Probably the biggest talking point around the 2018 Budget Speech, delivered by former finance minister, Malusi Gigaba, was the announcement of a one percentage point increase in value-added tax (VAT). But although this had people hot under the collar, with many petitioning against the move, many economists agree that this was inevitable and perhaps the best move to address the budget shortfall.
Specifically considering the impact of the budget on the construction industry, Dr Co-Pierre Georg, Associate Professor at the African Institute of Financial Markets and Risk Management, agrees that the increase in VAT would have very little effect on businesses offering a service, such as architectural practices, and that in fact VAT is still low in international comparison.

“People are overly concerned about this increase, but while it will change a percentage point on pricing because companies have to charge VAT, I don’t think it would have a significant impact either on profit or overall activity,” he says. “The group of South Africans who would really be concerned is indeed the poorest households, but for anybody else, 1% VAT increase is not the end of the world.”

Infrastructure spend
During the speech, Gigaba announced several investments in infrastructure development such as R3,8 billion allocated to the school infrastructure backlogs grant that will see 82 unsafe schools being replaced, as well as R31,7 billion over the medium term for the education infrastructure grant for new schools and the upgrade and maintenance of existing ones.

Of the incentives budget, R4,9 billion is allocated for industrial infrastructure projects over the medium-term economic framework (MTEF) for special economic zones, government-owned industrial and critical infrastructure projects to promote industrial development.

Furthermore, the Department of Agriculture, Forestry and Fisheries received an additional allocation of R40 million over the MTEF to upgrade infrastructure and equipment for analytical services laboratories.

However, Dr Georg explains that this is not enough to have a significant economic impact on bolstering the construction sector in the short term, but points out that the South African construction sector hasn’t been doing too badly over the past year and even then the government part of it was not very large.

“In the long run, however, it is important that we shift more money towards infrastructure spending and less in the government sector wage bill, simply because infrastructure has a long-term positive effect and while government employees generate consumption that can stimulate the economy, it does not have this long-term effect,” he states.

The government wage bill currently eats up 35% of the budget and 14% of the gross domestic product (GDP).

Timely payments
“What would help construction firms, is if the government would pay their bills on time, and President Cyril Ramaphosa has issued a decree to ministries to ensure that this happens. I think this is a step in the right direction, which will benefit these industry players far more than what the VAT increase will hurt,” Dr Georg adds.

In a nutshell
“Overall, the budget won’t greatly impact the construction industry. The gist for the built environment is that if we see a refocusing of government spending towards infrastructure investment including fixing our schools and our roads, and increasing our ports capacity, then it is much better use of government money than simply having a ballooning government sector wage bill. If this was the first step towards such a shift, then I think it has been a good budget, but this remains to be seen,” he concludes.

Full thanks and acknowledgement are given to Dr Co-Pierre Georg for the insight provided.

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