Fiscal discipline

While there were a lot of areas which caused concern for consumers in the 2018 budget, it seemed as if government was backed into a corner and that former Finance Minister Malusi Gigaba had little choice but to make the tough decisions that will hopefully grow the economy.

It is now up to the new Finance Minister Nhlanhla Nene – who is not unfamiliar with the position – to work with what Gigaba left him. How will this effect the consumer? 

The issue of VAT

The issue of increasing Value Added Tax (VAT) has always been seen as a political mine field. On the one hand, it is one of the easiest ways to increase the country’s tax revenue. On the other hand, it affects rich and poor citizens alike and the African National Congress (ANC) has relied heavily on the vote of the poor in the past to keep the party in power. 

But there was simply nothing else that government could have done. The question now is: how will the VAT increase affect the man on the street? 

Jenny Gordon, Head of Legal Support and Legal Services at Alexander Forbes Retail, says that the VAT decision increase the cost of living for all households. However, the zero-rating of basic food items and paraffin will reduce the impact on the poor, who will receive further assistance through an above-inflation increase in social grants. 

“The wealthiest 30% of households in the country contribute 85% of the country’s VAT revenue. South Africa’s VAT system includes 19 basic food items that are zero-rated. This system remains in place. While government has explored implementing a more progressive tax, this option is not being proposed and it has not been recommended by the Davis Commission,” says Gordan. 

Medical tax credits

One of the aspects of the budget that may affect the public the most is the decision to use medical tax credits to fund the National Health Insurance programme. 

“Over the next three years, below-inflation increases in medical tax credits will help government to fund the rollout of national health insurance. The medical tax credit will be reviewed after the Davis Tax Committee presents its recommendations,” says Gordan. 

“The medical tax credit consists of two components; medical scheme fees for approved medical scheme contributions and additional medical expenses for out-of-pocket medical payments. Government is concerned that some taxpayers may be claiming this credit more than once. For example, adult children jointly contributing to their elderly parent’s medical scheme. Where taxpayers carry a share of the medical scheme, contribution or medical cost, it is proposed that the medical tax credit should also be apportioned between the various contributors,” concludes Gordan. 

Investor joy

One of the most positive aspects of the budget is the new investment outlook. 

In a release to the media, Dave Mohr – Chief Investment Strategist Old Mutual Multi-Managers – said that with the offshore allocation of balanced funds lifted from 25% to 30%, fund managers will have more freedom to allocate funds based on expected return and valuation. Institutional investors can also increase African exposure from 5% to 10%. 

“This is probably the biggest surprise for local investors. The further easing of capital controls demonstrates government’s confidence in the local economy and local assets. The experience of recent times (2011- 2015) showed that it was useful to the domestic economy (and the fiscus) for South Africans to have substantial foreign assets in a declining rand environment, acting as a shock absorber,” said Mohr. 

He added that changes to offshore exposure (currently at the maximum of 25% for most balanced funds) will need careful reconsideration. For one thing, the rand is probably slightly overvalued territory on a purchasing power parity (PPP) basis after the strong appreciation of the past two years. 

Editor’s Thoughts:
Political musical chairs aside, we need to work together to achieve government’s growth ambitions if we want to see a budget that is favourable on the consumer in our lifetime. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.