Bill English had something to smile about in the 2014 Budget. Photo / Mark Mitchell
Q: The New Zealand Budget has been and gone recently, but I have a few questions.
First the Government says it has balanced the books and now has a surplus. To me, put in simple terms, this means the Government's income is now exceeding its expenses. It's just like when my wages exceed my costs, and I have spare money to spend. This should explain how the Government has now got money to spend, which in this Budget has (quite rightly) been used mainly to assist young families. So far so good and easy to follow.
But wait there's more. On National Radio, the programme was discussing how the Government was borrowing $75 million a week. To those discussing this, all seemed well with this borrowing. But to my way of thinking it's not.
When I had a mortgage, the interest cost and principal repayments were taken from my income. And the balance, less other costs such as rates, car and food, was my surplus.
But the costs of borrowing (both principal and interest) do not appear to feature in the Government's balancing of the books act. It simply cannot be so, if we really are borrowing $75 million a week.
Sooner or later the principal and interest costs will decrease our surplus to nothing, or even worse put us into a situation where we cannot pay our daily costs. This would have happened if I had increased my borrowing instead of paying off my mortgage.
If this is correct, are we really balancing the Government books? Or is this government surplus all done by smoke and mirrors, far too hard for my simple brain to understand?
Mary, please explain.
A: Good on you for taking an interest in this. I suspect many people think it's all too hard, but it isn't that tricky.
You're right that the Government's income is expected to be a bit higher than its expenses in 2014-15. You're also right that it plans to borrow about $75 million a week for capital spending - buying assets that are expected to give long-term benefit to the country.
"This is a bit like a family who earns enough to pay for its living expenses, but who borrows from the bank to add a new room for the kids at the back of the house," says Cheryl Barnes, director, budget and public services, at the Treasury. "They borrow to purchase an asset, while also meeting day-to-day expenses from their day-to-day earnings. The Government's case is a lot more complicated, but the principle is the same."
You're not right, though, to say that principal and interest payments aren't included in the Budget. Interest is included in expenses, says Barnes. And principal repayments are reported as a reduction in debt.
Why aren't they treated as expenses too? "When someone - a family, a business or the Crown - repays principal on a loan, they're using an asset (cash) to get rid of a liability (the debt). While their cash holdings goes down, that payment isn't part of day-to-day expenses, and in wealth terms (assets versus liabilities) net worth doesn't change immediately," says Barnes.
To put that in terms of a family budget, the portion of your mortgage payments that is principal isn't really an expense as such. You're swapping cash for increased equity in your house - one asset for another.
You might think of it as a form of saving.
Adds Barnes: "Of course families, businesses and taxpayers often feel better off when they pay off loans, since that frees up cash that otherwise would be spent on interest payments, and it creates flexibility for a 'rainy day'."
All this means that your "sooner or later" scenario is not what's happening.
"The Treasury's forecasts show such concerns diminishing in the coming period. As operating surpluses increase over the next few years, the Crown's net worth rises and its need for cash falls," says Barnes.
"Starting from $4.3 billion in 2014-15, the Treasury expects the Crown's cash needs to fall to $1.8 billion in 2015-16 and to approach zero ($100 million) in 2016-17. Then the Crown would have surplus cash and start repaying the stock of debt (about $700 million worth in the current forecast) in the 2017-18 year."
In response to your question, "Are we really balancing the Government books?", Barnes says, "As explained, the books can be 'balanced' in the sense that net assets are not falling - showing that the Crown's overall financial position is stable - so long as any Crown borrowing is matched by growing assets.
"While the Crown is still borrowing, this isn't to fund underlying deficits in its activities. It is mostly to purchase new assets."
Finally, Barnes rejects your "smoke and mirrors" scenario. "The New Zealand Government is one of only a handful in the world that account for its finances according to Generally Accepted Accounting Practice. In addition, under the Public Finance Act, the Treasury prepares both its forecasts and the Crown accounts independently of political influence."
Not so amazing
Q: The writer last week made a good point about dyslexia but is way off about the overuse of the word "amazing". Often the way in which "amazing" and "awesome", etc, are used amounts to untruth by hyperbole.
Look on Trade Me and you will see listings like "Awesome Motorhome". I want to write and ask "okay, so it's awesome, but is it any good?"
So you keep at it, Mary. Keep plugging away for sensible English.
A: Funnily enough, another reader also writes about "awesome" and "amazing".
"Everything is described as 'awesome' these days whereas I would describe something like the Niagara Falls as being awesome," he says. "The overuse of these two words is taking away/demeaning their original greatness." Quite. But see the next two Q&As.
Please apologise
Q: I really enjoy your column and the very considerable knowledge you have and provide to your readers. The final letter last week, though, was one you should reread and consider.
You should have apologised and learnt from the comments, not indulged in a further put-down of the writer.
If writers make mistakes in their spelling and grammar you should print their letters verbatim. Your language in your reply is going to be the critical influence in helping your audience improve theirs . Surely you want your column to be something for all readers not just the financial wizards and highly literate.
Please next week just write a genuine apology.
A: Oh dear. My comment last week that "I usually just quietly correct correspondents' errors - including one in your letter!" was meant to be light-hearted. Sorry to anyone who found that, or my earlier comments, offensive.
On your other point, I welcome everyone's letters, and I'm more likely to answer those for whom life hasn't been easy. But I don't think printing letters verbatim is a good idea. Sometimes it takes me a while to work out exactly what someone is saying, and a few changes to grammar or punctuation help.
Keep it up
Q: Gosh, has it now become politically incorrect to correct correspondents' grammar! I certainly hope not.
I recall, vividly, the letter referred to by last week's correspondent. You corrected the correspondent she referred to graciously, and through that probably thousands of us, including dyslexics, were enlightened.
My English grammar has always been sadly lacking due to long periods of absence, because of illness, from my small town and low decile schooling. Please, Mary, continue correcting our grammar, and that includes any errors in this message :)
A: Thanks. Will do. But I think I'd better stop pointing out corrections. One person's learning seems to be another person's hurt, and I'm not trying to hurt anyone.
Okay, enough of this. Let's get back to financial topics.
KiwiSaver risks
Q: I am retired and 66. My KiwiSaver account is still ticking along nicely although I could cash in if I wished. The total is now approximately $14,000 after five years.
Not too shabby seeing I only put in $6000.
Instead of withdrawing, I am now pondering depositing $500,000 into it.
I feel my ANZ conservative balanced fund is far better than any term deposit I have looked at lately. And as you say, term deposits have a wait date whereas KiwiSaver for me is virtually on call.
I could split the $500,000 between my present conservative balanced fund and the balanced and balanced growth funds to get a better average. But unless I am mistaken, the fund I am now in returns approximately 8 per cent net, and I'm more than happy with that. Also I can sleep at night.
P.S. I have a freehold home and receive both NZ Super and a pension, both approximately the same value. I would still have approximately $100,000 rainy day cash in hand. What's your opinion please Mary?
A: Your return, $8000 on your $6000 of contributions, is typical for people in KiwiSaver in their 60s. It's a particularly good deal at that stage in life.
That return is, of course, boosted by Government contributions. The return on investment in your fund averaged 7.2 per cent a year since April 2009, according to the KiwiSaver Fund Finder on www.sorted.org.nz. That's after fees and tax, except the annual $24 membership fee. As you say, it's better than term deposits.
Note, though, that the Fund Finder also tells us the returns ranged from minus 6.5 per cent in the year ending March 2009 to 12.92 per cent the following year. Those were volatile times, but they will come again at some stage. So if you move $500,000 into that fund, be prepared for the balance to drop sometimes.
This will be even more the case if you venture into the balanced fund, which holds more risky investments such as shares. And the balanced growth fund is riskier still. The latter has had average returns of 10.3 per cent since March 2009, and a range of minus 15.94 per cent to 21.35 per cent.
Ask yourself how you would feel if you put $100,000 into the balanced growth fund and it plunged to, say, $70,000 over a year? If you would panic and switch funds at that point, don't go there!
But if you would stay put, knowing the fund would almost certainly recover in due course, why not put some of your savings there and receive higher probably long-term returns?
The trick is to keep money you plan to spend in the next two or three years in a conservative investment, such as a low-risk KiwiSaver fund or bank term deposits. Your $100,000 rainy day money probably takes care of that.
Then put money you plan to spend over about three to 10 years in a mid-risk investment, such as your current KiwiSaver fund.
The rest can go into higher risk, as there's time for it to bounce back from a downturn.
Every year or so, transfer some money from higher to medium risk, and some from medium to lower risk.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
Prices and interest rates have fallen, offering a window to buy homes now.