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18/02/2006 | South Africa: Budget 2006: South African Budget is Generally Good for Growth

WMRC Staff

The 2006 South African national budget was largely in line with our expectations, attempting to address the wants and needs of a wide variety of economic role players within the government’s broad policy objectives and within a sound fiscal framework.

 

Global Insight Perspective

Significance

The 2006 national budget, tabled in the South African parliament yesterday (15 February 2006), strikes a good balance between addressing the needs and wants of a variety of economic agents. However, Global Insight is somewhat disappointed that there was not sufficient attention paid to lowering the corporate tax or secondary tax on company rates. In hindsight, however, this may not be as surprising if one considers that the local government elections are around the corner and that too much of a focus on the corporate sector may have irked the ruling ANC's alliance partners. Notwithstanding this, Global Insight views the latest budget in a very positive light and the focus on investment in physical and human capital is commendable.

Implications

Given its focus on investment in physical and human capital, the budget should be good for the country's long-term growth prospects. In addition, personal income tax relief, as well as increases in social spending and grants, will favour household consumption expenditure growth. The adjustment to property transfer duties is likely to provide a significant boost to the property market - especially in the first-time buyer segment of the market.

Outlook

Global Insight is in broad agreement with the National Treasury's projections over the medium term. Although the budget can be viewed as expansionary, it is unlikely to add to macro-economic imbalances. In fact, we believe that if the government is successful in addressing capacity constraints and implementing its plans, it will add to the long-term growth potential of the South African economy.

South African Government's Key Objectives

The 2006 South African national budget is set within the government's broad medium-term strategic framework, which includes the following key objectives:

accelerating overall economic growth and investment in the productive capacity of the country;

promoting the opportunities for economic participation by marginalised communities and improving the quality of life of the poor;

maintaining a progressive social security net, along with investment in community services and human development;

improving the quality and effectiveness of the state, including combating crime and promoting a service-orientated public administration; and

building regional and international partnerships for growth and development.

National Treasury's Economic Outlook

Finance Minister Trevor Manuel presented an upbeat medium-term outlook for the South African economy and also revised upwards most of the National Treasury's medium-term macro-economic forecasts. The Treasury believes that the South African economy expanded by 5% in 2005 and that there will be only a marginal slowdown in growth to 4.9% and 4.7% in 2006 and 2007 respectively. It is projected that the economy will pick up steam in 2008, growing by 5.2% in that year. Inflationary pressures are also projected to remain relatively muted over the period 2006-2008, with targeted consumer price inflation rising from 4.3% in 2006 to around 4.8% in 2008.

Overall fiscal policy will remain stimulatory, with real final consumption expenditure by general government growing at an average annual rate of around 4.8% between 2006 and 2008. The deficit on South Africa's current account is projected to remain above 4% of GDP over the forecast period, which is more optimistic than Global Insight's latest estimates. Overall, however, the National Treasury's view on the South African economy is currently in line with that of Global Insight.

Revised Revenue and Expenditure Trends

Revisions to South African National Account statistics towards the end of 2005, combined with generally buoyant economic conditions over the course of the 2005/06 fiscal year, contributed to an upward revision in anticipated revenue receipts. It is now estimated that overall government revenue will amount to 411.1 billion rand (US$67.42 billion) in 2005/06, compared to the 369.9 billion rand projected at the time of the 2005 budget. The relatively strong growth in incomes and consumer expenditure during 2005/06 contributed to personal income tax receipts being more than 13% higher than in 2004/05, and value-added tax (VAT) collections being up by more than 17% in 2005/06, compared to 2004/05.

The generally positive economic climate also contributed to company profitability, which in turn contributed to company tax collections and secondary tax on companies rising by 19.9% year-on-year (y/y) and 58.3% y/y in 2005/06 respectively. Main budget expenditure has also been revised upward from the originally budgeted 417.8 billion rand in 2005/06 to 419 billion rand. Prudent fiscal policies in recent years contributed to a relatively low financing need, which together with stable international and domestic interest rates contributed to lower than budgeted state debt costs. It is estimated that debt-service costs in 2004/05 and 2005/06 were 1.6 billion rand and approximately 2 billion rand lower than originally budgeted.

Revenue Trends and Tax Proposals in 2006/07

The National Treasury estimates that total revenue will amount to 446.4 billion rand in 2006/07, an increase of 8.6% on the revised estimate of 411.1 billion rand for 2005/06. The revenue overrun in 2005/06 allowed the Finance Minister some leeway in providing tax relief, but he nevertheless used the money very prudently. It is estimated that personal income tax changes will cost the Treasury 13.5 billion rand. Global Insight was somewhat disappointed to see that individual marginal tax rates were left unchanged, but the Minister nevertheless made some substantial changes to income tax thresholds. For example, the threshold for the highest income earners was raised from 300,000 rand to 400,000 rand, an increase of 33.3%. Retirement fund tax was lowered from 18% to 9% and, although Global Insight was disappointed that this tax was not scrapped altogether, the reduction is nevertheless welcome. In a country with a relatively low savings rate and a relatively large reliance on government pensions, it does not make sense to tax savings. There was substantial relief for first-time home-buyers, with transfer duties on houses costing less than 500,000 rand being scrapped. Given the surge in South African house prices in recent years, this should provide some welcome relief.

We expected that there would be a further lowering of the company tax rate or at least a substantial decline in the secondary tax on companies, but this did not materialise - a huge disappointment. However, the Treasury did announce the scrapping of the Regional Services Council Levy (RSC), which is likely to lead to a decline of 24 billion rand in the taxes that have to be paid by companies. In addition to this, a variety of relief measures was announced for small businesses by increasing various qualifying monetary thresholds. Global Insight also welcomes the tax amnesty for small businesses, which may draw more of these businesses into the tax net.

In line with Global Insight's expectations, there was no change to the fuel levy. This should provide some relief in current times of high international oil prices. The budget also carried the usual increases in 'sin taxes', while the 2006/07 tax proposals also make provision for research and development incentives.

Expenditure and Financing Trends

The latest budget continues on the path of the overall expansionary fiscal policy stance that started around the time of the 2001 budget, with real government expenditure projected to grow at an average annual rate of 4.8% between 2006 and 2008. The National Treasury estimates that total main budget expenditure will rise from the revised 419 billion rand in 2005/06 to 472.7 billion rand in 2006/07, an increase of 12.8%. The rise in expenditure and anticipated increase in revenue translates into a main budget deficit of 1.5% of GDP in 2006/07, which is somewhat worse than the 2005/06 deficit of only 0.5% of GDP.

The government estimates that the consolidated national, provincial and social security fund expenditure budget will amount to 495.2 billion rand in 2006/07. Of this total, 10.5% is allocated to interest spending on public debt and 0.5% is a contingency reserve, which can be utilised if new, unanticipated expenditure arises. This leaves 440.7 billion rand to be spent by the various spheres of the government. The government's focus on social functions is evident from the fact that nearly 60% of the consolidated budget is allocated to social services. This said, it must be noted that this amount includes capital expenditure on the upgrading of hospital infrastructure, for example. Protection services receive 18% of the total consolidated budget, while economic services receive 15.7%.

In the 2006 budget, there is a significant focus on infrastructure and human capital investment. The national government will contribute 7.1 billion rand towards the Gautrain rapid rail link, which will link Johannesburg and Tshwane, while national road and rail infrastructure spending will receive 3.5 billion rand over the next three years. Housing and municipal infrastructure, local transport and water schemes were allocated an additional 9.3 billion rand over the medium term. On the human capital investment side, the government will, among others, extend the learnership allowance introduced in 2002 for a further five years. The recapitalisation programme of further education and training colleges will get underway in 2006.

In April 2006, the newly established South African Social Security Agency, which falls under the national Department of Social Development, will take full responsibility for the administration of the social assistance grant programme. This represents a major shift of functions from a provincial government to a national government level. In addition to this, local government will receive a 7 billion rand increase in its share of overall expenditure to compensate for the abolition of the RSC levy.

Exchange Controls

Global Insight hoped that the National Treasury would take the 'bold' step to abolish all exchange and capital control legislation, but this was not to be. However, the Minister went some way in raising individual (South African) offshore allowances from 750,000 rand to 2 million rand. In an attempt to encourage the New Partnership for Africa's Development (NEPAD) initiatives, the Finance Minister also lowered the foreign direct investment threshold from 50% to 25% for investments of South African corporates and mandated parastatals. The South African Reserve Bank will provide more detail in due course.

Outlook and Implications

Overall, Global Insight views the 2006 budget in a very positive light, with the Finance Minister succeeding in addressing a wide variety of the needs and wants of all economic role players. The focus on investment in physical and human capital is likely to raise the long-term growth potential of the South African economy. However, Global Insight remains concerned over the ability of the government to implement its plans and actually spend the capital budgets. It is of very little significance if capital budgets are increased, but lower tiers of government are unable to spend the budgets efficiently. The government is aware of this dilemma and it is being addressed. If it is unsuccessful in addressing these challenges, it will stand in the way of the objectives of halving poverty and unemployment, and lifting the overall economic growth rate to a sustainable 6% by 2014.

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com

WMRC (Reino Unido)

 


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