Supplementary Budget 2020

ANALYSIS: A fair budget in a difficult environment

Cape Town - Although a cloud of political uncertainty hangs over his head, Finance Minister Malusi Gigaba's budget presented to the National Assembly represents a fairly good balancing act in a difficult fiscal environment.

The budget is a team effort. It is therefore once again probably a good testimonial to the sober and competent team of officials at the National Treasury, who produced the documentation.

Gigaba himself described the budget as tough, but hopeful. This is probably a fair assessment. 

Both revenue gaps and spending needs were large. There was a shortfall of R48bn on the current year’s budgeted revenue.

Money also had to be found for boosting social services, and to finance fee-free higher education for needy students. 

Of course state-owned entities' (SOEs) problems will not disappear overnight, and provision also had to be made for that. The replenishment of the depleted contingency reserve was an absolute imperative – especially in the light of water shortages in the Western Cape and other parts of the country.

Raising VAT 

The decision to raise the value-added tax (VAT) rate to 15% was sensible, while the announcement of expenditure reductions of R85bn over the three-year medium-term period gave the budget a balanced feel.

Politically, VAT always has always been a last resort. The increase in the VAT rate, then, shows how desperate the fiscal position has become. 

Personal income tax, the biggest contributor to state revenue, was just used in a limited way to boost state income by not adjusting tax brackets sufficiently to neutralise the effect of inflation on taxpayers.

And it was correctly acknowledged that our company tax rate is already high compared to international standards.

South Africa’s VAT rate, on the other hand, has not been changed since 1993 and is low compared to peer countries like Argentina.

As Gigaba pointed out, poor people pay less VAT than richer people because many of the necessities that they buy are zero-rated.

Gigaba also said that other measures to help the poor, like social grant increases and fee-free education, would help neutralise the effect of the higher VAT rate on the poor.

The figures he announced on the budget deficit and state debt position over the three-year medium-term budget period are still well under control.

In addition, the economic growth outlook and investor sentiment have improved since the end of last year. 

It was an honest budget that showed acknowledgement and understanding of the risks and strains that still exist. It should satisfy the international rating agencies for the time being to refrain from downgrading SA Inc further.

The big test for the budget allocations, and for continuing restoration of confidence, will be effective implementation of the budget and the absence of further political or other shocks.

Only then will South Africans be able to be fully upbeat.

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