expected surge in spending to beat the increase in the GST rate from October 1 scarcely eventuated. While that also means the forecast post-GST slump may not happen either, the Treasury expects some of the shortfall to persist, as consumer spending overall is more subdued than it expected.

Most of the rest of the shortfall in tax revenue ($464 million) was in corporate tax. The corporate tax take was still 26 per cent up on the depressed levels of the same period last year, but still 22 per cent lower than expected.

Almost a third of the deficit before gains and losses was clawed back by a net $1.3 billion gain on the investment portfolios of the NZ Superannuation Fund and ACC.

Finance Minister Bill English said the lower-than-expected tax take was largely the result of people opting to pay down debt and save more.

"New Zealanders understand our need to rebalance the economy away from debt and spending towards savings and investment," he said.

"While in the short term this increased saving means slightly lower growth and tax revenue, it is what the economy needs over the long term as we build our future on savings, productive investment and exports."

Labour's finance spokesman David Cunliffe said business growth was hitting the wall as any confidence in a recovery disappeared.

The pre-GST spend-up had not happened, "because Kiwis don't have money left over at the end of the week to spend".