The government is set to increase its capital spending from R18,9-billion to R39,5-billion over the next three years.
”We are hitting the sweet spot, and you can see that in the way in which the numbers are aligning,” Finance Minister Trevor Manuel told journalists at Parliament on Tuesday, ahead of delivering his Medium Term Budget Policy Statement in the National Assembly.
He said a key challenge was ”to watch where we go, to maintain the technique, and then to improve on this going forward”.
Increased spending would see a steady improvement in social and economic infrastructure at a national, provincial and local government level. It was made possible by a ”robust economy” and ”large increases in revenue”, Manuel said.
”Investment numbers are now also looking very strong, both in the greater public sector and also private sector.
”Secondly, the alignment of fiscal and monetary policy is something that you see starting to work through the system, and thirdly the fiscal accounts are exceedingly healthy on both sides, but clearly the issues on the revenue side are exceedingly healthy,” he said.
SA Revenue Services collected R347,9-billion during the 2004/2005 fiscal year — R20,9-billion higher than the original estimate of R327-billion. This was again R9,9-billion higher than the revised estimate of R338-billion.
According to the statement, transfers to provinces from nationally raised revenue will grow by 6,3% in real terms over the next three years, from a revised R209,8-billion this year to R290-billion in 2008/2009.
Starting next year provincial and local government are expected to receive about 61% (R46-billion) of the additional resources allocated. This will be provided over the medium-term expenditure framework (MTEF) period.
”This R46-billion will strengthen the ability of provinces and municipalities to improve access to public services, address vulnerability and inequality through proper targeting of services and improved governance,” the document says.
Of this amount, R30,9-billion will go to the equitable share while R15,1-billion will be added to conditional grants.
The bulk of the R30,9-billion (about R20-billion) will be used to improve education, health and social services.
In total, conditional grant spending as a result of the increased revenue from taxes, is expected to grow from R74-billion this year to R103-billion in 2008/2009, with government focus predominantly on housing and health.
The MTBPS says a further R2-billion will be given to municipalities for community infrastructure improvements and the expansion of free basic services.
Another R6-billion will be given to develop local transport, and R24-billion to accommodate the replacement of the Regional Services Council (RSC) levy, to be abolished on June 30 next year.
Local government share of revenue will rise from R17,5-billion this fiscal year to R33,6-billion in 2008/2009.
This will also include R24-billion to help with the transition from RSC to a new revenue source yet to be determined.
Govt committed to exchange control liberalisation
The government remains committed to the gradual liberalisation of exchange controls, according to the Budget policy statement.
This is designed to stimulate and enhance the continent’s economy, the document explains.
”South African banks are to be allowed to hold foreign assets up to 40% of their domestic regulatory capital as part of the shift from exchange control to the prudential regulation of banks’ foreign exposures,” it says.
But non-African foreign assets will be restricted to 20%, while African assets can constitute the entire 40%.
”South African financial institutions have already made a significant contribution to facilitating the provision of capital and financial services on the continent,” the MTBPS says, noting further exchange control reforms will be introduced to enhance South Africa’s potential.
Further regulations will make it easier for South African businessmen to finance their business plans, with local banks permitted to extend foreign currency denominated facilities for the financing of approved foreign direct investment by South African companies.
The liberalisation drive also makes provision for the foreign exposure limit on collective investments to be increased from 20% to 25% of total retail assets.
The limit for investment managers is also increased from 15% to 25% of total retail assets.
”This will further enable South African residents to diversify their investment portfolios through domestic channels and enhance the role of South African fund managers in facilitating the flow of funds to the continent,” it notes.
The increased allowance applies with immediate effect, the MTBPS says, but warns the gradual liberalisation of exchange controls will only continue if certain prerequisites, including macro-economic stability and enhanced financial regulation, are met.
Education, health get boost
Education and health will be major beneficiaries of more than R40-billion extra to provinces over the next three years.
R30,9-billion will be added to the provincial equitable share over the next three years, taking it up to R187 billion in 2008/2009.
As much as R20-billion of this would go to expanding education, health and social development.
In education, the aim was to reduce backlogs in school equipment, expand early childhood development, provide for teacher development, and extend the new curriculum to grades ten to 12.
The increased allocation also took into account the government’s commitment to phase out fees for schools in low-income communities.
Health care priorities were improved human resource management, recruitment of health professionals, expansion of emergency medical services and of a new national ambulance services model.
The increased allocation would also allow provinces to expand social welfare services, in particular gearing up for the phased implementation of coming children’s legislation, including care for children in conflict with the law.
Up to R2,6-billion of the extra cash would go on other provincial functions, including roads, support for agriculture and bolstering provincial tourism.
In addition to the increase in the equitable share, the ring-fenced conditional grants would be boosted by R4,8-billion in 2006/2007 and R4,6-billion the following year, rising to R103-billion in 2008/2009.
Much of this would go on housing, which would get R23,5-billion over the next three years.
An additional R900-million would bring the hospital revitalisation grant — which helped provinces to modernise infrastructure and equipment — to R5,1-billion over the next three years.
By 2008/2009, 45 hospitals should have been fully modernised through this grant.
More money for peacekeeping in Africa
South African peacekeeping operations in Africa remain on the government’s priority list.
Defence and Intelligence’s revised estimate for this year 2005/2006 is R25,4-billion, the document reports, increasing to R29,1-billion by the 2008/2009 financial year.
A large contingent of South African troops, often operating under the United Nations or African Union banner, are deployed in the Democratic Republic of Congo, Burundi, Côte d’Ivoire and other African countries.
Troops on the ground, however, have expressed concern over stretched supply lines and shortages of key equipment considered vital in carrying out their operations in areas often devoid of basic infrastructure.
”Plans to modernise and improve the combat readiness of the SANDF to fulfil its constitutional mandate will be strengthened by additional allocations in the 2006 MTEF,” the MTBPS says.
Witholding tax for sports visitors
The government has decided to levy a final withholding tax of 15% on visiting sports personalities and entertainers.
The tax will be applicable to all payments by South African residents to foreign entertainers and ”sportspersons” performing in South Africa.
In the Budget earlier this year a split rate was proposed: five percent on visiting African artists and 15% on all others.
However, the split rates would have breached the General Agreement on Trade in Services, and after ”further consultation” it was decided on one uniform rate.
A withholding tax is an amount of an employee’s income that an employer sends directly to the tax authority as part payment of that person’s tax liability for the year.
Economists react
Mike Schussler, economist at T-SEC said: ”I am very happy about the extra infrastructure spending, but having said that I am a bit shocked at the Gautrain cost — according to the speech the project will exceed R20-billion, whereas we were told it would be between R7,5-billion and R10-billion, so it means the cost has doubled. I am extremely happy about the higher growth projection as well as the lower budget deficit, which will be good for the bond market. I would like to see large tax cuts next year; I think there is room for that.”
Rejane Woodroffe, economist at Metropolitan Asset Managers said: ”My concern is that if we’d like to grow the economy then we can’t have a Budget that is contractionary at 1%. I think the government should stimulate the economy rather than holding back; the government now has a huge cash pile that is unspent. We’ve in the past seen budget allocations that were lower than projections.”
”I would have loved to see more spending on infrastructure and capex. With the relaxation of forex outflows — an increase from 15% to 25% limit for fund managers — I don’t see a rush of money going out and in fact the relaxation is a positive signal to foreign investors.”
Goolam Ballim, chief economist at Standard Bank said: ”The details of the mini Budget serve as testimony to the economy’s robustness and increased resilience, to the extent that the government is forecasting a fairly shallow Budget deficit by developed world norms.
”This suggests that government finances are in healthy shape and indeed the blockages are in the capacity to execute delivery of the pro-growth and pro-poor agenda. The resilience of the economy is highlighted in the forecasted growth above 4% over the three-year horizon and in target friendly inflation as well as fairly bold moves with regard to foreign exchange liberalisation.”
George Glynos, Market Analyst at ETM: ”I generally give it a thumbs up — there have been significant steps made especially in exchange controls.
”Aside from that, the points to be made are that policies remain fairly expansionary going forward. It’s good news that government is budgeting for lower deficits in the years ahead, indicating that they expect the revenue collection to remain relatively strong.
”The only criticism, if I have one, is that I do think there was scope for government to have increased the amount of spending in the economy. They have the room to become more expansionary and we may see some tax breaks early next year, although the authorities will be somewhat concerned about fuelling inflation as South Africa is poised with solid economic fundamentals to sustain levels of growth we have seen into 2007 and beyond.”
Political party reaction
African National Congress (ANC) spokesperson Smuts Ngonyama said in a statement that the ANC’s effective management of the economy over the last 11 years ”has created space to expand measures to stimulate economic growth and meaningfully tackle poverty”.
”The ANC welcomes the increased investment in economic infrastructure, particularly transport networks, to meet growing demand and stimulate faster growth in the economy. These expenditure plans for the next three years should contribute significantly to government’s Accelerated and Shared Growth Initiative for South Africa.”
The official opposition Democratic Alliance’s Ian Davidson said: ”We welcome government’s commitment to ease the tax-burden on individual taxpayers by
utilising a portion of the R30-billion revenue overrun in tax collections
to revise tax rates and thresholds. Likewise its commitment to produce relief
in its treatment of medical scheme contributions and employer provided health
services.
”We believe the Treasury missed an opportunity for increased growth which could have been achieved by commitment to a lower corporate tax rate.”
The Independent Democrats secretary general Avril Harding said there were ”no real surprises” in Tuesday’s mini-Budget.
”All the forecasts were directed at increasing infrastructure [spend]. This turned out to be the case but… we still have major infrastructure deficits and targets [for implementation] are unclear.”
The African Christian Democratic Party’s Steve Swart said that his party was positive about today’s presentation. ”As far as the economy is concerned…
with the deficit being cut to 1%, we are looking forward to reduction in tax for individuals to be announced in February. We would like to see further details about spending on hospitals, police and education.” – I-Net Bridge, Sapa