With the country’s debt teetering on the brink of further downgrades, the budget was being watched closely by investors and funders alike. The onus was on government to show that they were serious about narrowing the budget deficit by controlling spend and increasing revenue, without stifling our low-growth economy.
In our view, the budget delivered was generally fair and balanced. Challenges remain with the most significant being our current low economic growth environment and growing sovereign debt.
Key highlights of the budget:
- VAT will increase from 14% to 15%. Although basic foodstuffs remain zero rated and therefore do not attract VAT, the increase in VAT will impact all consumers negatively, particularly those at the lower end of the income spectrum. This is the first time VAT has been increased since 1993.
- Personal income tax increases will be mostly felt by those earning a taxable income of more than R500 000 per year as tax bracket adjustments were lower than inflation. The fuel levy will increase by 52 cents per litre, made up of a 22 cents per litre increase in the General Fuel Levy and a 30 cents per litre increase for the Road Accident Fund. Increases in the fuel levy have the potential to drive inflation higher but we are hopeful that the stronger Rand will cushion the effect of this for the foreseeable future.
- Estate duty for deceased estates will increase from 20% to 25% for the portion of an estate exceeding R30 million. Accordingly Donations tax was also increased from 20% to 25% for donations exceeding R30 million.
- There will be an increase in excise duties on tobacco and alcohol. These common ‘sin taxes’ mean that a 340ml beer will cost you 14.615 cents more and the price of a pack of 20 cigarettes will increase by R1.22.
This budget has seemingly sent a strong and positive message to international investors and funders that South Africa is committed to fiscal discipline and economic growth.
There was at least some good news in the budget with National Treasury expecting economic growth to improve to 1.5%, rising to 2.1% by 2020. Inflation has also fallen to 4.4% which may create space for the South African Reserve Bank to continue easing interest rates.
Improving economic growth prospects for South Africa should limit the necessity for future tax increases and assist with an improving fiscal position.
All round a tough but well considered budget that hopefully stimulates economic growth for South Africa and does enough to avoid any further credit rating downgrades of the country’s sovereign debt.