Ramaphosa tax gamble targets debt before elections

Johannesburg - President Cyril Ramaphosa risks alienating voters in the run-up to next year’s elections after his administration announced plans to raise sales tax and curb spending as it seeks to stabilise debt and prevent a third junk credit rating.

The value-added tax rate will be raised to 15% from 14%, the first time since the end of apartheid that the government has targeted a charge seen as hitting the poor hardest. Levies on fuel and luxury goods will also go up, while planned spending will be cut over the next three years, according to Finance Minister Malusi Gigaba. The rand and government bonds gained.

“The decision on VAT was not an easy decision,’’ Gigaba said in an interview after delivering his Budget Speech to Parliament in Cape Town on Wednesday. “We need to take the hard choices and make the difficult trade-offs. We needed a huge quantum of money so that we didn’t go and increase our debt unsustainably. ’’

The first increase in the sales tax since 1993 comes just over a year before national elections and could backfire on the African National Congress because it will affect its largely poor and middle-class supporters. The ruling party may be banking on stronger growth this year boosting income, allowing it to provide relief and placate voters in next year’s budget.

Labour unions that backed Ramaphosa’s campaign to win control of the ANC in December vigorously opposed a VAT increase, arguing that the government should target wasteful spending instead. Ramaphosa was elected president last week, a day after his party forced Jacob Zuma to quit following a scandal-marred nine-year tenure when economic growth stagnated.

“Cosatu might be sympathetic with government on the need to stabilise and fix its budget crisis but we are deeply disappointed that it is doing this upon the backs of the struggling working and middle classes,” the Congress of South African Trade Unions, which is in an alliance with the ANC, said in an emailed statement.

Higher taxes will raise an additional R36bn in the year through March 2019 and be coupled with budget cuts totalling R85bn over three years. The National Treasury expects those measures, together with an improved economic growth outlook, to narrow the budget deficit to 3.6% of gross domestic product in the coming fiscal year, from 4.3% now.

Forecasts in October that projected gross debt ballooning to more than 60% of GDP were pared back. That may appease rating companies that have steadily downgraded the nation and help ward off a cut to junk next month by Moody’s Investors Service.

Moody’s is the only major company that still ranks  debt at investment grade after S&P Global Ratings and Fitch Ratings punished the country in 2017 following political changes that sapped confidence and knocked financial markets.

“The budget was probably enough to avoid another downgrade, at least for now,” said John Ashbourne, Africa economist at Capital Economics in London. “Much more remains to be done. The biggest challenge will be turning around struggling state-owned enterprises.”

Peter Griffiths, a spokesperson for Moody’s, said by email the company didn’t have an immediate comment and Fitch’s Peter Fitzpatrick resent a previous note in which it said the budget would be indicator of the direction of fiscal policy under Ramaphosa.

Treasury officials spoke to analysts at Moody’s and S&P on Wednesday and they were positive about the budget, said Monale Ratsoma, the deputy director general for economic policy. Gigaba said he expects South Africa will avoid another downgrade, which could lead to capital outflows and drag down growth.

Rand, bonds

Benchmark bond yields fell 12 basis points to 7.99% on Wednesday, dropping below 8% for the first time since May 2015. The rand, which was the best-performing emerging-market and major currency against the dollar on Wednesday, weakened 0.3% to 11.6924 by 06:38 on Thursday.

Improved sentiment since Ramaphosa took power is expected to help lift economic growth. The Treasury forecasts a 1.5% expansion this year, up from the October forecast of 1.1%.

“Coming off a very low base, the growth number is very achievable,” Jeffrey Schultz, an economist at BNP Paribas, said by phone from Johannesburg.

The budget allocates an additional R57bn over the next three years to finance a plan announced by Zuma late last year to fund tertiary education for poor students. It didn’t promise any additional funding for cash-strapped state-owned companies, although provisions could still be made and financed by selling about R40bn’s worth of state properties.

Last speech?

“Any spending on state-owned companies will have to be done in a budget-neutral way,” Gigaba said. “We will have to find resources, probably through the sale of state assets.’’

The annual Budget Speech could be Gigaba’s first and last, with Ramaphosa widely expected to replace him and several other Zuma appointees in a Cabinet reshuffle.

“The president ultimately has the prerogative over this issue,” Gigaba told reporters before his speech. “We will support him fully.’’

Visit our Budget 2018 Special for all the news, views and analysis.

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