A weak economy and higher than expected take-up of KiwiSaver will significantly dent the Government's books when they are unveiled in a week, increasing pressure on National as it prepares to offer bigger tax cuts.
The pre-election fiscal update on October 6 is set to show debt levels exceeding the target Finance Minister Michael Cullen is comfortable with as tax cuts kick in and economic forecasts worsen.
Dr Cullen said yesterday - after confirmation the country was in a technical recession - there is "quite significant deterioration" in the books compared with the Budget in May.
"About two-thirds of the change that you'll see on Monday week is due simply to economic factors," he said.
Among the other drivers were costs associated with KiwiSaver rising faster than forecast because more people than expected were signing up.
The Government's commitment to provide 20 hours of free early childhood education also had a "much higher" rate of uptake than forecast, while the rapid progress in Treaty of Waitangi settlements had also brought forward anticipated expenditure.
"The debt track is not a pretty picture, I think one could say," Dr Cullen said. "Will we exceed the 20 per cent target? Yes, we will."
Dr Cullen has long had a target measure for debt of 20 per cent of gross domestic product. After years of bringing debt down, his management of the books saw the level get as low as about 17 per cent recently.
Now that the books are deteriorating Dr Cullen appears uncomfortable with knowing he will be exceeding the debt target he has religiously stuck to for so long.
"I would say I'm beyond my comfort zone on Monday week. So it's going to be important over the next three years for government to very carefully manage its accounts and not add to those fiscal pressures."
The red ink in the books is likely to further heat up debate about tax cuts in the election campaign, with Labour arguing National simply will not be able to afford to offer any more than it has.
Labour has regularly accused National of planning to "borrow for tax cuts", but the way the books are shaping up Labour will be doing so with its own tax cuts.
"What we can say is we were not borrowing for tax cuts at the time we made the forecasts," Dr Cullen said yesterday when asked about this.
National is doing its best to sound as if it is fully prepared for the deteriorating books.
Leader John Key said yesterday it had been factored into all of the economic decisions his party was making for the years ahead.
National has pledged to lift the level of government borrowing by another two percentage points over Labour if it wins power.
Asked if he was comfortable with doing so, after Dr Cullen had revealed he would already be going over 20 per cent, Mr Key said: "Yeah, we are, on the basis that this is a long-term programme.
"New Zealand has a growth problem, we need to address that and one of the ways out of that growth problem is to have an infrastructure which will allow us to grow."
Dr Cullen said there was room for only "very modest" new spending commitments from Labour during the campaign.
* Start on Wednesday.
* Will give workers an extra $12 to $28 a week.
* Will be accompanied by boosts to Working For Families and New Zealand Superannuation payments.
* Will be followed up with more tax cuts in April 2010 and April 2011.