Budget 2018 Tabled in Parliament

National Treasury

Tabling Budget 2018 in parliament, finance minister, Malusi Gigaba, described it as a “tough, but hopeful budget.”

The minister called for 2018 to be the year of “renewal, revitalization and a step change in progress in fostering inclusive economic growth which rolls back unemployment, poverty and inequality.”

The Budget balances a number of key priorities including social investment and protection, economic investment and the need to stabilise the growth in public debt.

According to the minister, the current challenge is to build a country in which all people have a decent standard of living, access to economic opportunities and opportunity to pursue their dreams.

The budget was designed to contribute towards achieving these objectives.

Difficult but necessary trade-offs were needed to ensure that the budget supported renewal, inclusive growth and job creation.

In a nutshell, the budget was focused on educating the youth, protecting the vulnerable and promoting inclusive growth.

Spending would be moderated and revenue raised to rein in rising debt while at the same time minimizing negative effects on growth.

Government will seek to create the right environment for investment, work with social partners to create sustainable employment, address governance and financial failures at state-owned companies and reduce concentration within the economy.

A new compact with the social partners will be forged to achieve these objectives.

Investor certainty was necessary to increase levels of investment and thereby support job creation.

Fiscal Framework

Government still faces a revenue shortfall of R48.2 billion in the current year, which carries through to the outer years of the medium-term expenditure framework.

Large new allocations are also required over the medium-term to meet fee-free higher education and training requirements.

The minister announced that significant changes to the fiscal framework have, therefore, been made to meet the challenges.

New tax measures raise an additional R36 billion in 2018/19, mainly through a higher VAT rate and below-inflation adjustments to personal income tax brackets.

The spending ceiling has also been revised down marginally from what was announced in October.

Over the medium term, the spending framework includes:

•    Expenditure reductions approved by Cabinet amounting to R85 billion.
•    An allocation of R57 billion for fee-free higher education and training.
•    Additions to the contingency reserve amounting to R10 billion.

The consolidated budget deficit is projected to narrow from 4.3 per cent of GDP in 2017/18 to 3.5 per cent in 2020/21.

The main budget primary deficit reduces over the medium term.

The gross debt-to-GDP ratio will stabilize at 56.2 per cent of GDP in 2022/23, and decline thereafter.

Tax Proposals

The tax proposals for the 2018 Budget are designed to generate an additional R36 billion in tax revenue for 2018/19.

The gross tax revenue projected for 2018/19 amounts to R1.345-trillion.

The main tax proposals for the 2018 Budget are:

•    An increase in the value-added tax rate from 14 per cent to 15 per cent;
•    A below inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets;
•    An increase in the ad-valorem excise duty rate on luxury goods from 7 per cent to 9 per cent;
•    A higher estate duty tax rate of 25 per cent for estates greater than R30 million;
•    A 52 cents per litre increase in the levies on fuel, made up of a 22 cents per litre for the general fuel levy and a 30 cents per litre increase in the Road Accident Fund Levy; and
•    Increases in the alcohol and tobacco excise duties of between 6 and 10 per cent.
•    The health promotion levy (sugar tax) is expected to generate R1.93bn in 2018/19.

The minister declared that treasury had decided that increasing VAT was unavoidable in order to maintain the integrity of South Africa’s public finances.

The current zero-rating of basic food items such as maize meal, brown bread, dried beans and rice will limit the impact on the poorest households.

Medium Term Expenditure and Division of Revenue

Consolidated spending will increase from R1.67 trillion in 2018/19 to R1.94 trillion, representing a nominal annual average growth of 7.6 per cent, or 2.1 per cent in real terms.

Government will spend R792 billion on basic education, R668 billion on health and R528 billion on social grants over the medium term.

In 2018/19, R200 billion has been allocated for peace and security and another R200 billion for economic development to build a safer country and to stimulate inclusive growth.

Higher education and training will get additional funding of R57 billion over the medium term making it the fastest growing spending category.

Government will phase in fee-free higher education and training to students from poor and working-class families.

All new first-year students with a family income below R350 000 per annum at universities and TVET colleges in the 2018 academic year will be funded for the full cost of study.

Over time, all years of study will be covered.

Returning NSFAS students at university will have their loans for 2018 onwards converted to a bursary.

Over the medium term, R3.8 billion allocated to the School Infrastructure Backlogs Grant will replace 82 inappropriate and unsafe schools, and provide water to 325 schools and sanitation to 286 schools.

The NHI is allocated an additional R4.2 billion over the medium term.

Overall, government will spend R205 billion on health in 2018/19 growing to R240 billion
by 2020/21.

Above-inflation adjustments to the social grants include:

•    Old age, disability and care dependency grants to increase on 1 April 2018 from the existing R1600 by R90 to R1690 and by a further R10 to R1700 on 1st October 2018.
•    Child support grant to increase from the baseline of R380 to R400 on 1 April and to R410 on 1 October. This is a 6.6% annual increase.

An additional R2.6 billion allocation to social grants since the MTBPS enabled the changes.

To boost global market access for South African agricultural products, the department of agriculture, forestry and fisheries received an additional allocation of R40 million over the MTEF to upgrade infrastructure and equipment for analytical services laboratories.

Over the medium term, the department of rural development and land reform intends to accelerate the settlement of restitution claims with plans to finalise 2 851 claims at a budgeted amount of R10.8 billion.

The department has also set aside R4.2 billion for the acquisition of about 291 000 hectares of strategically located land.

In the provincial and local government spheres, a provisional allocation of R6 billion has been set aside in 2018/19 for several objectives including drought relief and to augment public infrastructure investment.

Allocations for drought response funds for water infrastructure projects and EPWP will be made in the medium term budget in October 2018.

The budget contains disaster relief grants for provinces and municipalities worth R473 million in 2018/19 in order to provide short-term assistance.

Funds available for spending on public services grow by an average of 7.1 percent per annum over the medium term, increasing to R1.3 trillion next year, and projected to rise to R1.5 trillion in 2020/21.

Over the next 3 years, 48 per cent of nationally raised funds are allocated to national government, 43 per cent to provincial government and 9 per cent to local government.

In the Pipeline

Budget allocation for the Judicial Commission of Inquiry into State Capture will be dealt with in the 2018 medium term budget once costing requirements had been finalised.

The Competition Commission’s market inquiry into data prices will be completed by the end of August 2018. This will contribute towards efforts to improve competition in the telecommunications sector.

Treasury, together with the Reserve Bank, the Financial Intelligence Centre and the South African Revenue Service, is taking steps to detect, disrupt and deter illicit financial flows.

Some of the measures include increasing capacity, coordinating a national risk assessment and improving information sharing between various agencies.

According to the minister, treasury is also investigating options to further curb the practice of excessive interest deductions by companies in order to reduce their tax liability.

As regards the draft Carbon Tax Bill, designed to assist South Africa to meet its climate change commitments to reduce carbon emissions, the minister confirmed that the tax will be implemented from 1 January 2019.

A policy paper that aims to broaden the scope of environmental fiscal reform, explore fiscal and regulatory measures to improve water resource management, mitigate the emission of pollutants and encourage recycling to reduce waste will soon be published.

In 2018, government will also respond to the Davis Tax Commission’s report on tax administration.

Draft legislation to give effect to some of the Commission’s recommendations, including the accountability of SARS to the finance minister, the setting up of a supervisory board and measures to strengthen the Office of the Ombud will be introduced in 2018.

Over the medium term, government will also review the efficacy of current support measures to municipalities and introduce a new instrument designed to facilitate the turnaround of poorly performing municipalities.

State-owned companies will also be assisted to develop and implement effective turnaround plans. This will also include restructuring with equity investment for certain SOCs.

During 2018, government may have to provide financial support to several SOCs which could be done “through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.”

Draft legislation will also be published soon to strengthen the financial regulatory system, including introducing deposit insurance and introducing a new way of resolving banks that are in financial distress.

The offshore allocation limits for institutional investors will also be increased by five percentage points across all categories.

The draft Public Procurement Bill will be tabled in cabinet in March 2018 for approval for public comment.

Sabinet Cape Town Office