Running a household on limited funds is not unlike managing the budget of a country
National Treasury has done a remarkable job in developing a budget for South Africa. Last year it was rated
as the most transparent budget in the world according to International Budget Partnership (IBP), an
organisation that measures the transparency of government spending.
Every year the Finance Minister has to strike the right balance between income and expenditure to try to
meet the needs of all South Africans from a very limited tax base. Similarly, local households face budget
constraints each month. We can use the national budget as an example when drawing up our household
1. Have a budget
It would be inconceivable for a country not to have a budget. Imagine if government set no budget and just handed cash over to departments to spend as they wanted? The country would be bankrupt within a year.
Know how much income you have and the value of the bills that have to be paid. Then prioritise how the money will be spent because there is always a limited amount of money available for financial
commitments, necessities and luxuries.
2. Manage debt
The government, like many households, has to pay for its debts and this forms part of the budget. For the
next financial year, 15% of the budget will be spent on debt costs.
Since 1996, when Trevor Manuel became Finance Minister, South Africa has worked hard at reducing its
debt levels. The total debt owed by the country fell from 49.5% of GDP in 1995 to 22.6% by 2008.
The result is that less of the budget is allocated to paying off debt which means that more is available to
spend on areas like education, health and infrastructure. Low debt levels also helped us to survive the
financial crisis that hit in 2008: unlike most developed countries where national debt levels were well over
60%, South Africa was able to continue to service its debts and we were not faced with the financial
meltdown of countries like Ireland and Greece.
Currently, South Africa has a total debt ratio of 40% to GDP and Minister Gordhan stated that when
government decided to take on further debt in light of the crisis, it had to make sure it had a plan to repay
the debt so that it does not become a burden on future generations.
Focus on reducing your debt. Ideally, your debt repayments should be about 25% of your monthly income and should never exceed 30%. Having a good credit record will also put you in a stronger position should you face a financial crisis.
3. Save for emergencies
During our period of strong economic growth, rather than giving into the temptation to blow the country’s
entire income, the Finance Minister ran a budget surplus. This meant that government spent less money
than it received, creating a buffer for when economic conditions changed.
Due to the financial crisis, South Africa is now running a budget deficit as tax revenues have fallen.
However, the deficit is still manageable and, because of our low overall debt levels, the government has
been able to borrow money at very favorable rates.
The Minister stated that it is important to use good economic times to boost savings.
Your budget needs to make provision for emergency savings as you never know when your financial
situation will change. Try to put away 5% of your income into a money market account each month.
Increase your savings while interest rates and debt repayments are lower.
4. Save for the long term
Government’s role is not to save money for the long-term as that money is better spent in the economy. However, expenditure on infrastructure can be seen as a form of long-term saving.
Economists estimate that for every R1 the government spends on infrastructure like roads and
telecommunication, the economy receives around R2 in economic benefit. This is unlike other areas of
spending such as health and social grants which bring immediate relief but which do not build long-term wealth.
Apart from meeting your day-to-day expenses, you need to include long-term savings that can grow and provide you with an economic benefit in the future.
5. Maintain discipline
If you think you face pressure to spend money, imagine being the Finance Minister!
Every government department would like more money and there is a great deal of political pressure to loosen the purse strings. National Treasury requires departments to submit their own budgets and to be accountable for the money that they are receiving. According the Minister he received budget requests from the departments totalling R1.3 trillion! That was R350bn more than the total budget - he has to know when to say “no”.
When your children are demanding the latest iPhone or Playstation, make them budget for it out of their pocket money. If you want to spoil yourself, budget for it and do not use debt to fund luxuries