How much money will there be?
Budget week is the week in Parliament. It is when we finally get to see how much the Government will spend and where.
On Budget day the Government brings its Budget to Parliament, trying to prove it is meeting its manifesto commitments and tackling the issues of the day. The Opposition motions to depose the Government and explain to voters why they would do a better job.
What we call a Budget is Parliament granting legal authority to the Government to appropriate money to do its many jobs. While there is one single ‘‘Budget day’’, when the estimates of what will be spent for that year (July 1 to the following June 30) are published and introduced to Parliament, the Budget process goes on for months, as the Budget gets picked apart and debated.
It is split up into multiple sections, which are then sent to
relevant select committees before finally being passed later in the year, months after it is introduced.
The big question hanging over any Budget is how much money there is to spend. This is a more difficult question to answer than it first appears. A Government could tax and borrow enormous sums of money – just how much is a political decision.
Treasury will update its benchmark forecasts at the Budget, releasing the Budget Economic and Fiscal Update or BEFU. The most recent forecasts we have are the Half-Year Economic and Fiscal Update. It was released in December and its 130 pages record where Treasury thinks the economy is headed in the short, medium and long term.
The data helps to paint a picture of the Government’s books going into Budget 2021.
SO, HOW MUCH MONEY?
Alas, as with many questions in Government, there is no easy way to answer that question. The halfyear update forecasts expect core Crown revenue (taxes mostly) to hit $95.875 billion for the year this Budget applies to.
The Government also expects to borrow a lot of money this year. It will typically borrow money to invest in long-term infrastructure like a school, so that the cost of building the project is spread out across multiple years.
But money is also borrowed during an economic crisis, to plug a shortfall in revenue – the deficit between expenses and income. Some countries always run deficits but in New Zealand, in recent years, Governments, including the current one, have pledged to run a surplus.
The amount of debt on the Government’s books (measured by net core Crown debt) is expected to hit $166.217b by the end of the year the Budget applies to. Before the Covid-19 crisis, in 2019, it was sitting at about $57.73b.
Debt is expected to keep rising until 2024, when it will hit $194.1b before slowly coming down.
Interest costs, thankfully, are far lower than they were before the pandemic, reducing the burden of servicing that debt.
GREAT, BUT HOW MUCH MONEY?
The amount of money spent each year is quite high at the moment.
Money paid out in welfare is known as below-the-line expenditure; it rises and falls with the number of people who claim those benefits.
Because more people are on some form of welfare at the moment and the Government is trying to stimulate the economy, expenses are higher than they have been for a while.
Heading into the pandemic, core expenses were about $80b a year – $86.95b in 2019.
The economic cost of fighting Covid has put that up to $114.2b for this year and an expected $109.10b next year.
The other big number is the surplus. This is mainly a political number. Essentially it does what it says on the tin. If you take more money from the economy than you spend, you have a surplus; if you don’t, you have a deficit.
Whether a surplus is something you actually want to have is a subject of quite intense political debate. Running a surplus effectively takes money out of the economy, as more money is taken out in taxation than is injected into the economy through spending.
Some argue that persistent deficits are effectively giving the Government a credit card with no limit. For now, the detractors of deficits have won, and both Labour and National are committed to running surpluses.
Treasury is forecasting a deficit of $21.57b for this year and a deficit of $16.4b for the year of Thursday’s Budget.
The books will finally squeak into surplus in 2027/28, according to the December forecasts.
Recent economic data has been much kinder than those forecasts predicted, so it is safe to assume those deficits will be much smaller when the final accounts are tallied later this year and the forecasts for the next few years are published on Thursday.
The other important number to think about is the fiscal impulse. That is all about how stimulatory the Government’s fiscal policy is on aggregate demand pressure in an economy.
Currently, we are seeing a positive fiscal impulse, evidence that the Government’s policies are adding to the level of demand in the economy.
Politicians want that stimulus to keep people employed and to keep the economy going.
Unemployment is 4.7 per cent, defying predictions that it would be much higher.
BUT HOW MUCH MONEY?
How much money? That question is quite easy. The amount of money allocated in a Budget is a political decision. It is made by the finance minister, who will get advice from Treasury.
What most of us know as the Budget is the allocation of two pots of money: the operating allowance and the capital allowance. The operating allowance, currently set at $2.625b for the next year but set to be increased on Budget day, pays for increases in operational day-to-day spending; if the Government wants to fund new initiatives to teach people languages in school, it would pay for it from this allowance.
There is also a capital allowance; this is allocated across multiple years and pays for investments in capital infrastructure – stuff you can see.
If you want to build a school, you would build it from the capital allowance. This is set at $7.8b between 2021 and 2024 but is also set to increase on Budget day.
Ministers bidding for funding for projects have to come to the finance minister, begging for a slice of those two pots of money. Bids always exceed the amount of money on the table.
It is important to remember those allowances are just the new money that is being allocated – the $2.625b of new money is really a tiny slice of the more than $100b that will actually be spent by the Government this year.
Most goes to hospitals, schools and pensions, and is spent on existing programmes that won’t be talked about on Budget day.
The amount of new spending in those allowances is a political choice. The finance minister can make the allowances whatever they need to be, taxing and borrowing to make the numbers add up.
Just what those numbers will look like will be revealed in three sleeps.
The amount of money allocated in a Budget is a political decision.