GEORGE NEWS - Nicky Weimar, Nedbank's senior economist, says the country cannot afford politicians making populous statements like former President Zuma did when he promised free higher education. 

Promises must be kept to avoid political suicide, and this is one of the factors that makes the 2018 national budget, under President Cyril Ramaphosa, exceptionally challenging.

Weimar was the guest speaker on Friday 23 February at a George Business Chamber networking event at the Oakhurst Insurance George Arts Theatre where she gave an overview of the budget.

She criticised the decision to reduce the basic education spend - one of the ways in which Treasury is going to try to pay for higher education students' first year - while basic education is not on par.

She said treasury is in an "impossible" situation and had to up taxes.

Its attempt to reduce the budget deficit should be enough to convince rating agencies such as Moody's not to downgrade South Africa. 

But government "might have set itself an impossible task" to keep the increase in expenditure over the next three years below 8% (while it usually ranges between 8% and 12%), while granting free higher education to first-year students. 

"If they manage it, it will be the first time we have seen this modest growth since 1994.

"Taking into account the effects of inflation, it is real increase in expenditure of less than 2%. It is a huge challenge."

VAT increase brave
"They have made the best choice by hiking VAT. People are not going to like it. It is a very brave act and it shows they have got some backbone because they are doing this a year ahead of an election."

The assumption that it will be a burden on the poor "is not entirely true". 

According to a thorough investigation by the Davis Commission, the top 30% of income earners pay about 80% of VAT. 

Furthermore, basic foodstuffs are already zero rated and this increase will not affect these prices. 

Treasury is contemplating adding more articles to the zero-rated basket. 

Compared with global VAT rates, South Africa is still way under the average rate, said Weimar.

Special economic zones
She was positive about government's proposal of using tax incentives in special economic zones and said this has proven to be successful elsewhere in the world. 

"South Africa's company tax rate is higher than the global average. This matters, because even advanced countries are now cutting corporate taxes ... we are starting to get a little uncompetitive."

The new budget offers very limited relief on personal income tax. 

All income tax rates have been left the same and it is only in the lower categories that partial adjustment has been made for the effects of inflation. 

"Inflation matters, because when you get your annual increase in an inflationary environment, what tends to happen is you get put into a higher tax bracket and you are paying higher taxes and sometimes you are worse off than prior to your raise.

"This was normal during Apartheid years, but changed under Mandela and Mbeki, who did incredible work regarding personal income tax. 

"The outcome is that South Africa is among the highest in personal income tax rates. It has become a real disincentive."

She said turning around the tremendous damage done by Zuma will be challenging, but there are some supportive factors that might help the new president in his efforts. 

These include a world economy that is emerging from its slump, a slow recovery of the local economy, and investor and consumer confidence that improved somewhat since Ramaphosa delivered the state of the nation address (Sona). 

"But the confidence is fragile because the trust in government was broken through state capture. The new president will have to follow up with action."

One of his actions should be to address shrinking private sector investment by creating an investor-friendly environment, she said. 

The "disastrous and complicated legislative environment we inherited" is one of the things that need to change. 

"The way in which black economic empowerment has been implemented is making it difficult, if not impossible, for small enterprises to do business and it puts off foreign investors. 

"Investors take the risk of investing and are then expected to give away 15% to 20% of their business. "It is that sort of stuff we have to look at."

She also expressed concern over the mention of expropriation without compensation in the Sona and the effect this will have on investor confidence. 

"We are going to try to do something that has not worked anywhere else in the world, this while government has not really given expropriation with compensation a serious go."

The increase in the number of people receiving social grants (foreseen to increase to 18-million in the next three years) while there are only about 7-million tax payers, is unsustainable.

She said the millions on social grants is a reflection of a country's failure to create an economy that is big enough for its population, and government faces huge challenges if it wants to turn this around.

'We bring you the latest George, Garden Route news'