Budget 2025: How Does Government Spending Actually Work?

Monday, 19 May 2025, 4:31 pm
Article: RNZ

Susan Edmunds, Money Correspondent

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."

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