Government faces the same tough choices as South African households when it comes to its budget.

Last week our new finance minister Enoch Godongwana laid out the plans for government’s spending over the next three years.

The medium-term budget lays out the framework of how much income the government is likely to receive, how much it will borrow, and how much it will spend. The details around taxes and spending are provided in the main budget review in February.

Like most households, government finances are in bad shape. Spending exceeds income with a high reliance on expensive debt.

Since 2008, government has spent more than it has received in taxes and the shortfall has been met by debt. The only way out of this situation is to balance the books through spending cuts and higher income.

This is what the finance minister’s plans would look like if he was running a household:

Windfall to pay debt and meet emergency needs

Any household fortunate enough to receive a 13th cheque or bonus would probably use this money to pay off debt and assist family members who are in financial difficulty.

South Africa has been extremely fortunate to experience a boom in commodity prices which provided an unexpected revenue boost. Revenue is R120bn higher than forecast in the February 2021 budget review. This windfall will be used to reduce debt obligations and to continue with support for those impacted by COVID-19.

An amount of R37.85bn will go to fiscal relief in 2021/2022. This includes a further R26.7bn for social grants, R3.9bn to support SASRIA payments to those businesses impacted by the July riots, and R2.3bn in business support.

The dependency problem

In South Africa there is a high rate of dependency on working family members due to the rate of unemployment. Often referred to as a “black tax” this puts pressure on most household budgets.

Households with children have the additional costs of providing for them, including education and health. The Old Mutual Savings and Investment monitor found that more than 40% of households were supporting not only children but also parents or other older dependents.

Government spends nearly 60% (R1.06 trillion) of its non-interest spending on providing free social services, including education, health, housing, grants, and transport. Known as the “social wage”, this equates to around R4 500 a month per household.

Excluding the special COVID-19 social relief of distress grant, 18.3 million South Africans receive a form of social grant. If one based that on the 7 million South Africans paying income tax, that dependency ratio is around 2.5 grant recipients per income tax payer.

The emergency funds allocated for COVID-19 distress grants increased the number of people on social grants by 9.5 million to 27.8 million. To continue with the Covid relief grant of R350 past March 2022 at a cost of R40bn, either further taxes would need to be introduced, or spending cut in other areas.

The only way to reduce “black tax” is to have more people in the family working – in other words, to increase employment.

The debt situation

For any household where the monthly spending exceeds the money coming in, there is a reliance on loans.

Since 2008, government has spent more than it has received in tax revenue and has borrowed money to meet the shortfall. This year alone, government will have a shortfall of nearly R480bn.

Since 2018, the total debt owed by government has nearly doubled from R2.788 trillion to R4.3 trillion and is expected to increase by nearly 30% to reach R5.5 trillion by 2024.

Over the next three years, debt-servicing costs will rise by 10.8% per annum, crowding out the ability of government to increase spending in other areas.

Government debt is like a revolving loan or credit card where only the interest is paid and capital is rolled over.

Currently government is spending 21c of every rand collected on interest payments. From a household perspective that would equate to your credit card repayments making up 21% of your take-home pay. That leaves a lot less money for all the other priorities.

Over the next three years the capital repayment of some debt will become due, which means government will need to re-finance R423.4bn. A household comparison would be that balloon payment that comes due at the end of your car finance period. If you can’t settle it, you take out a further loan.

And as any household will know, the more debt you have relative to your income, the worse your credit record becomes. This results in lenders charging you a higher interest rate as your risk of default increases.

The interest rate government is paying for debt is higher than the rate at which the economy is growing. This means it cannot simply grow itself out of debt. The same applies to a households, with many receiving lower-than-inflation increases. With increasing living expenses, servicing debt becomes more challenging.

Revising the spending budget

Continuing to spend more than you earn is ultimately unsustainable. For any household that wants to reduce its reliance on debt, the starting point would be finding cost savings and using that to target debt repayments.

The finance minister committed to cutting the spending budget. The focus is on reducing the primary budget (non-interest spending) with the aim to be running a surplus by 2024/25. This surplus could then be used to reduce the debt burden. But where to find those budget cuts and where do you focus your spending priorities?

A household could cut the grocery bill by smarter shopping, spending less on non-essentials and reduce spending on utilities by using less water and electricity. Yet, it may make sense to spend money on things that may reduce your expenses over time or generate an income. For example, investing in a solar geyser to reduce electricity costs or buying equipment to start a small business to supplement your income.

In order to grow the economy, government is focusing on spending less on day-to-day consumption and more on building infrastructure that will enable the economy to grow, allocating R500bn for infrastructure spend over the next three years.

As the minister pointed out, the increased spending since 2008 had not resulted in higher economic growth or an increase in productivity. For a household, it is like receiving a higher salary but rather than investing it to build wealth, you spend it on day-to-day consumption and one day wake up to wonder where all your money went.

Find ways to grow revenue

Apart from budget cuts, another way to balance the books is to generate more income. As an employee, you cannot keep asking your employer to pay a higher salary so you can meet your bills. For most households the only way to generate more money is to start a side business and find alternative ways to earn an additional income.

In the same way, government can no longer simply rely on increasing taxes to meet its expenses, as the tax burden in South Africa is now the highest among developing economies.

Any further increase in taxes will have a negative impact on economic growth and actually reduce tax collection. The only way for government to increase revenue is for the economy to grow. The current projected growth rate of 1.7% to 1.8% a year will not solve our financial problems.

And like anyone who has tried to start their own business will know, this is the hardest part for government to achieve and is beyond the power of National Treasury.

It requires structural reform which would make doing business in South Africa easier, providing a safer environment for business and ensuring uninterrupted services like energy and transport.

Without economic growth, South Africa will quickly slide into a debt trap and face default. This is where the household is placed under court-ordered debt review at best, or faces insolvency.

This article first appeared in City Press.