Everyone has different expectations of the annual state Budget. The wealthy want to pay less tax, the poor want more of everything. The trick for any minister of finance is a balancing act, while keeping the financial house in order. The balancing act is not easy as any government budget is essentially a political statement. In making that statement, a government has to look to the voters who put it into power.
The biggest fear that many people had about the ANC government was that in an attempt to meet the demands of its constituency, it would borrow and spend the country into a financial basket case.
It is this larger picture that all of us should keep in mind when we look to see what Trevor Manuel has done for us individually in the Budget. Yes, we could say taxes are too high, particularly when you add all the indirect taxes to income tax. We can equally say that the increases he gave to social pensioners are pathetic, particularly when you consider that the tax saving Manuel gave the highest income brackets, R3 380 or R281.67 a month, is a heck of a lot more than the R30 a month extra he gave to social pensioners. Pensioners now have to survive on R570 a month. Put another way, over six months social pensioners have to make do with R3 420, which is almost equivalent to the tax saving for the wealthy.
Manuel describes this as a pro-poor Budget. I think he is stretching it a bit, particularly as most of the R8.3 billion in income tax savings has gone to the middle-income group. But he has taken action to improve the chances of the poor gaining the tools to make their own lot better, such as allocating more money to vocational training.
But back to the big picture. The most important issue is that the ANC government, for it is the ANC's Budget, not only Manuel's, has stuck to a rigid regime of fiscal discipline. In other words, it has not borrowed and spent its way to popularity with any particular interest group.
The principles of running a country are not much different to running your home, namely, to use an old cliche, you have to cut your coat according to your cloth. If you borrow too much money, you will ultimately land up in trouble and you will have to make major sacrifices to get yourself back on the straight and narrow. Likewise with any government and its citizens.
When the ANC came to power in 1994, government borrowing to balance its budget was getting out of control and was snowballing. The snowball started under P W Botha, who in his declining days, ran the country much like a personal fiefdom. On one famous occasion, while his then finance minister was out of the country, he decided to increase teachers' salaries and left it to officials to find the cash. But it was probably his spending on the military that did more damage than anything else.
The problem with borrowing too much is that you have to pay back moneyE and the more you borrow and the more precarious your position becomes, the higher the interest rate you have to pay. There is a rough rule of thumb that when more than 25 percent of your income goes to service debt then you are getting into what is called a "debt trap". Effectively this means you have to borrow more to be able to repay the interest and capital on your earlier borrowings. Government debt had got very close to this level. In 1997/98 it reached 23.7 percent of income.
Unless you take early action the debt trap can grow rapidly. The government recognised this problem when it came to power. In the initial years the problem got worse as it had to restructure the budget process and decide on new spending priorities. This process was rather like attempting to stop a growing snowball on a steep slope.
Manuel, justifiably was able to claim on Wednesday that he had not only stopped the snowball, but that he is pushing it back up the hill. It was because of this victory that he could use the analogy of plucking the sweet fruits of victory and hand out apples to the large press contingent in Parliament for Budget day.
Reducing the level of debt as a percentage of government income means that money that would have gone to repay capital and interest can now be spent on the infrastructure of the country and to improve the lot of the poor, while placing a brake on any potential tax increases for the wealthy.
The advantages of a government without serious debt are not limited to the Pretoria, headquarters of the Ministry of Finance. They bounces all the way down to you and me in other ways as well.
If a government is borrowing heavily foreign investors start to doubt the ability of a government to pay up. Place that government in Africa and the foreign investors fear looms even larger. The result is that there is less money available for borrowing, not only for the government but also for us ordinary citizens.
The knock-on is upward pressure on interest rates for bank loans and home loans. There is also an effect on inflation, as companies have to pay more to service their debt and that extra interest is passed on to us by way of higher prices, placing more pressure on us to borrow and so on and on.
One final point: It appears the high interest rates following the 1998 emerging markets crises have had a significant effect on the way we all run our personal finances. At the Budget media conference it was suggested to Manuel that the tax cuts of years past had not been used to improve the savings base of ordinary South Africans. His response was that the debt levels of individuals were dropping and he believed the tax cuts had contributed to this.
So buy yourself an apple to celebrate the fruits of victory with Trevor!
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Last week I wrote about index funds and the need to consider costs. I failed to mention that the index fund with the closest correlation to the All-Share index in the domestic general equity category is the Investec index fund. It charges nothing as an initial fee and an annual management fee of 0.35 percent, which proves the point that costs do affect performance.