Treasury has painted a very ugly economic picture for the incoming National government with cash deficits increasing, growth shrinking, tax revenue diminishing and unemployment rising.

Prime minister designate John Key was briefed by Treasury yesterday and told the economic outlook had deteriorated further since the pre-election fiscal update.

Mr Key did not go into detail then, but told reporters the scenarios were "a little bit" worse than they had been.

"They are more pessimistic but I wouldn't describe it as Armageddon," he said.

Today outgoing Finance Minister Michael Cullen released a Treasury economic update given to him on November 7 -- the day before the election.

This would have formed the basis of yesterday's briefing to Mr Key and his incoming finance minister Bill English.

The main finding in the report is that growth levels are likely to be hit even worse by the global financial market turmoil.

The economy would suffer from weaker export demand, lower commodity prices, lower housing values and weaker confidence.

The economy is expected now to sputter along at 1.3 percent growth in the 2010 March year pushing up unemployment to 5.7 percent (compared to 5.1 percent in Prefu)

NZPA understands that National were warned by Treasury that the growth outlook could be even worse for the coming years.

Total tax revenue over the next three years is expected to more than $2.1 billion lower, increasing total cash deficits up until 2011 to more than $2 billion.

NZPA understands that National have yet to receive detailed numbers from Treasury, but there was concern at how grim the growth forecasts were and the predictions tax revenues would remain lower even when the economy did start to grow.

Mr Key has made it clear that he is not willing to change any promises to improve the Government's fiscal position.

The argument is that taking an axe to spending could do more damage than good and instead the focus should be on increasing economic growth to get the books back into the black.