By Indie CEO Peter Castleden
Every year around mid-February, the news cycle turns its focus to the national budget speech. Everybody knows how important it is for the country and our economy, and for a few days following the budget speech many of us recycle expert commentary as our own and pretend to know what we’re talking about. For ordinary South Africans, the outcome we typically care most about is how the new budget is going to affect our pockets. Will we have to pay more in income tax? How much more will my fuel cost? Will my parents’ old age pension increase?
Although these questions are important, the bigger budget itself is a great way to gauge the health of the country, which will ultimately affect all of us in the longer term. We suspect that most of us don’t really pay much attention to the bigger budget because we struggle to make sense of it. For many of us, when numbers get into billions and trillions, and jargon like “percentage of GDP” is thrown around, we tend to disengage and have little chance of really understanding what’s going on.
Simplifying the budget
In an effort to contextualise the latest projected national budget, we conducted a little thought experiment: we created a fictional household with an income of R100,000 per year. And this fictional household has a fairly normal household budget which consists of income, spending, investing, borrowing and interest on borrowing. We then took the projected budget of South Africa, and allocated the income and expenses into the categories that this household has to see how well or badly the household’s finances are managed.
Fortunately, National Treasury produce a really handy summary of the budget which makes this experiment a little easier. It’s certainly debatable how we allocated the different national expenditure lines to the various household budget categories, but we tried to keep things simple.
This was the easiest one since we could simply allocate all the projected Revenue collected through taxes (like the income tax you pay), duties and levies into this line. For the 2019/2020 financial year, the Income is R1,455.2 billion.
In a normal household, spending would typically cover costs such as utilities, food, security, medical expenses, education for the children, charity, insurance, dining out and entertainment. We looked at the various expenditure items in the national budget and decided to allocate the following core spending areas to spending: Health, Learning & Culture, Social Development, Community Development, Peace & Security, General Public Services and two other small spending lines.
Adding these categories together brings us to a total of R1,290.9 billion.
A normal household will choose to invest primarily to create additional income and assets in the future. In the same way, the government spends some of its budget on things which should increase revenue in the future primarily through economic growth. We allocated the full Economic Development budget of R192.4 billion to the Investing category.
Interest on Debt
This was simply the published Debt Costs Service of R182.2 billion.
Making sense of the numbers
In order to get a grip on these big numbers, we recalculated all the spending items to be relative to the simpler household income of R100,000.
There are a few interesting observations we can see from this picture now. The most startling is that this household is spending R14,400 more this year than it is earning. The other troubling observation is that this household is not paying off any of its debt. In fact, because the household is spending R14,400 more than it’s earning, it is actually increasing its debt each year.
At this stage, a financial advisor for this household would be quite worried about the situation and words like “debt spiral” may start to be thrown around. For those who don’t know, a debt spiral can start when a person has borrowed so much money that the interest owed on that debt becomes so high that the person has to borrow even more to survive. This further increases the interest cost, making the problem worse and even more debt is needed and so on and so forth. It normally doesn’t end well.
How do we turn the tide?
If this was a normal household, there are a number of interventions which would need to be put in place immediately. We’re going to make the assumption that the South African government can’t go into debt rescue, and will want to pay back its debts in full.
This household should cut back on spending across the board so that it can stop borrowing. Continual borrowing and the resulting increase in interest costs on that debt will eventually end very badly. In a crisis like this, cutting back on both spending and investments to achieve this would be a good idea.
This household should look to find what it can do to increase its income. For ordinary people, this may mean looking for alternative employment or starting a side hustle. For a government, this can only be done by increasing its tax revenue. This can be done through tax increases, although much research suggests that any further increases in personal income tax may have the opposite effect of lowering revenue. The other option for this government is economic growth which will mean more people working (which is more personal income tax), more spending from these people (more VAT) and more corporate profits (more corporate tax income).
Start paying back the debt. There are two ways to do this. Firstly, this can be done by spending less than we’re earning and using the budget surplus to pay off debt. Given the current budget shortfall and economic growth outlook, this solution seems unlikely at the moment.
The second option would be to sell off existing assets and use the proceeds to pay off some of the debt. If a household was in this situation, yet had some assets which had some value (like a second car), they could sell it to pay back some debt to make it more manageable. Unfortunately, in the case of South Africa, it’d be tricky to start selling any of the government’s assets on Gumtree.
What can we do?
As individuals, we should aspire to run our finances as best we can. It’s not entirely rocket science to get it right in theory, but we know how difficult it can be to put this theory into practice.
So here are a few simple principles:
- Spend less than you earn
- Only borrow money to acquire assets (as opposed to borrowing to fuel spending)
- Invest the difference between what you earn and spend
- Income generated from these investments, over time, should passively increase your income which means even more can be reinvested.
If each of us is able to grow our wealth – paying taxes, creating jobs and spending money (wisely) as we do – then we can do our little bit to help grow the government’s income. And little by little, a little becomes a lot.