BUDGET 2006/07
A Budget for everyone
Shaun Benton
15 February 2006
Good news was the hallmark of Finance Minister Trevor Manuel's 10th Budget, tabled in the National Assembly on Wednesday.
"The economic outlook is exceedingly favourable - more promising than has been seen in 40 years," Manuel told MPs in his 2006/07 Budget speech.
"And our policy stance, unlike that of 40 years ago, emphasises development opportunities for all South Africans, built on a foundation of social solidarity and a shared economic destiny."
Even after promising benefits for the poor, lower-income earners, homeowners and the economy as a whole, Manuel still managed to reduce the budget deficit, down from 3.1% to a mere 0.5 percent of GDP.
Tax amnesty
While corporate entities are not getting quite the tax relief that they had hoped, 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. A proposed tax amnesty will allow the South African Revenue Service (SARS) to waive taxes that small firms owe for the years before March 31, 2004.
This is intended to widen the tax base and build a culture of tax compliance, with the threat that if they do not enter the tax system they will face prosecution.
Businesses of all sizes will benefit from the abolition of Regional Service Council levies, which is equal to a two-percent cut in the corporate tax rate, equivalent to relief of about R7 billion a year.
'Profound impact'
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 will be, in the words of the minister, 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.
Retirement funds
Although the economy is currently expanding by an average of 5 percent a year, the current account balance is being hit by a high consumption of imported goods. South Africans 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 Manuel, and takes effect from March 1.
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.
Transfer duties
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 March 1, says the minister, 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. It also 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.
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.
Social infrastructure
"We have to focus a lot more on social infrastructure," said Manuel at a press briefing prior to the delivery of his speech, 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, R6bn more than last year, while welfare and social security get R7bn more than last year - R80bn.
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 R42.9bn in the 2002/03 financial year to R74,2bn last year - a massive increase over a short period.
Social grants are to increase in real terms from April 1, with the old age and disability grant and care dependency grant increasing by R40 a month to R820 a month, and the
foster care grant goes up by R30 (to R590) and child support by R10 (to R190).
Expanding the economy
With economic services (trade and industry, public enterprises) getting the biggest increase in rand terms - 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 R3bn 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," he told financial journalists flatly.
Lowering national debt
Overall, the main budget revenue for government for 2005/06, is expected to amount to R411,1 billion. This is more than R40 billion more than the original estimate, and almost 20% percent more than 2004/05 revenue.
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 unforgiving of national debt, 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.
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".
Source: BuaNews
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