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Mini budget

26 October 2004 Angelo Coppola

Jac Laubscher, group economist at Sanlam shares some of his views on the mini budget presented by the Minister of Finance Trevor Manuel.

The Minister surprised by announcing the scrapping of the limits on offshore investment for SA companies, as well as allowing them to keep foreign dividends off-shore.

Corporates will however still have to get permission from the SARB to move money out of SA, and will have to demonstrate the benefit it will have for the SA economy. It is nevertheless signalling confidence that the SA business environment is attractive enough to compete with offshore investment opportunities.

The fact that no further relaxation was announced for individuals probably indicates that this will have to wait for the completion of the amnesty process by 30 May 2005.

The amount of R65 billion in offshore funds declared under the amnesty is quite large, and together with the indication that government expects to receive R2.2 billion in levies from the process it points to a large portion of these funds being repatriated to SA.

This perhaps partly explains the strong inflow of capital SA has experienced recently, including the large amount in unrecorded transactions.

The announcement regarding the limits for institutions being incorporated into the prudential investment guidelines is of course not new, but the Minister gave a clear indication that the current limits are unlikely to be increased substantially.

The inflation target was left unchanged at 3-6% to avoid forcing the SARB into a more restrictive monetary policy stance, which underscores government's commitment to higher economic growth. It was however balanced by the indication that individuals will not get much by way of tax relief next year so as not to stimulate household spending further.

The increase in budgeted expenditure for the next three years will result in a higher budget deficit and a meaningful increase in the public sector borrowing requirement when the capital needs of the parastatals are taken into account.

At the margin it should exert some upward pressure on bond yields, unless cash flows to institutional investors also pick up as the economy expands more rapidly.

The adjustments to the revenue budget for the current fiscal year, with higher VAT and personal income taxes compensating for lower company taxes, are realistic and improve the credibility of the budget.

The changes to government's macro-economic assumptions are an improvement on the previous numbers. The GDP growth forecast in particular is now much more credible in allowing for a cyclical peak in 2005, compared with the previous forecast of a continuing acceleration in growth.

It is nevertheless striking that the forecast relies on a substantial improvement in net exports, which will be vulnerable to any weakness in the global economy.

Fiscal policy and monetary policy are now both very expansionary and are set to remain so for the near future. The risk is that it does not allow for anti-cyclical measures in the event of the economy disappointing, for example as a result of the global downturn being more severe than what is currently forecast.

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