Budget for beginners

Budget for beginners

Pile of $100 notesOn May the 15th the Finance Minister, Bill English, delivers his sixth Budget just four months before the election.

Budgets include lots of big numbers, predictions about what is going to happen and announcements about what the Government is going to do lift economic growth and make everyone better off.

But people are largely turned off by the jargon and the fact budgets tend to be captured by economists and vested interests.

The former Prime Minister, Sir Robert Muldoon, once famously said most people would not know a Budget deficit if they fell over it.

So why do Budgets matter and why should you care?

What is the budget?

At its simplest the Budget spells out how much the Government expects to earn in the financial year ahead, beginning on July the 1st, and what it will spend.

In effect it details how much the Government's going to take off you in tax and how much it is going to spend for your benefit on health services, education, the police and other services you and your family and friends use every year.

Illustration of tax system

But why does it matter?

tax sign leftYou work hard for your money, so you want to be sure everyone is paying their fair share and that your taxes are spent effectively. You do not want to think the money you earn, but pay to the Government in taxes, is being wasted.

Remember the Government does not just tax what you earn from work. Any interest or other income is also taxed. And everytime you spend money at the supermarket, on your power bill, going to the movies or on other goods and services you also pay 15 percent GST.

In last year's Budget the Government expected to raise nearly $28 billion from taxing people in work. It expected to get another $16.5 billion from taxing your spending through GST. It was forecasting businesses would pay $10 billion and that other direct and indirect taxes would raise $8.1 billion.

That is a lot of money and you want to know it is being spent well.

How is the money spent?

Ambulance illustrationMost of it – $51 billion  this financial year – is spent on social welfare and security, health and education. Those are the three big spending items for any government.

Governments do not control every item of spending. For instance, payments on New Zealand Superannuation are rising simply because more and more people are reaching 65, the age of entitlement.

Unless a government changes that – and some political parties have talked about raising the age to 67 – nothing can be done to stop spending more on super.

The same pressures build in health. More demand for services inevitably means more spending.

But how it is spent does matter. That is why the detail of Budgets – while they appear to be boring – do matter.

There is all this talk about the government getting back into surplus. Why does it matter?

Expenditure and revenue diagramThe operating balance – here is a bit of jargon – is the difference between what the Government earns and spends each year.

Since 2008 the Government has been spending more than it earns from taxes, interest and dividends. So it has been running a big deficit. To cover the shortfall it has had to borrow. It is now spending more than three billion dollars a year just paying the interest on what it owes.

Now not all borrowing is bad if it is to build schools, hospitals, roads and public transport. But in the Government's case it is borrowing just to pay for its daily spending.

Think of your household. It makes perfect sense to borrow money to buy a house. But how long could you afford to borrow money to pay your weekly grocery bill?

That is the problem the Government faces and why it is so keen to get into surplus in the financial year starting on July the 1st.

What is a zero Budget?

Illustration of empty fuel tankIn the past few budgets the Government has allocated no extra money for new spending. That is a zero budget.

So if any minister had a bright idea about what he or she wanted to do in their portfolio area the minister would have to cut spending somewhere else to pay for the new initiative.

The Government took this approach in an effort to get its finances back into shape.

This month the Government will set aside one billion dollars for new spending so it will not be a zero Budget. Most of the new money is expected to go to health and education, but some has already been allocated to the Defence Force.

brent edwards
Brent Edwards, Political Editor