By: David Crossley, CFP® and Business Manager at BDO Wealth Advisers
Have you ever stopped to think why we are treated to this Parliamentary spectacle every year in February?
Actually it happens twice every year, but the second event is called the “Mini Budget.”
In South Africa, it is the only time when silence and decorum reign in the house and the Minister has everyone’s rapt attention.
So why do we have a National budget?
When we boil down the budget for the country and our own budgets, there is actually very little difference.
Sure, the figures are a bit bigger for the National budget, but essentially we both do our respective budgets for the same reason.
We need to know how much money we are earning to ensure that we have enough for all our expenses. Most of us have one source of income – our remuneration from our employer against which we balance our monthly expenditure.
If we do this properly, we should have a surplus and if we don’t then we have to resort to borrowing to balance our budget.
The National Budget follows the same sort of process, albeit a little bit more complicated.
Remuneration is in the form of taxes derived from a variety of sources – personal income tax, company tax, VAT, fuel levies, taxes on alcohol and tobacco and dividends and estate duty tax – the list is longer than this but nevertheless it is still a form of remuneration to the government.
Against this income comes the inevitable expenditure – government employee remuneration, social benefits, health, education, capital projects, local government – the list is almost as endless.
At the same time, the national budget incorporates a cost for repayment of loans – a bit like you and I cater for our bond, car and sundry loan repayments.
The difference here is that the government’s loan repayments amount to 168 BILLION rand a year! That money has to be recovered from you and me through taxes.
The consequences of not sticking to a budget have similar ramifications for both individuals as well as the national government.
If we become indebted to the extent that we cannot pay our debts, we will eventually be blacklisted by banks and we can even be declared insolvent.
The government in a similar scenario can also be blacklisted – Ratings agencies will downgrade the economic status of a country to that of junk status. This means that the cost of borrowing money becomes prohibitive or even impossible.
If you don’t think that national governments can go bankrupt, then visit Greece!
So next time you listen to or read about the annual budget speech and the outcomes, it is really no different from you and I maintaining our budgets and ensuring that we stay on the right side of managing our finances.
Read more BDO Insights