Consumers hit once again
It took South Africa almost a decade, but for the first time since 2009, the National Budget was given with a fresh air of optimism. In Ramaphosa, has South Africa finally got the right man in charge to put the country on the path of growth?
A massive speed bump
While the optimism in the economy is palpable, recovering from the damage caused by Zuma may not be the easiest thing to do.
There is the issue of the R50.8 billion budget deficit that Finance Minister Malusi Gigaba, or whoever Ramaphosa chooses as his candidate for the position over the long term, will have to address.
The consensus is that we cannot carry on with a budget deficit that is. There are several ways to achieve this; however, none of them will sit well with the public. Let's look at the table below.
| Main Budget Proposals Include: |
|---|
| an increase in VAT from 14% to 15%; |
| increased estate duty to be levied at 25% for estates above R30 million; |
| an increase of 52c/litre for fuel, consisting of a 22c/litre increase in the general fuel levy and 30c/litre increase in the Road Accident Fund levy; |
| higher ad valorem excise duties for luxury goods; |
| increases in the plastic bag levy, the motor vehicle emissions tax and the levy on incandescent light bulbs to promote eco-friendly choices; |
| no rate adjustments to the top four income tax brackets, and below inflation adjustments to the bottom three brackets; |
| no rate adjustments to the top four income tax brackets, and below inflation adjustments to the bottom three brackets; and |
| the sugar tax will be implemented from 1 April 2018. |
Let's look at the increased VAT rate, which increased by 14% to 15%. While this will have a minimal impact on the pockets of most South Africans, it will generate a sizable amount of revenue that government can use to plug holes where needed as it is the tax most paid by South Africans.
According to research done by PricewaterhouseCoopers, South Africa could collect as much as R22 billion if it raises VAT, by one percentage point to 15%.
Space for personal growth?
It will take a few years for Ramaposha's administration to undo the damage caused by his predecessor. This may mean that while there is long-term optimism, there may be short-term pain.
Is there space for personal growth? A press release by Standard Bank argues that there is.
Elna Moolman, an economist at Standard Bank, pointed out that while the expectation is that wealthier taxpayers and those consuming alcohol, cigarettes and sugar sweetened beverages will be hardest hit, consumers should experience lower inflation this year at an average of 4,4%, from last year's 5,3%.
"If wage growth is around 6,5%, it would mean real wage growth of around 2%. This is the key driver of consumer spending growth in the coming year, and in turn we expect the consumer to drive economic growth to a large extent in 2018, despite the tax increases," she explained.
The case for disciplined spending
How will the budget impact the financial services industry?
Tendani Mantshimuli, an economist at Liberty, said that the Budget took place against the backdrop of an economy that might grow around 1% by the end of the year. This will put more pressure on consumers and their ability to afford their long-term insurance cover.
"We want South Africans to become aware of the tough budget environment and how it will impact their pockets. Increased taxes are unfortunately a reality that government hopes will get it out of its current situation. It is time to reduce frivolous spending and put measures in place to maintain life insurance policies," said Mantshimuli.
"Even if your budget is tight following the Budget speech, it is advisable to rather look at cutting alternative expenses but not your cover. The reality is, if life policies such as retrenchment, life and dread disease cover are not made a priority, the ability to service basic debts after a life changing event would become impossible," said Mantshimuli.
Recent research from FMI points out that seven out of ten people will suffer an injury or illness that will impact their ability to work at some stage in their life. These injuries or illnesses may result in leave of absences that may be short-term or long-term in nature.
Additional key points
During his speech, Gigaba pointed out that personal income tax will bring in R505.8 billion, VAT R348 billion and company tax R231 billion for the 20017/18 financial year.
He also announced that the general fuel levy will increase by 52c per litre on 4 April 2018. Additionally, R324bn is provided for higher education and training, including R57bn of new allocations for fee-free higher education and training.
Government will also be spending R528.4bn on social grants. This was up from the R490 billion that was spent last year.
Editor's Thoughts:
We have the opportunity to achieve faster and more inclusive growth. This is being driven by a better global economic outlook and growth among global business partners. Quoting the late former President of Tanzania, Julius Nyerere, Gigaba pointed out that we must run while others walk, we much work together to achieve economic growth. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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