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CAPE TOWN - The rise in value added tax (VAT) to 15% will hurt lower-income households disproportionately, says Momentum Investment Economist, Sanisha Packirisamy. However, the rich will face additional tax on high-end estates, luxury items and donations. 

This comes after Finance Minister Malusi Gigaba announced various economic reforms. This is reportedly set to place our economy back on track and with a positive fiscal outlook. 

Packirisamy noted that credible structural reform efforts were announced in the budget, but implementation will be key to elevate SA’s growth profile.

One such reform is the increased pressure that higher end individuals will now face. 

Government attempted to keep tax increases redistributive, by raising estate duty rates. This will see estates valued at more than R30 million being taxed by between 20% to 25%. 

This is expected to generate R150 million in the 2018/19 financial year. 

Donations tax exceeding R30 million will also see a 20% to 25% tax increase whereas excise duty on luxury goods will see a tax increase between 7% and 9%. 

This increase is expected to produce R1 billion in the 2018/19 financial year. 

However, despite VAT increase which will hurt consumer spending, Treasury noted the zero-rating of basic food items mitigates the effect of the tax increase on poorer households.

This is set to act as a safety net for lower income households. In addition, reasury suggested vulnerable households would be compensated through a positive real increase in social grants (expected to average 2.5% in the MTEF). The lowest-three income-earning brackets were also granted tax relief (R6.8 billion) in an effort to place the burden on higher-income households.

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Meanwhile, government predicts an increase in social grants from 17.3 million to 18.1 million. 

Packirisamy says that this is in fact positive for the economy. 

“A higher number of grant recipients implies a larger allocation to current expenditure, away from capital expenditure in the budget. Capital expenditure is favoured to promote longer term growth potential in an economy. That said, the World Bank has shown that the increase in grant payments has had a positive impact on SA’s inequality ratios and has had a positive effect on alleviating poverty”, said Packirisamy. 

Despite government’s R85 billion cut in expenditure over the next 3 years, implementation will be key to elevate SA’s growth profile, said Packirisamy. 

“A renewed commitment has been made by government to resolve governance and financial issues at SA’s SoEs. Cabinet has approved a private-sector participation framework and government has committed to reviewing the funding models of troubled SoEs”. 

“A broader social compact is seen as essential for the successful implementation of reform in SA. Greater collaboration between government, business, labour and civil society is expected to drive the implementation of the new administration’s economic plan”, concluded Packirisamy. 

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