As hype builds for new Finance Minister Nicola Willis’ first Budget, there’s no shortage of speculation about how she will deliver promised tax cuts and how tough the spending cuts will have to be to fund them.
When Willis stands in parliament to deliver her Budget(at 2pm on Thursday May 30) the Crown accounts will get their annual spot in the public limelight.
It lays out how much the Government expects to take in through tax revenue and investment, how much it expects to spend and how much it intends to borrow... and what for.
The accounts can show a surplus where the Crown has taken in more revenue than it spent, or a deficit where it has spent more than it earned.
Budgets are a political battleground because they reveal the choices the Government is making about how much to tax, how much to borrow, how much to spend and where it will be spent.
Finance Minister Nicola Willis during the release of the Budget Policy Statement in the Beehive Theatrette, Parliament, Wellington, 27 March, 2024. Photo / Mark Mitchell
The Budget also offers an outlook for the next year, but also spending over four years - something that can often make the big multi-billion dollar announcements look more generous at first glance.
Budget announcements can also sometimes include existing spending as well as new spending.
That’s why journalists, economists and Opposition politicians are so enthusiastic about digging into the numbers to decode the exact amount of new spending that has been allocated.
The Budget typically talks about two different types of spending: “Operational” and “Capital”. Operational spending refers to ongoing costs for things like public sector wages and maintenance of existing infrastructure.
Capital spending refers to big one-off investments in things like public buildings (eg schools and hospitals) and new investment such as in transportation infrastructure (eg roads, railways, bridges).
Outside of the pandemic years, the biggest areas for spending are typically social welfare (including New Zealand Super), health and education.
The Covid-19 response shifted the balance with the Government borrowing billions more to fund policies like the wage subsidy and other targeted support initiatives.
While somewhat more normal conditions have returned, the Government now faces more pressure on spending because its debt levels are higher.
There are also risks that any new spending to help people with the cost of living will boost the economy and actually add to high inflation woes.
Budgets aren’t what they used to be in the 1970s and 1980s.
Back then, the public watched with bated breath for tax announcements and then queued to buy petrol, cigarettes and alcohol before price changes took effect at midnight.
For financial markets, the process was even more harrowing, so in 1989 the Public Finance Act was introduced.
Since then, big spending plans and other policy changes like tax cuts or hikes have had to be signalled in advance in pre-Budget announcements.
Financial markets will factor new details about the Government’s debt track into their equations on the outlook for interest rates and currency.
For that reason, the Budget can make the Kiwi dollar rise or fall (although not as much as it did before 1989).
The Budget can also influence the extent to which the Reserve Bank (RBNZ) will need to adjust the Official Cash Rate (the interest rate the RBNZ sets for borrowing and lending between banks).
There’s no question the Budget is still a very big deal as these things can have a very real effect on our lives in terms of mortgage rates and the cost of living. But these days the Budget is also a political exercise.
Governments typically save one or two big spending announcements to unveil on the day, in the hope they will dominate the news cycle with positive headlines.
Beyond that, they are a chance for the Finance Minister to grab the media spotlight and outline the Government’s grand plans for the economy.
While it is not an election year, the stakes remain high for Willis and the new Coalition as they look to set the agenda for the rest of this term.
