Budget: Economists expect personal tax cut

Strong South African government revenue growth should allow Minister of Finance Trevor Manuel to cut personal taxes by about R20-billion when he announces the 2006/07 Budget on Wednesday February 15.

But economists are divided on whether the tax relief will come in the form of adjusting brackets, which would benefit mostly the low- and middle-income groups, or in the form of a reduction in the top marginal tax rate, which would benefit the high-income group.

Last year, Manuel unveiled reductions in personal income tax totalling R6,8-billion for the 2005/06 fiscal year after R4-billion-worth of personal income-tax cuts granted in 2004.

Relief in 2005/06 took the form of adjusting brackets, while the top marginal rate was kept steady at 40%.

Some economists believe this should be cut to 38%, but others say that a reduction in the number of brackets to only four from six makes more sense.

The consensus is that personal income tax relief will total R20-billion, with a range from R18-billion to R30-billion.

Since 1996, South Africans have benefited from more than R66-billion in personal income-tax relief, primarily alleviating the tax on low-income earners.

Economists also expect companies to get tax relief, but once again there is no consensus as to how that should be implemented.

Some argue that the easiest is to lower the rate further by one or two percentage points, while others think the best option is to scrap the secondary tax on companies (STC), which is a tax on distributed profits and was introduced by Derek Keys to encourage investment in capacity expansions.

Manuel last year announced a one-percentage-point reduction in the rate of corporate tax to 29%.

A less likely option for the surplus cash is to eliminate or reduce the tax on retirement funds.

On exchange controls, most economists expect the government to ease the limits on individuals, which currently stand at R750 000, after companies and investment funds had their limits increased in October 2005.

The government fiscal deficit fell by 87,8% year-on-year to only R1,855-billion in the first nine months of the 2005/06 fiscal year, which started in April 2005.

In the first nine months, expenditure rose by 13% year-on-year, while revenue jumped by 19,1%.

The February 2005 Budget forecast a 13,5% increase in expenditure to R417,819-billion, while revenue was only expected to rise by 6,5% to R369,869-billion.

The October 2005 Medium-Term Budget Policy Statement changed this to a 12,8% increase in expenditure to R415,8-billion, while revenue is now expected to rise by 15% to R400,1-billion.

The National Treasury in February 2005 forecast that the deficit would increase by about 130% to R47,95-billion, but has since acknowledged that a surge in revenue in March last year means that the deficit would be at least R10-billion less than this. 

The 2004/05 fiscal deficit was only R20,733-billion compared with R29,345-billion in the 2003/04 fiscal year and a budgeted R41,948-billion given in the February 2004 Budget.

The halving of the 2004/05 deficit was due to far higher revenue than expected, with revenue for the fiscal year rising by 16% to R347,291-billion, while expenditure increased by 12% to R368,024-billion.—I-Net Bridge

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