Personal finance lessons from the Budget

Most of us look to the Budget for new tax breaks to make our life a little easier in the coming year. But the way the government manages its finances can also tell you a lot about what you should, or should not, do with your own money. Here are the key lessons from the 2017 Budget.

Ever wondered why there is so much hand-wringing about the fiscal deficit? Well, it’s because the fiscal deficit captures the excess of government spending over what it earns. In FY-17, the Government spent ₹20.14 lakh crore, while it earned only ₹14.8 lakh crore from taxes and other sources.

The gap of 36 per cent (₹5.3 lakh crore) was met by borrowings. But FY17 wasn’t an unusual year. Government expenses have overshot its income by a third for the last many years.

This constant over-spending has led to the government adding to its debt pile each year, leading to a situation where it stood at ₹59.6 lakh crore in FY17. The Centre now spends ₹24 out of every ₹100 it earns in paying off interest alone. To put it another way, it uses up over 90 per cent of its yearly borrowings towards interest payments on old loans.

We often miss this because fiscal deficit and borrowings are usually measured as a percentage of the country’s GDP and not as a percentage of the government’s own income. A fiscal deficit expressed as 3.5 per cent of GDP and public debt at 40 per cent, don’t appear panic-inducing.

But as a householder, if you’re spending more than you earn, the first thing you must do is to quantify your monthly expenses and debt. Sweeping the problem under the carpet will land you in a debt trap.

Between FY12 and FY17, the Indian government’s total debt expanded by 75 per cent — from ₹36 lakh crore to ₹60 lakh crore. But with the GDP racing rapidly too, the debt-to-GDP ratio showed a declining trend. As this metric is much lower for India than some of the nearly broke European and emerging economies, India isn’t seen as a nation in crisis.

The government need not worry about its rising debt and can keep borrowing because its income (tax collections) tend to rise with the GDP. Plus, it has the capacity to hike tax rates at will to increase its income. As the sovereign, it also gets to borrow money at the cheapest rate, no matter how indebted it is.

As householders though, we can’t be so sanguine. Salary increments often do not keep up with inflation. For us, a higher indebtedness definitely means paying higher interest rates to borrow. Therefore, if you are in debt, prioritise debt repayment over any fresh spending.

As it follows cash accounting, Government accounts don’t make much distinction between capital items and revenue items. The Budget counts one-off proceeds from borrowings and sale of assets (such as equity stakes in PSUs or telecom spectrum) as part of its annual ‘income.’

The bulk of this ‘income’ is then splurged on consumption expenditure, with very little re-invested in new assets.

In FY-17, for instance, the exchequer earned 71 per cent of its total ‘income’ from regular sources such as direct and indirect taxes, interest and dividends. It supplemented this with one-off capital receipts from disinvestment and borrowings to make up 100 per cent. But it spent nearly 86 per cent of this kitty on revenue items such as interest, salaries, defence and subsidy, leaving just 14 per cent for capital spending.

In short, the government routinely kills the golden goose to make omelettes. Asset sales dent its income too. The steady dilution of government equity in cash-rich PSUs reduces its future income by way of dividends from these firms.

This is a lesson to you, to always separate your capital items from revenue. If you’ve sold a plot of land, or redeemed a bond, make sure you keep the proceeds separate and reinvest it into other assets or investments. Don’t go splurging it on a family vacation or groceries! That’s a sure way to destroy wealth.

One reason why the Indian government is always strapped for cash is that it has signed up for one too many fixed commitments.

Out of every ₹100 it earned in FY-17, it spent ₹24 on interest, ₹13 on food and fertiliser subsidies, ₹6 on pension payouts and ₹12 on defence.

With ₹15 to be shared with the States, this leaves very little room for the Centre to rejig its budget.

Increases in support prices of crops lead to rising yearly outlays on food subsidy. Pay Commission awards lead to a regular escalation in the wage bill.

These fixed obligations completely take away the government’s flexibility to tighten its belt or repay its debt, even during tough times.

While the government may have little choice but to keep its constituents happy by committing to such splurges, you have much more leeway with your personal money.

Think twice about signing up for any regular payout which ties up your income for a multi-year period — be it an EMI (equated monthly instalment), endowment plan or equity SIP. It will take away your flexibility to embrace risky career moves like entrepreneurship.

Inflexible spending will also make it hard for you to weather bad times.

Should it allocate more to rural projects or urban ones? Should it hike outlays on defence or welfare schemes? Should it increase staff salaries or invest in new projects?

The government has myriad demands on its limited resources. And if it makes wrong choices, it can get booted out at the next election.

So, in each budget, the Finance Minister often ends up spreading himself thin across hundreds of schemes, making very little progress on any of them in the long run.

As an investor, you don’t have to pander to such populism. Sit down with your family and set out three or four clear financial goals that all of you would like to achieve. Create separate portfolios for each of them. That’s the best way to financial freedom in the long run.