Apart from the usual – personal tax cuts, more money for the police and the obligatory groans from the smokers and drinkers – the budget deficit made a comeback.
There was a lot of public hand-wringing about its return, but why should you care?
What is a budget deficit?
It's a feeling many of us know too well: spending more than we earn.
When a government runs a deficit, it receives less money from tax than it spends.
While we turn to credit cards and overdrafts to fund the difference, governments have a couple of other options:
A government can sell some of its assets – like state-owned companies or property. It can also print more money to pay local bills. This can be a dangerous game. The more money you print, the less valuable it gets – Zimbabwe is a painful case in point.
Most governments turn to bonds to earn some money. Bonds are like IOU's. In return for the money, a government undertakes that it will repay the amount by a specific date in the future. Regular interest payments are made at fixed intervals.
SA has been spending less than it received from tax – running budget surpluses – for the past three years.
Why the return of the budget deficit?
The sharp slowdown in the local economy – primarily due to the global crisis – means SA businesses are earning less money. Less income, less tax. Government is getting less in.
At the same time, like governments worldwide, SA is also trying to boost its own economy with state spending to prevent it from collapse.
The government is nervous about the SA economy. It has been growing steadily for the past couple of years, but the official estimate is now that it will only expand by 1.2% this year. Some economists think that too optimistic and expect a recession. (That's when the economy shrinks for at least six consecutive months.)
Already thousands of South Africans have lost their jobs, as the overseas' demand for local cars and metals dry up.
Government is hiking its spending, hoping that it will create jobs and keep the economy afloat. Over the next three years, it will invest R787bn on improving electricity, water, rail and other infrastructure.
Since government spending represents about a third of total spending in SA that could help save the economy.
But it comes at a cost. This year, government will spend an estimated R93.9bn more than it will get it.
Where will the money come from?
Overseas investors are currently very jittery – and cash-strapped. Lending money to an African government won't sound enticing.
Therefore, the SA government will turn to the local bond market. The state will issue bonds, which should then be bought on auction by pension funds and other large local institutions.
How can the budget deficit affect you?
1. More debt means government will spend more of its income on paying interest in the years to come. This could become a big problem if government runs large deficits for many years.
Because of the debt payments, government will have less to spend on services like schools, hospitals, the police and welfare. In the end, it will also mean less money to spend on infrastructure.
2. Higher taxes. Higher debt repayments will put a squeeze on government, and it may turn to the middle and higher income groups to increase their taxes and hike its income.
3. Higher interest rates. As government takes on more debt, its financial position deteriorates and investors get more nervous about its ability to repay debt. They will demand higher interest rates in return for the higher risk. This will push interest rates up for everyone in the market.
Also, if government wants to borrow a lot of money, it runs the risk of crowding out businesses who also want financing.
This will discourage new investments and the creation of new jobs.
4. A government with a lot of debt does not inspire confidence. Businesses will think twice before investing in the country, hurting job prospects and growth, and consumers won't have the confidence to buy cars and houses.
Why you shouldn't lose your beauty sleep – for now.
1. Government is not planning to make a habit of big budget deficits.
The deficit should decline next year. (If the global economy gets worse and the local economy does not start to pick up in 2010, this won't be so easy to do.)
Also, SA has some room to manoevre. Government debt is already considerably less than it was. Ten years ago, state debt was equal to half of the economy – the gross domestic product (GDP). At the moment, it is less than a quarter.
2. Interest rates shouldn't go up. Despite an initial wobble in the bond market, investors are not that concerned about the state's lending requirements. Also, due to the downturn, government is not facing a lot of competition to raise money.
3. It's what the money buys that matters, said Finance Minister Trevor Manuel last week. While other governments are having to borrow a lot of money to bail out troubled banks, SA is using it to invest in better infrastructure – a stable power supply, good roads and rail connections – which will help the country to grow faster in the years to come.
4. SA's budget deficit will represent 3.8% of its GDP this year.
Compared to many of the world's biggest economies, that's chicken feed.
In the US, an enormous stimulus package has just been accepted which could push up that country's budget deficit to $2 trillion – an estimated 15% of the GDP.
The UK's deficit is expected to reach 10% and even India may announce a shortfall of 6.5% this year.
Many of the biggest countries have also run deficits for years, which put them at a disadvantage in dealing with the economic crisis.
SA, on the other hand, has had conservative policies in place and has the breathing space to take on more debt for a change.
Having a budget deficit actually looks like the responsible thing to do.
– To find out what the national budget means for you, go to Fin24.com's budget section.
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