NZ Prime Minister John Key often talks about his desire to grow New Zealand out of the global economic recession, rather than bail the country out through huge spending packages. This puts him at odds with most other Western democratic leaders and this approach has won him plaudits abroad. The Key government's first budget on Thursday will show if rhetoric matches reality.

Key and his National Party did not campaign on big policy changes. Rather, the prime minister hewed to the middle and crafted a platform loosely defined as centre-right ‘pragmatism.’ He took office last November promising ‘100 days of action,’ including tax cuts, a loosening of employment dismissal laws, reform of restrictive planning legislation and relief for small business owners. His party also promised no cuts to public services and no extra borrowing to fund tax cuts.

Key has moved this agenda along, albeit slowly. His government has undertaken a line-by-line spending review of all departments, proceeded with promised small business tax relief and started the process of amending planning legislation called the Resource Management Act. In addition he's plumped for a few populist gestures such as a national cycleway, which has pleased both parties on the left and right.

All these policies are mostly tinkering at the margins, however – just when New Zealand's economic position is drastically worsening. The government's operating balance, excluding gains and losses, has moved from a projected surplus of 1.9 billion New Zealand dollars (US$1.1 billion) just prior to November's election to a deficit of NZ$233 million, and this trend looks likely to continue. New Zealand's net debt position may not look bad at NZ$5.12 billion, or 3% of GDP, but gross debt has up reached NZ$45 billion, or 25.1% of GDP – up from the 17.2% forecast last October. Key has also inherited a public sector that has expanded around 35% over the past decade in terms of spending. He doesn't have much fiscal manoeuvring room.

New Zealand is a small open economy that is affected early and hard by global economic downturns. The country entered recession last year, making it the first among developed countries to do so. Tax revenues between July 2008 and March 2009 were lower than October's forecast by NZ$1.9 billion, a decline of 4.3%. Like it or not, the government must make tradeoffs – by cutting the size of government and cutting spending commitments. This is a challenge Minister of Finance Bill English has spoken about repeatedly in recent weeks.

Yet the government seems hesitant to push forward with the big reforms needed to keep New Zealand's economy moving. Messrs. Key and English have signaled this budget will not institute politically unpopular policies, especially as regards the public sector and various vested interests. This hesitation is unfortunate given the Key government enjoys a majority in parliament and approval ratings above 59%. English should be looking at dismantling whole government departments and selling state-owned enterprises such as Solid Energy (coal), KiwiRail (railroads), Kordia (telecommunications and infrastructure) and Air New Zealand.

The expected lack of bold action in the budget exposes the National government's apparent lack of political courage. This is typical of the National Party, a party with agrarian roots that historically chooses the path of least political resistance. The early Jim Bolger National government in the 1990s, which pushed labour market flexibility and required more government transparency and a balanced budget, was a notable exception. But even that government was straying from its comfort zone and ended up marginalising those who continued pushing the policies of the reformist Labor government that came before it.

Key and English may surprise New Zealanders on Thursday with a budget that tackles tough issues. To do so, they'll have to ditch their approach of the last few months, when little new has been achieved. Although Key may look fiscally prudent and reform-minded in comparison to US President Barack Obama, British premier Gordon Brown or Australian Prime Minister Kevin Rudd, he can do better. If he doesn't, his administration will go down in history as just another classic New Zealand conservative government that doesn't rock the boat.

Luke Malpass is New Zealand Policy Analyst at The Centre for Independent Studies.