Although there are notable revenue shortfalls and taxes had to be increased, the Budget framework has put South Africa back on the path of fiscal prudence, which will be positively viewed by the credit ratings agencies. Importantly, there is a renewed focus on introducing economic reforms, which, if implemented, could lift gross domestic product (GDP) growth.

Tax hikes

From April 1, value-added tax (VAT) will be increased by one percentage point, from 14% to 15%, to plug revenue shortfalls. Along with below-inflation adjustments for the personal income tax brackets, the VAT increase will raise R36 billion this fiscal year. 

The average VAT rate in Africa is about 15%. South Africa is now in line with countries such as Mauritius, Ghana and Ethiopia, but would seem uncompetitive on tax relative to Nigeria, which has a VAT rate of 5%, although there are plans to increase it to 10%. The VAT increase will negatively impact the financial well-being of South Africans. 


Other taxes have also risen:

• Excise duty on luxuries increased to 9% from 7%;

• Estate duty for estates above R30 million increased to 25% from 20%;

• The fuel levy increased by 52 cents a litre; and

• Excise duty on alcohol and tobacco increased by between 6% and 10%.

Free tertiary education

National Treasury has defined the scope of free education to include all expenses incurred by a student during his or her year of study: tuition, prescribed books, meals, accommodation and travel allowances. The benefit will be for students from families with an annual household income of less than R350 000, beginning with the first-year cohort of 2018. There are more than 340 000 university students and more than 420 000 students in technical vocational education and training institutions.

Within the next three years, the cost of free education will be R67bn, which is 4% of revenue over the same period. Post-school education and training has become the fastest growing component of expenditure, at 14% over the forecast period. Given that #FeesMustFall was a legitimate concern by students, and the pressure placed on the fiscus to honour this commitment, there is a need to find different sources of revenue through economic reforms. 

Economic reforms

For some time, the credit ratings agencies have urged South Africa to undertake economic reforms to raise its GDP. Since the 2008 global financial crisis, the country has seen its potential growth decline from 3% to 1.5%.

Treasury has identified five reforms, and quantified their commensurate likely contribution, to lift GDP growth. The reforms include: improving confidence, the roll out of the broadband spectrum in the telecommunications sector, dealing with anti-competitive behaviour, improving logistics in the transport sector, and prioritising the tourism and agriculture sectors. This work has provided a good framework to judge the resolve of the new administration’s commitment to economic reforms.

Confidence-boosting measures

A study by the South African Reserve Bank indicates that GDP growth of between 0.4% and 1% can be achieved when consumers and businesses feel confident and have a high degree of certainty about economic prospects. The actions taken by the authorities to implement  economic policy underpins this confidence and certainty. 

The administration led by President Cyril Ramaphosa has provided the green shoots of confidence-building measures, which could rebuild trust between the government, labour and business.

State-owned enterprises (SOEs) 

Eskom has drawn down its R350bn credit line with Treasury to the tune of R220.8bn, with more than R46bn used in the past three years. The electricity utility makes up the lion’s share of the total guarantees, worth R466bn, committed to SOEs. These guarantees remain a major source of risk for South Africa’s budget. 

Although it is admirable that Ramaphosa’s administration has moved swiftly to instal a new board and acting chief executive officer at Eskom, much work is required to wean the utility off its dependence on state finances. The real test for the new Eskom leadership is in how it reduces the guarantees and maintains the institution as a going concern without government funding. 

Most state-owned companies worldwide received some form of government injection during the 2008 global financial crisis, but have since competed with themselves to “pay back the money” and stand on their own two feet.

Government debt

There is a notable downward revision of the expected path for the debt-to-GDP ratio from what was proposed in the October 2017 Medium-term Budget Policy Statement. As opposed to debt levels rising to more than 60% of GDP, it is forecast they will peak at about 56% of GDP and taper off. The debt-to-GDP ratio is expected to remain at these lofty levels for the next decade. At these debt levels, the economy needs to grow sustainably at more than 4% to stop further ratings downgrades.

More investment diversification

In what will prove to be the largest step change since 2008, the prudential offshore limits for funds under management by institutional investors – expressed in regulation 28 of the Pension Funds Act – will be increased by five percentage points from 25% to 30%, with allocations to Africa increased from 5% to 10%. This will increase diversification benefits for local investors and attract foreign investment back into South Africa.

Bottom line

This budget represents a new dawn for South Africa. After several years of decay, the tide seems to have turned. One always needs to look for proof of what is promised, but in this year’s Budget Ramaphosa and his team have demonstrated the resolve to effect positive change.

Lesiba Mothata is the executive chief economist at Alexander Forbes Investments.