VZCZCXRO1692
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #0942/01 0670652
ZNR UUUUU ZZH
R 080652Z MAR 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2041
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBU/AMEMBASSY BUENOS AIRES 0209

UNCLAS SECTION 01 OF 03 PRETORIA 000942 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND 
TREASURY FOR OAISA/JRALYEA/BCUSHMAN 
USTR FOR PCOLEMAN 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA'S 2006 BUDGET 
 
¶1.  Summary.  Finance Minister Trevor Manuel outlined South 
Africa's planned expenditures and revenues over the next 
three years in the Budget 2006.  Few finance ministers have 
the luxury of dispensing an unplanned $6.9 billion in 
revenue, and having close to a balanced budget.  Strong 
growth and improved tax collection improved South Africa's 
fiscal balances enough to give lower and middle income 
individuals and more small businesses tax relief, as well as 
modest increases in social grants aimed at the poor.  Key to 
achieving government's goal of accelerated growth is 
increased spending on infrastructure and education, along 
with increased investment.  Reaction to the Budget was 
mostly positive, with the major complaint coming from big 
business, which did not receive any tax cuts.  End Summary. 
 
After Climbing Mountains, Come Joys 
----------------------------------- 
 
¶2.  Finance Minister Trevor Manuel opened his February 15 
2006 Budget address to Parliament with the theme, "there are 
no joys without mountains having been climbed," a phrase 
borrowed from Nigerian poet Ben Okri.  Manuel touted South 
Africa's GDP growth to be 5% in 2005 (Note:  2005 growth 
officially came in at 4.9%. End Note.) and in the years 
ahead, noting in Zulu that "this is the year of plenty, when 
all South Africans will reap the fruits of economic growth." 
Manuel highlighted South Africa's accomplishments and plans 
for the future, stating that since 1994, 3.5 million 
households have been given electricity, water is accessible 
to 90% of the population, and sanitation services are 
improving.  He also said that housing subsidies will provide 
for 500,000 houses over the next three years and that 1,500 
new jobs are now created each working day.  In terms of 
challenges facing South Africa, Manuel underlined investment 
in infrastructure and skills development as the two most 
important. 
 
A River of Revenue 
------------------ 
 
¶3.  Strong economic growth and improved tax collection meant 
the government collected R41.2 billion ($6.9 billion) more 
revenue in the 2005/06 fiscal year (ending on March 31), 
than it had estimated in the February 2005 budget.  Manuel 
proposed using the extra tax revenues to provide personal 
tax relief, reduce budget deficits, and increase spending on 
infrastructure and social grants.  He announced R19.1 
billion ($3.2 billion) in tax relief to primarily middle to 
lower income brackets (those earning less than R250,000 or 
$42,000).  Additionally, he proposed plans to reduce 
projected deficits to an average of 1.4% over the next three 
years, compared to previous planned deficits of over 2%, as 
well as to spend an additional R15 billion ($2.5 billion) on 
increased infrastructure and social grants. 
 
¶4.  In fiscal year 2005/06, South Africa's budget is nearly 
balanced, as its strong economy and improved tax collection 
gave South Africa its lowest budget deficit in 25 years. 
Manuel announced that the National Treasury's estimated 
2005/06 budget deficit is now 0.5% of GDP compared to an 
October 2005 estimate of 1% and a February 2005 estimate of 
3.1%.  If this estimate holds, it would be the lowest budget 
deficit since 1981's deficit/GDP of 0.4%.  Manuel also 
forecasts smaller deficit/GDP ratios for each of the next 
three years even as the SAG increases its expenditure 
growth.  He estimated South Africa's budget deficit at 1.5% 
of GDP in fiscal 2006/07, easing slightly to 1.4% in 2007/08 
and reaching 1.2% 2008/09.  These revised estimates compare 
to previous forecasts of 2.2% of GDP in fiscal 2006/07, 2.1% 
in 2007/08 and 2% in 2008/09, made last February.  Manuel 
also lowered its forecast for public sector borrowing to 
0.6% of GDP in fiscal 2005/06 and an average of 2.4 percent 
over the next three years. 
 
Personal Tax Relief 
------------------- 
 
¶5.  Manuel announced tax cuts for individuals, small 
businesses and retirement savings.  Personal taxes were cut 
by R13.5 billion ($2.3 billion) with 73% of the reductions 
focused on individuals earning R250,000 ($42,000) or less. 
The top tax bracket at which the 40% marginal rate applies 
will increase to R400,000 ($67,000) from R300,000 ($50,000), 
 
PRETORIA 00000942  002 OF 003 
 
 
while the tax threshold at which employees begin paying tax 
increases to R40,000 ($6,700) from R35,000 ($5,800), 
beginning in April. 
 
¶6.  Manuel proposed reducing the tax on retirement savings 
by half to 9% starting March 1 in order to boost South 
Africa's low savings rate.  In addition, taxes on property 
were reduced with the lower limit of property value being 
subject to taxes increased to R500,000 ($83,000) compared to 
the previous threshold of R190,000 ($32,000).  Since 1996, 
there has been more than R80 billion ($13 billion) in 
personal income tax reductions, mainly aimed at lower and 
middle income groups. 
 
Small Firms Benefit in Corporate Tax Proposals 
--------------------------------------------- - 
 
¶7.  Manuel increased the pool of firms eligible for small 
business loans.  Small businesses are now defined as having 
annual revenues of R14 million ($2.3 million) or less 
compared to last year's revenue cap of R6 million ($1 
million).  Manuel also announced that the income threshold 
for the lower 10% corporate tax rate would increase to 
R300,000 ($50,000) from R250,000 ($42,000) in 2005. 
Industry analysts had expected Manuel to reduce the top 
corporate tax rate, currently at 29%, or the secondary tax 
on companies, at 12.5%, but neither happened.  The regional 
services council (RSC) taxes, payable to municipalities, 
were abolished amounting to a tax reduction of R7 billion 
($1.2 billion).  Manuel made no announcement on whether 
there would be a replacement tax.  The minister also raised 
thresholds for capital gains tax to account for inflation. 
 
Only Sin Taxes and Road Fund Levies Increased 
--------------------------------------------- 
 
¶8.  Manuel did increase taxes on alcohol, tobacco, and fuel. 
The tax increases on alcohol and tobacco will increase 
between 9% and 20% and between 5% and 10%, respectively.  A 
5 rand cent per liter increase in the Road Accident Fund 
charge will increase the prices of gasoline and diesel.  The 
overall tax burden averages 26.5% of GDP, higher than the 
previous government commitment of 25%. 
 
Expenditure Plans 
----------------- 
 
¶9.  Spending on social services remains the key priority 
over the next three years, accounting for 53% of total 
spending in 2006/07 and increasing 12% per year.  Manuel 
announced increased social security grants of R80.6 billion 
($13 billion).  Disability and old age grants will rise to 
R820 ($137) per month, an increase of R40.  The foster care 
grant will be R590 ($98) per month, an increase of R30. 
Finally, the child support grant (reaching children up to 
the age of 14) increased by R10 to reach R190 ($32) per 
month.  Manuel also announced an additional R34 billion 
($5.7 billion) for planned infrastructure spending over the 
2006-2009 Medium Term Expenditure Framework.  Expansions in 
the commuter rail network, water and road infrastructure 
will increase infrastructure spending sharply as South 
Africa prepares for the 2010 World Cup and implements the 
Accelerated and Shared Growth Initiative. 
 
¶10.  All government expenditures during 2005/06 fiscal year 
increased by 13.7%, higher than the 12.9% planned in the 
February 2005 National Budget and the 12.8% increase posited 
in October 2005 Mid Term Budget Policy Statement.  In 
2006/07, expenditure should increase 12.8% with an annual 
average of 10.9% over the next three years.  As a percentage 
of GDP, expenditures will increase from 26.9% in 2005/06 to 
27.6% for the next year and easing to 27.3% by 2008/09. 
 
Exchange Controls Eased 
----------------------- 
 
¶11.  Manuel announced another easing of foreign exchange 
restrictions on individuals.  Individuals may now transfer 
up to R2 million ($330,000) offshore a year, up from the 
previous limit of R750,000 ($125,000).  To promote 
investment in other African countries, companies will no 
longer have to own a majority stake in a foreign firm to 
invest elsewhere on the continent.  The present foreign 
direct investment threshold of 50% will be lowered to 25% 
 
PRETORIA 00000942  003 OF 003 
 
 
for investments by South African corporations and 
parastatals. 
 
¶12.  Manuel said the government's foreign exchange control 
amnesty had raised R2.9 billion ($480,000) in fees and R1.4 
billion ($200,000) in taxes from money previously parked 
illegally offshore.  He identified total assets of R68.6 
billion ($11 billion) from 42,672 applications for amnesty 
and announced the completion of the amnesty program 
announced in February 2003.  Manuel said that 42,184 amnesty 
applications were approved, 924 were withdrawn and only 20 
applications were declined, with approximately 70% of the 
disclosed assets illegal.  The revenue raised through 
amnesty fees will be used in public-private partnership 
investments in community infrastructure and business 
development in low income areas. 
 
Comment 
------- 
 
¶13.  Initial reaction to Budget 2006 was mostly positive. 
Business sector's disappointment stemmed from receiving no 
reduction in either the corporate or secondary taxes; 
however, the removal of the RSC levies did yield R7 billion 
in corporate tax relief, along with reduced administrative 
burdens of filing RSC paperwork monthly.  Community 
activists and opposition parliamentarians (Democratic 
Alliance) argued that budget proposals did little for the 
unemployed and pensioners.  Grants to the poor increased in 
real terms by 2%, although many argue that that the bulk of 
the revenue windfall accrued to those having jobs. 
Defending the modest increase in social grants, Manuel 
warned against `populist' spending and noted the importance 
of striking a balance between social assistance and giving 
people the incentive to work.  In addition, he did not think 
the revenue windfall was sustainable in the future. 
 
¶14.  In the face of the March 1 local elections, Budget 2006 
emphasized infrastructure spending, improved delivery of 
services, and targeted tax relief.  Most of the tax relief 
is targeted towards lower and middle income workers, which 
is not likely to slow consumer demand in the future.  By 
introducing a sharp reduction of taxes on retirement 
savings, Manuel is hoping to increase South Africa's already 
low savings rate and shift some of the demand side growth 
into increased investment.  By emphasizing increased 
investment, Budget 2006 will help South Africa achieve its 
accelerated growth path.  More than ever, South Africa faces 
a conflict between more redistributive policies shifting out 
demand at the expense of higher prices or growth initiatives 
aimed at expanding supply. 
 
TEITELBAUM