The 2018 Budget, presented by Finance Minister Malusi Gigaba in Parliament, lays out the painful consequences of the country's public finances for South Africans.
The National Treasury's proposal of an increase in Value Added Tax (VAT) – a tax applied to most items consumers purchase – from 14% to 15% is the most dramatic change of these consequences. It is a tax paid by all citizens, putting it up by one percent point raises certain concerns about the negative effects on the poorest households.
The Budget also proposes that tax brackets for the highest-earning 1 million taxpayers will not be adjusted for inflation, which effectively increases income taxes for these taxpayers.
Another concent for distress is that the country's finance is proposed cuts to government infrastructure spending, especially at local and provincial government level. The need for expenditure cuts is exacerbated by the fact that the budget supports former president Jacob Zuma's commitment to providing free higher education for a great number of students. The minister said that the policy would be phased-in, with the Budget indicating that the cost rises from R12-billion to R24-billion over the next three years. But there are reasons to believe the cost could be higher.
While the ascension of Cyril Ramaphosa to the presidency has provided hope that pressure on public finance will be reduced by the state being better managed, it will likely take years to improve South Africa's current financial situation.
A substantial shift
October 2017, Gigaba painted a grim picture of South Africa's public finance in the 2017 medium-term budget policy statement. With an expected R50-billion shortfall in tax revenue Gigaba also indicated that national debt would increase rapidly – contrary to repeated earlier promises to "stabilise" the debt levels.
The 2018 Budget reflects a substantial shift from this position. The new plan is to return to a strategy of reducing the speed at which national debt increases relative to the size of the economy so that within a few years the national debt will begin to decline.
The debt will still increase to levels higher than promised in numerous previous budgets, but significantly slower than suggested in October. Reducing the debt at which the government borrows, requires raising money from taxes and decrease planned government expenditure. This is even more difficult to do because of Zuma's announcement of "free higher education" – which took place after the medium-term budget statement.
To make "free higher education" a reality means a combination of more taxes, more spending and more borrowing.
Important factors to keep in mind
By law, the budget is actually a set of proposals – even though the Treasury and minister of finance almost always get their way. The proposals are only fully legally binding once they have been approved by parliament. If citizens are not happy with certain proposals there are still opportunities in Parliament to change it.
Some of the proposals that need attention are:
1. The impact of VAT increase: Of all the major taxes available, VAT is the least "progressive". It is paid to a much greater extent by the poor and vulnerable than personal income tax or corporate tax. In the context of South Africa's high rates of income and wealth inequality, VAT has not been increased since 1994.
The tax increase has been defended on the grounds that other options – personal and corporate income tax – are increasingly strained and VAT is the least harmful to economic growth. It seems likely that most poor households will experience additional hardship.
2. Free higher education: The budget repeatedly states that the costs of Zuma’s free higher education announcement “remain uncertain”. It is surprising that the budget does not provide more detail.
The budget indicates additional government expenditure of R12.4-billion in 2018/19, increasing rapidly to R20.3-billion in 2019/20 and R24.3 billion in 2020/21 as the policy is rolled out beyond just first-year students. But these numbers look optimistic.
3. Expenditure cuts: The budget proposes R85-billion in cuts to planned government spending over the next three years. It is hard to tell what the implications of spending cuts really are just from looking at the number and explanation in the budget.
Firstly the cuts affect infrastructure spending in particular: about R40-billion is cut. In some ways this is understandable. But it’s also dangerous because these decisions seem, for now, less harmful than they really are. That’s because South Africa’s economic and social infrastructure is already a matter of concern and the additional negative consequences of underspending will only be noticed years down the line.
Secondly, the cuts are targeted at provincial and local government: R28-billion will be cut in grants given to local and provincial governments for various infrastructure programmes. This is also concerning given the importance of service delivery at these levels.
Treasury needs to provide more information on why the decision was taken to increase VAT, and what the implications are likely to be. It is important because it raises concerns about the effect on poorer and more vulnerable South Africans.
Finally, the attitude of the Treasury in recent budgets has been that provinces and municipalities simply need to become more efficient and must fulfil their obligations with fewer resources. But what if that’s not possible? The Treasury can’t wash its hands of the negative consequences of cuts to critical areas of service delivery.
In conclusion, the Budget represents progress since last year when Zuma and his cabinet effectively sat on their hands and refused to take any difficult decisions. At least proposals have now been made to stabilise the national debt. Whether they represent the best solutions to our public finance challenges is a matter for public debate.
Take a look at the graphic below from Eye Witness News for a simple breakdown of the speech.