Finance Minister Malusi Gigaba will deliver a “tough and unpopular budget” on Wednesday that will include hikes in valued added tax (VAT) and personal income tax.
A senior bureaucrat at the National Treasury told City Press on Friday that “tough decisions” have been made to fill the close to R51 billion revenue shortfall, which Gigaba announced during the medium-term budget policy statement in October.
Treasury, said the official, would attempt to raise half of the R51 billion by trimming expenditure, and the other half from revenue management.
“It is hard news to swallow, but VAT and personal income taxes are set to climb. It will be hard now, but South Africans will reap the rewards in five years. You simply cannot avoid taxes this time around.”
Nedbank economists said in a note: “There is an outside chance that the VAT rate will be increased from its current 14%, with more essential goods added to the list of zero-rated goods to protect the poor.
"There is also a possibility the VAT rate on luxury goods could be raised ... The VAT rate has been left unchanged since 1993, but an increase ahead of next year’s general election still seems unlikely ... A hike to 16% from 14% would currently raise nearly R50 billion before targeted relief.
"Well above-inflation increases are expected in the general fuel levies. The zero VAT rating on fuel may also be removed.”
Any hike in the rate of VAT certainly won’t be popular, and Gigaba could face opposition from Cosatu and the SA Communist Party, which supported President Cyril Ramaphosa in his ANC presidential bid.
While taxes will increase, the official said Gigaba would undertake a fine balancing act to make sure the poor and economic growth were not affected adversely. Other critical elements in the budget included the management of state-owned enterprises (SOEs) and the government’s salary bill.
Treasury’s first prize would be to freeze public servants’ salaries.
“The truth is that we could have plugged the shortfall just by managing a public wage freeze. But there are political sensitivities, and Cyril is the right man to talk to Cosatu and other unions as he is their candidate,” said the official.
“Since that may not be possible at all, we could settle at increases that are linked to inflation and nothing more.”
On government companies, the official said Gigaba would announce sweeping changes.
“There will be a strong stance on new boards and executive management on SOEs such as SAA, Eskom, Denel and others.”
Treasury, he said, was pleased with the improvement in business sentiment.
“It means people will start spending money and companies will invest, which will improve the performance of the economy. The budget will focus on renewal, styled along Ramaphosa’s State of the Nation Address.”
Gigaba’s budget speech could mark a change in the direction of the country’s finances following the swearing in of Ramaphosa as South Africa’s new leader on Thursday.
The trend under Jacob Zuma was increasing state budget deficits, rising government debt, rising unemployment, declining business and consumer confidence, negative or stagnant growth, and a weakening credit rating.
A political analyst who wished to remain anonymous said that a budget under Ramaphosa could appear to be less populist than a budget under the Zuma administration, and may include a great effort to narrow the budget deficit and increase austerity measures.
However, the pledge to provide free higher education, which could increase government spending by R45 billion in two years, would still go ahead, he said.
“The budget speech could by degrees look more like those of [former finance ministers] Trevor Manuel and Nhlanhla Nene, in which there was greater fiscal discipline,” the analyst said.
For Gigaba, this could be his first and last budget speech, given speculation that Ramaphosa will reshuffle his Cabinet and replace the minister.
Since Ramaphosa’s election as ANC president, the rand has firmed to a three-year high against the US dollar; he replaced the Eskom board; forced Jacob Zuma to resign; and generally inspired hope for an improvement in presidential leadership.
During his medium-term budget policy statement, Gigaba painted a dire picture driven by poor growth and massive debt that could see South Africa slide further into “junk” status and even seek an International Monetary Fund bailout from 2022.
In this week’s Budget Speech, Gigaba needs to include a plan to get out of the low growth debt trap and avoid any worsening of state finances. The medium-term budget policy statement document said that “decisive action” and “hard choices” were required.
However, he didn’t follow through on this.
If Gigaba is booted out by Ramaphosa, the new minister would be the third novice in fewer than three years. Some of those tipped to replace him include former finance minister Pravin Gordhan, former deputy finance minister Mcebisi Jonas or even former ANC treasurer-general Zweli Mkhize.
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