Prime Minister John Key yesterday acknowledged private sector, rather than Crown debt is the bigger problem for New Zealand as the worsening European debt crisis threatens the global economy.

International financial markets have continued to take a hammering this week on signs Europe's third largest economy Italy, a nation considered too big for Europe to bail out, may be engulfed by the ongoing debt crisis.

New Zealand's economy was also showing some signs of strain yesterday as Treasury reported lower than forecast tax revenue, the Reserve Bank published a gloomy report on the state of our financial sector, and Standard & Poor's said risk had risen in our banking industry.

But in the middle of his re-election campaign, which yesterday took him to Rotorua Hospital, Mr Key told reporters risks outlined in the Pre-election Economic and Fiscal Update two weeks ago had not increased and his Government was prepared for a deterioration in the global economy.


"The economic downturn that may occur on a pronounced basis in Europe is factored into our books.

"We are being very cautious and I think New Zealanders will have noticed in terms of the contrast between ourselves and Labour.

"Labour has spent $16 billion of money they don't have on the campaign trail. We're out there promising that any money that we might spend we'll be matching it with revenue we've actually got."

Italy's problems servicing and refinancing debt which stood at 120 per cent of GDP showed New Zealanders that "they don't want to be backing a Labour administration that would rack up more debt."

However Mr, Key said Italy's debt was mostly owed by its Government. New Zealand was "absolutely" much safer than Italy in terms of Government debt which currently stands at about 38 per cent of GDP on a gross basis, or 20 per cent in net terms. Mr Key, who has relentlessly highlighted the risks associated with prospect of higher Government borrowing under a Labour Government, acknowledged New Zealand's debt vulnerability lies in the private sector.

Standard & Poor's yesterday noted New Zealand's private sector debt was about 150 per cent of GDP.

The size of that debt and the fact that much of it was concentrated in the agriculture sector, were principal factors as it revised its Banking Industry Country Risk Assessment on New Zealand from "group 2" to the riskier "group 3" - the same as Italy, the US and the UK.

That came on top of a gloomy Financial Stability Report, a review of the health of banks and other financial institutions produced by the Reserve Bank. The RBNZ also noted banks' risk had risen recently but they were better placed to handle it than they were during the 2008 global financial crisis.


Labour leader Phil Goff said New Zealand was relatively sheltered from the instability in Europe for two reasons.

"During the good times, Labour paid off the debt. That left us well prepared.

"Secondly, we broadened our markets, places like South East Asia and China. Those free trade agreements now are a huge boon to New Zealand because they've kept our economy going."

He said Labour's compulsory KiwiSaver policy would help New Zealand's private debt problem.

Mr Goff said if tax revenue was a lot lower than predicted, Labour would look at its spending plans to see what could be changed - but he did not have any policies in mind that would be first on the chopping block.

Lower tax revenue was the key driver as Treasury yesterday reported an operating deficit of $2.5 billion - $210 million worse than expected - in its September or first quarter Crown Financial Statements.

Tax revenue came in $301 million lower than projected at $13 billion but was offset somewhat by lower spending.