South Africa tackles the budget deficit by rising VAT to 15%


By Letreis Lawrence, Corporate Communications Assistant, CIPFA

Since becoming president, Cyril Ramaphosa has pledged to cut South Africa’s budget deficit by increasing its value added tax for the first time in 25 years. From 1 April this year, VAT will go from 14% to 15%, as part of efforts to cut the budget deficit. A Reuters report has stated the VAT hike will generate 23bn rand (1.93bn USD) of revenue in 2018/19. Whether this will prove to be popular with people, only time will tell.

South Africa is working hard to plug a 50.8bn rand (4.27bn USD) revenue hole in its finances and repair its economy. The VAT increase was announced during the Treasury’s presentation of the country’s new budget, along with expenditure cuts over the next three years to fund inclusive growth and social spending. 

In aim of stabilising debt and narrowing the deficit in South Africa, 85bn (7.15bn USD) rand has been slashed from the government’s spending over the next three years. 

Finance Minister Malusi Gigaba gave South Africa’s 2018 Budget speech and put the measures in context of the Freedom Charter, the Constitution and the National Development Plan (NDP). He explained that these goals were ultimately aimed at addressing the triple challenges of poverty, inequality and unemployment. For these goals to be achieved implementation of radical socio-economic transformation is greatly needed.

The Department of Education acknowledged that South African children are unable to execute tasks that demonstrate key skills associated with literacy. Poor education makes the children of the future ill-equipped for the world of employment. The imperative skills that are not being given to an individual will bring about the inability to work and contribute to their economy, which will then cause further deficit and unsustainability in South Africa. 

However, the Budget also recognised and included spending on education, rising 13.7% annually. The government will be investing 32bn rand (2.69bn USD) in building and upgrading schools, providing clean water and sanitation to schools, and investing in getting pupils into the education system. The Department of Education also launched the 'Read to Lead' campaign in 2015, which will continue over the next four years. The focus of the campaign is to improve the reading abilities of all South African children, while the main aim of the campaign is to ensure that all learners are able to demonstrate age appropriate levels of reading by 2019. 

Education is an important aspect for any government to seriously consider and fund appropriately to ensure citizens are properly educated and able to add value to the economy. 

In 2017, Bloomberg explored the poor health care and service that South Africa’s citizens receive, with 1,427 facilities being inspected in the four years through March 2016. Only 6% of them passed their inspections, on criteria ranging from drug availability to infection control. South Africa’s doctor-patient ratio is 0.8 per 1,000, lower than Brazil, Russia, India and China, Egypt and Mexico. The poor working conditions, damaged equipment, severe shortages in medicine and insufficient numbers of staff, are the biggest reasons cited by doctors for leaving South Africa’s public sector.

South Africa’s 2018 Budget has taken into account these issues and pressures and has provided the National Health Insurance project with an additional 42bn rand funding, through a reduction in tax benefits on medical expenses. Keeping workers healthy will in turn help South Africa’s economy, so this focus on improving health care for those who most need it is a step in the right direction for South Africa.

Overall, the VAT hike has not been popular with everyone. A question can be posed about why South Africa’s Government did not choose to increase income tax rather than VAT. As VAT can be seen as a regressive tax that disproportionality affects people on lower incomes than those on higher incomes. However, Malusi Gigaba stated, a below inflation increase in the personal income tax rebates and brackets will be made with greater relief for those in the lower income tax brackets. South Africa’s government is working to plug the funding gap, make their economy sustainable and narrow the deficit and a VAT increase is their chosen way to do so.

This article will also appear in The Accountant. 

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