WELLINGTON - NEW Zealand's government on Monday slashed its economic growth forecast to nearly zero and said its own accounts would fall into the red amid the first recession in a decade and global financial turmoil.

The Treasury has cut its forecast for growth in the current year to March to just 0.1 per cent from the 1.5 per cent forecast in May.

The economy shrank in the March and June quarters, signalling the first recession since late 1997 to early 1999.

'The dramatic scale and speed with which international financial markets have moved in recent weeks have been extraordinary,' Finance Minister Michael Cullen said.

'What we thought we knew even five months ago has been overtaken by events.'

Added to swings in asset prices, the effect on the economy and on confidence had been profound, he said.

'The rainy day has arrived.'

New Zealand goes to the polls on November 8 and the pre-election economic update is bad news for Prime Minister Helen Clark's Labour Party-led government.

Treasury predictions of large budget deficits in coming years - after posting surpluses since 1995 - come less than a week after personal tax cuts came into effect, worth NZ$10.7 billion dollars (S$10.1 billion) over four years.

The main opposition National Party is planning to announce more generous tax cuts on Wednesday as part of its bid to win back power after nine years, but the rapid deterioration in the economy gives it less room to move.

The Treasury cited a sharper-than-expected downturn in the domestic economy and housing market, sharply rising prices and the international financial crisis for the worsening outlook.

Economic growth is expected to rise to 1.8 percent in the year to March 2010, down from 2.3 per cent forecast in May.

The government's adjusted operating balance is forecast to post a deficit of NZ$31 million in the current year, worsening to NZ$3.2 billion by the year to March 2013, with a surplus not projected until the March 2018 year.

Previous government forecasts had seen the adjusted operating balance remaining in surplus in coming years, despite the slowdown.

Cullen acknowledged there were risks the outcome could be worse if the US government's US$700 billion (S$1 trillion) bailout package fails to restore confidence to the global financial industry.

National Party leader John Key said the forecast of a decade of budget deficits reflected the government's poor handling of the economy.

'New Zealand cannot afford Michael Cullen's high spending low growth programme,' Mr Key said.

Polls have put the centre-right National Party well ahead of the centre-left Labour Party, with one released on Sunday showing National 19 percentage points ahead. -- AFP