UPDATE 2-In "tough but hopeful" budget, South Africa raises VAT for first time in 25 years

time in 25 years@

* VAT to increase to 15 pct from 14 pct

* First VAT adjustment since 1993

* GDP growth seen picking up in next 3 years (Adds quotes, details)

CAPE TOWN, Feb 21 (Reuters) - South Africa will in April implement its first value-added tax (VAT) hike since the dawn of democracy over two decades ago, the Treasury said on Wednesday, part of efforts to cut the budget deficit and stabilize debt under new President Cyril Ramaphosa.

The government of Africa's most industrialized country wants to plug a revenue hole in its budget and repair its economy after nine years of mismanagement under Jacob Zuma, who resigned as president this month on orders of the ruling African National Congress following a series of scandals.

Zuma has denied all wrongdoing.

Raising VAT is potentially unpopular ahead of a national election next year but will generate an additional 23 billion rand ($2 billion) of revenue in 2018/19 as the economy recovers from a recession last year.

Unchanged since 1993, the South African VAT rate would increase to 15 percent from 14 percent effective April 1, the Treasury said in a document laying out its budget plans for the next three years.

Raising VAT is less harmful to economic growth than raising other taxes, the Treasury said.

"This is a tough, but hopeful budget," Finance Minister Malusi Gigaba said.

"We decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances."

Gigaba said poor households would be cushioned through a zero-rating of basic food items such as maize meal and beans.

The Treasury said South Africa faced a 48.2 billion rand revenue gap in the current 2017/18 fiscal year ending in March, down from an earlier estimate of 50.8 billion rand, and that the revenue shortfall was expected to continue into the medium term.

As Gigaba read his budget speech, the rand extended gains to 0.81 percent against the dollar, government bonds firmed and retail shares on the stock exchange fell.


Ramaphosa's government faces an uphill battle to revitalize growth and create jobs in a nation still polarized by race and inequality more than two decades after the end of white-minority rule in 1994.

In a sign that it was mostly middle to high income earners targeted in tax increases, the Treasury said the excise duty on luxury goods would be raised to 9 percent from 7 percent, among other taxes.

The budget deficit is expected to narrow to 3.5 percent of gross domestic product (GDP) by 2020 from 4.3 percent in the 2017/18 fiscal year, while gross debt is seen narrowing to 56 percent of GDP in the 2020/21 fiscal year from nearly 60 percent seen in the October mid-term budget statement.

GDP growth is seen at 1.5 percent this year, up from an estimated 1 percent last year, helped by a recovery in agriculture and improved investor sentiment, the Treasury said.

The improved economic outlook comes as South African debt faces the risk of a downgrade to "junk" by Moodys after downgrades to sub-investment grade by S&P Global Ratings and Fitch last year.

Moody's said it would make a ratings decision after the budget announcement. ($1 = 11.6359 rand) (Additional reporting by Wendell Roelf and Alexander Winning in Cape Town; Editing by James Macharia and Gareth Jones)