VAT is to increase by one percentage point to 15% from April 1 this year‚ to raise R22.9bn more for the fiscus.
This and other new tax measures announced by Finance Minister Malusi Gigaba in the 2018-19 budget tabled in Parliament on Wednesday will raise an additional R36bn for the fiscus.
At the same time R85.7bn has been slashed from government spending over the next three years in a bid to accelerate the drive to narrow the budget deficit and stabilise debt.
Treasury believes that raising VAT “is less harmful to growth than raising other taxes”.
Higher income earners earning more than R410‚461 a year will be taking home less pay as no relief has been made for fiscal drag.
Those earning below this amount will not be fully compensated for inflation either — though they will get some relief. The provisions on fiscal drag will generate R6.8bn more in tax revenue.
Also announced were higher ad valorem taxes on luxury goods such as cosmetics‚ electronics‚ cellphones and motor vehicles (R1bn); a higher estate duty tax (R150m); an increase in the fuel levy (R1.2bn); and a hike in excise duties (R4.3bn).
Together with an R85.7bn reduction in expenditure over the next three years‚ the tax measures lead to a strengthening in fiscal consolidation even with the additional R57bn being provided for the cost of free higher education and training over the medium term.
Gigaba believes the measures announced will satisfy the credit ratings agencies and hopefully avert another ratings downgrade. The ratings agencies have been concerned about the grave deterioration in the government’s debt position.
The minister noted in his budget speech that “the fiscal framework has improved markedly since the October medium-term budget policy statement (MTBPS). At the time of the MTBPS government debt was shown to be on an unsustainable path.”
The consolidated budget deficit is projected to improve from the estimated 4.3% in 2017-18 to 3.6% in 2018-19 and 2019-20 and to 3.5% in 2020-21. This compares with the projections in the MTBPS of 4.3% for 2017-18 and 3.9% for each of the next three years.
A further sign of improved debt consolidation is that the ratio of gross debt to gross domestic product (GDP) is projected to be 53.3% in 2017-18‚ rising to 55.1% in 2018-19‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]55.3% in 2019-20 and 56% in 2020-21[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]— compared with the MTBPS forecasts of 57% in 2018-19‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]58.2% in 2019-20‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]59.7% in 2020-21 and 60.8% in 2021-22.
Gigaba spoke of a new sense of “optimism‚ purpose and resolve”‚ due not only to the vision outlined last week by President Cyril Ramaphosa in his state of the nation address (Sona) but also to the positive prospects for economic growth and more robust consumer and investor confidence.
The economic outlook has improved since October and Treasury is now projecting growth of 1% for 2017‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]1.5% in 2018‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]1.8% in 2019 and 2.1% in 2020. This compares with the October forecasts of 0.7%‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]1.1%‚[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]1.5% and 1.9% respectively.
To cater for unexpected demands on the fiscus‚ the contingency reserve has been increased to R26bn over the next three years — R8bn in both 2018-19 and 2019-20‚ and R10bn in 2020-21.
Funding for free higher education and training for poor students will amount to R12.4bn in 2018-19‚ R20.3bn in 2019-20 and R24.3bn in 2020-21. This is in addition to the R10bn provisional allocation made in the 2017 budget.
The Budget Review noted that the main risks to the fiscal outlook “are uncertainty to the growth forecast‚ contingent liabilities of state owned companies and the public service compensation budget”.
The total borrowing requirement in 2018-19 will be R224.2bn while the revenue shortfall for 2017-18 is estimated at R48.2bn.
Gigaba said raising VAT — which has remained the same since 1993[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]— was “unavoidable” to maintain the integrity of public finances.
The Budget Review noted that the decision to increase VAT was based on a recognition of the limits of the revenue-raising potential of other major tax instruments over the medium term.
Treasury officials say the ability to raise the corporate tax rate is limited in the light of global competition‚ while personal income taxes have risen sharply over the past few years.
“Increasing the VAT rate by one percentage point is estimated to have the least detrimental effects on economic growth and employment over the medium term‚” the Budget Review stated.
“The zero rating of basic food items mitigates the effect of the increases on poor households.”
There are 19 basic food items — such as maize meal‚ brown bread‚ dried beans and rice — that are zero-rated.
Trade Unions have warned in recent years that a VAT increase would hit the poor the hardest. Gigaba admitted it was difficult to consult with trade unions beforehand and said although “people will likely protest‚ you don’t want to not take the decision”.
While an alternative would have been to implement a luxury VAT on items such as CDs or cigars to make the tax more progressive‚ Treasury said it was not being proposed.
“Reducing inequality is crucially important‚ but the VAT system is not the best instrument for achieving redistributive goals‚” said Treasury‚ adding that the zero-rated items were well targeted.
The wealthiest households contribute 85% of VAT revenue‚ Treasury says.
Gigaba added that vulnerable households would be compensated through “an above-inflation increase” of 7.9% a year for social grants.
The gross tax revenue projected for 2018-19 amounts to R1.345-trillion.
An increase of 52c a litre for fuel is proposed. This will consist of 22c a litre more in the general fuel levy and 30c a litre more in the Road Accident Fund levy.
A R700m adjustment has been made to the medical tax credit.
Estate duty will be raised from 20% to 25% for estates above R30m‚ whereas previously it was a flat 20% for all estates.
Ad valorem excise duty rates of 5% and 7% will be increased to 7% and 9%‚ with the maximum duty for motor vehicles being increased from 25% to 30%. Excise duties on tobacco products will rise by 8.5% and on alcohol by between 6% and 10%.
The plastic bag levy‚ the motor vehicle emissions tax and the levy on incandescent light bulbs will also be raised.
Partial relief for fiscal drag will cost the fiscus R7.3bn. The health promotion levy (sugar tax) is expected to generate R1.93bn in 2018-19.
The ratio of gross tax revenue to GDP will increase from 25.9% in 2017-18 to 27.2% in 2020-21.
The Carbon Tax Bill will be implemented from January 1[tooltip id=”4500c2f113202943ff1ae30d00c9d4ac”] [/tooltip]2019.
Spending cuts and plans
Noninterest expenditure in 2018-19 is forecast at R1.332-trillion and is expected to grow by an average of 1.8% over the next three years in real terms. The expenditure ceiling for 2018-19 has been reduced to R1.315-trillion from the 2017 budget figure of R1.323-trillion and the 2019-20 ceiling has been cut to R1.417-trillion from R1.435-trillion.
Of the R85.7bn cut in government expenditure projected for the next three years‚ R53.4bn will be cut from national government budgets (particularly large programmes and transfers to public entities‚ at R30bn) while the conditional infrastructure grants of provincial and local government will be slashed by R28bn.
Reductions to the allocations to provinces and municipalities over the next three years amount to 1% of provincial allocations and 3.5% of local government allocations.
“The impact of spending cuts falls mostly on capital programmes‚” the Budget Review said. A substantial reduction has been made to the municipal infrastructure grant.
The impact of spending cuts falls mostly on capital programmes
About 47% or R39.7bn of the R85.7bn spending cuts will consist of cuts to capital transfers‚ while goods and services will be reduced by R16.5bn and current transfers by R27.4bn.
An allocation of R4.2bn has been made for the national health insurance which will be funded through adjustments to the medical tax credit.
An amount of R2.6bn has been added to the social grant allocation to allow for an above-inflation increase to offset the effects of the VAT increase on the poor.
Expenditure on social grants is expected to increase at an average annual rate of 7.9% over the next three years‚ reaching R189.8bn in 2020-21. An amount of R6bn has also been provisionally allocated in 2018-19 for drought management and public infrastructure.
Debt service costs are expected to grow by 9.4% between 2017-18 and 2020-21‚ costing R180bn in 2018-19. Noninterest budget expenditure is expected to remain stable at 26.6% of GDP.
No provision was made in the budget for any expenditure on the proposed nuclear build programme over the next three years.
Main budget noninterest expenditure remains stable at 26.6% of GDP.
Public sector wages
The baseline for the consolidated public sector wage bill will maintain the cuts in compensation ceilings for national and provincial departments announced in the 2016 budget‚ namely a cut of R15bn for 2018-19.
Compensation as a share of total expenditure will average 35.2% over the medium term and is projected to grow at a nominal annual average of 7.3% over the next three years.
Gigaba said in his speech that government was “working to ensure that the current wage negotiatiuons process results in a fair and sustainable agreement.”
Treasury has warned that if salary increases exceed consumer price index inflation‚ it will be difficult to keep within the budget’s expenditure limits.
No provision was made in the budget for bail-outs of state-owned enterprises though Gigaba cautioned that “government may be required to provide financial support to several state-owned companies which could be done through a combination of disposing of noncore assets‚ strategic equity partners or direct capital injections”.
At a media briefing before his speech Gigaba stressed that recapitalisation of state-owned companies would be undertaken in a “budget-neutral way” and would probably be done through the disposal of assets. Several of these companies were financially unsustainable‚ the minister said.
The government owns about 195‚000 properties with an estimated value of over R40bn and these would either be better used or sold in the short to medium term‚ Gigaba said.
“Government is finalising a framework on guarantees aimed at both reducing the exposure and improving the quality of the guarantee portfolio.”
In its notes to the budget documents‚ Treasury said that “over the medium term the state-owned company sector will require far-reaching governance and operational interventions — including‚ where appropriate‚ private-sector participation”.
Treasury is to increase the prudential limits on offshore investments for funds under management by institutional investors — by five percentage points for all categories‚ including the allowance for investments in Africa.
The limits for collective investment schemes‚ investment managers and long-term insurers will rise to 40% from 35%; and for non-linked long-term insurers and retirement funds to 30% from 25%.
An additional allowance is available to all institutional investors for investment in Africa and this is increased from 5% to 10%.
The limit for so-called holding companies has also been increased. Transfers to holding entities will be increased from R2bn to R3bn for listed entities; and from R1bn to R2bn for unlisted companies‚ both subject to Reserve Bank reporting requirements. The aim of the holding company regime is to facilitate direct investment by South African companies into Africa from a domestic base.
Treasury has also given notice that it will release a paper later this year on a proposed policy framework for the review and approval of complex cross-border transactions.
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