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Dull and boring?

18 February 2004 Angelo Coppola

Rian le Roux - head of economic research at Old Mutual SA - says that there shouldn't be any major policy surprises in this year's national budget, which is Trevor Manuel's eighth.

So what has happened since 1994, asks le Roux, besides a shift in government policy, based on economic restructuring and fiscal focus. All the guesswork has been taken out of the budget essentially.

"Import tariffs have been cut, exchange controls have been relaxed, there has been broad based deregulation of economic activity, lower inflation and the construction of a credible policy track record."

In terms of fiscal consolidation, the budget deficit has been cut, there has been improved tax administration and improved spending control.

"On the other hand the macro-economic results have been mixed. While there has been reasonable growth and structurally lower inflation, there have been huge job losses," he explains.

"The economy was put through a deep restructuring process."

Le Roux reckons that this budget will focus on consolidation, driven by revenue constraints, and characterised by less to 'give away' if the deficit target is left unchanged. "This will limit the Minister's options for this budget. There a bit of tension as this is an election year."

He concurs with the market consensus that there should be no major surprises in terms of policy issues. Having said that he says that all previous years have had at least one surprise.

The slowing nominal economy will hurt revenue growth, as corporate profits and taxes hurting the most.

There are also concerns about the gap between profit growth and wage growth. Le Roux says that income and spending growth keeps VAT and personal tax income growth on track. There was some pressure although the minister wasn't unhappy about the VAT receipts.

Having said that the budgeted increase for companies has been revised downwards from 20.7%, to 10.9% and -1.7% for the last quarter.

In terms of individual tax relief in the last five years, Le Roux reckons that there could be between a 5% and 6% cut for individuals. A significant drop from the 13.3% cut last year, and 14.9% the year before that. You would have to go back to tax year 1999/2000 for a similar cut to the one predicted for this year.

The tax cuts here are mainly to provide fiscal drag relief in the lower brackets, while he expects tax free income interest income to be lifted further.

There should be inflation linked increases in the fuel levy and sin taxes, while there shouldn't be any change in VAT or company tax. An increase in VAT though would be politically insensitive and the government may be critisized for 'politicing'.

On the question of retirement fund taxation, Le Roux explains that last year it was lowered from 25% to 18%, and there is an ongoing review, with some speculation that there would be a cut to 15% - costing the government R1bn.

He hedges his bets in this regard, saying that there may be a rate cut here, but it is likely to be put on hold due to the constraints.

He doesn't expect any announcements on privatisation, although there may be some surprises on exchange control relaxation, to keep the momentum going, which should be supported by the strong rand and positive sentiment towards South Africa.

Manufacturing sector production growth is slumping while retail sales growth is climbing steeply, while manufacturing employment has slumped - 300 000 jobs have been lost from the employment pool of 1.3 million people, since 1992.

All in all there will be no major surprises.

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