South Africa ramped up spending in its 2009 budget but cut taxes to counter a global slowdown and boost an economy seen limping to its lowest rate of growth in more than a decade.
Finance Minister Trevor Manuel also delayed the introduction of mineral royalties until next year as miners struggle amid falling commodity prices and easing global demand.
South Africa’s economy was seen growing 3,1% in 2008, down from October’s forecast of 3,7%, and expanding just 1,2% this year — its slowest rate since 1998 — as the country heads into an election.
”The storm that we spoke of last year has broken and it is more severe than anyone anticipated,” Manuel said in a budget speech. ”Trading conditions are tough and are likely to deteriorate further in the short-term.”
Decisions taken in previous years had created room to temper the impact of the downturn that may well become a ”second great depression”, he said, denying suggestions that a more expansionary stance was linked to elections later this year.
More spending, partly to compensate for inflation, will be added to the government’s already ambitious infrastructure plans, while additional funding is directed to social services and a public works programme to help limit net job losses.
The move is in line with steps taken in other countries, particularly in developed economies where governments have drafted multibillion-dollar stimulus packages and central banks have cuts rates to record lows to avoid a long, deep recession.
South Africa’s budget will shift back into a deficit of 1% of gross domestic product in 2008/09 after three years of surpluses, before widening to 3,8% of GDP in the 2009/10 financial year.
”We are able to announce a counter-cyclical fiscal stimulus, on the strength of a secure and stable fiscal position,” Manuel said, describing the deficit as ”reasonably comfortable”.
”It’s what the money buys that matters, and so fixations with the size of deficits or surpluses are illusory detours.”
Royalties delayed
A deficit of 3% of GDP is seen as an international benchmark, but many countries are moving into bigger shortfalls amid the current financial and economic crisis.
The National Treasury said in its 2009 Budget Review the deficit would be financed through increased borrowing, including a $1-billion international bond, but debt service costs would stay low at about 2,5% of GDP.
Borrowing would retreat as the economy recovers, it said.
The Treasury said the more expansionary stance added to easing monetary policy, with the central bank seen continuing its rate cutting cycle started in December.
”This complements the role of monetary policy in supporting macroeconomic stability, reducing the impact of the downturn on households and mitigating its depth and duration.”
The budget offers individual tax relief that more than compensates for inflation, despite lower-than-expected revenue and the planned jump in spending.
Tax brackets are adjusted to target relief at low and middle-income earners, but personal and company tax rates remain the same.
Manuel said easing consumer inflation — headline CPI was seen back in the 3% to 6% target range in the first half of 2009, more optimistic than the central bank’s forecast — would create room for further rate cuts in the months ahead.
Credit growth may already have slowed more rapidly than was desirable, Manuel said.
The central bank cut its repo rate by 100 basis points to 10,5% last week, adding to December’s 50 basis point cut. But at 14%, the commercial banks’ prime lending rate remains restrictive and more rate cuts are expected.
Manuel also announced proposed mining royalties, that calculate levies based on earnings before interest and tax (EBIT) and were due to come into effect from May this year, would be deferred until March 2010.
”This provides a boost to the industry of about R1,8-billion, which will assist in minimising job losses.”
Mining companies in South Africa — the world’s biggest producer of platinum and a key producer of gold and other resources — have long argued against the royalties, with marginal miners warning it could force them to shut down.
The proposals have changed drastically since first mooted in 2003, with rates initially related to turnover. – Reuters