Treasury has painted a very ugly economic picture for the incoming National government with cash deficits increasing, growth shrinking, tax revenue diminishing and unemployment rising.
Prime minister designate John Key was briefed by Treasury yesterday and told the economic outlook had deteriorated further since the pre-election fiscal update (Prefu).
Mr Key did not go into detail then, but told reporters the scenarios were "a little bit" worse than they had been.
"They are more pessimistic but I wouldn't describe it as Armageddon," he said.
Today outgoing Finance Minister Michael Cullen released a Treasury economic update written on November 7 - the day before the election, but delivered to him on November 10.
Shortly after it was released, the Treasury issued a statement saying the figures were "very preliminary in nature" and were indicative only.
"The figures were produced at a very early stage in the normal forecast process, using high-level approximation to generate fiscal numbers," the Treasury said.
"The figures are still being worked through. They will be subject to considerable review and revision, and significant changes are possible."
The economic update released by Dr Cullen would have formed the basis of yesterday's briefing to Mr Key and his incoming finance minister Bill English.
The main finding in the report is that growth levels are likely to be hit even worse by the global financial market turmoil.
The economy would suffer from weaker export demand, lower commodity prices, lower housing values and weaker confidence.
The economy is expected now to sputter along at 1.3 per cent growth in the 2010 March year pushing up unemployment to 5.7 per cent (compared to 5.1 per cent in Prefu).
It is understood that National were warned by Treasury that the growth outlook could be even worse for the coming years.
Total tax revenue over the next three years is expected to more than $2.1 billion lower, increasing total cash deficits up until 2011 to more than $2 billion.
It is also accepted that National have yet to receive detailed numbers from Treasury, but there was concern at how grim the growth forecasts were and the predictions tax revenues would remain lower even when the economy did start to grow.
Mr Key has made it clear that he is not willing to change any promises to improve the Government's fiscal position.
The argument is that taking an axe to spending could do more damage than good and instead the focus should be on increasing economic growth to get the books back into the black.
Dr Cullen said it was in the public interest to release the material to "encourage ongoing debate about New Zealand's response to these serious external economic challenges".
Treasury said it was now forecasting growth amongst New Zealand's 20 top trading partners to reduce "sharply" to 1.8 per cent growth, down from the 2.8 per cent assumed in Prefu.
Export growth would slow and the prices for commodities - which New Zealand heavily depends on - would be lower, while less tourists would come here.
All of these factors had already driven the value of the New Zealand dollar down and also the price of oil.
Cheaper oil probably meant that inflation had peaked and interest rates would drop further and for longer.
Treasury said in the briefing that it was working on a more detailed paper to be completed by November 14.
They said there were many uncertainties and many views about international growth and lending were being revised downwards.
"While we have tried to make some allowance for even further weakness in economic data... there is the distinct possibility that future revisions to our forecasts will be to the downside."
Mr Key appeared unperturbed by what Treasury told him yesterday and he said tax cuts and other election campaign commitments would be delivered and he would stick to the $1.75 billion of new spending, Mr Key said.
He had asked the Treasury for another update and his new government would issue a budget policy statement in December.
Mr Key is going to the Apec summit meeting in Peru next week and said it would be an important opportunity to assess the international economic situation.