This week, our new Minister of Finance, Enoch Godongwana, presented the government’s spending plans for the next three years. The medium-term budget sets the framework for how much revenue the government is likely to receive, how much it will borrow and how much it will spend.
Details on taxes and spending are provided in the February Main Budget Review.
Like most households, public finances are in bad shape – spending exceeds income with heavy reliance on costly debt. Since 2008, the government has spent more than it received in taxes and the shortfall has been made up by debt.
The only way out of this situation is to balance the books by reducing expenses and increasing income. Here’s what the finance minister’s plans would look like if he ran a household:
GROWTH TO PAY DEBT AND MEET EMERGENCY NEEDS
Any household lucky enough to receive a 13-year check or bonus would likely use that money to pay off debts and help financially struggling family members.
South Africa was extremely fortunate to experience a surge in commodity prices which provided an unexpected increase in income. Revenues are 120 billion rand higher than forecast in the February 2021 Budget Review.
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This windfall will be used to reduce debts and continue support for people affected by Covid-19. An amount of Rand 37.85 billion will go towards tax relief in 2021/2022. This includes an additional R26.7 billion for social grants, R3.9 billion to support Sasria payments to businesses affected by the July riots, and R2.3 billion for business support.
THE PROBLEM OF ADDICTION
In South Africa, there is a high rate of dependency on working family members due to the unemployment rate.
Often referred to as a “black tax”, this puts pressure on most household budgets. Households with children have additional costs to support themselves, including education and health. The Old Mutual Savings and Investment Monitor found that over 40% of households supported not only children but also parents or other older dependents.
The government spends almost 60% (1.06 trillion rand) of its non-interest spending on the provision of free social services, including education, health, housing, subsidies and transport. Known as the “social wage”, this works out to around R4,500 per month per household.
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Excluding the special Covid-19 social distress relief grant, 18.3 million South Africans receive some form of social grant. Based on the 7 million South Africans who pay income tax, this dependency ratio is about 2.5 grant recipients per taxpayer.
Emergency funds allocated to Covid-19 distress grants increased the number of people receiving social grants from 9.5 million to 27.8 million.
To continue with the Covid-19 relief subsidy of R350 after March 2022 at a cost of R40 billion, either new taxes should be introduced or a reduction in spending in other areas. The only way to reduce the “black tax” is to put more people in the family to work – in other words, to increase employment.
THE DEBT SITUATION
Any household where monthly expenses exceed cash coming in, there is a dependency on loans. Since 2008, the government has spent more than it received in tax revenue and borrowed money to cover the deficit. This year alone, the government will have a shortfall of almost 480 billion rand.
Since 2018, the government’s total debt has almost doubled from R 2.788 trillion to R 4.3 trillion.
It is expected to increase by almost 30% to reach 5.5 trillion rand by 2024.
Over the next three years, debt servicing costs will increase by 10.8% per year, preventing the government from increasing spending in other areas.
Public debt is like a revolving loan or a credit card where only the interest is paid and the principal is renewed. Currently, the government spends 21c of each rand collected on interest payments.
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From a household perspective, this would equate to credit card repayments of 21% of your take-home pay. That leaves a lot less money for all the other priorities. Over the next three years, the principal repayment of some debts will become due, meaning the government will have to refinance R 423.4 billion.
A household comparison would be that lump sum payment that is due at the end of your auto finance period. If you can’t pay it off, you take out a new loan.
And as any household knows, the more debt you have relative to your income, the worse your credit report gets. Therefore, lenders charge you a higher interest rate as your risk of default increases.
The rate of interest that the government pays on the debt is higher than the rate of growth of the economy. This means that he cannot simply go into debt. The same goes for households many of which receive less as inflation rises – with increasing living costs, debt servicing becomes more difficult.
REVISE THE EXPENDITURE BUDGET
Continuing to spend more than what you earn is ultimately unsustainable. For any household that wants to reduce its dependence on debt, the place to start would be to find cost savings and use them to target debt repayments.
The Minister of Finance has made a commitment to reduce the expenditure budget. The focus is on reducing the primary budget (non-interest expenditure) with the aim of achieving a surplus by 2024/2025. This excess could then be used to reduce the debt burden. But where do you find these budget cuts and where are you focusing your spending priorities?
A household could reduce their grocery bill by shopping smarter, spending less on non-essentials, and cutting down on utility expenses by using less water and electricity.
Still, it can be a good idea to spend money on things that can reduce your spending over time or generate income. For example, investing in a solar geyser to reduce electricity costs or buying equipment to start a small business to supplement your income.
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In order to grow the economy, the government is focusing on daily consumer spending and more on building infrastructure that will allow the economy to grow, allocating R500 billion for infostructure spending over the three coming years.
As the Minister pointed out, the increase in spending since 2008 has not resulted in higher economic growth or increased productivity. For a household it is like receiving a higher salary but rather than investing it to build wealth you spend it for daily consumption and you wake up one day wondering where all your money has gone.
FIND WAYS TO GROW REVENUES
Besides budget cuts, another way to balance the books is to generate more income. As an employee, you cannot keep asking your employer to pay higher wages so that you can meet their bills. For most households, the only way to generate more money is to start a side business and find other ways to earn extra income.
Likewise, the government can no longer simply rely on increased taxes to meet its expenses, as the tax burden in South Africa is now the highest among developing economies.
Any further tax increases will have a negative impact on economic growth and will actually reduce tax collection. The only way the government can increase its revenues is to grow the economy. The current projected growth rate of 1.7% to 1.8% per year will not solve our financial problems.
And as anyone who has tried starting their own business knows, this is the hardest part for government and beyond the power of the National Treasury to achieve.
This requires structural reform that makes it easier to do business in South Africa, provides a safer environment for doing business and ensures uninterrupted services like energy and transport.
Without economic growth, South Africa will quickly fall into the debt trap and face a default.
This is where the household is best placed under judicial control, or faced with insolvency.