Budget Speech Summary:
South Africa’s new president Cyril Ramaphosa might not have been directly responsible for the deployment of the person who delivered the Budget Speech, but his fingerprints are all over the document. The text comes from a different universe to the flowery waffle Zuma-appointed finance minister Malusi Gigaba indulged in during his October mini-Budget address. Like Donald Trump in Davos, Gigaba’s address was tightly scripted – this speech is all business. That’s reflected by its length – 8,800 words – which, despite it dealing with far more substantive issues than October’s mid-term address, is around 1,000 words shorter. Also, instead of the emotive rhetoric that punctuated the Zuma era, this one is on point, rational, professional. As heartening, there are only two oblique mentions to Radical Economic Transformation – one in reference to “deconcentrating the economy” through greater competition, and the other relating to the creation of opportunities for black agricultural producers. A new age has truly dawned.
Here’s the executive summary:
- New taxes will be introduced to raise R36bn. On the other side of the bookkeeping statement, the annual cost cutting programme introduced by Pravin Gordhan in 2016 to save 5% a year (R25bn) through consolidating State procurement, has been written in concrete this year. As a result, the 2018/19 Budget deficit is projected to fall from 4.3% to 3.6%.
- The largest reallocation of State resources is R57bn to fund fee-free higher education over the next three years. It will be phased in, starting this year with free tertiary education for first year students from households that earn less than R350 000pa (75% of taxpayers).
- The lion’s share of the coming year’s additional tax of R36bn will be generated by an increase from 14% to 15% in VAT, which will generate R22.9bn. This is the first time in the democratic South Africa that VAT has been raised, the last increase coming in 1993. VAT’s share of total revenue rises to 25.9% from last year’s 24.7%. Personal income tax remains the biggest contributor at 37.6% with corporate tax kicking in 17.2%.
- The impact of fiscal drag or bracket creep, where income rises automatically because of inflation, is now R21bn a year. An equitable tax policy would kick this back through adjusting the bands. This year only the bottom three income levels will enjoy the usual adjustment, kicking back only a third of the hit. As a result, an effective R14bn extra tax burden will fall on those earning over R410 000 a year.
- A total of R1.2.bn in new revenue will be raised through a higher fuel tax. The price of petrol and diesel will rise by 52c a litre; 30c/l for the Road Accident Fund and 22c/l for the general fuel levy. Sin taxes will be increased between 6% and 10% raising R420m (tobacco) and R910m (alcohol) respectively.
- Estate duty tax is raised to 25% for estates of greater than R30m. This will raise R150m in fresh taxes.3
- The excise duty on luxury goods is raised from 7% to 9%. This will raise an additional R1bn for the fiscus.
- Spending on education is the fastest growing spending category, rising 13.7% annually. Over the next three years R32bn will be invested in building and upgrading schools; R22bn in feeding 9m learners at 19 800 schools; and R3.8bn will go into providing water and sanitation for 325 and 286 schools respectively.
- Over the medium term, the National Health Insurance project will receive an additional R4.2bn funded through a reduction in tax benefits on medical expenses.
- New country-by-country reporting, in line with G20 recommendations, are being introduced which will help to address tax base erosion by multinational companies through transfer pricing.
- Treasury is investigating ways in which companies reduce their tax liability through excessive interest deductions.
- A total of R3bn will have been collected by end March from over 2 000 applicants for off-shore wealth amnesty through the Special Voluntary Disclosure Programme.
- Online sales to South Africans by foreign businesses will in future be liable to VAT.1
- Six Special Economic Zones have been approved where companies will be enjoy reduced corporate tax rates and employment tax incentives.
- Carbon Tax will be implemented on 1 January 2019, based on a principle of polluter-must-pay.
- Overall government spending will increase from R1.56 trn to R1.67trn in the year ahead. It is projected to rise at a real rate of 2.1% in the next three years.
- South Africa’s economy is anticipated to grow by 1.5% in 2018 after 1% in 2017 (raised from the 0.7% anticipated in October’s Mini Budget.)
- The consolidated Budget deficit for 2017/18 was 4.3%. This is slightly lower than what was expected in October as higher economic growth led to a R2.6bn improvement in revenues, narrowing the revenue gap to R48.2bn from October’s expected R50.8bn.
- Old age grants will increase by R90 to R1 690 in April and to R1 700 in October. The child support grant rises to by R20 to R400 in April and to R410 in October. This will cost a total of R2,6bn.
- Social spending will increase 7.9% a year.
- The Department of Agriculture is re-prioritising R581m of its Budget allocation over five years to support a black producer commercialisation programme for 450 farmers.
- The Department of Rural Development and Land Reform will accelerate restitution claims with plans to settle 2 851 of these worth R10.bn. A further R4.2bn has been set aside to acquire R4.2bn for 291 000ha of “strategically located land.”
- An allocation of R6bn has been set aside for provincial and local government to assit with drought relief.
- A property audit conducted by the Department of Public Works shows that national government owns 195 000 properties worth over R40bn. A programme will be implemented to “better utilise of dispose of” the properties. It will also review all rental and property leases in an effort to cut costs.
- The new Twin Peaks authorities will be established “on or soon after” 1 April 2018.
- The finmin welcomed back Old Mutual, which is shifting its primary stock exchange listing from London to Johannesburg.2 He added his voice to calls for retribution for the Steinhoff accounting fraud, saying SA regulators are working with foreign counterparts to ensure “those at fault are made to account for their crimes.”
- Offshore allocation limits for institutional investors are increased by five percentage points across all categories.2
- The Financial Services Board has been directed to “proceed with measured to modernise and improve the governance” of all retirement funds, including the requirement that they must now submit financial statements every year.
- Government will be reviewing all of its open-ended, “evergreen” contracts to open up opportunities for SMMEs and black owned companies to participate; and next week all departments will be instructed to pay suppliers on time “or be charged with financial misconduct.”
- South Africa’s Budget remains one of the most transparent on earth and was ranked joint first (with New Zealand) in the 2017 Open Budget Survey