Prime Minister Jacinda Ardern says the health sector's finances are worse than she expected.
Nurses and midwives on Monday rejected a 2 percent pay rise offer from New Zealand's district health boards (DHBs).
They argue they've been underfunded for years and are threatening strike action, but the PM ruled out an immediate cash injection to fund the nurses' pay rise.
"If I said I was inserting a specific amount that then predetermines what the DHBs are negotiating," Ms Ardern said.
"That I can't do,” she said. “The DHBs need to be able to negotiate this as entities without me inserting myself into it."
She is working on her first Budget, and told The AM Show host Duncan Garner that money for the health sector was going to be tight.
"We know they have deficits. I have to say it's worse than I thought, because coming in there was no suggestion that they were quite so underfunded, particularly around capital.
"What I didn't anticipate was how serious the issues would be in other portfolios as well, including areas like education."
Ms Ardern suggested that the previous Government is to blame for the health sector's problems, saying there are only two DHBs that aren't in deficit.
"In terms of capital expenditure, DHBs have suggested they have - from memory - over $10 billion of investment required just in capital terms," she told Garner.
"The last Government - from memory - put aside roughly $600 million."
The New Zealand Nurses Organisation (NZNO) says industrial action is a last resort - but in mid-April, the NZNO will meet to plan a vote on whether to strike and discuss the details of it, should it go ahead.
However Ms Ardern says she won't insert herself into the negotiation process and the strike threat is for the DHB and nurses to sort out.
"No one wants industrial action and everyone wants a resolution," she said.
Watch the full interview with Jacinda Ardern above.
The AM Show with Duncan Garner, Amanda Gillies and Mark Richardson, weekdays 6-9am on RadioLIVE and streaming live to the rova app on Android and iPhone.