Bold budget hikes tax, cuts spending
• VAT rate rises for first time in decades • Looming Moody’s downgrade could be averted
Finance Minister Malusi Gigaba delivered a budget of bold decisions that exceeded market expectations, slashing spending and hiking taxes in a bid to arrest the deterioration in public finances and avert further rating downgrades.
Wednesday’s budget saw the first increase in the VAT rate in a quarter of a century, a measure that was pointedly avoided by the ANC in past due to its effect on poor people.
Economists’ consensus was that the budget would stave off a Moody’s downgrade later in February. The rand rose as much as 10c to the dollar as Gigaba was speaking, while the JSE all share gained momentum after being flat at midday. Government bonds attained levels last seen in early 2015.
The rand reached R11.61/$, before softening to R11.65/$ on Wednesday night. The government’s benchmark R186 bond strengthened to 7.97% at one stage, before pulling back to 8%. The longer-dated R207 firmed to 6.63%, from Tuesday’s 6.745%, its best level since February 2015.
The local bourse ended the day up 1.17%, at 58,606 points.
Although the budget was met with strong approval by the markets and business it was panned by trade unions and civil society, which expect it to hit poor people as higher VAT and a raised fuel levy of 52c/litre eat into incomes.
But Gigaba and Treasury officials said the government had no option to hiking VAT to put the public finances on a more sustainable path and at the same time fund free higher education for the poor and working class.
“These fiscal proposals will cause economic discomfort, but they are necessary to protect the integrity of public finances. Acting now will strengthen the
fiscal position, will improve the outlook for the economy and increase space for future investment growth,” Gigaba said.
Treasury deputy directorgeneral Ismail Momoniat said that the decision to hike VAT had been arrived at through a process of elimination as there were signs that rates of personal and corporate income tax had reached their limits.
As late as October 2017, the government had refused to look to VAT as a source of revenue. The one percentage point VAT increase, which is expected to bring in an extra R22bn in revenue, is one of a set of tax hikes to add R36bn to revenue in the 2018-19 fiscal year.
Gigaba also announced a massive R85bn in spending cuts that will hit public entities and infrastructure spending by provinces and local government particularly hard.
Gigaba revised growth forecasts slightly upwards to levels that are in line with market forecasts, pencilling in 1.5% for 2018, rising to 1.8% in 2019. The effect was to reduce the consolidated budget deficits over the medium term to levels below those revealed in the medium-term budget policy statement in October. The budget put a cost of R57bn over the next three years on the free higher education plan, which will cost just R12.4bn in the first year, but will phase in funding for postschool education for households earning less than R350,000 to cover all students by the third year.
Nedbank economists said: “The move to raise VAT so close to the 2019 election is brave and helps the fiscal arithmetic considerably. Unfortunately, this is negated by the massive rise in expenditure resulting from free university fees.”
Investec Asset Management’s co-head of fixed income, Nazmeera Moola, called it a plausible, conservative budget with reasonable growth assumptions. “By raising SA’s VAT rate to 15%, the government indicated a willingness to take difficult decisions to stabilise the fiscus. Coupled with the recent change in the president, this budget should be enough to keep Moody’s on hold.”
However, Moola said structural reforms were crucial to improving SA’s growth outlook and the key was whether the expected cabinet reshuffle put people in charge of key ministries who could produce a regulatory environment that would encourage investment.
Standard Bank economist Elna Moolman said the improvements in the budget deficit and debt trajectories, compared with October’s policy statement had exceeded expectations and, for creditratings agencies, the key was that the debt trajectory was now projected to stabilise by 2022 at 56.2% of GDP.
Cosatu said that while it understood the crisis point that public finances had reached, the result “would hurt workers and their families by taking money from their pockets and making basic food and … living expenses that much more expensive.”