Nerd Sunday: How Budgets work, for people who hate numbers and are cynical more generally

OK, first things first. What qualifies me to talk about the Budget?

I’ll answer as honestly as I can. A few years ago, I worked at Treasury. Since then, I’ve worked in policy jobs in different Ministries, then the private sector. Am I a Budget expert? Well, not really. And by that, I actually mean not at all. But my thoughts are free, and Treasury would be the first to tell you, you get the quality you pay for.

With that in mind, welcome to my intro to how Budgets work. Are you ready for a good time?

What is a Budget? Asking for a friend. A friend who … doesn’t get out much.

At one level, it’s obvious. The Budget is the government figuring out how it will spend its money. Like you and me, government can decide to spend a bit more here and a bit less there - and if it doesn’t balance, the gaps can be plugged by borrowing. Unlike us, the government can also raise tax.

Maybe the more interesting thing is not what the Budget is, but how it’s done. First, the government picks a theme for the next Budget, like it’s a very dull fancy dress party - something like ‘wellbeing’ or ‘economic recovery’ or ‘crushing the poor using the pretext of economic recovery’. Government will also figure out in advance how much they’re keen to spend.

Then the Hunger Games begin. Different Ministers, who are in charge of different pots of money, get their ministries to create Budget bids - basically requests for funding. Often, Ministers will want money for new and shiny things. After all, they’re politicians. But other, less sexy things will also need funding, like IT systems about to fail, or state houses with mouldy ceilings. More on this later.

With all these Budget bids on the table, Cabinet - the group of Ministers who call the shots - has to decide which will get funding and which won’t. New and shiny things, or less sexy things? Education or transport or museums or courts or social workers? There will be winners and losers.

Why does the Budget matter?

To be honest, I’m not sure how much it does matter - or not in the way we might think.

That’s because most of the money government spends just gets rolled over, from one Budget to the next. This is called ‘baseline’ spending. Governments can cut baseline spending if they want to, but it’s a lot of faff. It could mean stopping funding for pointless stuff - but it could also mean doing things the public sees as dick moves, like closing a hospital or cutting benefits.

To give you a sense of scale, the Budget announced an extra $5.9 billion for next year - a shit tonne compared to most budgets - but total government spending for next year will be way bigger, at $128 billion. If baseline spending is the cake, most of what happens on Budget day is icing.

I’d say, the important thing about the Budget is not just the cash. It’s the day the government announces its big ideas and its main directions.

What about inflation and debt - the elephants in the room of that first home you can’t afford?

I can’t think of anything I understand less than inflation, unless it’s online dating.

So here, I’m deferring to the fabulous Bernard Hickey. To summarise brutally, Hickey says most of our inflation comes from overseas. Some of our inflation is driven within New Zealand - but that’s mostly due to housing prices, a craptastic hellscape both Labour and National have created. This means we don’t need to get too worked up about the inflation impacts of government spending.

I don’t know much about government debt either - except that a lot of people want to swipe left on it.

Aotearoa has pretty low debt, compared to some. As the Minister of Finance just said, ‘Our debt is forecast to be around one half of Australia’s, a quarter of the UK’s and a fifth of the USA’s, using a comparable measure’. Yes, low debt can help us weather storms. The government is like you and me - when we’re mortgaged to the hilt, with the credit card maxed out, just one more problem can push us into strife.

The thing I would add is, when government borrows, including to get us through the pandemic, debt is shared by all of us. But when people and families suffer ill effects, like job losses from COVID, they have to borrow too, just to survive. It’s just the debt incurred by poverty, as well as the shame - the school uniforms you haven’t paid off, the slow selling down of what little you own to pay the power bill - is very much an individualised problem.

Either way, the poo is hitting the fan. It’s just a matter of which poo and whose fan.

Watch out for small shenanigans

Righto: we’ve covered some basic Budget ideas. But Budgets aren’t just about bean counters and spreadsheets. They’re political, too. Some governments like to be seen as spenders - others are proud to be penny pinchers. That can influence how they approach Budgets. Here are some details to look out for.

• Think about inflation. We talked about how baseline funding gets rolled over, year to year. If funding stays the same, but inflation is creeping up, it might look OK on the surface, but it’s the same as a bunch of little pay cuts. That’s especially tough for community groups who rely on government funding.
• How many years is that funding for? When the Budget is prepared, it covers spending for the next four years (called the ‘forecast period’). But governments don’t always spell out if they’re announcing one year of funding, or the four-year total. It’s like me boasting ‘I just earned a million bucks!' - and then murmuring ‘over the course of my three-decade working life’, and hoping you won’t notice.
• Can the government actually spend all those smackeroos? Saying you’ll fling out some cash is one thing. But some projects always take time, like building a road. Or, some key ingredients might be missing, like enough people with road-building skills to do the job. These things affect how fast the money can be spent - no matter how sexy the announcement.
• Is enough funding being set aside for the whole thing - whatever that thing may be? For example, if the government plans to build a school, there’s no point setting aside only half of the funding, to make the books look good - because there’s no such thing as half a school. Doing that just saves up a nasty bill for later. Classic shenanigan.

Watch out for BIG shenanigans

Remember how we talked about new and shiny things, versus less sexy things?

Governments don’t always make good decisions for the future. Sometimes the reasons are cynical. They like to whip up excitement on Budget day, and they know no one gets excited about things like prudently maintaining infrastructure - or not, at least, until Wellington ends up with sewage running down its streets.

People get even less excited about preparing for things that may or may not actually happen. It’s hard to imagine now, but only three years ago, no one had heard of public health units, the organisations that have carried out contact tracing during COVID, saving tens of thousands of kiwi lives. These units were underfunded, neglected, forgotten. It’s a miracle, that, against the odds, they rose to the challenge.

Simply put, governments know they can ignore these kinds of problems. By the time the poo eventually hits the fan, odds are it’ll be another government’s problem. The current government is trying to fix this, creating new rules to hold governments to account for future wellbeing - not just narrow issues of dollars and cents. It’s a good idea, but too early to know whether it’ll work.

Cynicism aside, it’s not so bad

The first Budget I worked on was at Treasury, early in my public service career, and I found it daunting. Treasury has the job of pulling the Budget together - stressful and hard even when things are going well.

I wasn’t the typical Treasury type, in politics, personality or qualifications. The ideas of the Budget were utterly new to me, intimidating at first - but after a time, I could see the sense in them, even though they were cloaked in big numbers and fancy words. I realised these ideas are important. We need to demystify them. The Budget belongs to all of us, after all.

Systems and processes are made by people, and people are only human - even Treasury people. They’ve even got some great stories. One year, or so I was told, there was Budget funding for an extension to the airport in Manukau. Someone at Treasury made a typo, bestowing the funding on Manakau, a town of some 500 people eight kilometres out of Ōtaki. The mistake was caught in time. But to this day, the Horowhenua doesn’t have an international airport, in what feels like a missed opportunity for New Zealand’s global tourism reputation.

We could have been Levin the dream.