Manuel’s medium-term Budget as expected

The South African medium-term Budget policy statement (MTBPS) was expected to cut the revenue and gross domestic growth (GDP) forecast, and extend the foreign exchange amnesty beyond its current deadline of the end of this month — and this is exactly what happened.

The amnesty deadline has now been extended to February 29 2004. It is extremely unlikely that it will be extended beyond this date.

The GDP growth rate was lowered from February’s estimate of 3,3% for this year to only 2,2%, which is in line with most private sector forecasts.

Revenue was cut to R299,9-billion from R304,5-billion, while revenue forecasts for the three-year horizon have also been revised lower.

Next fiscal year’s revenue has been chopped by R5,3-billion and by R3,4-billion in 2005-06.

The MTBPS is a mid-fiscal-year update of the progress of the current fiscal year, while laying the strategic policy direction for the next three years.

In September, government revenue year-on-year (y/y) growth was barely positive at 0,2%. So far there have been two y/y monthly declines, as corporate profits have been under pressure due to the strong rand. There was a 6,9% y/y drop in April and a 3,1% y/y slide in May.

The cumulative increase for revenue for the first half of the fiscal year rose to 5,5% after being up only 3,7% y/y after the first four months.

The fiscal year started with y/y declines in April and May. The February 2003 Budget projected a revenue increase of 10,4%. South Africa’s total nominal GDP is estimated to have been R1,099-trillion in 2002.

The cumulative increase for expenditure for the first half is 13% y/y compared with a budgeted increase for the full fiscal year of 14,4%.

The first half deficit of R21,064-billion was more than double the R9,798-billion of the first half of the previous fiscal year.

In view of the slow revenue collection, the National Treasury has been aggressive in front-loading its funding requirements. This meant that at the end of August, the Treasury was sitting on a record cash pile of R28,595-billion.

In February, the Treasury expected GDP growth of 3,3% in 2003 and 3,7% in 2004. In the first half of this year, GDP growth was only 1,9% y/y.

Most economists expect the growth rate to be lowered to 2,5%, but this may be premature, as Statistics South Africa will only release its benchmark revisions on November 25.

Last year, the MBTPS increased the GDP growth rate from 2,3% to 2,6% at a time when the first-half GDP growth rate was 2,2% y/y. In the November 2002 revisions, the first-half growth rate was raised to 3% and the full-year growth rate was 3%.

Furthermore, South Africa’s National Treasury would be reviewing the possibility of granting new cuts in personal income taxes in the coming 2004 National Budget, to be released on February 18, according to Minister of Finance Trevor Manuel, but the decision would have to be made against rising volatility in government tax collections.

The news comes after the implementation of sweeping reforms in the tax system over the past four years that saw substantial reductions in personal income taxes, particularly for the middle- and lower-income segments of the population.

“We will be grappling with the issue of tax cuts in the coming months but the announcement will be made on February 18,” Manuel told journalists ahead of the announcement of the medium-term Budget policy statement (MTBPS) in Parliament on Wednesday.

“Company taxes have now risen from 12% to 20% of our overall tax collections, and this introduces a lot of volatility in collection levels given that they depend on profitability.

The Treasury has revised downward its revenue projections for the current 2003-04 financial year by R4,6-billion due largely to lower company taxes, the first time it has been forced to lower its revenue targets since the new MTBPS budgeting framework was introduced four years ago.– I-Net Bridge