21 Feb 2018
Finance Minister Malusi Gigaba presented his maiden budget in Parliament on Wednesday, just five days after newly elected president Cyril Ramaposa delivered his first State of the Nation Address
And when South Africans wake up on the morning of Sunday April 1 this year, they will be paying a higher rate of VAT for the first time since 1993.
The rate hike will change the VAT rate from 14% to 15%, and is expected to bring in R22.9bn in additional revenue for the SA fiscus.
“We have not adjusted VAT since 1993 and it is low compared to our peers,” said Gigaba in his speech.“We therefore decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances.”
In total Gigaba announced that an additional R36bn of tax will be generated this year.
While personal income tax has not been raised, South Africans would be paying more for the fuel levy, sugary drinks and estate duty.
Gigaba also announced that the allocation for the phase-in period of fee-free higher education would amount to R57bn over the next three years, of which R12.4bn will go towards needy first-year students in 2018/19.
Spending, meanwhile, would be cut by R85bn over three years.
Gigaba also stressed the importance of bringing down debt levels, saying the current generation “dare not borrow irresponsibly, leaving it to future generations to repay”.
The consolidated budget deficit is projected to narrow from 4.3% of GDP in 2017/18 to 3.5% in 2020/21.
Decreasing the budget deficit was flagged by ratings agencies as vital if SA wants to stave off another round of sovereign debt downgrades.
GDP growth of 1% is expected for 2017, up from 0.7% projected in October 2017. Growth of 1.5% is forecast for 2018 and, according to the Treasury, it will reach 2.1% by 2020.
Gigaba will hope that the relative higher growth will boost tax revenues and bring comfort to ratings agencies.
The economy, said Gigaba, has benefited from strong growth in agriculture, higher commodity prices and, in recent months, an upturn in investor sentiment.
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21 Feb 2018
Higher VAT will increase inequality - Wits research unit
The hike in value added tax from 14% to 15% poses the risk of eroding the spending power of poor and lower-income households, exacerbating poverty and increasing inequality, according to the Corporate Strategy and Industrial Development (CSID) research unit at Wits University.
VAT has contributed 24% to 27% of tax revenue in SA, and has been held constant at 14% since 1993.
The research unit explained that VAT is levied irrespective of how much somebody earns, making it a regressive tax and in its view, taxes on goods (VAT and excise duty) hit the poor the hardest.
21 Feb 2018
Motorists will have to fork out more when filling up their petrol tanks owing to increases in both the fuel and Road Accident Fund (RAF) levies, which were announced by Finance Minister Malusi Gigaba in his 2018 Budget Speech on Wednesday.
21 Feb 2018
Free education funded by 'expenditure reductions'
Finance Minister Malusi Gigaba’s maiden Budget Speech showed that free higher education for poorer SA students would be phased in over time by government, and that the money to fund the students will mainly come from savings in other areas.
The savings amount to a total of R85bn over the next three years.
Education remains one of the biggest items in the budget, with R792bn allocated over the next three years to basic education. In addition, the largest reallocation of resources towards government’s priorities was on higher education and training, where R57bn will fund the phase-in of fee-free study for poor and working class students over the next three years.
21 Feb 2018
Fuel and Road Accident Fund levies going up
South Africans will be paying 52 cents more per litre for fuel from April 4. Finance Minister Malusi Gigaba announced that this increase would include a 22c/litre increase in the general fuel levy, and a 30c/litre rise in the Road Accident Fund (RAF) levy.
It will apply to both petrol and diesel.
The Automobile Association (AA) said the levies are a cause for great concern.
"[T]he increases are sizable, and more than double current inflation”, said the AA, adding that the increases will place an extra burden on all road users, but especially on the poorest of the poor who mostly rely on public transport.
“Coupled with the increase in VAT, the increase to the fuel levies means South Africans, especially the poor, will, in our opinion, be faced with substantial hikes in their day-to-day living expenses. Many of these people will simply not be able to absorb them.”
21 Feb 2018
A fair budget that seeks to fairly distribute hardships SA faces
Banking Association South Africa MD Cas Coovadia
With today’s budget, government has shown its willingness to take some of the hard decisions necessary to restore fiscal stability, but much more serious work needs to be done to ensure fast, sustainable economic growth, the only way to secure investment and create urgently needed jobs.
However, under the present difficult circumstance, it is a fair budget that seeks to fairly distribute the hardships that now face us as a country.
While the one percent increase in Value Added Tax (VAT) was necessary, we are aware that it will be a drag on consumer spending, a major source of economic activity in South Africa. Considering this, the smaller increase was a reasonable decision. Businesses and consumers will also feel the effect of the increased fuel levy, among the other proposed taxes.
The decision to increase VAT was an important signal that government is willing to take unpopular decisions to restore the fiscal health of the country. This will further boost investor and business trust and confidence.
We applaud the efforts of government to mitigate the effects of VAT on the poor, by increasing social grants. Social grants are one of the country’s most effective poverty alleviation programmes and we once again underline the commitment of South African banks to helping develop an effective payment system, as required by the Constitutional Court, by 1 April 2018.
The renewed commitment to good governance in the public service – especially the South African Revenue Service – and state-owned enterprises by the minister is acknowledged. However, much more needs to be done to recover the many billions lost to corruption and fruitless and wasteful expenditure. The aggressive recovery of these funds will do much to narrow the budget deficit and restore the confidence of taxpayers, who will now be working harder for less disposable income.
While government has made significant commitments to reducing its expenditure and the budget deficit, many of the proposed cuts will not be enough and the public service wage bill must still be reduced in a responsible manner. We look forward to the restructuring of the executive announced by President Ramaphosa in the State of the Nation Address, for possible areas where meaningful trimming of the public services will take place. Regarding state-owned enterprises, the focus must now be on securing private sector investment and skills, rather than bailouts.
Trust and confidence-building on their own are not enough – action must quickly follow. If we are to secure investment in those sectors where we have comparative advantage and can be truly world class: like mining, agriculture, tourism and manufacturing, then South Africa needs to make bold structural reforms that will encourage inclusive economic growth and job creation.
While the financial sector is a willing partner with government, creating the right environment for investment, growth and employment requires concrete investment programmes and appropriate regulation.
As BASA, we share the government’s commitment to transforming the financial services industry and strengthening the regulatory system. Banks are getting ready for the introduction of the Twin Peaks authorities that will be established sometime this year, and which aims to improve market conduct and strengthen prudential regulation. We are committed to maintaining and sustaining South Africa’s world-class financial system and also welcome the licensing of new banks, increased competition and innovation in the industry, and the regulation of digital financial services.
We will continue to support the transformation of the economy and the financial services sector. We look forward to presenting our achievements and challenges, in financial inclusion and empowerment initiatives, at the coming financial sector summit.
This budget has bought us time to take advantage of increased global economic growth and the boost in trust and confidence brought about by the promise of better governance. We must now work together to put into action the promises we have made as a country.
21 Feb 2018
ICYMI: WATCH the #Budget2018 in under 90 seconds
Watch this video of the budget to find out what Finance Minister Malusi Gigaba highlighted in his Budget Speech.
21 Feb 2018
21 Feb 2018
Court finds Gigaba lied under oath
The North Gauteng High Court has ruled that Finance Minister Malusi Gigaba lied under oath when he testified during his tenure as home affairs minister in a case filed by a company that wanted to open a private immigration terminal at the country’s biggest airport.
“The minister deliberately told untruths under oath,” Judge Neil Tuchten said in his ruling, which was circulated by the main opposition party, the Democratic Alliance, on Wednesday shortly before Gigaba was due to deliver the annual budget.
“The minister has committed a breach of the Constitution so serious that I could characterise it as a violation.”
21 Feb 2018
Rand responds well to the Budget Speech
Bianca Botes, Corporate Treasury Management at Peregrine Treasury Solutions
The rand had an impressive knee-jerk reaction to the budget speech, strengthening from earlier levels of R11.78/$ to begin trading at R11.66/$ immediately following Finance Minister Malusi Gigaba’s announcement of a VAT hike from 14% to 15%.
This hike was positively received as it will enable government to capitalise on a broader tax basis.
Other announcements such as the restructuring of the boards of other State Owned Enterprises (SOEs) and plans to implement measures to ensure the proper allocation of taxpayer money towards improving the country’s current economic position were also received very favourably by markets, and the rand could immediately be seen enjoying the effects.
But funding queries remain
Other crucial elements that still need to be addressed, however, are the questions of where the funding for free tertiary education will be generated, and how much is the amount needed to save SOEs such as Eskom from financial collapse.
Although the market is responding very well to the budget for the time being, it will take some time for data to trickle through and for analysts to run the numbers to understand the budget’s effect on consumers, production, manufacturing and economic growth.
At the end of the day, the key questions will be whether the budget allocation will stimulate economic growth, and whether there will be enough space left in the budget to ensure that government can meet all the obligations they have set themselves in terms of SOEs and free education.
21 Feb 2018
Carbon tax, nuclear and Eskom
Richard Halsey from the environmental organisation Project 90 by 2030
“In the speech today, it was announced that the Carbon tax would be implemented from the 1 January 2019. While this may sound like a step to leverage environmental reform, unless there are dramatic changes, the carbon tax in its current form is essentially toothless as there are so many exemptions and ways to get out of paying an amount that would actually be a deterrent for big business. So this is a bit of mute point.
The difficulties at Eskom and the controversy around a potential nuclear deal have been of great concern in recent years. Both could sink the economy, so their role in the budget is critical.
While nuclear is not mentioned at all in the Budget Speech, in the full Budget Review it is stated that: "The nuclear procurement plan should not be pursued at the expense of the financial sustainability of Eskom and the country."
The nuclear lobby will no doubt react to this, claiming that it is actually not that expensive, but all the modelling by respected local and international institutions shows that new nuclear is not part of a future least cost energy mix. Regarding Eskom itself, it is encouraging to see that: “Eskom’s business model will also have to change as part of broader transformation in the electricity sector”.
This is long overdue, as a fossil fuel based monopoly in the electricity sector is not what South Africa needs.
We need a just transition to a distributed, renewable energy based electricity system which will not happen if Eskom stays the way it is. It will be hard work to change an entrenched entity like Eskom, but it must be done.
21 Feb 2018
Solidarity on 2018 Budget Speech - pipe dreams built on debt
Gerhard van Onselen Economics Researcher: Solidarity Research Institute
Trade union Solidarity expressed its discontent at the Budget Speech delivered in the National Assembly.
According to Gerhard van Onselen, economics researcher at the Solidarity Research Institute, the 2018 Budget would put a further damper on economic growth.
“There is no apparent deviation from the harmful ANC policy we have had
to face for so many years. In fact, higher VAT and a higher fuel levy together
with no real sign of a cut in government spending, in reality put the economy
on a weaker footing.”
Van Onselen contends that taxpayers and consumers will have to bear the heavy burden of ANC policy.
He furthermore said that all the optimism about the curbing of government spending that followed President Ramaphosa’s State of the Nation Address was misplaced.
“It appears that this budget is a continuation of the pipe dreams built on debt,” Van Onselen added.
The Solidarity Research Institute will shortly issue a more detailed commentary on the perturbing impact of the budget.
21 Feb 2018
Where’s the plan in #Budget2018, Minister Gigaba?
“The last few weeks have brought a new sense of hope to the country with the change in leadership and clear actions that signal the address of corruption and maladministration. However, Budget 2018 leaves OUTA concerned about the practical implementation of the promises,” says Ben Theron, OUTA’s COO.
OUTA is concerned that there is a significant increase in state spending -- including an increase in the cost of the executive -- but Minister Gigaba hasn’t given us a comprehensive plan to eliminate systematic corruption or even costed a budget yet for the already running commission of inquiry into state capture.
“Minister Gigaba is still trying to mislead society by conveniently spouting vague promises without giving clear action to implement them. The extension of guarantees in SOEs such as Transnet, Eskom and SAA, whilst necessary for stability, fails to address the plans to rebuild these institutions and stop future guarantees. The hints of privatisation of SOEs is encouraging and, in this regard, SAA should be disposed of as soon as possible.”
Minister Gigaba has missed an opportunity to shed light on plans to get our economy growing again. The vague statements on the stabilisation of balance sheets of SOEs provide no certainty or confidence that further bailouts will be avoided. SANRAL is to be recapitalised, which underlines the failure of e-tolls.
OUTA is disappointed at the lack of clarity on Government's commitment to reduce waste and eliminate underperforming programmes to address the deficit. OUTA is pleased to see that the Minister managed to find the money to get the free higher education promise started, but he seems to have forgotten that those students will soon need jobs.
The constant increase in personal income tax puts more strain on overburdened taxpayers. The plan to adjust medical aid tax credits to fund a very vague National Health Insurance plan will place taxpayers in a worse position.
“Taxpayers are sick and tired of seeing taxes increase year after year without material improvement in governance. Any increase in the tax burden on society is extremely frustrating against the backdrop of rampant maladministration and corruption,” says Theron.
“We’re positive that President Cyril Ramaphosa will take state capture seriously and reduce corruption. As such, we see the Budget and tax increases as a necessary bitter pill to swallow, courtesy of Jacob Zuma and his ineffective Cabinet,” says Wayne Duvenage, OUTA CEO.
“We trust that government will now be put to task to reduce spending and waste, in order to ensure there are no further increase in taxes in 2019.”
OUTA intends to keep watch on the Budget promises and spending.
“Minister Gigaba, in your speech by saying we must fight corruption and maladministration. Lead by example and resign,” says Theron.
21 Feb 2018
While the rate of personal income tax will not change this year, some income tax brackets will be tweaked, and Treasury will work to improve tax morality and administration.
Of the R36bn in additional tax revenue proposed by Finance Minister Malusi Gigaba in his maiden Budget Speech, some R7.5bn is expected to result from changes to tax brackets and rebates.
21 Feb 2018
Major risks to SA economic outlook remain
Major risks to a better economic outlook remain, and a sustained recovery in GDP growth depends on extending the current upturn in business confidence.
The budget labelled continued policy and political uncertainty, as well as further deterioration in the finances of state-owned companies, the largest risks to the economic outlook.
21 Feb 2018
Sugary drinks tax a go, plastic bag levy up
South Africans will be paying more for sugary drinks from April 1 this year.
Officially called the “health promotion levy”, the tax on sugar-sweetened beverages aims to reduce South Africans' sugar consumption in an effort to control the high obesity rate.
It amounts to a tax of 2.1c per gram of sugar per 100ml, above 4 grams per 100ml.
The new tax is expected to contribute R1.9bn in additional revenue, according to the budget, broadly in line with economists' expectations.
21 Feb 2018
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21 Feb 2018
Fuel levy hikes will hurt the poor – AA
The 52 cents a litre increase in the General Fuel and Road Accident Fund levies announced by Finance Minister Malusi Gigaba in today’s Budget Speech is cause for great concern, notes the Automobile Association (AA).
The increases amount to a total increase of 11 percent on the current levies from R4.78 to R5.30. The increases comes into effect on 1 April, along with other increases, such as the increase of VAT from 14% to 15%.
The Minister announced the General Fuel Levy will increase by 22 cents from R3.15 to R3.37 (7% increase), and the RAF Levy will increase by 30 cents from R1.63 to R1.93 (18% increase).
In January we urged government to be careful in determining future hikes to the levies, and must consider the impact the increases have on especially the poorest of the poor in the country.
“At the time we also argued that any increases should be in line with inflation which, we note today, is at its lowest since March 2015 at 4.4%. Instead the increases are sizable, and more than double current inflation,” says the AA.
The Association says the increases will place an extra burden on all road users, but especially on the poorest of the poor who mostly rely on public transport.
Based on current fuel prices inland and coastal, these increases will now comprise 38% and 39% respectively of a litre of 93 unleaded petrol. Currently a litre of unleaded 93 octane fuel inland costs R13.90. This will increase to R14.42. A litre of unleaded 93 octane at the coast costs R13.49 which will increase to R14.01. Note these increases are based on February fuel prices which may increase or decrease before the implementation of the levy price increases in April.
This 52 cents a litre hike in the fuel levies more than wipes out the 30 cents gain realised in the fuel price in January, and the AA’s predicted decrease of 28 cents going into March; these decreases were gained mainly through the strengthening of the Rand as a result of the change in leadership of the ruling party.
“Coupled with the increase in VAT, the increase to the fuel levies means South Africans, especially the poor, will, in our opinion, be faced with substantial hikes in their day-to-day living expenses. Many of these people will simply not be able to absorb them,” notes the Association.
21 Feb 2018
'Property still good investment'
Mike Greeff, CEO of Greeff Christie's International Real Estate
Finance Minister Malusi Gigaba’s 2018 Budget Speech has done much to allay the fears of investors and the public by presenting a balanced budget speech set within the framework of the State of The Nation Address.
Although there are small changes to the VAT rate and the Personal Income Tax rate, we at Greeff can’t see this affecting the property market. Property continues to be a good investment. A further positive is that duties on the transfer of properties remain unchanged.
The budget speech has laid out plans to move South Africa’s economy out of its current stagnation and predicts an increase in GDP growth of 1.5 percent in 2018, rising to 2.1 percent in 2020, paired with a projected narrowing of the budget deficit from 4.3% of GDP in 2017/2018 to 3.5% in 2020/21.
The Finance Minister also announced much-needed drought relief to the tune of R6 billion. This is a welcome move and will definitely aid the drought-ravaged areas of the country, in particular, Cape Town.
21 Feb 2018
Commentary on Twin Peaks
Johan Ferreira, African Unity Life’s Chief Legal Advisor:
"We welcome Minister Gigaba’s announcement today that the two new Twin Peaks authorities will be established on or soon after 1 April 2018.
“The implementation will strengthen South Africa’s approach to consumer protection and create a more resilient and stable financial system. This will have significant implications for the financial sector and, in particular, the insurance industry.
“We need to make sure our industry remains safe by evolving our regulatory sphere to protect the financial stability of the country and its consumers.”
21 Feb 2018
Absa highlights the top 10 things to know about the Budget Speech
1. VAT increased from 14% to 15%
Government will raise the lion’s share of the R36 billion in additional taxes in 2018/19 through a one percentage point hike in the VAT rate. This is expected to contribute roughly R23 billion to the fiscus.
To limit the impact on poor households, the current zero-rating on basic foodstuffs such as maize meal, brown bread and rice will remain in place.
Vulnerable households will also be compensated through an above average increase in social grants, while some relief will be provided for lower-income individuals through an increase in the bottom three personal income tax brackets and the rebates, finance minister Malusi Gigaba said during his budget speech on Wednesday.
The increase will take effect on April 1 2018.
2. No inflation adjustment for four wealthiest income tax brackets
Government will raise almost R7 billion through lower-than-inflation increases to personal income tax brackets and rebates.
High-income earners will bear the brunt of these increases – while the bottom three personal income tax brackets as well as the primary, secondary and tertiary rebates will be partially adjusted for inflation through a 3.1% increase, the top four brackets will remain unchanged.
3. No wealth tax, but…
While there has been much speculation about the introduction of a wealth tax – potentially a land tax or annual net wealth tax – no explicit announcement was made in this regard.
However, Gigaba announced an increase in the ad-valorem excise duty rate on luxury goods from 7% to 9%, effective April 1 2018.
According to the budget review, these duties apply to “goods that are consumed mainly by wealthier households (such as cosmetics, electronics and golf balls)”.
Estate duty will also increase from 20% to 25% for estates of R30 million or more. This will take effect on March 1 2018.
4. No change to capital gains or dividend taxes
The dividends tax rate remains unchanged at 20% while the maximum effective capital gains tax rate for individuals stays at 18%.
5. Higher fuel levies
The general fuel levy will increase by 22 cents per litre while the Road Accident Fund levy will rise by 30 cents per litre. This will take effect on April 4.
6. Medical tax credit remains in place, but…
Medical tax credits have not been abolished, but will only increase from R303 to R310 per month for the first two beneficiaries (2.3%), and from R204 to R209 per month (2.5%) for the remaining beneficiaries.
“Over the next three years, below-inflation increases in medical tax credits will help government to fund the rollout of national health insurance,” the budget review stated.
Government also indicated that it was concerned that certain taxpayers might be “excessively benefiting from this rebate, specifically in instances where multiple taxpayers contribute toward the medical scheme or expenses of another person (for example, adult children jointly contributing to their elderly mother’s medical scheme). Where taxpayers carry a share of the medical scheme, contribution or medical cost, it is proposed that the medical tax credit should also be apportioned between the various contributors”.
7. Smokers and drinkers pay more
Excise duties on tobacco products will increase by 8.5%, and those on alcohol between 6% and 10%.
8. Economic growth outlook improves, but remains lacklustre
National Treasury revised its GDP growth projection for 2017 from 0.7% to 1%. It anticipates growth of 1.5% in 2018, compared to 1.1% in the Medium-Term Budget Policy Statement.
“While this is a good start, there are immediate policy interventions that we need to make to ensure that we create the right environment for investment, growth and employment,” Gigaba said.
9. Turnaround plan for state-owned companies (SOCs)
Government plans to introduce a reform programme for SOCs, which will consider their role in economic development. Entities like Eskom and SAA have been a huge burden on government coffers amid allegations of mismanagement and corruption.
“Some [SOCs] will require restructuring with equity investment. In the coming year, government may be required to provide financial support to several SOCs which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections,” Gigaba said.
10. Roughly R57 billion allocated to free tertiary education over medium term
“Government will phase in fee-free higher education and training to students from poor and working-class families,” Gigaba said.
According to Treasury, all new first-year students with a family income below R350 000 per annum at universities and TVET colleges in the 2018 academic year will be funded for the full cost of study. This will be rolled out in subsequent years until all years of study are covered.
Returning NSFAS students at university will have their loans for 2018 onwards converted to a bursary.
21 Feb 2018
Bleak outlook for agricultural products
Wessel Lemmer, Senior Agricultural Economist at Absa AgriBusiness
“The projected GDP growth of 1.5% will be challenged by a VAT increase to 15% and the 52c/l increase on the fuel levy as these two factors will drive headline inflation to rise above expected levels in 2018.
Additional taxes will put
consumers under pressure and limit spending in the economy. We can expect the
domestic spending on agricultural products to be negatively affected as a
21 Feb 2018
VAT, income and fuel taxes disappointing
Rudi Botha, CEO of BetterBond
The increases in VAT, income and fuel taxes are clearly disappointing from our point of view because they will limit the ability of ordinary households to qualify for bonds and afford their own homes.
“This is a blow for a real estate market that has been turning positive for the past few months. National Deeds Office statistics show, for example, a year-on-year increase of 2,25% in the last quarter of 2017 following two years of declining numbers, and our own statistics* show an increase of almost 11% in bond approvals during that period, indicating a continued rise in registrations this year.”
However, he says, tax increases were expected in the light of the tax revenue shortfall revealed by the Finance Minister a few months ago (now revised to R48bn) and looking at the bigger picture, this Budget is clearly designed to do the essential job of proving to investors that SA has financial discipline and stability.
“This is the only way we are going to attract the funds we need from both foreign private investors and local investors who have been sitting on cash to re-fire SA’s economy, boost the growth rate and start creating new jobs.
“And in the longer-term, increased employment is the real key to sustained growth and development in the real estate sector, so BetterBond also strongly supports the forthcoming Job Summit and Youth Working Group announced by President Ramaphosa during his recent State of the Nation address, as well as the Budget allocations for internship incentives and the establishment of a Youth Employment Service.
“We also applaud the vision behind the new focus on educating our youth to be full players in the Fourth Industrial Revolution, while also seeking to re-vitalise SA’s manufacturing sector and so immediately start to create opportunities for entrepreneurs and lower-skilled workers who have been let down over the past decade by our mismanaged State education system.”
Botha notes that this Budget should also help SA avoid a downgrade to total junk status – and that this should underpin the Rand, keep inflation down and obviate the need for any interest rate increases in the near future, which will be a further positive for property going forward.
21 Feb 2018
PwC commentary on the proposed increase in the VAT rate
Lesley O’Connell, PwC VAT partner
The Minister of Finance announced in his Budget speech that the VAT rate will be increased by 1 % to 15% with effect from 1 April 2018. This increase is expected to raise additional revenue of 22 billion.
This will result in additional costs for consumers as they will now have to pay an additional VAT on any purchases of goods or services from VAT vendors. This will have a major impact on households’ already tight budget.
The implementation of the VAT increase for certain business will also be complex, and the implementation date of 1 April does not leave much time to allow businesses to effect the necessary system changes and enhancements.
This is the correct approach as we see further reliance on indirect taxes. This raises large amounts of revenue with relatively small increases in rates due to its broad base and economic efficiency.
The effect that there is no amended list of zero rated foodstuffs is positive as it maintains the integrity and efficiency of the South African VAT system.
21 Feb 2018
A slow return to the path of fiscal consolidation
Craig Pheiffer, Chief Investment Strategist; Absa Stockbrokers & Portfolio Management.
Bonds rallied and the rand strengthened as minister Gigaba announced a return to the path of fiscal consolidation. The budget deficit of 4.3% of GDP forecast for the 2017/18 fiscal year was left unchanged as expected, but the 3.9% deficit forecast for the next three years was reduced to 3.6% (2018/19), 3.6% (2019/20), 3.5% (2020/21) respectively.
This modest improvement in the deficit outlook enabled the minister to announce a lower amount of government bond funding and by extension a lower amount of debt servicing costs over the next three years. Where government debt was set to peak at 60% of GDP, the new expectation is that Government debt will reach a peak of 56.2% in 2022/23. Net debt is expected to stabalise at 53.2% of GDP in 2023/24. In the medium term budget policy statement (MTBPS) debt servicing costs were forecast to grow at an annual rate of 11% over the next three years, and this is now being reduced to 9.4%.
While the deficit reductions over the next three years are positive, the estimates fall far short of what the Minister was forecasting at the time of last year’s national budget.
The vat rate was always going to be the one big lever that the Minister could pull to make a real difference to tax revenue. The increase in the vat rate from 14% to 15% was probably a compromise for a market that was gearing up for a 2% increase in the vat rate. This move together with a lower than inflationary increase in the tax brackets helped the Minister budget for new tax revenue of R36 Billion in the new fiscal year.
There were no real surprises with Sin taxes and environmental taxes such as the plastic bag levy, and these were generally increased at a rate above the inflation rate. Firm dates for the implementation of the sugar tax (1/04/2018) and the carbon tax (01/01/2019) were announced but all of these measures have more of a broader societal benefit than a massive impact on the fiscus.
Other speculated vat increases such as that on fuel did not materialise and the Minister chose to continue to increase the general fuel levy.
One surprise announcement in the budget was the increase in the offshore prudential limit for institutional fund managers and pension funds. The increase for fund managers from 35% to 40% and for pension funds from 25% to 30% will allow investment managers to diversify their portfolios globally to a greater degree.
Together with expenditure reduction of R85 Billion and greater efficiency of Government, the Minister was able to announce a total of R 57 Billion set aside for fee – free higher education of the next three years. First year student with a family income of less than R350 000.00 per annum will be fully funded for their studies in 2018, and this will be rolled out to second and third year students over the ensuing years.
It was always questionable whether Government could accommodate this unplanned expenditure, but the combination of tax hikes and expenditure reductions have made this a reality. Another positive development is that the contingency reserve has been ratcheted up to R26 Billion over the next three years.
The introduction of the tertiary educational expense is the chief reason why the pace of fiscal consolidation is not as fast as it potentially could have been.
The success of the budget will ultimately depend on whether or not the proposed taxes can be received, and whether or not the Government can affect the efficiencies and expenditure cuts that the Minister has tabled. Recent history is against us, but there is a nationwide search in optimism and confidence that is a prerequisite to greater growth rates and social upliftment. Now is the time.
21 Feb 2018
Budget 2018 VAT shocks: The good and the bad
Hermann Marais, associate, Bowmans
Taxpayers had been holding their breath and crossing their fingers, ahead of Finance Minister Malusi Gigaba’s Budget Speech today (21 February 2018), worried about potential VAT increases. The news is in: VAT is increasing from 14% to 15%, with effect from 1 April 2018; and the VAT zero-rating on fuel will not be removed.
There is no doubt that the 1% increase in the VAT rate will be a cost to all taxpayers, with some concerned that the lowest income earners will be hardest hit. However, given the availability of exempt and zero-rated items, the impact of this change may not be as large as is feared, particularly for the more vulnerable lower income consumers. The good news is that removing the VAT zero-rating on fuel is not currently on the cards, which should come as a very substantial relief.
Background to the VAT increase
VAT increases have been discussed for several years, despite being politically sensitive. The urgency for an increase in the VAT rate escalated towards the end of 2017 when Finance Minister Malusi Gigaba announced in the Medium Term Budget Policy Statement that there would be a ZAR 50.8 billion tax revenue shortfall in the 2017/ 8 year. This excludes the cost of free tertiary education for low-income households, announced late last year, and the cost of National Health Insurance (NHI), both of which are critical to mitigate the structural inequalities in South Africa.
It is accordingly clear that the fiscus will need to collect a substantial amount of additional revenue to cover the current shortfall and provide free tertiary education, and NHI in due course.
Government’s need to raise funds takes place against a background of exceptionally high unemployment, and South Africans are reeling from substantial job losses throughout 2017. Lower income households are struggling to make ends meet, and cannot afford any significant tax increases. For this reason, many people have been very outspoken against increasing VAT.
VAT increase may not be a critical blow for low income consumers
It is noteworthy that South Africa’s VAT rate is below the average for both OECD countries and African countries. In addition, on its own, an increase in the VAT rate may not hit lower income consumers as hard as is feared.
If one looks at the average spend of households that Statistics SA categorises as “poor households” in the 2017 Poverty Trends publication, various categories of expenditure are not subject to VAT. If the VAT zero-rating on fuel were to stay, the average transport cost of ZAR 3 957 per year would not be impacted by VAT rate changes, and neither would the average yearly housing costs of ZAR 6 966 (bond repayments and rent are both exempt from VAT).
Basic foodstuffs, too, are zero-rated for VAT purposes. Such items include, among others, brown bread, dried beans and other legumes, maize meal, milk, amasi, rice, fresh fruit and vegetables, eggs, vegetable oil and tinned pilchards.
These items make up at least 46% of the normal food purchases of the average poor household, according to Statistics SA. Essentially, then, changes to the VAT rate would, on average, affect approximately 54% of poor households’ yearly food spend of ZAR 9 487, and spend on “Other” of ZAR 8 150.
A 1% VAT increase would equate to approximately ZAR 133 of extra costs per year for households with an average annual income of ZAR 46 624.
No removal of the VAT zero-rating on fuel: a relief for lower income earners
The removal of VAT zero-rating on fuel, as was proposed in Budget Review 2017, would have been a far greater VAT blow to lower income consumers.
If this had happened, the cost of petrol and diesel would have risen by 14% with knock-on effects on the prices of goods that are transported.
Consumers would also have been hit hard, especially commuters making use of public transport and the taxi industry.
Relative impact of VAT on fuel versus VAT increase
The impact of VAT on fuel is much more substantial than an increase in the VAT rate. Based on average transport spend of ZAR 3 957 per year for poor households, the tax impact would be ZAR 554 per year.
For poor households, then, the VAT charge on fuel would be approximately four times as severe as increasing the VAT rate by 1%.
The situation is more severe for households that Statistics SA categorises as “non-poor households” (average annual income ZAR 199 267, so definitely still lower income earners).
On an estimated annual Vatable spend of ZAR 45 000, the impact of a 1% VAT rate increase is ZAR 450 per year. By contrast, 14% VAT on transport spend of ZAR 25 415 per year is ZAR 3 558 per year. The VAT charge on fuel would be almost eight times as severe as increasing the VAT rate by 1%.
21 Feb 2018
Budget NHI comment from Neil Kirby, Director and head of healthcare and life sciences at Werksmans Attorneys
National health insurance ( NHI) is nigh, apparently. Recent statements in the media appear to indicate that a National Health Insurance Bill is to be placed before Cabinet for approval. However, much work lies ahead of us in respect of the proper and constitutional construction and the implementation eventually of a national health insurance scheme bespoke for South Africans.
The Bill, in whatever forms, it appears, will have to thoroughly interrogated at level including its character as a possible money bill for purposes of the application of a legislative process prescribed by the Constitution of the Republic of South Africa, 1996.
In addition, and has many times been pronounced upon the Constitutional Court, the Bill will have to pass through a meaningful public participation process, which may require amendments and further iterations of the Bill before it is remotely ready for Parliamentary approval and eventual assent, as an Act, by the President.
Currently, the private healthcare sector and other are engaged with the Department of Health on the precise framework of bodies, committees and institutions required to plan the architecture for a national insurance scheme that is appropriate for South Africa and its burden of disease as well as the constitutional prerogatives that bind the State.
Therefore, it must be clear that although a Bill is produced that within and of itself presents only a small step in the achievement and implementation of a relevant, meaningful and effective national health insurance scheme and thus does not represent that the scheme is 'round-the-corner' or legally imminent.
Apart from legal and, fundamentally constitutional, challenges and criteria that the scheme must meet, funding remains one of the greatest challenges to the successful implementation of a national health insurance scheme.
Statements in the Budget Speech 2018 leave one unconvinced that the funds are readily available for the engineering of one of largest socio-economic plans in the country's history.
21 Feb 2018
Watch our live studio analysis as Fin24's Moeshfieka Botha unpacks the 2018 Budget Speech with a number of prominent political commentators and analysts.
21 Feb 2018
Rand cheers Gigaba's 'tough but hopeful budget'
The rand firmed almost 1% after Finance Minister Malusi Gigaba delivered what he called "a tough but hopeful budget".
Currency traders earlier said the rand exchange rate would be volatile throughout the almost 2-hour delivery of the Budget Speech.
By 15:53 the local unit as trading 0.77% firmer at R11.63/$ from an intra-day low of R11.78 against the greenback in the run-up to the Budget Speech.
Traders have pinned the range for the day between R11.65 to R11.85 to the US dollar.
21 Feb 2018
Finance Minister Malusi Gigaba delivered his maiden Budget Speech in parliament on Wednesday. Below is his full speech.
21 Feb 2018
21 Feb 2018
21 Feb 2018