What the everyday person needs to know about the budget speech

The build up to the 2018 budget speech was surrounded by a veil of mixed emotions. On the one hand, concerns were raised about the widening budget deficit, which was further exacerbated by the announcement of free tertiary education (to qualifying households). An estimated R57 billion will be spent over the medium term (three years) to fund free tertiary education. Conversely, recent political activities, which culminated in former president Jacob Zuma resigning and Cyril Ramaphosa being sworn in as president, have had a positive effect on South African economic indicators.

The question of how the ever widening budget deficit would be financed was at the tip of many South African’s tongues. The consensus was that directly or indirectly, South African citizens would finance the additional revenue that needs to be raised. As if to highlight the seriousness of the task ahead of him, finance minister Malusi Gigaba joked with Ramaphosa and asked “How much time do I have?” before getting into the main elements of his speech.

Gigaba began by painting a picture of an economy that is underperforming but has been improving since the Medium Term Budget Speech was given in 2017. Since then, the economic growth outlook has improved (albeit still at reduced levels), the rand has strengthened and investor sentiment has improved. On the negative side the budget deficit stands at R48.2 billion and has been on the increase in recent years (this means that expenditure exceeded revenue by R48.2 billion). The budget deficit is to be reduced by raising tax revenues by R36 billion in 2018/19 and reducing expenditure by R85 million over the next three years. This is expected to reduce the budget deficit from 4.3% in 2017/2018 to 3.5% by 2020/2021.

Gigaba spoke about the need to reform state-owned institutions that are not being run efficiently, stabilising the public debt so that future generations do not pay for today’s debts and the effects of low economic growth on unemployment, inequality and poverty. In response to this, the budget directs its spending toward priority areas, which include:

• Education;
• Protecting the vulnerable; and
• Investing in enablers for economic participation.

The additional R36 billion in tax revenue to be raised will be raised as follows:

• Value Added Tax has been raised from 14% to 15% (1% increase);
• Tax brackets will be adjusted on average by less than inflation. Provision has been made to protect the lowest income tax brackets from the effects of additional VAT;
• Taxes on luxury goods have increased from 7% to 9% (2% increase);
• The fuel taxes are up cumulatively 52 cents per litre. 22 cents is attributable to fuel levy and 30 cents to the Road Accident Fund;
• Alcohol and tobacco taxes are up between 6% and 10%; and
• The taxes on high value luxury estates have increased.

Gigaba acknowledged that an increase in VAT can be seen to affect the poor more than the rich but gave a number of reasons as to why these changes have been made.

• Although VAT can affect the poor the most, the provision of the basket of zero rated goods (no taxes) should shield the poorest from the effects of raising VAT.
• VAT has not been increased since 1993 and is low in comparison to nations South Africa sees as its comparators.
• Personal income tax has increased appreciably in recent years and therefore the burden of a hike in income tax has been limited to the brackets being adjusted by less than inflation.
• Above inflation increases have been given to social grants to protect the vulnerable from the increased VAT burden.
• Company’s tax has remained unchanged as South Africa seeks more investment to create jobs and does not want to disincentives businesses from investing locally.
• Raising the taxes on luxury goods and estates is an effort to alleviate the impact on the poor by raising additional revenue from affluent individuals.

These points can be summarised as the working class citizens are under financial pressure and already taxed at a sufficiently high rate. Although VAT is seen as a regressive tax, it is low by international standards. The impact of the effect of the VAT hike on the most marginalised individuals has been mitigated via a number of interventions. The richest of individuals within the economy will be paying more taxes via indirect luxury tax and estate tax increases.

Analysing the expenditure plans for the coming three years, a few key areas are:

• R792 billion will be spent on basic education;
• R668 billion will be spent on health services; and
• R528 billion will be spent on social grants.

In accordance with Gigaba’s statements that social grants have received above inflation increases, the following adjustments have been made:

• Old age pension will increase from R1 600 to R1 700 by October 1 2018 (over two increases) – 6.25%.
• Child support grant will increase from R380 to R410 by October 1 2018 (over two increases) – 7.9%.

In the recent past, the South African citizens received a clear message that the 2018 budget speech would not be without its controversies when Gigaba announced that “drastic” steps would be taken to close the budget deficit. Given that the budget deficit was already high and received further pressure when free tertiary education was announced, Gigaba has done well to put together a budget which seeks to increase revenue and reduce costs in a responsible manner.

By largely shielding the poorest households from the effects of the increased VAT, Gigaba has attempted to spread the tax burden wider than the working class (Personal Income Tax payers) that have borne the brunt of the search for increased tax revenue in recent years. Any plan is only as good as its implementation but given the reasoning and the instruments used to reduce the budget deficit, Gigaba has delivered a well thought out budget speech during challenging economic times.

Gigaba has now “talked the talk” and it remains to be seen whether government can “walk the walk” and effectively execute the plans discussed within this year’s budget speech.

Chris Blair is CEO and Bryden Morton is executive director of 21^st Century. 

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