By Shaun Benton
Cape Town – with a windfall of an extra R41-billion in government coffers than was originally estimated, and with a far smaller budget deficit – a mere 0.5 percent of GDP – than the expected 3.1 percent, Finance Minister Trevor Manuel confidently delivered his 10th budget on Wednesday, 15 February, with benefits for the poor, lower-income earners, homeowners and the economy as a whole.
While corporate entities are not getting quite the tax relief that they had hoped for and expected – although they stand to benefit from the abolition of Regional Service Council levies, which is equal to a two-percent cut in the corporate tax rate, or relief of about R7-billion a year – small businesses stand to thrive on this budget.
With an eye on the valuable economic and developmental role of small businesses, there is a tax amnesty for them. The proposed amnesty will allow the SA Revenue Service to waive taxes that small firms owe for the years before March 31, 2004.
The taxi industry, facing a recapitalisation programme, is the first beneficiary of this first phase, while small businesses will be the benefits of the second phase – with the threat that if they do not enter the tax system they will face prosecution. This is intended no doubt to widen the tax base and build a culture of tax compliance.
Small businesses and lower-income earners drawing less than R40 000 a year pay no tax. This threshold has been raised from the previous R35 000 tax-free earnings. This is a major bonus for lower-income earners.
As Manuel put it in a press briefing this morning, raising the non-payment of tax threshold to R40 000 will have a “profound impact on the take-home pay of probably the bulk of unionized workers in South Africa”.
For personal income tax, the tax regime has been simplified and the brackets
widened, with the upper bracket lifted from
R300 000 a year to R400 000. This, too, in the words of the minister, is a
“measurable change” for many working families.
Those earning R250 000 a year or less get the lion’s share of tax relief – 73 percent of this year’s income tax relief.
With the economy currently expanding by an average of 5 percent a year but with a current account balance being hit by high consumption of imported goods, South Africans, notoriously slack on saving, are being encouraged to put money away for a rainy day.
To this end, the tax on retirement funds has been slashed, from 18 percent to 9 percent, in one of the most dramatic outcomes of this year’s budget. This is at a cost to the state of R2,4-billion, said the Finance Minister in his speech today, and takes effect from 1 March.
There are savings for the less wealthy: for those renting, stamp duty of less than R500 is waived – it was previously R200. For the wealthier, the exchange control limit of R750 000 for investment outside the country has been raised substantially, to R2-million, in a move that the minister believes will ultimately facilitate the flow of investment inwards as well.
In line with other attempts to draw the majority of South Africans in to the housing market, first-time home buyers stand to benefit tremendously. Transfer duty has on property transactions has been decreased and is some cases reduced to nothing. From 1 March, houses costing less than R500 000 will attract no transfer duty.
Houses selling for between R500 000 and a million will have a 5 percent duty, while those costing over R1 million get hit by 8 percent.
The flat 10 percent transfer duty for companies and trusts in the housing market is reduced also, to eight percent, adding to ongoing robustness of the property market.
All this falls in line with overall moves by government to encourage the secondary housing market and contribute to home ownership, and ties in with moves by the housing department to offer once-off subsidies to buyers of lower-cost housing once the major banks release an amount of R42-billion they have set aside for lower-income bonds.
Looking at the increase in the budget for housing and other social services this year, it is clear that government is moving away from a welfare programme to one of more personal responsibility by increasing the confidence and economic roles of South African citizens.
Housing gets a massive increase, by far the biggest percentage increase of all the departments – around 40 percent. From a revised estimate of R24-billion in 2005/06, housing now gets almost R35-billion.
“We have to focus a lot more on social infrastructure,” said Manuel at a press briefing prior to the delivery of his speech today, with specific reference to housing. He added that the ability of working families to afford to own their own homes would “take some of the pressure of the state, be it local, provincial or national, to be the sole provider of housing”.
But social services still attract the largest share of expenditure – Education gets R92-billion, R9-billion more than last year. Health gets R54-billion, R6-billion more than last year, while welfare and social security get R7-billion more than last year – R80-billion.
At the same time, welfare has seen the biggest growth over the past few years – and this is probably why the minister is keen on a slowdown, having already warned last year that South Africa is in danger of becoming a nation too dependent on handouts from the state, which in turn has a damaging effect on entrepreneurial ambition.
Income transfers to households through social assistance grant programmes have increased from R42,9-billion in the 2002/03 financial year to R74,2-billion last year – a massive increase over a short period.
Nonetheless, social grants are to increase in real terms on April 1, the minister announced today, with the old age and disability grant and care dependency grant increasing by R40 a month to R820 a month, the foster care grant goes up by R30 (to R590) and child support by R10 (to R190).
With economic services (trade and industry, public enterprises – and thus public entities, state-owned companies, etc) getting the biggest increase overall – from R71-billion last year to almost R85-billion this year, it is clear that the focus now is on job creation through expanded and improved infrastructure, which in turn will expand the economy.
Massive investment in infrastructure spending is expected over the next few years, with R5-billion to be spent on dedicated infrastructure for the world cup, of which R3-billion is to be spent over the next three fiscal years.
On possible criticism from the corporate sector on no dramatic decline in tax rates, the minister said the government favoured the route of “steady decline”.
“In developing countries such as ours, the state has enormous responsibility for underdevelopment,” the minister told financial journalists flatly.
Overall, main budget revenue for government for 2005/06, said the minister in his speech today, is expected, once finalized, to amount to R411,1-billion – R41,2-billion more than the original estimate, and 18,2 percent more than 2004/05 revenue.
This is supported by a buoyant economy, with rising commodity prices as evidenced by the current value of gold.
Expected expenditure for the 2005/06 financial year is R419-billion – a fraction more than revenue, giving the country a budget deficit of 0,5 percent. This time last year, government anticipated a deficit of R48 billion, or 3.1 percent of GDP.
The minister, known to be less forgiving of national debt than many of his contemporaries, told the house today that the extra R40 billion would in large part go to reducing the country’s debt.
“Lower debt means lower debt service costs in years to come, and lower interest rates across the entire economy,” he said.
Already, South Africa’s net debt position is equal to 30,8 percent of GDP, down from 33,2 percent at the end of 2004/05, the minister said.
State debt cost will decline even more, he said, from 3,3 percent of GDP in 2005/06 to 2,7 percent in 2008/09.
Taking all this into account, said Manuel, “R418,2-billion is allocated for national, provincial and local government expenditure in 2006/07, rising to R507,6-billion in 2008/09”.
On the whole, South Africa’s economic outlook “is exceedingly favourable – more promising than has been seen in 40 years”, said the minister in his budget speech in the national assembly today, reflecting on President Thabo Mbeki’s remarks in his state of the nation address on the current optimism pervasive among South Africans.
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