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By Alec Hogg
South Africans are today counting the cost of Jacob Zuma’s disastrous leadership. But while they curse a 1% higher VAT rate; no inflation-rated adjustments for “bracket creep”; a 52c/litre fuel price rise; a jump from 7% to 9% in luxury import duties, and higher sin taxes, they might also allow themselves a sigh of relief.
After years of contracting GDP per capita (in US Dollar terms South Africans have been getting poorer since 2011) some rationality is finally returning to those who determine the priorities of national finances. It is obvious from today’s Budget allocations and tax adjustments that, although it’s barely two months since he won a razor thin majority in the vote for the ANC’s presidency, business-savvy Cyril Ramaphosa is already having an impact where it matters.
It is hard to believe his predecessor would have directed the implementation of a non-populist VAT increase rather than the populist alternative of jacking up the top marginal income rate. As it happens, after last year’s three percentage point hike in the top marginal income tax rate (to 45%) and higher dividend tax, both were left untouched this time.
Top income earners are still carrying a disproportionate burden, however, with the 270,000 (3.7% of the total) who report taxable income of over R1m a year now paying 38.5% of total personal income tax while earning 22% of the declared taxable income.
Economically illiterate Jacob Zuma handed his successor a political poison chalice by promising fee-free tertiary education to the children of all but around a million households. With the sweep of his populist hand, Zuma landed National Treasury with a headache now quantified as R57bn over three years.
At the traditional “lock-up” press conference, Zuma’s finmin Malusi Gigaba and his emotional deputy Sifiso Buthelezi offered a spirited defence of the decision to make university education free. Gigaba also argued that VAT doesn’t hurt the poor.
Sensible educationalists have long told us the real blockages in a broken education system lie a lot further down the chain. And Gigaba’s VAT argument is very definitely a minority among economic theorists who explain that broader collection vehicles are the antithesis of progressive tax systems.
But all of that is now water under the Zuma bridge.
There was zero room or time for creativity on stimulating economic growth this time. Ramaphosa didn’t have much time to get his hands around the national bookkeeping exercise. But he was helped by the excellent team at National Treasury whose leader, new DG Dondo Mogajane, said that he and his 1,200 colleagues have learnt that finance ministers have tended to come and go – so they focus on just getting on with the job.
They kept it simple: Treasury needed to fill a R36bn hole and find tens of billions to meet Zuma’s free university pledge. They did so by raising VAT and using the automatic revenue boost that inflation provides to tax scales (aka fiscal drag).
There were a few bits and bobs at the extremities. In essence, however, that’s the story of this Budget.
But in truth, these are little better than stop gaps. Ramaphosa’s Administration has been dealt a weak hand. And its priority is to get the economy growing again. Without a significant improvement in economic growth – and the projected rise from 1% to 1.5% won’t cut it – Treasury will be facing an even greater challenge next year.
This year there was a R48.2bn revenue hole that pushed the 2017/18 Budget deficit from the modest, healthy 3.1% projected by Pravin Gordhan a year ago, to a distressing 4.3%. That dropped SA from a place among respectable global company next to the likes of Malaysia and France, into the league of recovering basket cases like Argentina and Pakistan.
Ramaphosa needs to get that corrected – and fast – or risk further downgrades by ratings agencies. His renowned negotiating skills and trade union background must have been put to good effect in convincing organised labour to bend a cornerstone “no-VAT-increase-ever” position.
Gigaba ducked a question about whether there had been any negotiating on VAT with trade unions, claiming that it is senseless to engage ahead of any tax increases. But given their vociferous opposition in the past and their obvious potential to do damage, it is naïve to believe this particular balloon wasn’t floated ahead of time.