Federal budget: Where does all the money go?

MY credit card provider has designed a frightening new website which reveals a pie chart of where all my money goes. 
 
Let's just say, if my spending was a pie, it'd be more sugary jam doughnut than protein-packed meat pie.

If you don't keep a proper track of your spending, it's easy for it to get out of control.

It's the same with government spending. How can we as citizens make informed decisions about where we think our tax money should be spent, if we have no idea where it actually spent?

So go on. Have a guess. What do you think is the number one biggest area of Federal Government spending? Health? Education?

Sorry, nil points. By far the biggest item in the federal budget next Tuesday is social security and welfare.

Of the $376 billion the government will spend this financial year (according to the latest estimates provided last December) more than a third, or 35 per cent, will be spent on welfare.

Far and away the biggest function of the federal budget is to raise money from those who have it to give over to those who need it.

Does that sound alarmingly socialist to you? It might help to know that all the major developed countries of the world have redistributive tax systems.

Providing a social safety net is the biggest cost of government in most advanced economies.

So where does all this welfare money go? To those welfare cheats and dole bludgers?

Again, you might be surprised. By far the biggest cost in the welfare budget is the cost of the aged pension.

The aged pension is predicted to cost $37 billion this year rising rapidly to $45 billion by 2015-16.
It is estimated another 220,000 older Australians will start drawing down an aged pension in the coming four years.
As the hairs keep turning grey and our population ages, this is only going to get more expensive.

The second biggest welfare spend is on family benefits, of which $20 billion is distributed to families a year.

About 60 per cent of Australian families receive a family benefit from the government. It all adds up.

And then we finally come some of the poorest and neediest members of society. Providing a pension to people with disabilities costs a further $15 billion a year, followed by the dole at $9 billion and money for carers at $6 billion.

After welfare, the second biggest chunk of the federal budget is healthcare.

Again, our greying hairs are a drag not just for us, but the budget too. The Medicare system ($18 billion) and pharmaceutical benefit scheme ($10 billion) are some of the biggest and fastest rising costs in the budget.

All up, the Federal Government pays $61 billion a year on health. This is set to escalate to $71 billion by 2015-16.

As countries become richer it is common to spend more on health as new technologies become available. Health spending is what economists call a "luxury good"  we spend more on it as our incomes rise.

After all, if you don't have your health, what do you have?

In third place in the budget comes education spending at almost $30 billion a year, including funding for universities, non-government schools and some funding for public schools (although states still pick up most of the tab for public schools).

Next comes the amorphous sounding "general public services", includes the cost of running parliament, the Governor-General, collecting taxes, managing public funds and the foreign affairs service.
In fifth place comes defence spending at $21.5 billion.

By now, we have accounted for two thirds of government spending.

It's important to know that another $50 billion of government "spending" is just the Federal Government handing over the revenue raised by the GST to the states to spend.

Other expenses of note include $12 billion in interest payments on the government's debts and $2.3 billion managing immigration. Yep, it all adds up.

Where does the money come from? The Federal Government gets revenue from a number of sources.

Top of the list is you and me, and the taxes we pay on our personal income.Of the $369 billion in revenue the government expected to raise this financial year about 35 per cent, or $160 billion, will come from individuals.

So interestingly, almost every dollar of income tax collected from Australian citizens eventually finds its way back into the pockets of other Australians.

In fact, thanks to some inefficient "churn" in our tax and welfare system, some of the tax you pay come tax time will be paid back to you as benefits.

Another third of government revenue is raised by the two other biggest revenue raisers: the 30 per cent tax on company profits ($73 billion) and the goods and services tax ($48 billion) which, of course, you and I pay too.

Together these three big taxes  personal income tax, company tax and the GST  pull in more than three quarters of all the money flowing in Treasury's coffers.

The final quarter is raised through a grab bag of taxes and excises, including $6 billion in excise on petrol, $6 billion from ciggies and $2 billion from beer.

The much-discussed carbon and mining taxes were only ever expected to pull in $4 billion and $3 billion a year respectively. And that money has all but disappeared.

So that's about the size of it. Some things to keep in mind when the Treasurer delivers his budget next Tuesday. See you next week, if I survive the budget lock-up. Where does it all go?

The Top 10 biggest Federal Government spending items:

$376 billion
Total spending in 2012-13, as forecast last December

$37 billion
Aged pension

$20 billion
Family tax benefits

$18 billion
Medicare services

$15 billion
Disability support pension

$10 billion
Pharmaceutical benefits scheme

$9 billion
The dole

$8 billion
Money for private schools

$8 billion
Residential aged care

$7 billion
Funding for universities

$7 billion
Public sector superannuation

news.com.au 12 May 2013