Some surprise was evident when the Minister of Finance disclosed in Parliament on Wednesday that the Treasury had told him the Government will face the biggest budget deficit in our history by the end of the financial year in June.
Yet it has been obvious for some time that the flat or recessive economy, the levels of government spending, and the effects of the two Christchurch earthquakes, as well as the impact of the finance company collapses, would compound the worsening national balance sheet.
And any retailer in the South will confirm the difficulties of profitable trading. In short, the recession many thought had ended merely subsided slightly in the weeks before Christmas, and is back in command whatever the technical analysis might say.
The minister's most immediate task is to prepare a Budget on May 19, having had to dedicate a lot of his time since the New Year revising his expectations.
The Government was - still is - borrowing about $300 million each week just to stay solvent; to which it has recently added another $200 million just to pay the extra income support costs arising from the earthquake.
It had hoped to be able to spend a little on new projects, with some $700 million to $800 million earmarked, mostly in health services and education, but even some of this now looks to be in jeopardy for it is necessary to cut Budget spending still further if the debt load is to remain sustainable.
This means that for many departments there may not even be an adjustment for inflation. The Government has repeatedly assured that services such as health and education will continue to get an adjustment at or near the rate of inflation, as will income support programmes.
The Budget will have to show a credible plan to repay as rapidly as possible the extra money being borrowed (it may be as much as $5 billion just for earthquake recovery) to get debt back to the estimates the Government relied upon before the earthquakes.
A responsible approach is required because future generations ought not be saddled with a greater debt load, but this inevitably means politically unpopular higher household costs at a time when people are already dealing with the pressures of an increased cost of living, tax cuts notwithstanding. The minister says these increased costs will be moderate.
New Zealand has among the highest levels of debt, public and private, in the developed world, and the extra debt incurred with the earthquake will push these to the limit.
No doubt the Budget will show a reduction in the rate of growth of government spending, but operating expenses at about $72 billion for the next financial year still represent an increase.
Likely some of the Labour-led government's choicest spending programmes will be axed, but the minister has said the commitment to building roads of national significance, reinvesting in rail, upgrading the electricity grid, and implementing ultra-fast broadband, will remain.
The Government maintains the accounts will return to surplus in 2014-15 despite the increased pressure on its books and the possibility of a credit-rating downgrade, which would increase its borrowing costs. That position is likely to be severely threatened, however.
It is by no means all bad news for the economy. Although householders are facing many increased costs, the average floating mortgage rate at 5.7% has halved in three years, providing a considerable weekly saving.
The prospect of a payout of $10 billion or thereabouts to dairy farmers will result in at least some positive impact on the retail economy, even if many farmers apply most of it to reducing their debt load.
Much hope for a short-term boost also rests on the Rugby World Cup and its associated visitor spending, and although the North Island, particularly the greater Auckland region, will derive the greatest benefit as a consequence of Christchurch earthquake damage, that spending will flow into the wider economy eventually.
And the vast sums required to rebuild Christchurch will provide many thousands of jobs, over several years, in a region of the highest significance to the South Island economy, from which all southern regions can expect some gain.
The National-led coalition will have to abandon some of its policies if it is to be true to its warnings: austerity will come at a political cost. But the election promises of all parties will be similarly constrained and will be fought on economic management.
