ECONOMIC CONDITIONS

Government forecast CPIX inflation (headline consumer inflation less mortgage interest rates) at 4.8% year on year (y/y) for 2004, down from 6.8% y/y in 2003. CPIX was expected to remain within the South African Reserve Bank's 3-6% target. CPIX in December 2003 was at 4.0% y/y, but base effects should lift it to an average of 5.6% in 2005.

Government revised downward its GDP growth target for 2003 to 1.9% from 3.3% previously expected, but growth is expected to rise to 2.9% in 2004. On a nominal basis GDP growth rises from 7.7% in 2003 to 7.9% in 2004 with the economy reaching a nominal size of 1.3 trillion rand. It is also expecting South Africa to post a current account deficit of 1.3% of GDP in 2004, from a deficit of 0.8% in 2003 and a 0.3% surplus in 2002.

BUDGET DEFICIT

Government's budget deficit for 2004-05 is set to rise to 3.1% of GDP from 2.6% in 2003-04. This is then due to fall to 2.9% in 2005-06 and 2.8% in 2006-07. Total government debt at March 2004 was estimated at 450 billion rand, or 36.8% of GDP.

The government is set to borrow more in 2004-05, thus providing a boost to the local bond market. New 2017 and 2018 bonds will be issued, while the government will launch a retail bond market on May 24 2004. Net domestic bond issuance is estimated at 34.3 billion rand, compared with 26.1 billion rand in 2003-04.

SPENDING HIGHLIGHTS

Consolidated expenditure - expenditure by both national government and the nine provinces - is set to be 381 billion rand in 2004-05, rising to 418 billion rand in 2005-06 and again to 453.5 billion rand in 2006-07.

Over the three years, the State is to spend 6.0 billion rand on black economic empowerment (BEE) initiatives, and an additional 3.2 billion rand will go to provinces and municipalities for the Expanded Public Works Programme and infrastructure development.

Importantly, another 2.1 billion rand has been allocated for HIV/AIDS treatment programmes, on top of the significant amounts already announced in November's Medium-Term Budget Policy Statement and the 2003 Budget.

In addition, government will spend 19.7 billion rand for social grants, schools, hospitals and clinic services, 1.9 billion rand more for police personnel, vehicles and IT infrastructure, 1.1 billion rand on defence for peacekeeping operations in Burundi and the Democratic Republic of the Congo for the next three years.

Other changes over the next three years are 910 million rand more for the restructuring of universities and technikons, 700 million rand more for land reform and 750 million rand for a new farmer support programme, 475 million rand to improve the efficiency of the courts and to cater for vulnerable groups, including women and children, and 850 million rand more for Home Affairs to improve services to citizens, especially in rural areas.

REVENUE HIGHLIGHTS

For the first time in many years, the government has experienced revenue shortfalls, rather than revenue overruns, caused by lower corporate tax receipts and customs duty resulting from slower economic growth worldwide and strengthening of the rand in 2003.

The National Treasury has reduced the government's revenue estimates for the current 2003-04 financial year and the three out years of the Medium Term Expenditure Framework (MTEF), acknowledging the dimmer growth prospects.

For the current 2003-04 financial year, the National Treasury is projecting total revenue collections of 300.3 billion rand, representing a shortfall of

4.2 billion rand from its original 2003 Budget estimate.

For future financial years, the Treasury has revised downward its projections for total revenue collections, which it said was "in keeping with lower economic growth".

For the 2004-05 budget, revenue estimates have been reduced by 4.0 billion rand to 327 billion rand from 331 billion rand, and the 2005-06 revenue estimates have been cut by 943 million rand to 360.3 billion rand.

Revenue for 2006-07 has been pencilled in at 394 billion rand. All the annual revenue amounts are steady at between 24.6% and 24.7% of GDP.

Manuel noted that going forward the Treasury would be forced into a choice between taxing, on the one hand, versus further spending. In previous years the government has been in the very fortunate position of being able to support higher spending through very large revenue overruns.

TAX HIGHLIGHTS

The government has proposed personal income tax relief to the amount of 4.0 billion rand, mainly involving upward adjustments to income threshold levels to compensate for inflation. This is lower than the 13.3 billion rand in relief granted last year, due to shortfalls in revenue due mostly to lower corporate tax receipts.

Lower- and middle-income earners benefit the most, accounting for more than 70% of the total 4.0 billion in cuts. People under the age of 65 earning below 32, 222 rand per year or over 65 and earning under 50,000 rand will not pay income tax next year.

The government has also helped savers by raising the interest income exemption by 1,000 rand to 11,000 rand for people under 65 and to 16,000 rand for people over 65.

Property investments have been encouraged as well, with the transfer duty threshold raised to 150,000 rand from 100,000 rand and the stamp duty on mortgage loans eliminated completely.

The general fuel levy on petrol will rise by 10 cents per litre, and the Road Accident Fund levy on petrol will increase by 5 cents per litre. The diesel rebate for primary producers has been lifted by 15 cents per litre.

In terms of alcohol and tobacco duties, a packet of 20 cigarettes will cost

64 cents more for excise duties, a 340 ml can of beer will rise by 4 cents, wine will go up 21 cents per 750ml bottle, and spirits will cost 1.76 rand more per 750 ml bottle.

Ad valorem excise duties have been eliminated on several categories of imports, including recorded music, some cosmetic products, print film, watches and clocks, printers and photocopying machines.

I-Net Bridge 19 February 2004