Minister of Finance Trevor Manuel has unveiled a “good news for all” South African government Budget for the next three years, providing for substantially lower Budget deficits between 2005 and 2009, total tax relief of R19,1-billion in 2006/07, and additional spending of R82-billion on priority infrastructure projects, skills development and education, health and welfare services until 2009.
Further relaxation of exchange controls on individuals has also been announced.
A reduction in corporate tax was perhaps the only element left out of the Budget that most experts had predicted would be included, although Manuel partly compensated for this by unveiling a considerable expansion in the number of small businesses eligible for tax breaks and a tax amnesty for small companies outside of the tax net.
Economic and fiscal stance
The Budget forecasts gross domestic product (GDP) growth of 4,9% for 2006, averaging about 5% for the three years until 2009. CPIX inflation, used by the South African Reserve Bank (SARB) in its inflation-targeting policy, is projected to average 4,5% over the three years, at the midpoint of the SARB’s 3% to 6% target.
The Budget deficit for 2005/06 has been revised downward to only R7,9-billion, or 0,5% of GDP, from the previous estimate of 1% of GDP in November, as a result of a substantial revenue overrun totalling R41,2-billion for the year. The projected Budget deficit for 2006/07 has been revised lower to only 1,5% of GDP, from 2,2% previously, and is expected to reach only 1,4% of GDP in 2007/08 and 1,2% of GDP in 2008/09.
Real growth in national government non-interest spending is planned to rise by an annual average of 6,4% until 2009, while provincial spending will grow by an annual average of 12%.
Borrowing costs are expected to fall as a percentage of GDP from 3,3% in 2005/06 to only 2,7% in 2008/09, helped by higher revenue, less borrowing and low interest rates. The three-year Budget framework also includes an unallocated contingency reserve, rising to R8-billion by 2008/09.
The public-sector borrowing requirement (PSBR) is expected to average 2,4% of GDP over the 2006/09 period.
Tax proposals
The 2006 Budget contains tax relief totalling R19,1-billion — not including the impact of the withdrawal of the Regional Services Council (RSC) levy, announced in 2005, of R7-billion.
Of this total, R13,1-billion goes for personal income tax relief, which will see substantial increases in tax-bracket thresholds across all brackets — including raising the top marginal tax threshold to R400Â 000 from R300Â 000 currently.
Proposed relief from lower transfer duties on property totals R4,5-billion, which includes raising the exempt threshold to R500Â 000 from R190Â 000, and the second threshold to R1-million from R330Â 000. There is also a reduction in the 10% transfer duty rate for companies and trusts to 8%.
The Treasury also proposes halving the tax on retirement funds to 9% from 18%, making it easier for individuals to save.
The Budget introduces further substantial tax relief for small businesses, raising the turnover limits for eligible companies to R14-million from R6-million and adjusting the range of tax thresholds. An innovation is the announcement of a tax amnesty for small businesses with less than R5-million in turnover, aimed at capturing the thousands of informal entrepreneurs such as taxi drivers, stall owners, spaza shops and shebeens in the tax net.
Learnership allowances have been extended to 2011 and the limits raised to R30Â 000 per year for new employees.
The withdrawal of RSC levies will reduce the business tax burden by R7-billion in 2006/07, and by a total of R24-billion across the three years until 2009.
Exchange controls relaxation
Manuel has announced an increase in the offshore foreign currency allowance for individuals to R2-million from R750Â 000 currently. He has also lowered the current foreign direct investment (FDI) threshold of 50% to 25% for investments in Africa by South African companies and mandated parastatals.
Main spending changes over the MTEF
The 2006 Budget allocates R418,2-billion for national, provincial and local government spending, rising to R507,6-billion in 2008/09. Consolidated non-interest spending, meanwhile, is projected to total R463,1-billion in 2006/07, a 14,4% increase over 2005/06 levels, rising to R511,6-billion (10,5%) in 2007/08 and to R562,6-billion (10%) in 2008/09.
The finance minister on Wednesday unveiled an additional R82-billion in spending over the next three years of the Medium-Term Expenditure Framework (MTEF), plus another R24-billion in direct grants to local government to replace the abolished RSC levies.
Of this R82-billion, R30,9-billion will go to provinces to be spent on improvements in school education, health, welfare services and provincial infrastructure; R8,78-billion will go towards local government infrastructure and services; R6,6-billion will go towards education, health and welfare; R16,2-billion for housing and community development, and R12,9-billion for economic infrastructure development.
R8-billion goes for investment in public administration, R5,4-billion to justice and crime prevention and R3-billion for industrial development, science and technology. — I-Net Bridge