The <a href="http://www.treasury.gov.za/documents/national%20budget/2018/speech/speech.pdf" target="_blank" rel="noopener">2018 Budget</a>, presented by Finance Minister Malusi Gigaba in Parliament, lays out the painful consequences of the country’s public finances for South Africans.
The National Treasury’s proposal of an increase in Value Added Tax (VAT) – a tax applied to most items consumers buy – from 14% to 15% is the most dramatic of these consequences. Because it’s a tax paid by all citizens, putting it up by 1 percentage point raises concerns about the negative effects on the poorest households.
The Budget also proposes that tax brackets for the highest-earning 1 million taxpayers will not be adjusted for inflation, which effectively increases income taxes for these taxpayers.
Another sign of the distress the country’s finances are in came in the form of proposed cuts to government infrastructure spending, especially at local and provincial government level. The need for expenditure cuts is exacerbated by the fact that the budget supports former president Jacob Zuma’s commitment to provide <a href="https://www.news24.com/SouthAfrica/News/zuma-announces-free-higher-education-for-poor-and-working-class-students-20171216" target="_blank" rel="noopener">free higher education</a> for a greater number of students. The minister said that the policy would be phased-in, with the Budget indicating that the cost rises from R12bn to R24bn over the next three years. But there are reasons to believe the cost <a href="https://theconversation.com/free-higher-education-in-south-africa-cutting-through-the-lies-and-statistics-90474" target="_blank" rel="noopener">could be higher</a>.
Whether measures announced by Gigaba will stave off a downgrade of South Africa’s local currency debt by the one remaining rating agency remains to be seen. While the ascension of Cyril Ramaphosa to <a href="http://ewn.co.za/2018/02/15/watch-live-ramaphosa-to-be-sworn-in-as-sa-president" target="_blank" rel="noopener">the presidency</a> has provided hope that pressure on public finances will be reduced by the state being better managed, it will take years to significantly improve the current situation.
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<h2>A substantial shift</h2>
In October last year Gigaba painted a grim picture of South Africa’s public finances in the 2017 <a href="http://www.treasury.gov.za/documents/MTBPS/2017/mtbps/FullMTBPS.pdf" target="_blank" rel="noopener">Medium Term Budget Policy Statement</a>. With an expected R50bn shortfall in tax revenue he indicated that national debt would increase rapidly – contrary to repeated earlier promises to “stabilise” debt levels.
The 2018 Budget reflects a substantial shift from this position. The new plan is to return to a strategy of “debt consolidation”: reducing the speed at which national debt increases relative to the size of the economy, so that within a few years it begins to decline.
Debt will still increase to levels higher than promised in numerous previous budgets, but significantly slower than suggested in October. Reducing the rate at which the government borrows requires raising more money from taxes and decreasing planned government expenditure. But this is even more difficult to do because of Zuma’s announcement of “free higher education” – which happened after the medium term budget statement.
Essentially, expanded free higher education means a combination of more taxes, more spending and more borrowing.
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<h2>Some notable proposals</h2>
It is important to remember that, <a href="https://www.parliament.gov.za/storage/app/media/PBO/act-9-2009-money-bill-amendment-procedure.pdf" target="_blank" rel="noopener">by law</a>, the budget is actually a set of proposals – even though the National Treasury and Minister of Finance almost always get their way. The <a href="https://theconversation.com/explainer-the-nitty-gritty-of-south-africas-annual-budget-72901" target="_blank" rel="noopener">proposals are only fully legally binding once they have been approved by Parliament</a>. If citizens are not happy with certain proposals there are still opportunities in Parliament to challenge them.
Some of the proposals that deserve attention are:
1. The impact of VAT increase: Of all the major taxes available, VAT is the least “progressive”. It is paid to a much greater extent by the poor and vulnerable than personal income tax or corporate tax. It is arguably for this reason, in the context of South Africa’s <a href="https://theconversation.com/south-africa-needs-to-fix-its-dangerously-wide-wealth-gap-66355" target="_blank" rel="noopener">high rates</a> of income and wealth inequality, that VAT has <a href="https://www.pwc.co.za/en/assets/pdf/vat21-september-2012.pdf" target="_blank" rel="noopener">not been increased</a> since 1994.
The increase has been defended on the grounds that other options (personal and corporate income tax) are increasingly strained and VAT is the least harmful to economic growth. The claim about economic growth is debatable: it depends on assumptions about how the economy works. And although the budget claims that social grants have been increased to try and offset the negative impact, the overall effect remains unclear. It seems likely that most poor households will experience additional hardship.
2. Free higher education: The budget repeatedly states that the costs of Zuma’s free higher education announcement “remain uncertain”. This is strange and probably reflects the fact that Zuma violated normal budget protocol by almost unilaterally announcing the policy change without adequate consultation or analysis of the likely costs. Nevertheless, it is surprising that the budget does not provide more detail.
The budget indicates additional government expenditure of R12.4 billion in 2018/19, increasing rapidly to R20.3 billion in 2019/20 and R24.3 billion in 2020/21 as the policy is rolled out beyond just first year students. But these numbers look optimistic. Treasury does not explain what it has assumed about the number of students needing support and how much support will be provided.
3. Expenditure cuts: The budget proposes R85 billion in cuts to planned government spending over the next three years. It’s hard to tell what the implications of spending cuts really are just from looking at the numbers and explanation in the budget. Nevertheless, a couple of things are clear.
Firstly the cuts affect infrastructure spending in particular: about R40 billion is cut. In some ways this is understandable. But it’s also dangerous because these decisions seem, for now, less harmful than they really are. That’s because South Africa’s economic and social infrastructure is already a matter of concern and the additional negative consequences of underspending will only be noticed years down the line.
Secondly the cuts are targeted at provincial and local government: R28 billion will be cut in grants given to local and provincial governments for various infrastructure programmes. This is also concerning given the importance of service delivery at these levels.
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<h2>The gaps</h2>
The National Treasury needs to provide more information on why the decision was taken to increase VAT, and what the implications are likely to be. This is important because the move raises concerns about the effects on poorer and more vulnerable South Africans.
A detailed explanation of the likely costs of the proposed policy to expand free higher education also needs to be provided. The absence of this information raises concerns about whether Treasury has allocated enough money for this policy and, if not, whether universities may be left to deal with the consequences of insufficient funding for students who have been promised free higher education.
Finally, the attitude of the National Treasury in recent budgets has been that provinces and municipalities simply need to become more efficient and must fulfil their obligations with fewer resources. But what if that’s not possible? The Treasury can’t wash its hands of the negative consequences of cuts to critical areas of service delivery.
In conclusion, the Budget represents progress since last year when Zuma and his cabinet effectively sat on their hands and refused to take any difficult decisions. At least proposals have now been made to stabilise the national debt. Whether they represent the best solutions to our public finance challenges is a matter for public debate. &#8211; Written by <a href="https://theconversation.com/profiles/sean-mfundza-muller-298216" target="_blank" rel="noopener">Seán Mfundza Muller</a>, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), <a href="http://theconversation.com/institutions/university-of-johannesburg-1275" target="_blank" rel="noopener">University of Johannesburg</a>
This article was originally published on <a href="http://theconversation.com" target="_blank" rel="noopener">The Conversation</a>.
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South Africa’s budget: first steps towards a recovery, but at what cost?

WEF Africa 2017 was a story of foreign investors, growth and grey business suits. It also held the tale of two finance ministers. Rarely have the economic politics of the host nation loomed so large over one conference.
The reshuffling of steady-as-she-goes Finance Minister Pravin Gordhan for young, untested, Malusi Gigaba prompted a downgrade to junk status for South Africa and reverberated throughout the conference in Durban.
“I am young, I have energy for days,” says the younger of the two as he strides confidently down the walkway. Forty-five-year-old Gigaba almost shines when you look at him, like has been varnished. He has his skinny suits made for him – for about $1,600 a pop – by Johannesburg designer Linda Makhanya and wears snazzy glasses. He may have a long way to go to become the greatest finance minister South Africa ever had, but is certainly the most snappily dressed from day one.
Gigaba, fresh from an investment roadshow to New York, Washington and Boston, faces another long haul to drag South Africa clear of damaging junk status and economic decay that will drive capital away from the country.
“He is a bright guy, give him a chance,” says Maria Ramos, the CEO of Barclays Africa.
The man himself bridles at the suggestion that he is too inexperienced for the job. He says, with 13 years under his belt, he is one of the most experienced in cabinet who served in the economic cluster when public enterprises minister.
“I think as soon as he can be on top of the numbers and speak the language of the numbers he will be able to work with a very good team at Treasury,” says Lesetja Kganyago, the Governor of the South African Reserve Bank.
It is Gigaba’s difficult job to stave off another downgrade by the ratings agencies, which could come in a matter of weeks, restore confidence, promote investment and create what he calls inclusive growth – fashionable buzz words in cabinet right now – at a time when any kind of growth would be welcome.
“You need to change the patterns or structures of ownership, of the South African economy, so that black people don’t become only employees and get limited to being a middle class, but you create asset owners,” he says.
<div id="attachment_31403" style="width: 1034px" class="wp-caption alignleft"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-31403" class="wp-image-31403 size-large" src="http://www.forbesafrica.com/app/uploads/2017/06/GettyImages-661435026-1024x684.jpg" alt="" width="1024" height="684" srcset="https://cms.forbesafrica.com/wp-content/uploads/2017/06/GettyImages-661435026.jpg 1024w, https://cms.forbesafrica.com/wp-content/uploads/2017/06/GettyImages-661435026-300x200.jpg 300w, https://cms.forbesafrica.com/wp-content/uploads/2017/06/GettyImages-661435026-600x401.jpg 600w, https://cms.forbesafrica.com/wp-content/uploads/2017/06/GettyImages-661435026-768x513.jpg 768w" sizes="(max-width: 1024px) 100vw, 1024px" />Former Finance Minister, Pravin Gordhan</div>
Nationalization – a word that sends foreign investors running for the hills – is off the table for now.
“You don’t nationalize shrinking economic sectors in a shrinking economy. We are not talking about that. The ANC itself, as the ruling party, has been clear on that; South Africa is a mixed economy.”
With corruption allegations swirling around government, the new minister’s public position on it could be seen as comforting.
“If we allow corruption to become rampant it actually creates a trust deficit between the public representatives as well as the public. And it makes it difficult for us when we have to take tough decisions to earn loyalty and support from the public. And so I am committed in doing everything that we have to do and can to fight corruption and ensure that we are running a clean country.”
Also at WEF Africa was the more soberly dressed Gordhan who looked a little down and had every right to be. He had worked tirelessly for 14 months to put the economy back on to an even keel before being dragged back from an investment roadshow in London to be reshuffled ruthlessly; he found out he had been fired in the newspapers.
“What has happened has happened we can’t mourn over those things. There could have been a more dignified way in which some of those ways could have been done and it was not just me, many  colleagues were part of this process as well and if we begin to lose our sense of dignity and decorum that is not a very good sign,” he says.
It did not rob him of all hope.
“We have had assurances that the policy framework that the government has adopted will remain in place. The world of course is still an uncertain place and whilst there were still green shoots in our economy and globally there is an element of uncertainty that come in either of geo-politics on the one hand or domestic politics and economics on the other hand as well. I am not apprehensive, I am hopeful but hope must be based on some real actions that are taken,” says Gordhan.
“We have to all focus our attention on our best to get the country going, not in the interest of a few individuals, but in the interest of the 50 million people we are here to serve.”
Gordhan had a rough ride as finance minister after climbing back into the saddle in December 2015 following a clumsy reshuffle that saw three finance ministers in four days. He spent most of his second stint in the shadow of the sack or trumped up charges in court.
Even outside cabinet he was under unfriendly fire. Hotheads from the ANC youth league heckled him at a memorial service – yes, I said memorial service – for party stalwart Ahmed Kathrada in Durban. Catcalls from youths for a man who spent the best part of a year in solitary confinement for their freedom to do so.
“I think if you lack a sense of history, if the younger people are not educated about the past and don’t wish to be educated. Thirdly if you practice the politics of renting a crowd you will end up with that sort of denigratory behavior and you have to just forgive them for their ignorance,” says Gordhan before giving a warning.
“Many of us have said that if you carry on at the current rate then the ANC will lose the 2019 elections and we don’t want that to happen.”
A dignified political epitaph for a man likely to end nearly half a century of fighting the good fight by quitting politics. He says he will discuss this with his family and surely they’ve had enough by now.
As for Gigaba; people can often become what the times demand. Many expect him to do what he is told, but maybe the unexpected power bestowed upon him could see him make landmark decisions for the good of the economy with insight as sharp as his tailored suits. If only.

Tag: Malusi Gigaba

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South Africa’s budget: first steps towards a recovery, but at what cost?

A Tale Of Two Ministers