Minister of finance Malusi Gigaba painted an upbeat picture when he presented his 2018 Budget Speech on 21 February, saying he was confident that the tough decisions it took to address soaring debt and gaping budget deficits would be enough to halt a downward spiral in the country’s credit ratings and nurture its tentative economic recovery.
Moody’s, the last major rating agency to have kept South Africa’s debt at investment grade, has put the country on credit watch and said it will deliver its verdict after gauging whether the Budget will be able to stimulate growth and make the debt more manageable.
Speaking to journalists ahead of his speech, Gigaba said: “We believe we have done enough – we have taken the tough decisions. We think we can stave off another credit rating downgrade, and, going forward, improve SA’s credit ratings.”
But the decision by Moody’s could be a close call: Treasury’s choice to increase taxes by R36bn in the fiscal year which starts in March and slash spending by R26.38bn had little impact on its projected 2018/19 revenue shortfall, trimming it to just R48.2bn from an estimate of R50.8bn in October.
Former President Jacob Zuma’s pledge in December that higher education would be free from this year gobbled up most of the benefits of those changes, forcing Treasury to allocate R67.2bn to the policy over the next three years.
This nudged the pace of growth in spending on post-school education up to an average rate of 13.7% annually over the next three years, overtaking debt costs as the fastest growing category in the Budget.
Nonetheless, the ratio of the budget deficit to GDP eased to 3.6% from a projected 3.9% in October, mainly because economic growth this year was revised up to 1.5% from 1.1%.
Growth will continue to edge up over the next two years, but the decline in the budget deficit ratio will be minimal, dipping to 3.5% in 2020/21 – which will make ratings agencies uncomfortable.
The projected climb in gross debt to GDP was less steep in the Budget, reaching 56% on 2020/21 instead of 59.7% – although it is still high enough to count against the country’s creditworthiness.
But Gigaba insisted that free higher education was a worthwhile investment, as it would help to break the cycle of poverty and high unemployment in South Africa, ultimately reducing reliance on welfare grants. “The pains we have to endure are temporary and transitional,” he told reporters.
He made it clear that the nuclear power plan mooted under Zuma was no longer on the table.
“We can’t afford it,” he said in reply to questions, adding that renewable energy generated by independent power producers would play a bigger role in the economy. “Over the foreseeable future I don’t foresee that we are going to be needing nuclear generation.”
Gigaba indirectly acknowledged that the main driver of South Africa’s improving economic outlook was the fact that Cyril Ramaphosa had replaced Zuma as president of the republic.
The rand had strengthened, business and consumer confidence had improved, and investors were being encouraged by the steps being taken to address governance and economic policy uncertainty, he noted.
“After several years during which economic growth undershot our projections, we now see the improved growth projections for 2018 and subsequent years as a floor, rather than a ceiling,” he said in his speech, which was peppered with references to Ramaphosa’s State of the Nation Address.
“This is a tough, but hopeful, Budget,” he added.
However, the Budget document acknowledged the risks to government finances. Public service wage negotiations are in progress, and an agreement which locks in salary increases that exceed Consumer Price Inflation would make expenditure limits difficult to achieve, it said.
The financial position of struggling state-owned enterprises are also a threat to government finances, as its guarantees for their debts now stand at R466bn, with the state’s exposure already at R300.4bn.
Profitability for these institutions, measured by return on equity, has fallen from 0.8% in 2015/16 to 0.3% in 2016/17.
New boards for the hardest hit – Eskom and South African Airways – have been put in place, but question marks over the sustainability of their finances remain. Gigaba said that the board of Denel was next in line for a review, which would happen “in a short time”, with SA Express likely to follow.
Gigaba made light of any threat to his future in Ramaphosa’s expected cabinet reshuffle, saying a court ruling that he had violated the Constitution by lying under oath was being challenged.
“What matters are not untested allegations – a court of public perceptions is not a court at all,” he said.
He declared that the new president deserved whole-hearted support, and he would be backing Ramaphosa in whatever way he could, whether he kept his position or not.
GRITTING HIS TEETH AND RAISING VAT
Gigaba gives the wealthy a bit of a breather, but ups the fuel levy and duties on cars and smartphones.
After years of speculation, Treasury finally bit the bullet and took the politically sensitive step of raising the country’s value-added tax (VAT) rate by one percentage point to 15%, in a bid to generate the revenue needed to pluck the country from the jaws of a debt trap and curb a ballooning budget deficit which was on its way to causing further credit rating downgrades.
The widely anticipated step, which was unveiled by finance minister Malusi Gigaba in his 2018 Budget Speech on 21 February, will be the first increase in VAT in South Africa since 1993.
It will generate R22.9bn in additional taxes – the bulk of an additional R36bn which needs to be raised in the coming fiscal year, which begins in March.
In his speech to Parliament, Gigaba said Treasury had decided that the step was unavoidable as it would raise the most revenue and be the least damaging to economic growth and employment of all the options available.
Its effects on the poor would be mitigated by increases in social spending above the inflation rate and the retention of zero ratings on basic food items.
“Our view is that something had to give,” he told reporters ahead of the speech. “Even if we had not raised VAT it would not have helped improve the lives of the poor.”
Wealthy South Africans, who pay most of the country’s taxes, got off relatively lightly as a result of the fact that personal income tax was already expected to undershoot expectations by a staggering R21.1bn this year, indicating that it would be difficult to squeeze further revenue out of them.
But the wealthy minority will still feel the pinch of this year’s Budget measures. Estate duty will rise to 25% from 20% this year for those worth R30m or more, yielding R150m.
As anticipated, the tax brackets for high-income earners were not adjusted for inflation, which means more people will end up in the upper brackets, which have higher tax rates.
This step will bring in an additional R6.8bn, while ad valorem excise taxes on luxury goods will also rise to 9% from 7%, raising R1.03bn.
Smartphones will fall into this category, and the maximum excise duty on motor vehicles will rise to 30% from 25%.
But taxes on capital gains and dividends – which many had anticipated – were left untouched after hefty increases last year.
In addition, a new “wealth tax” on land and other assets, which many analysts said beforehand would have made a VAT hike more palatable to the majority of South Africans, failed to materialise.
The corporate income tax rate was also left unchanged at 28%, with the Treasury pointing out in a Budget document that the global trend was to reduce the tax burden on companies – and many of South Africa’s trading partners have lower corporate income tax rates already.
SA was becoming an outlier as its corporate tax rate was higher than that of most member countries of the Organisation for Economic Co-operation and Development.
As a result, companies had the incentive to shift profits abroad and pay lower taxes elsewhere, Treasury said.
The biggest blow to consumers of all income levels will come from a further increase in the fuel levy, of 22c, which will yield R1.22bn in revenues while so-called sin taxes on tobacco and alcoholic beverages would generate a further R1.33bn.
A long-delayed carbon tax bill – which will put pressure on business – was expected to be enacted before the end of 2018 and take effect from 1 January 2019, Gigaba said.
Environmental taxes were also singled out, with increases in levies on plastic bags, incandescent light bulbs and vehicle emissions.
An environmental fiscal reform policy brief would be published soon, as well as a discussion document outlining design options for a proposed acid mine drainage levy to make polluters pay for any damage they cause.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article originally appeared in the 1 March edition of finweek. Buy and download the magazine here.