All eyes on Manuel ahead of Budget

Finance Minister Trevor Manuel’s national budget speech on Wednesday is even more keenly anticipated this year in view of the electricity crisis and its anticipated negative effects on the economy, and Democratic Alliance (DA) spokesperson Kobus Marais has urged Manuel to tackle the crisis head-on.

Presenting the DA’s “alternative budget” to the media on Monday, he also called, among other things, for the budget to promote growth and job creation, and make significant allocations to deal with the crime situation.

He suggested setting aside R50-billion over the next five years to assist Eskom to finance its electricity expansion programme, and allocating R1,2-billion to diversifying power generation and reducing demand on the national grid.

A “stimulatory package” of R14,5-billion should be made available immediately to assist the economy to overcome the negative effects of the electricity crisis and stimulate foreign direct investment, he said.

The occupational skills-development system should be revamped, and more than R7-billion be spent on improving social security and basic service delivery in crucial areas, such as education, health and housing.

The DA also proposed that almost R2,6-billion be spent on restoring capacity and efficiency to the criminal justice system, as well as the South African Police Service and the Correctional Services Department, of which R200-million should be earmarked to retain and strengthen the Scorpions, Marais said.

Uncertainty

Nedbank’s group economic unit said Wednesday’s budget comes at a time of much uncertainty. Higher interest rates, the current electricity crisis and fading global growth prospects are undermining confidence, it said in a statement.

It is critical that the budget deal with the current electricity constraints in a decisive manner, including incentives to encourage energy savings as well as support for short-term additions to electricity capacity.

The government should start the new fiscal year on a strong financial footing, with the outcomes for 2007 and 2008 likely to be broadly in line with the estimates set out in October’s Medium-Term Budget Policy Statement (MTBPS).

However, the estimates for 2008 and 2009 and beyond now seem unrealistic.
The forecast for economic growth is likely be revised downwards, implying that revenue will probably come in significantly below October’s expectations.

Yet the pressure to improve services and address infrastructure constraints has increased. These realities will make it difficult to achieve the MTBPS’s planned budget surplus, the unit said.

Given the commitment to fiscal discipline, Manuel might opt for a small budget deficit, with a counter-cyclical element in the form of moderate tax relief and slightly more aggressive spending.

The tax relief should be focused on companies. Such a move would bolster business confidence at a time when the economy is slowing and companies are expected to make significant sacrifices to overcome the electricity constraints.

On the spending side, the focus should remain on social welfare and infrastructure spending, Nedbank said.

PricewaterhouseCoopers said it expects a Budget that continues to advance a less regulated system better reflecting the reality of doing business globally. However, it cautioned there could be short-term fallout from the detailed rules designed to shepherd the transition.

Two prominent hallmarks of a modern Western economy still not seen in South Africa are group taxation and the abolition of exchange control. While it is unlikely these will be introduced this year, it is possible the budget will take further the measures that already set the scene for their implementation, the company said in a statement.

Under group taxation, all companies in a group are considered a single consolidated taxpayer—rather than as separate, stand-alone taxpayers—preventing the group’s use of one company’s losses to offset the taxable profits of another.

Similarly, it is expected that many of Manuel’s announcements on Wednesday will pave the way for an economy without exchange controls.

Plugging the leaks

However, PricewaterhouseCoopers warned that the Treasury will have to focus on “plugging the leaks” that could be caused by the changes.

“The unfortunate reality is that Mr Manuel and his team have a reputation for erring on the side of caution to an extreme that often results in unintended outcomes,” it said.

A suggestion by tax, transaction and advisory services provider Ernst & Young is that Manuel review the mechanisms enabling people with access to remuneration structuring to benefit under company tax.

Ernst & Young corporate tax director Brigitte Keirby-Smith pointed out in a statement that a drop in the corporate tax rate combined with proper management of the option to draw income versus dividends could be extremely tax effective.

Individual taxation, on a sliding scale of rates, is not as effective over a certain income.

“Clearly this disparity is one that needs review,” said Keirby-Smith. “For the majority of South African taxpayers that are salaried earners, there is no luxury of structuring their tax affairs in this way.”

She suggested that Manuel carefully review individual tax rates and narrow the gap with the corporate tax rate or extend the thresholds at which the higher rates are triggered.

Trade union Solidarity on Monday urged Manuel to unveil a budget that promotes the country’s production sector.

“Fiscal policy must be employed to strengthen our country’s production sector,” Solidarity’s Jaco Kleynhans said.

At present the production sector is struggling with skills, infrastructure and electricity.

“If infrastructure is improved, unskilled people are trained and the production sector has access to sufficient electricity, many new jobs can be created and the social burden on government can be relieved,” he said.—Sapa

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