By Nonkululeko Zungu
It’s been two weeks since the annual South African budget speech, one of the most highly anticipated events in the country's political and economic calendar, was given, but that doesn’t mean it’s always easy to understand the significance of what’s being said. In an effort to contextualise all of the ways that our Minister of Finance plans to spend and earn revenue over the next financial year, we have undertaken a little thought experiment: we’ve created a fictional household with an income of R100,000 per year.
This fictional household has a fairly normal household budget which consists of income, spending, investing, borrowing and interest on borrowing. Now let’s take the projected budget of South Africa and allocate the income and expenses into the categories that this household has and see how well or badly the household’s finances are managed.
Fortunately, National Treasury produces 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.
Income
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 2023/2024 financial year, the Income is R1,958.9 billion. This is approximately 3.5% higher than the income for the previous year.
Spending and investing
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. A household would also 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 looked at the various expenditure items in the national budget and decided to allocate the following core spending areas to spending: Learning & Culture, Health, Social Development, Community Development, Peace & Security, General Public Services and other small spending lines. We view Economic Development expenditure as falling under the “investing” category.
For the 2023/2024 financial year, the Spending and Investing categories amounted to R1,897.1 billion. This is approximately 3.4% higher than the expenditure in the previous year.
Interest on Debt
This was simply the published predicted Debt Costs Service of R340.5 billion.
Rainy day Fund
This is the Contingency Reserve of R5 billion. This is to accommodate changes in the economic environment and meet unforeseeable spending pressures.
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. The most startling fact is that this household is spending R14,488 more this year than it is earning. The other troubling observation is that because the household is spending more than it’s earning, it is actually increasing its debt this year.
At this stage, a financial advisor for this household would be quite worried about the situation and words like “debt death spiral” may start to be thrown around. For those who don’t know, a debt death 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, so even more debt is needed and so on. 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.
Step 1
This household could 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 may eventually end badly. In a crisis like this, cutting back on both spending and investments to achieve this may be a good idea. Ultimately, this household needs to find a way to stop spending more than it is earning, since the current situation is worsening the debt and interest spending problem.
Step 2
This household could find ways 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 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).
Step 3
Start paying back the debt. There are two ways to do this. Firstly, this can be done by spending less 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 them 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 Facebook Marketplace.
What can we do?
As individuals, we should aspire to run our finances as best we can.
Here are a few simple principles:
- Spend less than you earn
- Only borrow money to acquire assets (as opposed to borrowing for 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) – then we can do our little bit to help grow the government’s income. And little by little, a little becomes a lot.
Nonkululeko Zungu is an Actuary at Sanlam Indie
** The views expressed do not necessarily reflect the views of Independent Media or IOL.
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