State’s plan of spending and income is like ours

To many of us the national Budget, read by Finance Minister Pravin Gordhan last Wednesday, may seem like a complicated assortment of government issues that we will never truly understand

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But the truth is that if we look at the country and the economy as we do our own households, we are all experts already.

Take, for example, one of the most talked about and worrisome indicators of the national spending plan: the budget deficit. We are all familiar with deficits; they arise when you spend more than you earn and this is exactly the position the government has gotten itself into.

Spending for the 2013/14 fiscal year is forecast at R1.15 trillion, but projected revenues will only account for R985.7 billion of that, leaving a gaping deficit of R190bn, a substantial 6.1 percent of gross domestic product.

When a deficit occurs, the government, like us, needs to borrow from future earnings. We do this by dipping into an overdraft on our transaction accounts, maxing out our credit card limits, or even turning to a loan provider. The government equivalent is to turn to debt in the form of bonds or borrowing directly from international credit suppliers.

Money is never free and like us, when the government borrows, it pays interest on its debt, which now totals R1.2 trillion.

Have you ever watched wistfully as the interest payment on your mortgage gets deducted and wondered what else you could have done with that money? Gordhan goes to bed with exactly the same sentiments as R88.3bn in the 2012/13 fiscal year went just to paying interest. That was R15bn more than the budget for the entire national police force and only R25bn less that the state’s total allocation for health.

When you go to a bank and ask for a loan, the first thing they will want to know is your likely capability of paying it back and how much of a risk it is to lend to you.

The interest rate the bank charges you will depend on these two things: the higher the risk that the bank can’t get its money back, the higher the interest you must pay to compensate for that.

Over the past six months South Africa’s sovereign credit rating (a measure of how safe it is to lend to the government) has been downgraded by all the major international rating agencies. Their primary reason is the increasing budget deficit.

Just like us, when the gap between the government’s spending and revenue increases, it becomes a more risky borrower and it needs to pay higher interest rates to incentivise the market to lend it money.

There are many other similarities between the national Budget and our own. Sixty percent of the budget went to social services, education, social protection, health and housing. If you relate “social protection” to the expenses of looking after your non-earning family members, these items mostly likely represent the majority of your personal budget as well.

In this year’s Budget the government’s focus on internal tightening of spending and the weeding out of corruption came across very clearly. We can all relate to this; when times get tough we evaluate our own wasteful spending, cut down on luxuries, and react more strongly when the people around us misuse the things we spend on.

The details may be a quagmire of technicality, but the overriding principles of how the government manages its spending, and indeed how it runs the country, are no different to how we manage our own lives.

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision-Making course. Follow him on Twitter @PierreHeistein.