The Treasury will increase social grants by above inflation, freeze the fuel levy and increase the basket of zero-rated goods to shield the poor from the decision to hike VAT for only the second time in democratic SA.
The decision to hike VAT was taken after weighing different options, including doing away with the social relief of distress (SRD) grant and taking on more debt, Business Day understands.
Both options were considered the least favourable due to several reasons, including keeping ratings agencies at bay.
The money expected to be collected from the VAT increase is expected to plug holes in the education, social wage and education budgets — particularly keeping thousands of teachers’ jobs in KwaZulu-Natal.
The KwaZulu-Natal department of education has warned that teachers will not be spared the latest round of budget cuts and that 11,000 posts are at risk due to budgets having been cut.
The last time the Treasury hiked the VAT rate was in the 2018/19 budget, when then finance minister Malusi Gigaba, increased it from 14% to 15%.
Without any zero-rating or exemptions, VAT is inherently a regressive tax, turning into a financial burden on the poor in a country riddled with deep-seated poverty, unemployment and a weak economy.
President Cyril Ramaphosa last year said the government of national unity would look to expand the basket of essential food items exempt from VAT and undertake a comprehensive review of administered prices.
According to Cliffe Dekker Hofmeyr, when VAT was introduced on September 30 1991 at a rate of 10%, only two food items were zero-rated: brown bread and maize meal.
In April 1993, the VAT rate was increased from 10% to 14%, and the basket of zero-rated food items was expanded by a further nine items to increase the total number to 19.
After the VAT rate increase in April 2018, the basket was expanded further, with cake wheat flour, white bread wheat flour and sanitary towels also zero-rated with effect fromApril 2019.
Deloitte, in a budget preview, said in summary that while expanding the VAT-free food basket may exhibit a quick-to-action response, this administrative approach may not effectively address the root causes of food insecurity.
“A more comprehensive strategy would involve multifaceted policies designed to generate sustainable, long-term outcomes. If the National Treasury decides to expand the VAT-free essential foods list, it must carefully mitigate potential unintended consequences,” Deloitte said.
“Past experiences demonstrate that while the VAT-free food list might seem straightforward, its practical application can be complex. Consequently, it is crucial for the Treasury to precisely define which food items would be zero-rated and establish clear boundaries for their inclusion,” Deloitte said.
“The Treasury must also recognise the inherent challenges of modifying such a list. Once food items are added, there will likely be significant political and social pressure to retain them and removing items will prove difficult.”
Cash-strapped Transnet, which in December reported a R2.2bn interim loss for the six months ended September while its debt increased to R136bn, is also expected to take centre stage when Enoch Godongwana tables the budget on Wednesday. The government has guaranteed certain borrowings of Transnet amounting to R30.9bn, representing 22.7% of total borrowings of R136bn.
S&P Global Ratings in November placed Transnet’s credit ratings on credit watch negative on elevated leverage — reflecting the increased likelihood of a downgrade if the expected turnaround in Transnet’s business performance and cash-flow generation does not materialise soon enough to control the current leverage levels and capital structure.
SA’s vast railway network is on the verge of a shake-up that will introduce third-party access to it, but it needs about R14bn a year of investment in its six corridors, which have been plagued by theft, vandalism and outdated systems.
Olga Constantatos, head of credit at Futuregrowth Asset Management, one of SA’s biggest institutional bond investors, said one form of support is an equity injection from the shareholder to fix its lopsided capital structure, as suggested by the Transnet board.
“This could go some way in solving the unsustainable capital structure (by improving Transnet’s gearing ratios) in the immediate term, thereby creating some borrowing capacity for the capex that is needed. However, under the current fiscal constraints and the finance minister’s often expressed “tough love for SOEs [state-owned enterprises]”, this may be a difficult decision to execute,” Constantatos said.
“The provisions of further government guarantees for Transnet’s borrowings is another form of support — an additional R47bn in guarantees was made available a year ago,” she said. “A shortcoming of this form of support is that the interest costs on these borrowings will be for Transnet’s account and will further constrain Transnet’s cash flow — already their interest costs chew up over R12bn per annum and adding further debt, albeit guaranteed, will add to this interest burden and will divert cash flow away from capex.”
A third form of support could be the introduction of public-private partnerships whereby the private sector could provide the capital for the capex that is needed, thereby relieving Transnet of the need to incur this financial obligation, Constantatos said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.