Positive news expected

Posted On Tuesday, 01 January 2002 03:01 Published by
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Economists expect the budget deficit will be much lower than Manuel's own projection of 2,3%
Economists expect the budget deficit will be much lower than Manuel's own projection of 2,3%

SERVICE delivery and tax cuts for citizens still shell-shocked by last month's interest rate hike, are expected to take centre stage when Finance Minister Trevor Manuel delivers his budget speech next week expected to be expansionary as the deficit has shrunk.

Economists say the budget deficit for the current fiscal year will be much lower than Manuel's own projection of 2,3%, due to continuing improvements in revenue collection and slow service delivery.

Economists at JP Morgan expect the deficit to come in at just 1,3%, while PLJ economist Dawie Roodt says it could be even lower.

Citadel chief investment officer Dave Mohr says SA's budget deficit is one of the lowest in the world, in line with a general easing in deficits all over the world. He also expects it to come lower than projected.

'A balance needs to be struck via improved delivery, making for more effective expenditure allocations, but within targeted parameters. Below-budget expenditure is indefensible, considering SA's low growth dilemma,' says JP Morgan.

Some economists, in a rare agreement with Manuel's critics on the left, suggest the low budget deficits should be a source of embarrassment rather than celebration for a government committed to uplifting the poor.

For some economists, the deficits have been seen as lingering evidence of government inefficiency, reflecting a lack of capacity in regional and local government.

They will be hoping for better this year, in line with indications in last year's mid-term expenditure framework that the extra cash will be spent on tax reductions and capital projects.

Economists are also hopeful that Manuel will confirm that Telkom's partial privatisation will take place in the current financial year. They say such a move will be a 'positive' signal to the international business community.

Many budget experts are predicting that SA will receive some welcome tax relief, both on the personal income tax and company tax fronts. This will go by some way to compensating consumers who are going to feel pain from the Reserve Bank's decision to lift interest rates last month.

Investec Asset Management head of fixed income, Andre Roux, says the national treasury may decrease the effective rate of taxation on individuals, because it has previously said that it was seeking to decrease the gap between personal and company tax.

A decrease in the secondary tax on companies, or the 'unfair' transfer tax on properties, given the introduction of capital gains tax, could be on the cards.

Roux says tax breaks favouring the low end of the income spectrum make the most sense, and with the inflation picture darkening, an increase in the grants made to old-age pensioners is another likely target.

Roux says the medium-term budget policy statement provides for an 8% increase in spending over the coming fiscal year compared to 2001-02, with provision made for additional costs of the arms deal as rand depreciation may add R1bn to the bill.

'Government will have to decide what areas to adjust for inflation, especially since the medium-term statement came out before inflation started climbing,' Roux says.

'I just hope there is no attempt to hide the added cost of the deal, as this would undermine the treasury's credibility,' Roux says.

Economists and players in the currency and bond markets will be keeping an eye on privatisation, which has implications for foreign investment and government financing needs.

Citadel's Mohr says there seems to be some stalling on the issue, especially when trade unions become involved.

'It is disappointing that there seems to have been more talk than action,' Mohr said.

Developments in world markets have also complicated the picture, and markets had been 'turned upside down' by the events of September 11.

The privatisation of Telkom has been delayed, government has said, until the global telecommunications environment improves.

Economists do not expect public sector wage agreements to upset the rosy finance picture.

Government's salary bill will have to increase at a rate of 0,5% above the inflation rate, in line with an agreement between the public service and Public Service and Administration Minister Geraldine Fraser-Moleketi.

Roodt says SA is a poor country and cannot afford to pay 'huge salaries' to public servants although the police and the teachers need a raise.

As far as government capacity to spend efficiently, Nedcor's senior economist Magan Mistry says capacity on spending will improve as it has on revenue collection.

'It should be a positive budget and the markets should respond accordingly,' says Mistry.

He says there is a 'good balance' between keeping the deficit low and capital spending, but the challenge is to maintain the former at about 2% of gross domestic product.

Whatever revenue situation Manuel reveals next week, the market is unanimous that bond issuance will remain restrained as improved revenue collection and strict adherence to budget deficits means that the need for new debt funding becomes redundant.

The speech should be supportive of the bond market, which has taken strain since the Bank unexpectedly decided to hike interest rates last month.

But government's prudent management of its finances means investors will be even more eager to hold on to their paper.

Any new bond issuance is likely to come in the form of an expansion of the R194 bond, but on a net basis, bond issuance is likely to remain negative as the government continues its buy backs of illiquid debt.

Publisher: SAPOA
Source: SAPOA

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