EMS – Grade 8Budget – Notes2015

BUDGETS

Budgeting lies at the foundation of every financial plan. It doesn’t matter if you’re living paycheque to paycheque or earning six-figures a year, you need to know where your money is going if you want to have a handle on your finances. Unlike what you might believe, budgeting isn’t all about restricting what you spend money on and cutting out all the fun in your life. It’s really about understanding how much money you have, where it goes, and then planning how to best allocate those funds. Every individual, household, firm, organisation or government needs to create a budget in order to plan successfully.

In this section of work, we will examine two types of budgets:

  • Personal / household budget
  • National budget

1.PERSONAL / HOUSEHOLD BUDGET

Creating a budget may not sound like the most exciting thing in the world to do, but it is vital in keeping your financial house in order. Before you begin to create your budget it is important to realize that in order to be successful you have to provide as much detailed information as possible. Ultimately, the end result will be able to show where your money is coming from, how much is there and where it is all going.

How to set up a personal or household budget

Step 1:

Gather every financial statement you can. The key for this process is to create a monthly average so the more information you can dig up the better.

Step 2:

Record all your sources of income. If you are self employed or have any outside sources of income be sure to record these as well. If your income is in the form of a regular paycheque where taxes are automatically deducted then using the net income, or take home pay, amount is fine. Record this total income as a monthly amount.

Step 3:

Create a list of monthly expenses. Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, insurance, groceries, utilities, entertainment, savings and essentially everything you spend money on.

Step 4:

Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They include expenses such as your mortgage or rent, car payments, dstv or internet services and so on. These expenses for the most part are essential yet not likely to change in the budget. Variable expenses are the type that will change from month to month and include items such as groceries, petrol and entertainment to name a few. This category will be important when making adjustments.

Step 5:

Total your monthly income and monthly expenses. If your end result shows more income than expenses you are off to a good start. This means you can prioritise this excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate debt faster. If you are showing a higher expense column than income it means some changes will have to be made.

Step 6:

Make adjustments to expenses. If you have accurately identified and listed all of your expenses the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense. If you are in a situation where expenses are higher than income you should look at your variable expenses to find areas to cut.

Step 7:

Review your budget monthly. It is important to review your budget on a regular basis to make sure you are staying on track.

2.THE NATIONAL BUDGET

The government of a country has five main economic objectives:

  • to encourage economic growth in the country
  • to make sure that the country's wealth is fairly distributed and justly shared among the people of the country
  • to create employment and through this to reduce unemployment
  • to control inflation and maintain price stability
  • to ensure that the country maintains a balance between money flowing into and out of the country, by controlling things like imports, exports and exchange rates

How does the government achieve its goals?

Although there are many things that a government might want to do to achieve its goals, it does not have enough money to do all of them, and choices have to be made (Opportunity Cost). Every year they plan what they hope to do by drawing up a budget.

The national budget is the government's budget. It is drawn up every year to plan how much money the government expects to earn during the year and how they plan to spend this money. The government uses the national budget to try and achieve its goals, in particular to influence economic growth and to even out the economic inequalities in the country. The national budget is the statement of the government's planned expenditure and anticipated income for the fiscal year. The government's fiscal year runs from 1 April of one year to 31 March of the next year. The budget is presented in parliament by the Minister of Finance in February every year.

Government revenue

In the 2015 National Budget, the government anticipates that it will raise a total of R1188.9 billion in revenue. Most of the government's revenue is earned from the taxes that they charge.

Tax revenue

Tax is defined as a compulsory payment to the government for which a person does not receive anything in direct return. There are two kinds of taxes: direct taxes and indirect taxes.

Direct taxes

Direct taxes are paid directly to the government by the person on whom the tax is imposed (the taxpayer). A direct tax is imposed on an individual person or a company. The two most common forms of direct tax are income tax and company tax.

  • Income tax is charged on the income that a person earns. In most countries, the more you earn the higher the percentage of income tax you pay. For example, if you earn R15, 000 a month, you pay R2, 700 in income tax at 18%, but if you earn R25 000 a month, you pay R5, 764 in income tax. People who only earn a small income are often not required to pay any income tax. The figure below shows the taxable income brackets for 2015 / 2016 and how much tax is payable from each group.

  • Company tax is tax that companies have to pay on the profits that they earn. Itis normally a set rate.

Direct taxes have two important characteristics. Firstly, it is not possible to avoid paying direct taxes. Secondly, direct taxes are paid directly by the taxpayer to the government.

Indirect taxes

An indirect tax is a tax imposed on a transaction (rather than on a person). For example, if the government imposes a tax when goods are bought and sold, this would be an indirect tax. Examples of indirect taxes are: value added tax (VAT), fuel tax and import tax.

  • VAT (value added tax) is charged on most goods and services that are bought. VAT is not charged on essential or basic goods.
  • Fuel tax (fuel levy) is imposed on the sale of petrol and diesel.
  • Import tax (import duty) is imposed on the sale of goods and services imported from other countries. An import duty is also sometimes known as a customs duty.

Indirect tax has two important characteristics. Firstly, it is possible for a person to avoid an indirect tax by simply not taking part in the transaction which has been taxed. Secondly, indirect taxes are collected on behalf of the state by others. For example, when VAT is charged on the sale of goods, the business selling the goods collects the tax from the taxpayer and then pays the tax to the government.

The table below summarises the main differences between direct and indirect taxes:

Differences between direct and indirect taxes

Direct tax / Indirect tax
Definition / Tax imposed on a person or company / Tax imposed on a transaction
Characteristics / Cannot be avoided
Paid directly to the state by the individual / Can be avoided
Collected on behalf of the state
Examples / Income tax, Company tax, Property tax / Value added tax (sales tax), Fuel tax (fuel levy), Import tax (customs duty)

Using taxes to achieve equality and justice

The government is able to use tax not only to raise revenue but also to achieve its objective of an equitable distribution of income and wealth between the rich and the poor. For example, the government can structure income tax in such a way that people who earn more pay a greater proportion of their income in tax.

Although tax is the main source of government revenue, it is not the only source of income. Other sources include income from state-owned enterprises and other service fees charged by the government.

Government expenditure on services

The government uses the revenue it raises to provide public goods and services and to achieve its economic objectives. In this section you will learn more about the pattern of government expenditure.

The different areas of government spending

The government normally spends money in the following areas:

Government expenditure on education

Education is an important national priority. The government spends large sums of money providing schools, educators and textbooks to learners. The constitution of South Africa, guarantees every individual the right to receive basic education, so the government must provide these educational services.

Government expenditure on protection services and security

It is the responsibility of the government to keep the country safe from external attacks and to ensure that the people living in the country do so in an orderly and lawful way. For this reason, the government must spend money providing a defense force, a police force and other protection services, such as fire brigades.

Government expenditure on housing and social services

The government makes money available to provide housing and social grants to the poor citizens of the country. This is one way of reducing poverty and raising the standard of living for economically vulnerable individuals. The government also provides other social services such as recreation and cultural facilities. The building of sports stadiums and theatres are examples of recreational and cultural services.

Government expenditure on health

The South African constitution guarantees all individuals the right to health. Therefore, the government spends a large amount of money on building hospitals and on employing doctors, nurses and other medical professionals to ensure that primary healthcare services are available to all individuals in the country.

If you were the country's Minister of Finance, how would you decide how much money to allocate to each of the different government functions? The first place to start would be to look at the goals that you want to focus on in the next year and then allocate your spending to achieve those goals.

Using government expenditure to achieve equality and justice

The government can allocate money in different ways to achieve different goals. For example, if the government wanted to reduce the level of poverty in the country it might allocate more to social services and make more money available to grants and subsidies for poor people. If the government wanted to improve the level of labour productivity it could allocate more money to education and training so that the skills of workers can be developed.

The government's involvement in the economy is often measured by the level of government spending in comparison to the total spending in the country. A government that plays an active and big role in the economy will have a high level of expenditure. It will spend a large amount of money on providing free education, medical and social welfare services. It would therefore need to raise a great deal of money in taxes. This means the tax rate in the country is likely to be very high. If a government does not play a very active role in the economy it will spend less money and need less revenue.

When the value of government revenue is equal to that of government spending we say that the budget is balanced. When expenditure is more than the income, the budget has a deficit. A budget deficit has to be financed through government borrowing.

Fiscal policy

Fiscal policy is the term used to describe the measures the government takes to achieve its economic objectives. This can be done by changing the pattern of government spending (expenditure) and by making changes in how it generates revenue through taxes. The government is able to influence the economy and achieve its goals using fiscal policy. In Economics you will learn more about how the government uses fiscal policy to achieve economic growth and reduce inequality.

Speaking to Parliament on Wednesday afternoon, Finance Minister Nhlanhla Nene outlined the nation’s predicament.

“Even after lowering our expenditure ceiling ... there is a structural gap between our revenue requirements and projected tax proceeds,” he said. “To bridge this gap we require additional revenue.”

And thus it became the onus of Nene, in his very first national budget speech, to outline a grim list of tax increases.

“Personal income tax rates will be raised by one percentage point for all taxpayers earning more than R181900 a year,” he said. This means an extra R21 per month for those taxpayers earning R200000. For those earning R500000, it means R271 more per month. And for anyone earning R1.5-million a year, the increase is R1105 per month.

“The net effect,” said the minister, “is that there will be tax relief below about R450000 a year, while those with higher incomes will pay more in tax.”

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