Budget 2018: Protecting the poor, securing the future
Former Finance Minister Malusi Gigaba outlines how government intends addressing the revenue shortfall and funding free higher education
In what was a delicate balancing act, former Finance Minister Malusi Gigaba recently delivered a Budget Speech that resulted in some difficult decisions that were necessary to address a revenue shortfall and fund free higher education.
An increase in value-added tax (VAT), fuel levy and a higher estate duty tax are just some of the things South Africans will be faced with this year.
On the other hand, Minister Gigaba announced some relief for the poor and the working class in the form of below inflation increase in personal income tax, while ensuring an above average increase in social grants.
As part of wide-ranging tax proposals, the Minister said the measures were being introduced, in the main, to generate an additional R36 billion in tax revenue for 2018/19.
The main tax proposals for the 2018 Budget are:
• An increase in the value-added tax (VAT) rate from 14 percent to 15 percent, effective 1 April 2018.
• A below inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets. • An increase in the ad-valo-
rem excise duty rate on luxury goods from seven percent to percent.
• A higher estate duty tax rate of 25 percent for estates greater than R30 million in value.
• A 52 cents per litre increase in the levies on fuel, made up of a 22 cents per litre for the general fuel levy and a 30 cents per litre increase in the Road Accident Fund Levy.
• Increases in the alcohol and tobacco excise duties of between six and 10 percent respectively.
The Minister said increasing VAT was unavoidable, as there was a need to maintain the integrity of public finances.
“In developing these tax proposals, government reviewed the potential contributions from the three major tax instruments, which raise over 80 percent of our revenue − personal and corporate income tax and VAT.”
“We have increased personal income tax significantly in recent years, particularly at the higher income bands, and our corporate tax is high by international standards.”
“We have not adjusted VAT since 1993,and it is low compared to some of our peers. We therefore decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances,” he explained.
Closer look at tax proposals
In its budget review document, National Treasury said the central adjustments to the fiscal framework in 2018/19 are meant to:
• Raise an additional R36 billion in tax revenue through an increase in the VAT rate, limited personal income tax bracket adjustments and other measures.
• Reduce the Medium Term Budget Policy Statement baseline expenditure by R26 billion.
• Allocate R12.4 billion for feefree higher education and training.
• Set aside an additional R5 billion for the contingency reserve.
• Provisionally allocate R6 billion for drought management and public infrastructure.
Funding free higher education
In December, former President Jacob Zuma announced that from this year, government would implement feefree higher education in a phased approach.
The Minister said government will spend R57 billion on free higher
education over the next three years.
“The largest reallocation of resources towards government's priorities was on higher education and training, amounting to additional funding of R57 billion over the medium term,” he added.
This is the fastest-growing spending category, with an annual average growth of 13.7 percent.
Government will phase in fee-free higher education and training to students from poor and working-class families.
This means that all new first-year students with a family income below R350 000 per annum at universities and TVET colleges in the 2018 academic year will be funded for the full cost of study. This will then be rolled out in subsequent years until all years of study are covered.
Meanwhile returning National Student Financial Aid Scheme (NSFAS) students at university will have their loans for 2018 onwards converted to a bursary.
“This is an important step forward in breaking the cycle of poverty and confronting youth unemployment, as labour statistics show that unemployment is lowest for tertiary graduates. Higher and further education and training is being made accessible to the children of workers and the poor," said the Minister.
Increase in social grants
According to the Minister, the poor have been protected from an increase in VAT.
“Vulnerable households will also be compensated through an above average increase in social grants. Some relief will be provided for lower income individuals through an increase in the bottom three personal income tax brackets and the rebates,” said Minister Gigaba.
As of 1 April 2018 the old age, disability and care dependency grants will increase from the existing R1 600 by R90 to R1 690 and by a further R10 to R1 700 on 1 October 2018.
The child support grant will increase from the baseline of R380 to R400 and to R410 on 1 October.
The Minister said in addition to VAT, National Treasury would increase
excise duties on luxury goods and estate duty on wealthy individuals.
He said taken together, National Treasury believed that the proposals best protect the progressive nature of the country's tax regime to minimise the impact on lower-income households.
Budget deficit
Government expects the budget deficit to narrow to 3.5 percent over the next three years.
“The consolidated deficit is projected to narrow from 4.3 percent of gross domestic product (GDP) in 2017/18 to 3.5 percent in 2020/21.
“The main budget primary deficit closes over the [the next three years], helping to stabilise the gross debt-to-GDP ratio at 56.2 percent of GDP in 2022/23, and declining thereafter.”
The Minister said government's fiscal interventions also demand greater efficiency in the use of funds across the public sector.
He said government recognised the need to shift spending away from consumption towards higher investment.
“Over the past decade, the public sector has invested R2.2 trillion in economic and social infrastructure. Yet weaknesses in project preparation, execution and delivery have resulted in lengthy delays and cost overruns,” said Minister Gigaba.
To improve this, government has established a Budget Facility for Infrastructure, to standardise and improve the management of public infrastructure projects.
“To support higher levels of capital investment and maintenance, the state needs to contain the publicservice wage bill. Government is working to ensure that the current wage negotiations process results in a fair and sustainable agreement. This process will require careful consideration from all stakeholders,” he added.
Higher projected growth
With an improved economic outlook, South Africa's GDP is projected to come in at one percent in 2018, up from the 0.7 percent projected last year.
“The 2017 GDP growth projection has been revised upward to one percent, which is higher than the 0.7 percent expected at the time of Medium Term Budget Policy Statement last year.We are anticipating growth of 1.5 percent in 2018, rising to 2.1 percent in 2020,” said the Minister
According to the Budget Review, the improved outlook flows from strong growth in agriculture, higher commodity prices and an incipient recovery in investor sentiment.
State-owned companies
On this issue of state-owned companies (SOCs), the Minister said that government recognised that the business models of some SOCs are unsustainable and that their capital structures are too reliant on debt.
“To confront these issues, we will assist them to develop and implement robust turnaround plans. This needs to be part of a holistic reform programme which considers the role we want SOCs to play in our economic development,” he added.
Some of the companies will require restructuring with equity investment.
“In the coming year, government may be required to provide financial support to several SOCs which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections,” he said.
Minister Gigaba stressed that state-owned companies are expected to fund their own operations.
A property audit conducted by the Department of Public Works showed that national government owns up to 195 000 properties, with an estimated value of over R40 billion.
“We will work with them on a programme to better utilise or dispose of these properties in the short to medium term,” he said, adding that government is finalising a framework on guarantees aimed at both reducing the exposure and improving the quality of the guarantee portfolio. We can and will ensure that all SOCs are run sustainably and contribute to our national development,” he said.