Key Points:

Our economics editor explained on Monday that New Zealand is going through two recessions, the first a domestic correction of house prices and private debt, the second a contraction of export markets in much larger economies that have suffered bank failures and a loss of confidence in financial services.

The domestic recession started early last year and might have been improving by now had Wall St's meltdown not poisoned most leading economies later in the year. We need to distinguish between these events when steps are taken to cushion the blow.

Finance Minister Bill English needs to make a clear distinction when he drafts a Budget this year. The domestic recession has exposed a fiscal problem for a Government committed to early tax cuts. The international downturn, though its damage could be greater, is beyond the New Zealand Government's power to provide more than palliative care.

The risk is that in spending heavily to alleviate the pain of shrunken markets and a likely decline in earnings and jobs, the country will lose sight of the underlying public savings it needs to make.

So far, the Government seems alert to the fact that it is dealing with two recessions, contemplating employment relief and even business bailouts to help weather the international storms while cancelling dubious public sector expenses such as conferences, cutting the bill for renovations to the vice-regal residence and making other small savings.

In hindsight, it was a good thing that the Treasury's pre-election fiscal update last year was out of date by the time it was published. It has given us a stocktake on the fiscal problems we faced before the international squalls of September and October. The domestic recession and the tax cuts scheduled from October had eradicated the Budget surplus and left the public accounts facing deficits for the next decade.

Former finance minister Michael Cullen believed the books would right themselves when the economy recovered, but he was not planning another tax cut for two years. Now, as Mr English admitted this week: "We have ended up with the worst of all worlds." We have Labour's level of public expenditure and we are about to get National's level of taxation.

Something has to give. If National will not postpone tax cuts due in April, it must trim some of the programmes it has inherited. The most costly of them, interest-free student loans, free childcare, KiwiSaver subsidies and the upper reaches of the Working for Families grants, should be means-tested more tightly to avoid taxing people to provide benefits they could pay for themselves. None of these would be politically painless and one or two are policies John Key has promised not to touch.

But National needs to cut core public spending to match its tax cuts even as it considers borrowing a much larger amount to fund counter-recessionary spending. To clarify what it is doing, its Budget needs to present the public with two accounts: one for the temporary relief it is borrowing, including the cost of capital for infrastructure, the other to bring core public spending into line with the permanent changes to income tax rates and thresholds.

Last week, the Treasury reported the Government's financial statements for the second half of 2008. Tax revenue was $1 billion below the last forecast. The operating balance had gone into the red by $6.2 billion and the residual cash deficit had deteriorated to $8.3 billion. Those figures are the scale of the underlying fiscal imbalance that needs to be corrected. They do not include another $9 billion the Government is prepared to borrow over the next two years to help sustain economic activity.

Future taxpayers will have to carry that debt. We should not load them with the cost of the next tax cuts, too. We have to cut our cloth accordingly, now.