The Government is being urged to be consider new taxes to increase revenue and use caution in its plans to cut spending in order to keep its commitment to returning to surplus by 2014/15.

Yesterday Prime Minister John Key, in his state-of-the-nation speech, said the Government still planned to return the books to the black by 2014/15, but the forecast surplus had been revised to only $300m to $500m - $1b less than the forecast before the election.

Mr Key said the domestic economy was largely at the mercy of the global economy and the financial turmoil in Europe, and in a worst-case scenario a return to surplus may have to be pushed back.

If that eventuated, first on the chopping block would be money allocated for new Government spending: $800m in the next two Budgets and $1.2m in the third year.


Council of Trade Unions economist Bill Rosenberg said spending cuts would add fuel to the possibility of a global recession.

"That's what they [the Government] are readying the New Zealand public for, and really that should have been done during the election," Dr Rosenberg told Radio NZ.

"Should we be joining those countries by cutting back, such as the UK which is going back into recession, and Greece which is actually going downhill rather than uphill from the kind of austerity programme they put in place?

"If they all cut back, the world's going to go down because no one is going to be around to buy the goods that everybody wants to sell."

He said the Government should have targeted programmes to create new jobs and revisit options - such as a levy to fund the Christchurch rebuild, and a new tax on high incomes - to increase revenue.

"They've actually boxed themselves into a tight corner there by their whole position of cutting taxes rather than ensuring they have sufficient revenue.

"We have had over 150,000 unemployed and 250,000 jobless almost constantly now since mid 2009. The unemployment rate at 6.6 per cent is barely below its financial crisis peak in December 2009. Further cuts in government spending will not help that."

Business NZ chief executive Phil O'Reilly said the Government needed to walk a fine line.

"We always knew the surplus target of 2014/15 was a stretch.

"What's to be done? The Government needs to have a very balanced view. They need to not cut spending so much that they cause the economy to fall over, but at the same time they need to make sure they have a lot of fiscal discipline."

He said reform of the Resource Management Act and labour laws - which the Government is planning - would help businesses, and the Government could cut costs by reviewing "silly spending" including Working for Families and interest-free student loans.

"If we have a slowing of growth in New Zealand, private sector businesses will pull us out of that by employing people and by investing. Governments won't," Mr O'Reilly said.

But Dr Rosenberg said eroding employment rights and welfare reform would only exacerbate income inequality in New Zealand, putting more people into a job market where new jobs were not being created fast enough.