For the first time in 25 years, the South African government will hike up Value-Added Tax (VAT) in a bid to fund the gaping hole in the national budget.
With tax collection falling short by R48-billion, compounded by former president Jacob Zuma’s announcement of fee-free higher education for disadvantaged students, government’s hand has been forced to increase the VAT rate from 14% to 15% – raising some R22-billion to plug the hole.
Finance minister Malusi Gigaba described the budget as “tough, but hopeful” in his inaugural budget speech, delivered on Wednesday afternoon. “It required us to make difficult but necessary trade-offs, important to ensure that this budget is a platform for renewal, inclusive growth and job creation,” he said.
At 15% the VAT rate still remains lower than the average rate (both for the continent and globally) but the ANC-led government has resisted hiking the rate – last increased in 1993 – as it is feared to be a regressive tax as it hits the poor hardest.
“Increasing VAT was unavoidable if we are to maintain the integrity of our public finances,” said Gigaba. The zero-rating of basic food items would limit the impact on the poor, he said, and an above-average annual increase in social grants would compensate vulnerable households. Unions too have stood fast against hiking VAT.
Old age grants will be hiked from R1600 to R1690 on April 1, and increased further to R1700 on 1 October. Child support grants will increase from R380 to R400 of 1 April, and to R410 on 1 October.
Some tax relief would also be provided through partially adjusting bottom three personal income brackets (earning up to R410 460 a year) and rebates for inflation.
Higher earning individuals in the remaining four brackets (earning R410 461 or more a year) will enjoy no adjustments for inflation allowing government to generate an anticipated R6.8-billion more in personal income tax.
A total R36-billion in additional tax revenue will also be assisted by other tax proposals which include:
A 52 cents per litre increase in the levies on fuel, made up of a 22 cents per litre for the general fuel levy and a 30 cents per litre increase in the Road Accident Fund Levy.
Increases in the alcohol and tobacco excise duties of between 6 and 10 per cent.
Ad-valorem excise duty rate on luxury goods increased from 7% to 9%.
A higher estate duty tax rate of 25% for estates greater than R30-million.
Medical tax credits will receive below-inflation increases, freeing up R700-million to assist in funding the rollout of National Health Insurance.
Government spending will also be slashed by R85-billion over the next three years, largely through large programmes and transfers to public entities and will delay large infrastructure projects as a result.
The budget, Gigaba said, directs spending to the “most pressing national priorities”: educating our youth, protecting the vulnerable and investing in enablers of inclusive growth.
Fee-free higher education and training will receive the largest reallocation of resources – some R57-billion over the next three years. The contingency reserve will receive R10-billion.
An established Budget Facility for Infrastructure is expected to improve management of public infrastructure projects too often running over time and cost and negotiations hoping to contain the public-service wage bill are underway. At provincial and local government level, R6-billion has been set aside to assist in drought relief amongst other things. Disaster relief grants of R473-millon has been budgeted for while other conditional grants can be reprioritized to respond to disasters in necessary. Delayed of non-payment of government suppliers will also be tackled head-on. “Next week, the Director-General of National Treasury will issue a directive to all government departments and public institutions, instructing them to pay suppliers on time or be charged with financial misconduct,” Gigaba said.
The budget deficit is expected to narrow from 4.3% of GDP to 3.6% in 2018 and the debt-to-GDP ratio will stabilize at 56.2% in 2022/23 – this is improved from the previous projection of 61.6%. Even so, debt service costs remain a millstone around Treasury’s neck: “The reality is that the rising cost of servicing our national debt leaves less resources available to invest in services across all three spheres of government,” Gigaba said.
Although measures to raise revenue and to cut spending will certainly hurt, the economic growth outlook is getting brighter, Gigaba noted. Treasury’s economic growth projections are improved from 1% last year to an anticipated 1.5% in 2018.
“We have the opportunity to achieve faster and more inclusive growth, to create jobs for our people and a better life for all South Africans”, Gigaba said. That opportunity, he said, comes from a favourable global economic outlook, with many of South Africa’s trading partners doing well, and from improved prices for our exports, as well as an improved fiscal framework, a stronger rand and a favourable inflation outlook.
Gigaba emphasised government’s resolve to confront allegations of state capture and corruption, through the judicial commission of inquiry as announced by recently resigned president Jacob Zuma. Government would also deal decisively with governance and financial failures at state-owned companies, he said.
“These fiscal proposals will cause economic discomfort, but they are necessary to protect the integrity of the public finances,” Gigaba told the nation. “Acting now to strengthen the fiscal position will improve the outlook for the economy and increase space for future investment growth. It is the right thing to do.”