Budget 2025: How Does Government Spending Actually Work?
You are going to hear a lot about government spending this week.
But how does it actually work? Where does the money come from, and where does it go?
First up, where does the government get its money from?
The government pulls in money in a few different ways.
Tax revenue is the big one.
The government brings in about $120 billion in tax revenue every year.
For the 2025 financial year, that was about $22,613 per person. It gets another $7833 per person from "other income" from things like ACC levies, the emissions trading revenue, fines and other things.
Just under half of the tax it collects comes from individuals paying tax on their income.
Simplicity chief economist Shamubeel Eaqub said while our total tax bill is roughly "middle of the pack" for the OECD, we are a bit unique in that our taxes are heavily paid by workers.
We do not have the capital gains or inheritance taxes that some other countries have.
Another 22 percent of tax collected comes from the GST we pay on things we buy, then 13 percent is from corporate tax, 6 percent from "sin taxes" like tax on tobacco and alcohol, and 4 percent is from tax on interest and dividends.
Then the government spends it…
The money collected in tax is used to pay for the services the government provides.
Social security and welfare is top of the list. Not including NZ Super, that's $6486 per person a year in the latest year.
"People think welfare is just poor people," Eaqub said. "It includes the working poor, things like Working for Families, the accommodation supplement."
Health is next, at $5804 per person, then NZ Super at $4352 per person a year. Education is in fourth place, at $4197 based on 2025 financial year numbers.
The government also spends $1400 per person per year on law and order, $3061 on transport and communications, $3153 on economic and industrial services, $592 on defence and $536 on environmental protection, among other things.
Spending can be classified as operational activities (sometimes called opex) and investment activities (sometimes called capex).
If you think about the way a household is run, opex might be things like paying your power bill or doing your grocery shopping.
Capex might be buying a house.
But what about the shortfall?
Eaqub said the government would earn about $30,446 for every New Zealander each year, but would spend $37,480.
So it has to cover that $7000 from somewhere, and that's usually through borrowing or selling assets.
Half of the shortfall borrowing is funding operating deficit - so that's your power bill or supermarket shopping.
The other 47 percent is for money that has been used for infrastructure investments. Provided these were a good investment, this should pay off over time and the borrowing is less of a concern.
The net interest payment made by the government - the difference between the interest on assets like bonds that the government sells to investors and the money it borrows - is about $550 per person per year.
"It's not the borrowing per se that's the problem, it's when you're borrowing for groceries… the last few years, we've done that repeatedly," Eaqub said.
"It's not that debt is bad. Debt for stupid things is bad. Debt for high-quality infrastructure is good."
But he said the government could not increase spending without increasing either borrowing or tax revenue.
"We can't have it all, we've got to choose. The trick in the coming Budget is that there is no money for new purchases.
"All announcements are funded by cutting something else, a shuffling of the deck chairs… we can all agree there is a whole heap of waste in a lot of things but rather than doing a once over lightly on every line of spend, we've got to pick things we are doing to stop. What are you going to stop, what are you going to start, what are you going to keep? If there's a reduced envelope of taxes we've got to make stopping decision really carefully but also really precisely."
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
1News
2 days ago
- 1News
Call to rethink tax on KiwiSaver
KiwiSaver members could be significantly better off if New Zealand adopted a taxation model similar to Australia's, an economist says. Simplicity chief economist Shamubeel Eaqub ran some numbers modelling a system similar to Australia's, where contributions and returns are taxed at 15%. In New Zealand, full tax is paid on income contributed to KiwiSaver, and returns in PIE schemes taxed at an investor's prescribed investor rate up to 28%. Eaqub said an "average" KiwiSaver investor starting now could end up $60,000 better off in nominal terms at retirement on a model similar to Australia's. If tax was not paid on contributions or returns, they could be about $1 million better off - and if only taxes on returns were removed the gain would be about $300,000. "In Australia, the context is there's some conversation about whether the tax breaks are too generous for richer people. It's not that it's perfect but the point is in other countries it's heavily incentivised for people to save in their private pension." ADVERTISEMENT But it was not in New Zealand. Kirk Hope, chief executive of the Financial Services Council, which represents KiwiSaver providers, said the Australian model was different because that country has a means-tested pension. "The tax break that occurs in New Zealand occurs when you retire, when you get national super... that is the equivalent of about $500,000. So I think it's hard to do a comparative analysis without acknowledging that there are significant differences between the schemes and what they are trying to achieve." Winter's here, supermarket spying, and TikTok's new feature. (Source: 1News) But he said if the tax on savings for New Zealanders was reduced it would give future governments more "fiscal options" in relation to superannuation. He said New Zealand previously had a system that was EET — or exempt, exempt, taxed, where contributions were tax-exempt, exempt from tax within the scheme and then fully taxed when withdrawn. The Tax Working Group in 2018 acknowledged that the change from that system had potentially created incentives for New Zealanders to direct savings into investments like houses instead. ADVERTISEMENT Hope said it would be expensive to adjust back to EET but there could be other changes that would be more affordable. The tax working group estimated that ignoring behavioural changes, it would cost $200m to $300m a year to move to a system where returns and withdrawals were not taxed, and $2.5b a year to move to an EET system. "The higher initial cost for an EET regime arises from the fact that there will be a substantial deferral period before significant amounts are withdrawn from the scheme, and thus taxed under the third 't'. Although these are very different initial costs, the costs will be the same in the long run on a net present value basis." Hope said providing different forms of tax incentives would be beneficial for savers. He said removing or reducing the employer contribution tax would be particularly useful for low-income people. Kernel Wealth founder Dean Anderson said New Zealand was one of the few countries operating a TTE — taxed contributions, taxed returns and exempt withdrawal — model. "Our future savings would be much better off under an EET approach, where we don't pay tax on the way in but on the way out. ADVERTISEMENT "With low savings rates in NZ, the government should be exploring everything in its powers to grow savings rates, which benefits NZ and Kiwis over the long term. "But it's not a surprise. The recent meek KiwiSaver policy announcement did all the hard work to announce a positive gradual increase to KiwiSaver contributions, yet they fell short by announcing a three-year policy rather than outlining a decade plus long policy of incremental KiwiSaver increases." Ana-Marie Lockyer, chief executive at Pie Funds, said KiwiSaver members were at a disadvantage compared to Australians because there was no upfront tax incentive or concession as in Australia to encourage them to contribute more. "Maybe consideration of a mid-tier flat tax rate on savings up to a certain amount would encourage savings." She said employer contributions were also taxed so investors lost the benefits of compounding, and investors paid tax on bonds and deemed dividends on global equities so they were effectively paying a capital gains tax. "So contrary to the government's stated goal of helping New Zealanders' grow their KiwiSaver balances, these factors mean New Zealanders have less incentives to make voluntary contributions and pay more tax on investment earnings, resulting in smaller balances at retirement relative to our Australian friends."
Newsroom
2 days ago
- Newsroom
The young need state support just as much as the old
In a recent column in the NZ Herald, Mathew Hooton said that if superannuation can't be cut, then wage subsidies should be. As 'welfare costs are exploding' and there is no political will to carve 20 percent off the universal pension, he continued, we must stop providing families with child-related tax credits and accommodation assistance, which he describes as 'wage subsidies'. While this view may resonate with some, all developed countries have variants on state policies like Working for Families to support children, and a version of New Zealand Superannuation to support the old. Typically and confusingly it is often argued that Working for Families is either 'corporate welfare' (letting businesses get away with not paying workers enough for their families to live on), or 'communism by stealth' that puts 'the whole population on welfare'. By similar logic it could be argued that NZ Super puts everyone on welfare at 65 or is a form of corporate welfare because wages should be high enough so people can save for a pension for themselves. Mid-last century, in a world long gone, wages were set by arbitration to ensure that one full-time male breadwinner earned enough to support a 'typical' family with a wife at home, and several children. Even so, tax breaks and a family benefit for children were also necessary. In the 21st century we have very different family structures including two-earner families. It is ludicrous to expect employers to meet the needs of both low-income adults and their children. For example, a very low-wage worker with four children currently receives an extra $610 per week from Working for Families. If cut completely, the net wage would have to rise by around $32,000 a year to make up for it, by Hooton's logic. The increase in the gross wage rate would cripple employers, be too much for workers without children, and not enough for larger families. There is the argument that by wiping Working for Families, the money saved be given back in tax relief to workers. That's pie-in-the-sky thinking. If families were to be compensated, it would require a complex package of abating tax credits. Oh, but isn't that that what Working for Families currently is? It all becomes so circular. One million superannuitants are collectively paid $20b after tax each year. Around one million children are given just $3.3b in Working for Families each year. You read that right. Each year around one million superannuitants are paid around six times more than one million children through Working for Families. But it is true that Working for Families is badly designed and does not meet the main goal of child poverty prevention. It doesn't reward paid work, as it is intended to. It is in desperate need of reform. It's often said that Working for Families is all Labour's fault, but it did not magically come into being fully formed under the Helen Clark Government in 2004. The universal weekly family benefit and tax breaks for families in the 1950s evolved by the 70s and 80s to become a complex mix of family benefit and different family tax credits. In 1991 the National Party folded the universal family benefit into the targeted tax credits to become one weekly targeted payment per child called Family Support. There were further changes under National in the mid-1990s, and rewarding paid work became elevated as a fundamental principle. All that the Clark government did in 2004 was to change the name to Working for Families, then build on and expand the existing complex structure, with even more emphasis on paid work as a criterion. Then, the Ardern government introduced an additional significant payment, called Best Start, for children under three years old, universal for the first year. As a policy, Working for Families is a mess. In contrast NZ Super is a simple, unconditional universal payment indexed to wages. It is easy to access and, until the housing crisis, has been enough to prevent poverty in old age. It is a basic income floor that does not disincentivise paid work. It has a very gentle income test though the tax system, so that the very highest income earners still get around three quarters of a pension paid when there is no additional income. The extra assistance for families to meet the basic income needs of their children is a very different story. Working for Families is tightly targeted and assists only children of low- and middle-income parents. Moreover, the full payment is conditional on parents having paid work and receiving no core benefit or part benefit. These conditions result in 200,000 children in the worst-off families being excluded from around $5000 per year, or more for larger families. With this division between deserving and undeserving children it's no wonder child poverty is so intractable. Working for Families payments are not annually indexed and are increased only when cumulative inflation exceeds 5 percent. There is no wage link as for NZ Super. Furthermore, payments are subject to a draconian clawback equivalent to an extra tax of 27 percent from a very low base of joint parental income. That threshold will be lifted marginally next year to $44,900, but to pay for it, the rate of abatement rises from 27 percent to 27.5 percent and Best Start becomes income-tested. This very 'tight targeting' ensures child poverty persists for many families in paid work. The overlap of tax, Working for Families clawbacks, student loan repayments and loss of accommodation assistance, and now Best Start clawbacks, confirms for too many, that extra work effort does not lift them out of poverty. Children are invisible: that is the problem. Fundamentally we need to understand that low-income wages, benefits, and paid parental leave are for the income needs of adults, but children also have income needs. I would argue that rather than take more from children we take more from the top end of NZ Super through the tax system and direct the revenue for fixing not just Working for Families but also the other failing welfare measures such as the accommodation supplement, benefits and disability support. We do want to grow the economy but should not be done at the expense of the wellbeing of both our current and future workforce.
Scoop
3 days ago
- Scoop
Interim Financial Statements Of The Government Of New ZealandFor The Ten Months Ended 30 April 2025
Press Release – The Treasury The majority of the key fiscal indicators for the ten months ended 30 April 2025 were slightly better than forecast. The Governments main operating indicator, the operating balance before gains and losses excluding ACC (OBEGALx), showed a deficit … Jayne Winfield, Chief Government Accountant The Interim Financial Statements of the Government of New Zealand for the ten months ended 30 April 2025 were released by the Treasury today. The April results are reported against forecasts based on the Budget Economic and Fiscal Update 2025 (BEFU 2025), published on 22 May 2025, and the results for the same period for the previous year. The majority of the key fiscal indicators for the ten months ended 30 April 2025 were slightly better than forecast. The Government's main operating indicator, the operating balance before gains and losses excluding ACC (OBEGALx), showed a deficit of $7.4 billion. This was $0.1 billion smaller than forecast. While the core Crown results were favourable to forecast, this was largely offset by the results of State-owned Enterprises. Net core Crown debt was in line with forecast at $184.6 billion, or 43.2% of GDP. Core Crown tax revenue, at $100.4 billion, was $0.7 billion (0.7%) higher than forecast. Corporate tax and other individuals' tax contributed $0.4 billion and $0.2 billion respectively to the above forecast result. Core Crown expenses, at $115.8 billion, were $0.1 billion (0.1%) below forecast. This variance is mostly timing in nature and was spread across a range of agencies. The OBEGALx was a deficit of $7.4 billion, $0.1 billion less than the forecast deficit. When including the revenue and expenses of ACC, the OBEGAL deficit was $11.7 billion, in line with the forecast deficit. The operating balance deficit of $6.7 billion was $2.8 billion higher than the forecast deficit. This reflected both the OBEGAL result and net unfavourable valuation movements. Net gains on financial instruments were $4.3 billion lower than forecast, driven by New Zealand Superannuation Fund (NZS Fund) and ACC's investment portfolios. This unfavourable variance was partly offset by net gains on non-financial instruments being $1.3 billion higher than the forecast loss. This was largely owing to the New Zealand Emissions Trading Scheme with net gains on the liability being $1.1 billion higher than the forecast loss. The core Crown residual cash deficit of $8.4 billion was $0.1 billion lower than forecast. While net core Crown operating cash outflows were $0.4 billion higher than forecast, net core Crown capital cash outflows were $0.5 billion lower than forecast. Net core Crown debt at $184.6 billion (43.2% of GDP) was in line with forecast. With core Crown residual cash broadly in line with forecast, this and minor movements in non-cash items contributed to the net core Crown debt result. Gross debt at $203.5 billion (47.7% of GDP) was $6.3 billion lower than forecast, largely owing to lower than forecast unsettled trades and issuances of Euro Commercial Paper. Net worth at $181.4 billion (42.5% of GDP) was $3.1 billion lower than forecast largely reflecting the year-to-date operating balance result.
