22/02/2018 08:59 GMT | Updated 22/02/2018 11:38 GMT

Why The New Budget Is Bad News For You

The one percentage point increase in VAT has bigger repercussions than you might think.

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South Africans will have to dig deeper in their pockets to bridge the multibillion-rand Budget deficit and fund various government projects like free higher education for the poor.

In his Budget speech on Wednesday, finance boss Malusi Gigaba announced, among other things, an increase in value-added tax (VAT) from 14 percent to 15 percent and a 52-cent-per-litre increase in fuel levies.

READ: Budget 2018: JZ's Last Gift – Very Nearly A Banana Republic Budget.

Kenosi Magosha, head of client solutions for recurring savings at Sanlam, said Gigaba has taken a position to steer the country's finance in a direction aimed at restoring confidence and laying the foundation for growth into the future.

READ: Ramaphosa Takes Charge Of The Economy.

"This can only be good for households, as it means we may inspire confidence with rating agencies and attract further investments into our economy, allowing opportunities for households to participate in the economy. This primary focus has required the minister to make tough decisions on how to raise money needed by the government," he said.

READ: Fact-Check: The Poor Won't Pay The Most For The VAT Increase.

According to Magosha, this is how Gigaba's announcement impacts the average South African:

  • An increase in VAT from 14 percent to 15 percent means that the cost of goods will increase; except for zero-rated "staple" foods such as maize and brown bread.
  • There was no adjustment for inflation in the top tax brackets. This means that higher-earning households will pay more tax. Although the tax rates remain unchanged, because income brackets were not adjusted for inflation, this will reduce households' disposable income.
  • The tax burden of higher-income households will be further increased owing to increases in taxes associated with wealthy individuals. For example, a 25 percent estate duty is now payable on estates more than R30-million, and there was an increase of excise duties on luxury goods, like motor vehicles, from 7 to 9 percent.
  • Increases in other levies, like the fuel levy and "sin taxes", will mean consumers need to rethink their consumption.

CEO at the SA Savings Institute Gerald Mwandiambira said every South African pays VAT on all items except for essential items, so the impact will be across the board.

"Everything has to be transported, so the fuel levies will impact on the costs of food and goods for example. But the rand has got stronger, so this may cushion the effect of the increase and absorb some of the impact," he said.

"The Budget will have addressed the concerns of the ratings agencies and international investors. But it hasn't dealt with structural problems in state-owned enterprises. I still believe the poor will be cushioned by the strength of the rand."

Mwandiambira said the announcement of free education will assist both the poor and the "missing middle" class.

"Most of the missing middle now qualifies for free education as well. But anybody who spends more will feel the VAT hike more. The timing is good though."