South Africa is so short on revenue it’s forced to do what it has not in 25 years

During the presentation of the first budget under the new South Africa President Cyril Ramaphosa, yesterday, the Finance Minister Malusi Gigaba said that the government is increasing its Value Added Tax (VAT) by one percent for the first time in 25 years. This is in order to help bridge a gap in the government’s budget.

“This is a tough, but hopeful budget. We decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances,” Finance Minister Malusi Gigaba said, acknowledging the reality in his budget speech to parliament on Wednesday.

South Africa’s VAT, which has remained constant since 1993, will increase from 14 percent to 15 percent. This will be effective from 1st of April 2018.

This is part of the measures that will help shrink the budget deficit of the country which stands at 4.3% Gross Domestic Product in the 2017/2018 fiscal year. It is also expected to generate an additional 23 billion rand ($1.97 billion) of revenue in 2018/19.

The decision to raise VAT by one percent has been criticized by some South Africans. According to Reuters, the opposition leader and head of the Democratic Alliance party Mmusi Maimane said the addition means the cost of living for the poor would rise sharply.

“This is a budget that is an assault against the poor people. What we saw today is a consequence of nine years of mismanagement of the economy by the ANC,” Mumusi said.

In way of showing that the tax increase wasn’t targeted at only the low to high-income earners,  the Treasury said the excise duty on luxury goods would be raised to nine percent from seven percent, among other taxes.

Rating agencies were monitoring the budget closely, S&P Global Ratings and Fitch downgraded South African debt to “junk” status last year, citing the dismal economic outlook. They are expected to give a rating decision after the presentation of the budget.

A negative rating could see South Africa lose its place in the Citi World Government Bond Index, the biggest of the global benchmarks and tracked by about $3 trillion of funds.  If it loses its place it would mean that the country will no longer be eligible for inclusion in investment grade bond funds. This would definitely force a large number of investors to sell their bond and this would in turn pressure the rand to fall.

Prior to the budget reading, Gigaba told a media briefing that the Treasury had done enough to avoid a downgrade by taking decisions to stabilize the debt and reduce the budget deficit.

“We will be able eventually perhaps in 18 months to 24 months to return to investment grade,” after the speech, Gigaba told Reuters after the budget speech.

Just as As Gigaba was reading the budget speech, the rand gained by 0.81 percent against the dollar, government bonds firmed and retail shares on the stock exchange fell.