Finance Minister Bill English is setting the scene for a grim Budget next month with the likely cancellation of personal tax cuts in 2010 and 2011.

Mr English said he would reveal a decision about future tax cuts in the May 28 Budget.

"The Government books are undoubtedly in worse shape now than Treasury predicted in the December downside forecasts.

"Borrowing and hoping is not an option."

He said a significant focus of his first Budget would be a credible plan for managing the Government's debt and indicated that would mean major policy shifts.

Mr English said without a change to the present spending track, preliminary Budget forecasts showed recurring operating deficits of more than $10 billion a year indefinitely.

"Most worrying of all, debt would continue climbing, with no sign of levelling off."

At the predicted 2023 level, Crown gross debt would equate to about $30,000 for every New Zealander and it would force the Government to pay an extra $8 billion a year in interest costs than forecast in the October pre-election update, Mr English said.

Crown gross debt now is about 20 per cent of gross domestic product. With no policy change, it would hit 45 per cent of GDP by 2013 (a December forecast was 33 per cent).

Cancelling those tax cuts - which have already been passed into law - is expected to save about $1 billion a year from 2012.

Mr English said his Budget would allow for more spending than Labour's last year.

But the rate of growth of Government spending in recent years could not be sustained, he said in a speech to business executives in Auckland yesterday.

Core Crown expenditure this year was expected to be $63.5 billion - up $21.6 billion or 51 per cent in the past five years.

He contrasted that to estimates that the economy had grown by just 23 per cent in the same time, and tax revenue by 24 per cent.

"Government spending growth cannot continue at this rate, particularly with revenue falling so significantly in the current environment."

Tax revenue and receipts for the eight months to February were $1.8 billion lower than forecast in October's pre-election update.

"Our revenue will remain under severe pressure until the economy recovers."

Mr English said that using publicly available forecasts, he now expected the New Zealand economy to permanently lose about $50 billion of output over the next three years compared with what would have happened without the recession.

"That's $50 billion we will not recover as a nation - and $50 billion that cannot be taxed."

He said the Budget was being prepared against a backdrop of global and domestic economic conditions unthinkable a year ago "even by the most pessimistic forecasters".

New Zealand was now in its sixth quarter of recession. But many of New Zealand's trading partners were in worse shape.

Labour leader Phil Goff said last night that Mr English was "softening the public up" to breach the basic promise National made in the election campaign last year - that people would be better off through tax cuts.

He said National had misled the electorate.

DEBT CLOUD

With no change to spending policy, gross Crown debt in 2023 would ...

* Equate to $30,000 for every New Zealander by 2023.
* Have increased by $100 billion to $135 billion.
* Exceed 70 per cent of GDP.