South Africa looks set to unveil tax relief or incentives for companies and more money to cut widespread poverty in next week’s 2007 budget, thanks to another massive revenue overrun.
But individuals are unlikely to receive significant relief due to already high, inflationary consumer spending, despite an expected budget surplus, analysts say.
Finance Minister Trevor Manuel is due to unveil this year’s budget in Parliament on February 21 and will, once again, have ample fiscal room to surprise investors and taxpayers.
Revenue overruns over the last year should allow for the country’s first ever budget surplus in 2006/07, a year ahead of the previous forecast.
The Treasury announced in October it saw a budget deficit of 0,4% of gross domestic product (GDP) in the current fiscal year, followed by a surplus of 0,5% of GDP in 2007/08.
Analysts said revenue so far this year is running way over budget and the trend should continue for the last few months of the fiscal year.
”Compared with the amount of R446,4-billion originally budgeted in February 2006, the overrun could therefore be as high as R37,3-billion,” Sanlam group economist Jac Laubscher said.
”Even if government revenue was not to be as exuberant as this, the excess will probably exceed the deficit of R7,8-billion in [October’s Medium-Term Budget Policy Statement], resulting in a small surplus for 2006/07.”
Faster growth in Africa’s biggest economy has boosted tax takes but public sector capacity to spend is unable to support a significant boost in expenditure.
Maintaining a budget surplus rather than distributing the windfall back into the economy would also help take some of the heat out of consumer spending, which has added to inflationary pressures.
South Africa’s economy expanded by a two-decade record of 5,1% in 2001 and is forecast to grow by 4,4% in 2006, a figure that is unlikely to be adjusted much.
Despite the capacity constraints, spending to address social problems would show real growth, in step with a shift to more interventionist policies by President Thabo Mbeki’s government.
There should be more money to tackle rampant crime and to slash widespread poverty, and Mbeki also mooted in his State of the Nation speech last week plans for sweeping changes to the social-welfare system.
Company tax relief
Analysts said Manuel could announce tax relief for companies to help spur investment but personal tax rates should be maintained due to the government not wanting to contradict the central bank’s efforts — through high interest rates — to curb rampant consumer spending.
”After the adjustment for bracket creep [to account for inflation] I don’t expect any significant tax relief for individuals,” Adenaan Hardien of Cadiz African Harvest said.
”But there could be interesting changes with respect to corporate tax, although we are more likely to see targeted relief rather than a blanket reduction in the overall tax [rate].”
The Treasury surprised many observers last year in keeping the company tax rate and the tax on dividends unchanged at 29% and 12,5% respectively, choosing rather to reward individuals.
This year it could be the other way round.
Nedbank, one of the country’s four big banks, said there was scope for big cuts for corporates to help lift investment and growth. But any announcement was likely to be muted.
”Unfortunately, any action is likely to be less bold, with a further cut of one or two percentage points to the basic rate most probable,” it said.
Small businesses should get relief again to help them create more, much-needed jobs, while VAT, because of its impact on the poor, should not be raised from the current 14%.
Economists also expect details of the proposed windfall tax on the liquid-fuels industry — and in particular Sasol — while markets will be looking for more news on possible further relaxation of remaining exchange controls.
With the huge revenue overrun expected, surprises are possible.
”This minister has always managed to surprise on the positive side, especially with so much cash in the kitty,” Hardien said. — Reuters