Budget to show large deficit: English

COUNTING THE COST: Prime Minister John Key says the deficit is worrying but understandable after the Christchurch quake.
COUNTING THE COST: Prime Minister John Key says the deficit is worrying but understandable after the Christchurch quake.

Prime Minister John Key says this year's deficit, set to be the biggest ever, is worrying but people will understand that's largely due to the Christchurch earthquake.

The Government has said the budget deficit is tracking $1.3 billion higher than forecast, mainly due to the $1.5 billion cost to EQC of the devastating February 22 quake.

But it is warning next week's Budget will confirm a "very large deficit" for the year.

"I think when people see the budget on May 19 they'll realise Government is actually making great steps towards getting back to surplus and getting the books back in order," Key said.

He reconfirmed that there would be changes to Working For Families in the budget , particularly to eligibility for high income earners, but would not be drawn on specifics.

Earlier today, Finance Minister Bill English said the deficit was driven by slower economic recovery as well as the quake and other one-off costs.

"However you measure it will be somewhere around $15-$17 billion, we've been borrowing a bit more than that to try and keep ahead of the game."

The Treasury reported the deficit hit $10.2 billion for the nine months to March against a forecast $8.9 billion.

But the deficit after gains and losses on investments fell to $3.3 billion from a forecast $7.2 billion  due to gains by the superannuation Fund and ACC.

English said that compared to the December forecasts, the accounts for March were broadly in line with February's results.

The May 19 Budget would set a credible path back to surplus, he said.

"The Budget next week will confirm a very large deficit for the current year, including the immediate costs of rebuilding Christchurch. But it will also confirm significant improvements in the fiscal position over the next few years, before we return to surplus and start repaying debt," English said.

"To achieve that, the Government has completed a careful and balanced review of its spending priorities."

The accounts showed the cash deficit was close to forecast at $12.4 billion for the nine months.

Gross debt was $2.5 billion ahead of forecast at $66.7 billion after a record $2.8 billion debt was issued in March.

But Treasury said the net debt was close to forecast at $39.4 billion (20.2 per cent of gross domestic product) because the proceeds of the borrowing was largely invested in financial assets..

Tax revenue was $19 million higher than forecast at $37.9 billion.

The New Zealand dollar dropped almost half a cent after the Finance Minister's comments.