The South African government is faced with such an embarrassment of riches in 2006/07 that Minister of Finance Trevor Manuel will be able to cut personal income tax by 1% across the board, reduce corporate income tax by 2%, and possibly halve the rate of retirement tax to 9%, according to Investec Asset Management.
Commenting on Friday on expectations for the government’s 2006/07 Budget, which will be unveiled in Parliament by Manuel on Wednesday, Investec Asset Management’s head of fixed income, Andre Roux, said he expects the government’s 2005/06 deficit to be as little as 0,5% of gross domestic product, with a revenue overrun in the region of R40-billion. As a result, the government will have leeway to reduce taxes significantly.
Personal income tax will likely be reduced by 1% across all brackets, including the highest-income category, while the tax-bracket thresholds will be adjusted upward as well, he predicted.
“Manuel will be aware that the excellent performances of the stock market and the property market have provided a bonanza to high-income earners in particular. He will therefore be reluctant to implement this across the board, as he would prefer to favour lower-income earners. However, given the anticipated revenue overrun, he is likely to be forced to reduce all marginal income-tax rates,” Roux said.
Likewise, he expects to see a reduction in the company tax on the order of 2% across the board. In 2005, the rate was reduced by one percentage point to 29%.
However, the secondary tax on companies (STC) is likely to be left unchanged, given its efficiency, Investec believed.
There is also a “good chance” that the government will halve the rate of retirement tax to 9% from 18% currently, as the finance minister realised that this is an unfair tax as it only taxes interest-bearing assets and ignored other instruments.
“We believe they would like to do away with retirement tax, but rather than take the big-bang approach, he will probably announce his intention and then implement it in steps,” forecast Roux.
Bad news on the tax side is likely to be focused on tightening the scope of deductions for car allowances.
On exchange controls, Investec Asset Management believes the government will stick to its policy of gradual relaxation.
“We think Manuel will use the current strength of the rand as an opportunity to adjust meaningfully the limit for individuals from the current R750 000 to a few million rand,” Roux commented. “Where institutions are concerned, we may well hear an announcement to switch control over the size of offshore assets from exchange controls to prudential limits.
“This limit is likely to be 25%, significantly higher than the current offshore allowance of 15%.”
Regarding funding, Roux noted that, although the Treasury will be faced with an unprecedented cash balance of about R50-billion and will therefore not have to borrow much in 2006/07, Manuel could be expected to continue to issue some long-term bonds to keep the bond market liquid.
However, the Treasury will probably opt, as it did in 2005/06, not to borrow in the offshore markets over and above what is required for the arms deal. It could also repay some foreign debt that will mature in the course of the year.
“[Bond] issuance is therefore likely to remain tight in the new financial year, which should provide some support to long-term interest rates,” he concluded. — I-Net Bridge