Hansa Case Study

THE 2006 NATIONAL BUDGET

1.0 Introduction

The Minister of Finance Trevor Manuel delivered his 10th highly anticipated budget on the 15th February 2006, with what the Market Economic Research (MER) termed ÐŽ§a remarkably successful fiscal policy era continuing to be in evidenceЎЁ The MER further attest to the fact that the overall tone of the budget is one of ÐŽ§stability and conservatismЎЁ.

Broadly speaking many commentators maintain the budget ÐŽ§is conservative, credible, emphasises stability and sustainability, enhances the expected positive macroeconomic trajectory for South Africa; and is financial market friendlyЎЁ (Du Toit, 2006).

Minister Manuel opened his speech by quoting Ben OkriÐŽ¦s rendition of ЎҐA way of being free, 1997ЎЁ ÐŽV ÐŽ§There are no joys without the nightmares that precede them and spring them into lightЎЁ

2.0 South AfricaÐŽ¦s Economic Scenario

The Minister highlighted that 350 00 jobs were created in 2005, almost 1500 new jobs every working day.

Exports grew 12 % in real terms in 2005 and should continue to benefit from strong global growth, which will average 4.3 % in the next three years. Export growth is to benefit from continued commodity demand globally, favourable tourism trends and investment. Exports to Japan were highlighted. South Africa stands to benefit from JapanÐŽ¦s improving economic outlook. Exports to Japan increased from 5 % of total exports in 2001 to 9 %.

The current account deficit rose to 4.2 % in 2005 from 3.4 % in 2004, and 1.3 % in 2003 and it is expected to remain steady at 4.4 % in 2006 and 4.3 % in 2007. It poses no major threat to local macroeconomic stability as it will be easily financed by capital inflows.

The MER has been more optimistic than consensus on economic growth prospects. Its forecast for 2006 is for GDP growth of 5 %, well ahead of the projected 4.2 %. The MER therefore notes with interest that the MinisterÐŽ¦s growth projection for 2006, which has been upgraded to 4.9 % (from 3.8 % in October 2005), 4.7 % in 2007 (from 4.4 %) and 5.2 % in 2008 (from 4.8 %). These upgrades follow substantial revisions of recent yearsÐŽ¦ growth data by Statistics SA.

On the inflation front, CPIX is projected to remain moderate at close to the midpoint of the target range in the next three years, averaging 4.3 % in 2006, 4.5 % in 2007 and 4.8 % in 2008.

3.0 Revenue Highlights

In general major tax reforms over the past ten years have broadened the tax base. This combined with strong economic growth has boosted revenue.

Total revenue is estimated at R 411 billion in 2005/06 (up 18 % against a budgeted R 369.8 billion), an overrun of R 41.2 billion. All taxes with the exception of retirement funds, are running substantially above budget. Personal income taxes are at R 125 billion, 13.3 % above budget.

Company taxes are R 16 billion above budget. The buoyant property market boosted taxes on property to R 11 billion, 23.4 % above budget. VAT receipts are estimated at 17 % above the original budget_ total VAT receipts were R 115 billion, R 9 billion above budget.

Revenue is projected to rise to R 446.4 billion in 2006/07 according to the MER.

4.0 Expenditure

Government expenditure has risen considerably over the past ten years; R 4800 per person in 2005 compared to R 2000 a decade ago, which constitutes a 50 % increase in real terms. Total expenditure is estimated at R 419 billion in 2005/06 compared with a budgeted R 417.8 billion in February 2005.

GovernmentÐŽ¦s capital spending is to increase substantially in coming years and will amount to R 372 billion over that period. Capital expenditure rose by 4.8 % a year on average between 2000 and 2004 and this will rise to between 10 and 15 % in the period 2004 to 2008. All three spheres of government, major enterprises such as Transnet and Eskom; and municipalities, will drive this process. Major infrastructure projects include the Gautrain and the 2010 soccer world cup_ a sharp increase in activity in the construction and infrastructure sectors is anticipated.

There is also a large focus on social spending_ expenditure on key social services is to be raised in coming years, with spending across all sectors increasing at well above the inflation rate. Notably expenditure on education (10 %), health (9 %), welfare and social security (10 %) as well as housing and other social services (25 %) will be boosted. This should encourage activity in these respective sub-sectors_ new schools, hospitals, training facilities etc.

5.0 Tax Measures

Tax relief totals R 19.1 billion_ this goes mainly to individuals and small businesses:

„X Individual tax relief totals R 13.5 billion, equivalent to around 1.5 % of total household expenditure in 2005.

„X The tax threshold which refers to the level at which tax becomes payable, is raised to R 40 000 from R 35 000, providing much relief to low-income earners.

„X Tax brackets have been adjusted upwards, bringing much needed disposable income to middle income earners. The top marginal tax rate remains at 40 % but the taxable income level rises to R 400 000 from R 300 000.

„X Estate duty threshold is raised to R 2.5 million from R 1.5 million.

„X The tax rate on retirement funds went down to 9 % from 18 %. This tax cut will result in relief amounting to R 2.4 billion.

„X Adjustment to property transfer duties result in revenue loss_ property costing less than R 500 000 will attract no transfer duty; a measure introduced to attract participation in the property market by low-income earners.

For corporates relief comes in the form the elimination of Regional Council Levies effective from 30 June 2006. The eradication of levies will result in relief to businesses totalling R 24 billion over the next three financial years.

6.0 Small and Medium Enterprises

The budget presents substantial tax relief for small businesses. Firms with an annual turnover of up to R 14 million (raised from R 6 million) will qualify for the relief.

The taxable income threshold for the reduced corporate tax rate of 10 % (from 20 %) will be increased to R 300 000 from R 250 000.

Tax amnesty for small businesses with a turnover of less than R 5 million was announced. Overall the relaxation of taxation measures for small