Finance Minister Bill English is warning the public sector the Government can no longer afford to fund "nice-to-have" policies that soak up money needed elsewhere.

Mr English said the overall size of the Government had to reduce as a proportion of the economy.

"Something has got to give and that something has to be lower-value activities the Government is currently funding."

Mr English and Prime Minister John Key have begun a softening-up exercise ahead of the May 19 Budget, which is expected to feature the highest operating deficit in New Zealand's history - more than $16 billion.

The new operating spending allowance has gone from what was foreshadowed as $1.1 billion to zero, with any extra for education, health and the justice sectors having to be funded by cuts to other departments.

The only new spending will be in areas over which the Government has no control, such as interest on sovereign debt, and rises in superannuation and benefits because of indexation.

In a speech yesterday at Parliament to senior public servants, Mr English said the public service had responded well to change required by the global recession but the pace of reform needed to step up.

"This is not a time we can afford to indulge in a whole lot of 'nice-to-haves', even though for sections of the population, they feel the loss of those services or funding streams.

"The alternative is that 'nice-to-haves' come at the expense of necessities and at the expense of fairness to people with more need."

Mr English said there were too many Government agencies: in a country of just 4.4 million people, there were 38 Government departments, more than 150 Crown entities and more than 200 organisations for which the Government had some responsibility.

"You should expect to see more consolidation of agencies and functions over the next two or three years."

It is understood many of the Crown entities are being reviewed for potential mergers, such as funding organisations like the Film Commission and NZ on Air, and the Health Research Council with the Science Board, to cut overheads.

Mr English later said the cutting of night classes in his first Budget was one of those areas that could be defined as "nice-to-have" spending.

So too was Working for Families for the wealthy.

He also said National was in negotiation with Act over the continuation of the 2025 TaskForce, headed by former National leader Don Brash to look at ways to close the wage gap with Australia by 2025.

Mr English suggested that savings could be made in future mergers in government departments, or at least some of their functions.

He referred to the collaboration between Inland Revenue, Internal Affairs and the Ministry of Social Development on a project aimed at giving people real-time access to tax and income support accounts.

* Govt KiwiSaver subsidies.
* Student loan qualifying criteria.
* Working for Families for wealthy parents.
* 2025 Taskforce; Families Commission; Ministry of Women's Affairs.