A simple principle to make your budget balance is to spend less than you earn. Picture 123RF/WAVEBREAK MEDIA
A simple principle to make your budget balance is to spend less than you earn. Picture 123RF/WAVEBREAK MEDIA

In an effort to contextualise the latest projected national budget, we look at what it would mean if it was the budget of a fictitious household with an income of R100,000 a year to see how well or badly the household’s finances are managed.

Income

In the national budget, all the projected revenue collected through taxes (such as the income tax you pay), duties and levies for the 2020/2021 financial year are expected to come to R1,583.9bn.

Spending

In a normal household, spending would typically cover costs such as utilities, food, security, medical expenses, education for children, charity, insurance, dining out and entertainment. 

In the national budget, the core spending areas are: learning and culture, health, social development, community development, peace and security, and general public services. Adding these categories together gives a total of R1,508.7bn.

Investing

A normal household will choose to invest to create additional income and assets in the future. In the same way, the government spends some of its budget on things that should increase revenue in the future, primarily through economic growth. The economic development budget of R211.5bn can be regarded as the government’s investing category.

Interest on debt

In the national budget, the predicted cost of servicing debt is R229.3bn.

Making sense of the numbers

To get a grip on these big numbers, we recalculated all the spending items relative to the simpler household income of R100,000.  

Looking at the budget this way, the most startling thing is how this household is spending over R23,000 more a year than it is earning. 

The other troubling observation is that this household is not paying off any of its debt. In fact, because this household is spending more than it’s earning, it is actually increasing its debt this year.  

A financial adviser looking at this household’s expenses would be quite worried that it was getting into a “debt spiral”. This happens when a person has borrowed so much money that the interest owed on that debt becomes so high 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.

In the last financial year, this same household spent R21,500 more than it earned in income, which was added to the debt pile. This increased debt meant that this household will have to spend R14,477 on interest this year, compared to R13,500 in the previous one.  

Looking a year ahead, this household can expect to spend R15,360 on interest payments (from R100,000 income earned) — another R900 more in interest costs from this year.  

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. Let’s assume this household can’t — as the government is also unable to do — go into debt rescue and has to pay back its debts in full.

Step 1

This household should cut back on spending across the board and investments so that it can stop borrowing. Continual borrowing and the resulting increase in interest costs on that debt will eventually come to a bad end. 

Step 2

This household should 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, although, as finance minister Tito Mboweni points out, any further increases in personal income tax may have the opposite effect, which is lowering revenue. 

The other option for the 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 generate the money to do this: spend less than you earn and use the budget surplus to pay down the debt; or sell assets (such as a second car) and use the proceeds to pay off debt. 

Given the current budget shortfall and economic growth outlook, the first solution seems unlikely at the moment.  

Unfortunately, for the country, it would 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 doesn’t take rocket science to get it right in theory, but it can be difficult to put this theory into practice.

The simple principles are:

  1. Spend less than you earn.
  2. Only borrow money to acquire assets (as opposed to borrowing for spending).
  3. Invest the difference between what you earn and spend.
  4. Income generated from these investments, over time, should passively increase your income, which means even more can be re-invested.

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.

• Castleden is CEO of Sanlam Indie.

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