Ramaphosa takes tax gamble ahead of elections in 2019

South Africa’s ruling party took a political gamble by increasing sales tax ahead of elections next year as new president Cyril Ramaphosa seeks to stabilize debt and prevent a third junk credit rating.

The value-added tax rate will be raised to 15% from 14%, the first time since the end of apartheid that the government has targeted a charge seen as hitting the poor hardest. Levies on fuel and luxury goods will go up, while spending will be pared back over the next three years, according to finance minister Malusi Gigaba.

“These fiscal proposals will cause economic discomfort but they are necessary to protect the integrity of the public finances,’’ he said in his budget speech to Parliament in Cape Town on Wednesday. “We dare not borrow irresponsibly, leaving it to future generations to repay.’’

The first increase in the sales tax since 1993 comes just over a year before national elections and could backfire on the African National Congress because it will be seen to be hitting its largely poor and middle-class supporters.

The ruling party may be banking on stronger growth this year boosting income, allowing it to provide relief and placate voters in next year’s budget.

Labor unions that backed Ramaphosa’s campaign to win control of the ANC in December vigorously opposed a VAT increase, arguing that the government should target wasteful spending instead. Ramaphosa was elected president last week, a day after his party forced Jacob Zuma to quit following a scandal-marred nine-year tenure during which economic growth stagnated.

‘Desperate Times’

“We are in desperate times, so it really required some exceptional measures,’’ said Ismail Momoniat, the Treasury’s head of tax policy. “It was clear that VAT was the least worst.’’

Higher taxes will raise an additional R36 billion ($3.1 billion) in the year through March 2019 and be coupled with budget cuts totalling R85 billion over three years. The National Treasury expects those measures, together with an improved economic growth outlook, to narrow the budget deficit to 3.6% of gross domestic product in the coming fiscal year, from 4.3% now.

Forecasts in October that projected gross debt ballooning to more than 60 percent of GDP were pared back. That may appease rating companies that have steadily downgraded the nation and help ward off a cut to junk next month by Moody’s Investors Service.

Political Changes

Moody’s is the only major company that still ranks South Africa’s debt at investment grade after S&P Global Ratings and Fitch Ratings Ltd. punished the country in 2017 following political changes that sapped confidence and knocked financial markets.

Better sentiment since Ramaphosa took over leadership of the ruling party, and the government, is expected to help lift economic growth. The Treasury forecasts a 1.5% expansion this year, up from the October forecast of 1.1%.

The annual budget speech could be Gigaba’s first and last with Ramaphosa widely expected to replace him and several other Zuma appointees in a cabinet reshuffle.

“The president ultimately has the prerogative over this issue,’’ Gigaba told reporters before his speech. “We will support him fully.’’

The budget allocates an additional R57 billion over the next three years to finance a plan announced by Zuma late last year to fund free post-school education for poor students. There was also an extra 6 billion rand for drought relief and another R4.2 billion for a national health insurance plan.

The budget didn’t promise any additional funding for cash-strapped state-owned companies, although provisions could still be made and financed by selling about R40 billion worth of state properties.

“Any spending on state-owned companies will have to be done in a budget-neutral way,’’ Gigaba said. “We will have to find resources, probably through the sale of state assets.’’

Read: We’ve reached our tax limit: economist

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Ramaphosa takes tax gamble ahead of elections in 2019