Finance Minister Bill English says further debt problems in Europe could derail the Government's spending plans.
Europe's debt crisis and a forthcoming wave of refinancing by countries that borrowed heavily to counteract the ravages of the global financial crisis have lifted the New Zealand Government's cost of borrowing to almost 6%.
Mr English says it's important that what New Zealand owes to foreigners - which is currently about $164 billion - continues to decline, to reassure investors and credit rating agencies.
But he says if Spain, for example, requires a bailout, interest rates will rise and any substantial change in the cost of borrowing may squeeze the Government's spending plans.
"Our external liabilities are actually dropping at the moment, (but) economists are telling us it will get worse again," he said.
Mr English said the cost of debt is up and an external banking crisis could see it rise again, which he said, "reinforces the need to reduce our debt".
