Discipline, strong leadership can rescue SA

Image: Halden Krog © The Times

A country's budget is like a typical household budget, the key difference is in the scale.

Consider a family of four - two parents and two children. The parents both work and earn an income.

In national budget language, that income is called revenue. The household also spends money on rent, food, transport, school fees and the like, and that is called expenditure. To be in the black, the family's income must exceed its expenditure. The opposite - in the red - is a budget deficit.

If the family is in deficit it can do two things to overcome that, it can either generate more money or reduce its expenditure. To generate more income the parents can work more hours or take on additional employment. To reduce expenses the family can minimise wasteful expenditure or do without certain things. Failing these measures, the household must borrow money.

The larger SA household which is the government is forecast to generate income of R1.5-trillion in the 2018/19 fiscal year and to spend
R1.7-trillion over the same
period, which will result in a deficit of R202 bn. A fiscal rule of thumb is that the deficit should not exceed 3% of gross domestic product.

SA's budget deficit is forecast to be 4% of GDP in 2018/19, 4,2% in both 2019/20 and 2020/21 and again 4,0% in 2021/22. A deficit of above 3% of GDP is not in itself a bad thing, if the excess expenditure is used on items that will bring about a positive return in the future, such as a car, which will ensure that the parents can get to work to earn income for the family.

The bigger South African family however, has not been that prudent with its money. It spends a disproportionate amount of money on current expenditure, such as salaries for government workers, instead of fixed investments which will earn a positive return in the future.

To cover its deficit the South African government has had very little choice but to borrow money. Borrowed money attracts interest, in this case the interest is estimated at a whopping R181bn in 2018/19 and R203bn in 2020/21. That is money it could spend on other priorities.

This is a cautionary tale if ever there was one and makes it clear that the family cannot just spend more money to better their lives if they must borrow money to do so.

Of course, when a family goes into too much debt, the ability to borrow more is hurting.

In a household this could mean a negative credit record which also affects the interest rate charged.

Countries are no different, with SA's credit rating deteriorating since 2012.

Of course, it does not help when the children in the SA family throw tantrums and ask for unaffordable goodies the parents can scarcely afford.

Besides cutting expenditure, the South African family has also demanded a bigger contribution to the communal spending pot from wealthier family members in the form of higher taxes.

Of course, it is not only the wealthiest relations that have had to contribute more to the communal pot, recently, Value Added Taxes were increased to ensure that all South Africans - wealthy or poor - contributed more to the pot.

Asking South African family members to pay more is not a sustainable way of closing the country's spending gap. A better way would be to send more parents to work so that they earn an income.

It is probably not too late to turn the country's fortunes around, but it will take strong leadership and fiscal discipline to do so.

-  Radebe is an economist with Nedbank.