Gigaba defends first increase in VAT since 1993

Finance Minister Malusi Giagaba announced that VAT will go up from 14 to 15%, a move he says will have the least impact on the economy.

Finance Minister Malusi Giagaba delivering 2018 Budget Speech in Parliament on 21 February. Picture: GCIS.

CAPE TOWN - Finance Minister Malusi Gigaba says his Budget will cause economic pain but that its proposals, including a one percentage point hike in the VAT rate and cuts in state spending, are necessary to stabilise the country’s finances.

He’s told Parliament that finding the billions needed to phase in fee-free higher education and training required significant changes to the fiscal framework.

Gigaba announced R57 billion over the next three years to finance fee-free higher education, which he says will help break the cycle of poverty.

Former president Jacob Zuma made the surprise announcement in December.

Gigaba’s defended the first increase in VAT since 1993.

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VAT will go up from 14 to 15%, a move Gigaba says will have the least impact on the economy.

Along with 52 cents a litre fuel levy increase and other tax hikes, Gigaba says this will bring an extra R36 billion in revenue this year.

Gigaba says the government had little choice but to increase VAT.

“We have not adjusted VAT since 1993, and it is low compared to some of our peers. We, therefore, decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances.”

Gigaba says the zero-rating of some foods will cushion the impact on poor households.

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On social grants, Gigaba says: “The child support grant will increase from the baseline of R380 to R400 on 1 April and to R410,00 on 1 October.”

There will also be a hike in social grants.

“The old age pension, care dependency and disability grant from 1 April will be increased by R90,00 from R1600,00 to R1690,00 and by a further R10,00 to R1700,00 on 1 October 2018.”

Increased excise duties on luxury goods and higher estate duty will affect the wealthy.

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Gigaba unveiled his R1,67 trillion Budget for this year, spelling out tough steps he says are needed to fix the country’s finances and get the economy back on track.

Deep cuts to government spending, a total of just over R85 billion over the next three years, also form part of the plan to rein in the government’s debt and help balance the books.

When Gigaba delivered his first Medium Term Budget Policy Statement in October, government debt was on course to rocket out of control, while the soaring cost of interest threatened to crowd out social spending.

Gigaba says the steps he’s announced on Wednesday will improve the outlook for the economy and make space for crucial investment

“These fiscal proposals will cause economic discomfort, but they are necessary to protect the integrity of our public finances.”

Gigaba says tough decisions had to be made.

“It is the right thing to do. We dare not borrow irresponsibly, leaving it to future generations to repay.”

Gigaba told a briefing ahead of his speech that he’s confident this Budget does enough to avert another ratings downgrade.