Guide to Interpreting Budget Decisions
The Budget process primarily focuses on additional funding
The annual Budget is the main process for funding new government initiatives, services and policies. Funding is also provided for existing activities that are facing cost pressures, for example, due to increased demand for services that cannot be met through existing funding.
The funding allocated through the Budget is additional to existing and ongoing Government expenditure, known as baseline expenditure
Most Government funding is assumed to continue at the same level every year, in line with an approach known as fixed nominal baselines. Details of all new and existing expenditure, organised into specific areas of spending known as Votes and appropriations, are included in the Estimates of Appropriations authorised by Parliament each year.
The amount of new funding available at each Budget is set aside in envelopes called allowances – split into an annual operating allowance and a multi-year capital allowance (MYCA) covering four Budgets
The operating allowance is generally for the day-to-day spending of the government, such as public servants' salaries, welfare benefit payments and the running of the health system. Operating funding is usually provided on an ongoing basis, leading to a permanent increase in baseline expenditure.
The multi-year capital allowance provides funding for assets that will increase the value of the Crown's balance sheet, for example investment in Crown-owned infrastructure such as schools and hospitals.
The amount charged against allowances for each initiative is the total impact across the forecast period
The forecast period is the number of financial years (the period between 1 July and 30 June) that the Treasury looks ahead when outlining New Zealand's financial position to the public. The forecast period covers the next four financial years, plus the current financial year ending on 30 June.
For operating funding, the figure we count against allowances is the total spending across the five-year forecast period. Even where an initiative is funded on an ongoing basis, only the funding within the relevant forecast period will be counted against allowances. For example, for an initiative providing $2 million per year of operating funding beginning in 2023/24 (the second year of the forecast period), the total allowance impact will be $8 million.
For capital funding, we look a bit further ahead, using a ten-year total instead to better reflect the one-off and often uneven nature of capital investment.
Allowances and initiatives are presented in Budget material either as an annual average amount, or the total amount across the forecast period
Operating allowances are usually presented as an annual average amount of funding available across the next four financial years. The funding amounts for operating initiatives are presented as the total impact of the initiative over the forecast period, unless otherwise specified. For example, Budget material might say “we are spending $8 million in operating funding on this initiative”, rather than “we are spending $2 million per annum beginning in 2023/24”.
Capital allowances are always presented as the total amount of funding available across the four Budgets covered by the multi-year capital allowance. The funding amounts for capital initiatives are always communicated as the total impact of the initiative over the next ten years.
Budget 2022 introduced new processes that impact multiple allowances
Two new processes were introduced in Budget 2022 that spread the fiscal impacts of decisions across multiple Budget operating allowances. Two Budgets' worth of funding for the Health portfolio was agreed through the Budget 2022 process, with the funding impact counted against the Budget 2022 and Budget 2023 operating allowances.
The ‘cluster’ process piloted in Budget 2022 provided three Budgets' worth of funding for two groups of agencies in the Justice and Natural Resources sectors. This funding was counted against the Budget 2022, Budget 2023 and Budget 2024 operating allowances.
In some circumstances, spending can be counted against other funding sources
While the allowance framework is the primary tool used to manage Government expenditure, other sources of funding have been used in recent years.
A process was run alongside Budget 2023 to agree a package of initiatives responding to the climate crisis. This package was funded from the Climate Emergency Response Fund (CERF), which is an ongoing fund that is not tied to a particular financial year, and covers both operating and capital expenditure across the forecast period. It utilises revenue from the available cash proceeds from the New Zealand Emissions Trading scheme.