JOHANNESBURG – The adjustment of VAT for the first time since 1993 and the proposed R85 billion expenditure cuts, announced in Minister of Finance Malusi Gigaba maiden budget speech yesterday, were a reflection of the tough balancing act in a tough economic environment.

Raymond Parsons, a professor at the North West University School of Economics, said the budget was tough, despite its laudable goals and commitment to the National Development Plan.

“The 2018/2019 Budget presented in Parliament confirms that, as long as government spending is not kept under control, the tax burden must inevitably rise. A wide range of higher or new taxes have been decided upon which will bear heavily on the average taxpayer and consumer spending,” said Parsons.

Gigaba said the government planned to increase VAT to 15 percent from 14 percent in a bid to generate an additional R36 billion in tax revenue for 2018/19 as the government grapples with a widening budget deficit and high debt.

Kwaku Koranteng, the acting head of Absa Asset Consulting, said an across the board rise to 15 percent of VAT on all goods and services was a surprise, but arguably the most effective way of raising revenue.

“It does mean, however, that general inflation will increase and the average consumers’ pockets will be hit the hardest”.

Ruaan van Eeden, the managing director for tax and exchange control at Geneva Management Group, said even with the increased VAT rate the revenue shortfall of close to R50 billion would not be fully met.

“The promised reduction in government spending will help, but it remains to be seen whether this reduction in spending can be achieved, especially given the comment that head counts in government departments must merely be managed so as not exceed spending gaps. There is no doubt that the government wage bill remains excessively high,” Van Eeden said.

Philip Faure, the global head of Wealth Advisory for Standard Bank Wealth and Investment, said all the predictions ahead of the Budget were far worse than what had transpired and the impact on wealthier South Africans was “not as severe as it could have been”.

No direct wealth tax

“On the positive side, there was no introduction of a direct wealth tax, the top marginal tax rate did not go up and there was no adjustment in capital gains tax inclusion rates. However, adjustment to donations tax, estate duty, VAT, a levy on international travel, and higher excise duty on luxury goods will lead to increased tax payable,” said Faure.

Nedbank Group’s Economic Unit said expenditure 2017/18 was lower than both the original estimate and the revised MTBPS estimate.

“Expenditure ceilings for non-interest expenditure have been reduced, with spending projected to grow by 7.3 percent this year. The budget allows for R50.7 billion for free higher education fees for qualifying students. It is hoped that restructuring government and keeping the wage bill under control will compensate for this large new item.”

David Crosoer, the executive of research and investments at PPS Investments, was optimistic that the 1.5 percent economic growth prospect for 2018 was possible.

He said Gigaba’s maiden speech had kept up with the positive momentum created by the State of the Nation Address, giving us all renewed hope for improved future prospects.

“The budget is market-friendly, showing a firm commitment to get a handle on state expenditure, improve the governance of State Owned Enterprises and a welcome focus on getting the debt to GDP ratio under control. While there is the unpalatable decision of raising the VAT rate, there was no new, super-marginal tax rate bracket announcement,” said Crosoer.

Lesley O’Connell, PwC VAT partner, warned that the increase would result in additional costs for consumers.

“This will have a major impact on households’ already tight budgets. The implementation of the VAT increase for certain business will also be complex, and the implementation date of April 1 does not leave much time,” he said.

This article was first published by IOL on 22 February 2018