​​A "Belt-Tightening" Budget to Benefit South Africa

By Jean Lombard, ​22 February 2018

The tough decisions announced in the National Budget speech will help to plug the fiscal deficit and demonstrates clear intent by South Africa’s new leadership to deal with the structural problems standing in the way of economic growth. Rating agencies will, in all likelihood, view this as a positive sign as they deliberate on SA’s credit ratings.

This is the view of Jean Lombard, Chief Executive of Sanlam Savings. Lombard says to a large extent the budget was targeted at showing that government is willing to deal with the structural issues even if it means taking politically unpopular decisions to stabilise the economy, like increasing the value-added tax (VAT) rate. “Although the increase in various taxes are likely to leave middle and high income earners poorer in real terms, it’s a good budget for the country given where we find ourselves in terms of the budget deficit.”

The Finance Minister increased the VAT rate from 14 percent to 15 percent and provided below inflation increases (at 3.1%) in the personal income tax rebates and the bottom three personal income tax brackets. The top four brackets will remain unchanged, which means that he did not adjust middle and higher income tax brackets for inflation.

“It was always going to be a tough budget for middle and high income earners. We are sitting with a budget deficit of over R50 billion. Following recent year increases in Personal Income Taxes (PIT) , CGT and Dividends Tax, Government was willing to make tough decisions by looking at other tax revenue streams. Hiking PIT is always an easier decision to make, but had the Minister gone this route again, people might have been tempted to look for loopholes to reduce their tax bill, given that just 14.5% of taxpayers contribute more than 67% of the personal income tax bill. PIT increase would also have greater negative consequences for economic growth and investment that a VAT increase.”

Lombard says while it is likely that there will be unhappiness with the increase in VAT, the Minister considered the overall impact on the poor by increasing social grants with more than inflation and maintaining the zero-rating on basic food items. The progressive structure of the tax system was also maintained by raising excise duties on luxury goods which are consumed mainly by wealthier households.

He says the hike in the VAT rate will affect the middle and higher income households the most as National Treasury’s estimates show these groups contribute more than 85% of the VAT revenues.

There are positive take outs for middle and high income earners too, says Lombard: Government did not reduce incentives already in place to encourage saving and investing and the Capital Gains Tax inclusion rate and dividend tax remained unchanged. Medical tax credits also received below-inflation increases, but remain in place despite some fears that these might be scrapped to make way for funding the National Health Insurance.

“As the Minister pointed out, this budget attempts to shift spending away from consumption towards investing. People who want to invest for a better future will still enjoy the tax benefits of investing for retirement or putting money into Tax-Free Savings Accounts."

Lombard concludes that while the budget asks consumers to tighten their belts through the introduction of tax increases, Government should know that consumers will be watching them closely to see whether they, too, are going to tighten their belts in order to reduce government expenditure over the next 3 financial years.