National Budget Speech 2018 – a difficult balancing act for Minister of Finance

THE National Budget Speech on February 21 this year is likely to attract more interest than it has on many occasions previously. South Africans have become accustomed to a National Budget characterised by inevitable increases in the

so-called “sin taxes” and gradual increases in the marginal rates of income tax for individuals.

But the 2018 Budget will have to be quite different.  It will have to include some significant changes that could be far reaching and potentially unpopular in order to address a budget deficit in excess of R50bn.

The deficit will be exacerbated by the estimated R12.4bn cost of free education announced late in 2017 – and more in the years ahead as the programme is rolled out.

The challenge is to find additional sources of revenue by growing the economy and thereby expanding the tax base. Short-term, this may however not be possible, which means a potential squeeze on an already shrinking tax base and adding to the tax burden of existing taxpayers.

The Minister of Finance also needs to address the bloated state wage bill and with regard to statements made by newly-elected President Cyril Ramaphosa in his maiden State of the Nation speech, a reduction in the size of Cabinet is also on the cards.

There is a strong chance that the Minister of Finance will announce in his National Budget Speech that VAT is to be raised by up to 200 basis points to 16%, which needs to be offset by expanding the zero-rating provisions for basic foods to counter the regressive nature of VAT on the poor.

What is equally likely is that the Minister may announce an increase in the highest marginal individual tax rate to 46%, but may refrain from introducing a type of wealth tax in addition to estate duty.  Further easy targets could be an increase in the Capital Gains Tax inclusion rate for individuals to 50% and, in a worst-case scenario, an increase of the company inclusion rate of Capital Gains Tax to 100%.

The Minister has to walk a fine line, though.

The small tax base, in particular wealthy South Africans, have the ability to externalise their asset base through emigration, which means a reduction of an already under-pressure tax base. Active steps in fighting corruption and restoring faith in a fragile South African Revenue Service will go a long way in getting the country back on track.

Ruaan van Eeden is the Head of Tax and Exchange Control at the Geneva Management Group