Budget 2018 – The ‘Band Aid’ Budget

By Nazrien Kader,Lead Partner: Africa Tax & Legal

On Wednesday, 21 February, Honourable Minister Gigaba presented what he termed a “tough but hopeful” Budget, which took some hard decisions in order to put the country on a better fiscal trajectory.

Our overall impression is that this is a “Band-Aid Budget” which aims to stop the financial bleeding, but which isn’t enough, on its own, to deliver the growth prospects we need. For that, we’ll be looking to President Ramaphosa’s administration to set economic priorities and to deliver accordingly.

The question remains whether the measures presented by Minister Gigaba will be enough to placate the ratings agencies – which in turn influence South Africa’s long-term economic prospects.

There is some good news regarding South Africa’s economic prospects. Growth in GDP is expected to increase from an estimated 1% for 2017, to 1.5% this year and hit 2.1% by 2020. This won’t be enough to create the job growth we need, but it’s a start, and an indication that the economy is looking up. At the same time, consumer inflation will remain steady at between 5.3 and 5.5% over the period. The Budget deficit will narrow from 4.3% of GDP in 2017/18 to 3.5% in 2020/21.
On the tax collections side, tax proposals were designed to generate an additional R36 billion in revenue for 2018/19 - the most notable of which was the raising of the VAT rate to 15%, from 14% previously – the first change in 25 years.

And in a further blow to taxpayers, this year, there was no relief given for fiscal drag for individuals earning above R410 461 per year. For those below this threshold, only limited relief is given which does not fully account for the effects of inflation.

‘Stealth taxes’, such as the Carbon tax is expected to be implemented from 01 January 2019 and the plastic bag levy was increased by 50% to 12 cents per bag with effect from 01 April 2018. A raft of new tax proposals include higher duties on luxury goods such as cosmetics and cellphones, motorcars and – of course – increased sin taxes on tobacco and alcohol.
The Minister also promised to make some very hard decisions on the expenditure side, in order to both cut overall spending while also funding free tertiary education for poor and working class students at a cost of R57 billion over three years. It is estimated that fiscal consolidation will see expenditure reductions of R85bn over the next three years, with funding for public transport and roads and infrastructure grants all taking a hit. However, debt servicing costs are expected to rise to R592billion in the medium term.

One of the pressing questions over the past year concerned the apparently never-ending bailout of state-owned enterprises (SOEs). Though this year’s Budget makes no specific provision for bailouts, the government’s contingency fund will increase by R10 billion. Minister Gigaba suggested that future bailouts could be funded by disposing of non-core assets, engaging in strategic equity partnerships or through direct capital injections. However, the emphasis on overall governance measures for SOEs is to be welcomed.

Minister Gigaba will be judged on delivery. The outlook continues to look daunting.

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