Finance Minister Bill English is warning of a tough Budget in May despite figures showing the Government's finances are improving.
The operating deficit for the seven months to the end of January was nearly $900 million lower than predicted in December.
Once gains on the Government's investments are included, the deficit is $1.4 billion better than forecast, according to figures issued on Friday.
The $3.4 billion operating deficit was better than the $4.2 billion forecast at the time of the Half-Year Fiscal Update last December.
Once the Government's investments were taken into account, the deficit was $630 million, compared with the $2 billion predicted.
Higher than expected GST receipts and delays to Treaty of Waitangi settlements boosted the Crown's coffers. GST receipts were $258 million, or 3.9% higher than forecast, while Treaty delays meant spending was nearly 2% lower.
The opposition Labour Party and the Council of Trade Unions say the figures represent a significant improvement in the Crown's books and believe the Government should loosen its purse strings and allow New Zealanders to benefit.
But Mr English says one-off factors mean the public finances could worsen later this year and is setting the scene for an austere budget in May, saying he will stick with a $1.1 billion limit for new spending.
Mr English says this needs to be maintained if the Government's accounts are to return to surpluses any time soon.
