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JOHANNESBURG — Government on Wednesday was left with little choice but to hike the VAT rate by one percentage point. It’s the first time since 1993 that the country’s sales tax has been increased, and listening to unions’ reaction afterwards, they were clearly not happy. But the reality is that Gigaba and team Treasury were left with little wiggle room. President Cyril Ramaphosa’s administration is trying everything it can to avert a further credit ratings downgrade by Moody’s. If such a downgrade had to happen, it risks hurting South Africans more than a once-in-a-generation VAT increase. Here then are six brilliantly compiled graphs by Bloomberg that sum up the tough choices that government had to make yesterday. – Gareth van Zyl
(Bloomberg) – South Africa unveiled a budget that will raise taxes and cut spending as it seeks to fend off a third junk credit rating.
These charts show the tradeoffs the National Treasury has had to make to steer the fiscal ship away from a debt downgrade.
A smaller-than-projected budget deficit will mean slower growth in borrowing. Finance Minister Malusi Gigaba forecast in October that gross government debt will exceed 60 percent of gross domestic product from 2022 onward. The Treasury has now trimmed the projection to reach a turning point of 56.2 percent in that year.
The budget shortfall is projected to narrow to 3.5 percent of GDP by 2021, compared with the October estimate of 3.9 percent, due to improved economic growth and revenue collection.
Moody’s Investors Service put South Africa’s debt on review for a downgrade to junk last year, the only major ratings company to still assess the bonds as investment grade. Improved economic growth forecasts and plans to narrow the fiscal deficit may placate Moody’s, which said in November its review would consider the budget plans.
The Treasury has proposed ways to increase tax revenue by R36 billion to R1.34 trillion in the 2019 fiscal year. The one percentage-point increase in the value-added tax rate would be the single-biggest contributor, adding R22.9 billion. The additional revenue from not fully adjusting income-tax brackets to compensate for inflation would be R6.8 billion, while the introduction of a tax on sugary beverages would contribute R1.9 billion, the Treasury said.
The fastest-growing spending category is post-school education and training, which will advance by an average of 13.7 percent annually in each of the three fiscal years through 2021. This comes after the ruling African National Congress pledged free post-school education for students that come from homes where the combined household income is less than 350,000 rand annually.
The National Treasury proposed raising the value-added tax rate for the first time since 1993, increasing it by one percentage point to 15 percent. Some products, such as rice, corn meal and paraffin, are exempted, which partially offsets the effects on the poor, it said. The wealthiest 30 percent of households contribute 85 percent of VAT revenue, the Treasury said.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.