What’s on the cards for 2018?

Expect to fork out for budget shortfalls, free education and Eskom, but interest rates, fuel and food could provide some relief

Tax certainty

A glaring budget gap and disappointing revenue collection over the past tax year — with added commitments, such as free higher education — foreshadows tax hikes in 2018.

The treasury, with so little room to manoeuvre, could make the controversial decision to hike value-added tax (VAT). Although it is seen as regressive, experts such as the head of the Davis tax commission, Judge Dennis Davis, view an increase as inevitable.

Nazrien Kader, the national taxation services leader of Deloitte Southern Africa, said the firm was expecting either an overall rate increase, or the implementation of a dual rate — a higher rate for nonessential and/or luxury items.

Kader said Deloitte also expected an increase in the proportion of capital gains subject to tax or an increase in the capital gains tax rate. Additionally, “a special levy on the turnover of companies to fund ambitious government spend on higher education and economic transformation may also be on the cards”, she said.

Davis has suggested a hike in the skills levy to assist in funding tertiary education.

The sugar tax, or the sugary beverages levy, will take effect from April 1. But the initial proposal to impose a 20% tax on sugary beverages has been moderated and will be fixed at 2.1c a gram of the sugar exceeding four grams per 100ml.

The treasury has released a revised Bill on the long-anticipated carbon tax, with comment due by March 9 but the implementation date of April 1 remains unchanged.

A wealth tax is considered unlikely in 2018 as the Davis tax committee is still working on it.

Overall, Kader did not expect any new taxes to be announced. “However, a general limitation on deductions is expected as well as more stringent enforcement measures,” she said. —

Interest rates

The South African Reserve Bank, at its monetary policy committee meeting in November, resolved to keep the repo rate unchanged at 6.75%. The next interest rate decision will be announced on January 18.

Busisiwe Radebe, a Nedbank economist, said the rand would be the most important factor for interest rates this year and, if the exchange rate could be sustained, a cut would be in order.

The currency strengthened both before the ANC’s national conference in December and after Cyril Ramaphosa was elected head of the party, and it reached a 2.5-year high over the festive season.

“Now the currency has strengthened quite a bit. If sustained, it will have a positive impact on inflation, which will come down nicely … If the rand remains this way, there is a greater possibility for rate cuts,” Radebe said.

The Reserve Bank’s mandate is to use interest rates to keep inflation within a target band of between 3% and 6%. In November, before the strengthening of the currency, the bank forecast inflation to remain firmly within the bracket in 2018 at 5.2%.

But Radebe said many other factors could affect rates. She feared that the rand, at a high of 12.27 to the dollar on Tuesday, was set up for failure. “It’s telling us wonderful things are going to happen politically this year,” she said, adding there could be a big fallout if the opposite transpired.

A credit downgrade by Moody’s could affect interest rate decisions, although this would also depend on how other emerging markets performed this year, Radebe said.

Uncertainty over electricity price increases and how this could play out could persuade the Reserve Bank to hold rates where they were, she said.

The United States Federal Reserve continued its rate-hiking cycle, which it raised from 1.25% to 1.5% in December. These movements also informed the South African Reserve Bank on its own interestrate decisions. But, Radebe said, the US moves were expected to be very gradual and so were unlikely be a major factor for South Africa in 2018. —

‘Free’ education

Students from poor and workingclass households attending public higher learning institutions can expect to be relieved of education costs after President Jacob Zuma announced in December a revised definition of poor and working-class households and increased the qualifying household income threshold for the National Student Financial Aid Scheme (NFSAS) to R350 000, which means these first-year students will study for free.

Students who applied for NFSAS funding and newly qualifying students must register with the department of higher education and training’s central application clearing house. This includes students who did not apply to go to university and who now qualify for a grant.

Grants are expected to cover tuition, study materials, food, accommodation and transport.

Students from households whose annual income is up to R600000 won’t pay the anticipated 8% fee increase for 2018.

It’s unclear how government will finance Zuma’s plan. Treasury says it is working out how this will be sustainably financed beyond 2018. Details are expected in February when Finance Minister Malusi Gigaba gives his budget speech and Zuma makes his State of the Nation address.

The treasury has warned the presidential fiscal committee that major cuts to other areas of the budget are needed if Zuma’s education plan is to be implemented. This could include cuts to social grants, housing, the armed forces, infrastructure spending and civil servant wage increases. An increase in VAT is also expected.

The director of the National Governing Body Council, Tim Gordan, said that schools, unlike universities, do not have a set fee increase because they factor in their individual needs such as salaries, administration costs and maintaining infrastructure.

Gordon says the tough economic climate means most schools are trying to keep the increase as low as possible. Parents should expect to pay between 6% and 8% more in 2018. —

Fuel relief

The ANC’s elective conference would either bring bad or good news for motorists in the new year, the chief economist at Econometrix, Azar Jammine, said in an interview with the Mail & Guardian in December. “If Cyril Ramaphosa wins, we could could see the rand strengthening and petrol prices could come down.”

Indeed, the election of Ramaphosa as the new ANC leader saw the rand gain by 10% on the day to R12.55 against the dollar.

The department of energy said fuel prices would drop this week because of the stronger currency. The rand averaged R13.27 to the dollar during December, compared with R14.10 the previous month.

As of Wednesday, motorists were paying 34c less a litre for 95 octane petrol and 29c less a litre for 93 octane. The price of diesel decreased by 22c and 26c a litre less for sulphur content of 0.05% and of 0.005 % respectively.

Brent crude increased from $62.50 to $63.77. —

Eskom burden

On the face of it, the recent 5.23% increase in electricity tariffs announced by the National Energy Regulator of South Africa (Nersa) is good news. But given Eskom’s dire financial state, there can be little doubt consumers will be made to pay for the ailing parastatal, deemed to be the biggest threat to South Africa’s economy, in other ways.

Announcing its tariff decision, Nersa flagged the serious problems facing Eskom. These included the ongoing decline in Eskom’s sales caused by consumers finding cheaper alternatives and the implications this has for its fixed costs, which are geared at much higher sales volumes. Other matters included Eskom’s poor management of its coal costs, which continue to grow despite declining demand, its exponentially escalating capital expenditure and its “completely out of control” salaries.

Nersa’s limited increase does not preclude three applications that can be made under Eskom’s regulatory clearing account, which allows for over or under recovery to be corrected.

The utility wants to recover almost R60-billion in this way. If granted, electricity prices would then rise by more than 5.23%.

The Eskom tariff increase also does not include increases municipalities have applied for, which would add to consumers’ costs.

Because of a qualified audit opinion and ongoing allegations of corruption and state capture, Eskom was unable to raise all the money it needed during the financial year. There were reports that the utility would run out of cash by November and, in late December, it cancelled the announcement of its interim results while it digested Nersa’s decision.

Eskom is expected to ask the treasury for more money to keep it afloat.

Given that the state coffers are empty, and that the state must now pay for free higher education for poor and working-class students, taxpayers will have to foot the bill. —

Good food news

The rebounding of South Africa’s agricultural sector after the 2016 drought is expected to continue into the new year. Record harvests following good rains in most areas means groceries are likely to be cheaper.

Wandile Sihlobo, the head of agribusiness research at the Agricultural Business Chamber, said food inflation was expected to average about 7.3% in 2017 but, based on the consumer price index for November, it had instead slowed to 5.2%.

These numbers were good, particularly when compared with 2016, when food inflation averaged about 10.6%, he said, adding that “general agricultural conditions are really good”. Above-average rainfall was forecast, farmers were expecting to increase areas planted and, all things being equal, this would lead to further good harvests, Sihlobo said.

“The affordable food prices being seen will be with us for some time. Under this scenario, it means 2018 will be good for consumers.”

Even foods such as poultry, badly affected by outbreak of bird flu, were expected to see some recovery in the new year, although it “won’t be quick”.

The key factor was that basic foods, which had been on a downward trend for some time, should remain at lower levels, Sihlobo said. —

“Now the currency has strengthened quite a bit. If sustained, it will have a positive impact on inflation, which will come down nicely”