Hike in VAT widely expected in effort to consolidate debt
It has been a messy four months since Finance Minister Malusi Gigaba delivered the mediumterm budget policy statement, revealing a R50bn hole due to lower than expected revenue. SA has veered wildly from a policy stance in the October statement that implied debt consolidation was not important, to one issued by the Presidency in November that said it was. Included in the latter statement was a commitment to raise taxes, cut spending and phase in free higher education for the poor sustainably.
This last part was then overridden by a rogue statement from former president Jacob Zuma at the ANC conference that declared free education for students with a family income of R350,000 a year or less would be implemented immediately. While there was some collateral damage in the Treasury — the resignation of the head of the budget office, Michael Sachs — the department is still standing and is expected to produce the budget speech and all the budget documentation to its usual standard. However, this time the Treasury has the most difficult set of numbers to fit into a budget framework since the mid 1990s. No wonder then that the word from Gigaba’s office is that this will be a “tough budget”.
Because of the patch-up job in November, SA has a good idea of what to expect on Wednesday.
There will be a plan to set debt consolidation back on track. This means raising R30bn more in taxes. Half of this was already written in the 2018-19 year in February 2017, with the other R15bn added in the patch-up. Here it is widely expected that valueadded tax (VAT) will be increased by a percentage point, which should yield about R22bn.
VAT is considered the least economically damaging of all tax increases, but its disadvantage is its disproportionate effect on the poor. Tax analysts expect that to make the VAT increase more politically palatable, social grants will need to increase to cushion the most vulnerable from its effect.
The rest of the tax hole can probably be filled through various other indirect taxes on the wealthier in society and through not compensating the wealthier for the effect of fiscal drag.
Beyond this though, Wednesday’s budget gets murky and enters the danger zone. November’s patch-up statement also promised R25bn in expenditure cuts to the 2018-19 year. Some of this would have been to make space for the free higher education plan, while some would have been part of the debt consolidation measures.
The ANC and its president, Cyril Ramaphosa, have made it clear that it has embraced the R350,000 threshold for free higher education and the provision as announced by Zuma will be implemented.
The word from the ANC at the conference as it moved to accept the provision was that it would cost the country R12.5bn in the first year, in which only new entrants into university would be covered.
Leaving aside for now the headache for the universities when returning students who fit under the R350,000 threshold also decide not to pay fees, the provision for free higher education over the next three years as the number of qualifying students doubles and then triples will be an enormous commitment. Where will the money come from?
The Treasury will make a show of protecting social spending, but it will be impossible to cushion the poor and working class from expenditure cuts. So while welfare grants are likely to be protected, as will education and health budgets, schools, hospitals and health services, for instance, are already buckling under pressure.
The budgets of public servant sectors have been increasingly consumed by salaries, which have been rising faster than inflation. The Gauteng health department has R229m in cash to pay for goods and services until the end of the financial year on March 31, but has outstanding bills of about R7bn.
The cuts are likely to come then to budgets such as municipal infrastructure, housing, provincial roads and other such economic infrastructure. But it is in communities where the state could make a material difference to people’s life opportunities by improving living conditions. This will be the trade-off for the higher education windfall.
SO WHILE WELFARE GRANTS ARE LIKELY TO BE PROTECTED, AS WILL EDUCATION AND HEALTH BUDGETS, SCHOOLS, HOSPITALS … ARE ALREADY BUCKLING