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Institute for Democracy in South Africa (IDASA)

Initial Response to Budget 2006

Institute for Democracy in South Africa (IDASA)

16 February 2006

SARPN acknowledges IDASA as the source of this document:
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  1. The Budget Framework

    After a number of years of limited economic growth, estimates of growth in real GDP for 2005 have settled at 5%. This higher than expected growth rate, combined with continued improvement in the efficiency of tax collection by SARS, produced a revenue over-run of R 41 billion for the 2005/2006 fiscal year. Not surprisingly, there were a wide range of opinions regarding what should be done with it.

    There was hope, primarily amongst private sector economists, that further reductions in the corporate tax rate and the secondary tax on companies would be on the cards, and, on the other side of the economic spectrum, hopes that the opportunity would be used for significant increases in social spending and direct income transfers to the poor and vulnerable. As is inevitably the case in a country still characterised by high levels of poverty, inequality and unemployment, the budget in other words again focused debate on budgetary incidence: who should contribute most to the fiscus and to what extent, and who should benefit most from it and to what extent.

    Budget 2006 attempts to steer a middle ground between such contesting claims on public resources: we have personal income tax relief to the value of R19.1 billion over the medium-term expenditure framework (MTEF), with most of it going to low and middle income earners. There are no reductions in corporate rates (the abolition of the regional services levy was largely expected) but some measures to benefit small businesses. There are real increases in social spending and, as expected, significant allocations to infrastructural spending and a renewed commitment to skills development, given the emphasis on these as pillars of government’s Accelerated and Shared Growth Initiative (ASGI), which in essence seeks to identify and address the constraints to growth in the economy.

    Is this an expansionary budget? Yes and No. Using a conventional measure, namely the ratio of the main budget deficit to GDP, it isn’t. Figure 1 compares proposed budget deficits and outcomes, where available, since 2001.

    Figure 1: Recent Budgeted and Actual Deficits

    Recent Budgeted and Actual Deficits
    Source: Various Budget Reviews, National Treasury

    On the other hand, as figure 2 shows, the budget proposes maintaining the significant increases in expected revenue collection as a percentage of GDP over the MTEF which characterised fiscal year 2005/2006.

    Figure 2: Trends in Revenue and Expenditure as a Percentage of GDP

    Trends in Revenue and Expenditure as a Percentage of GDP
    Source: Various Budget Reviews, National Treasury

    From this perspective, the small deficits are in fact due to the larger revenue claims of government on the economy. These larger revenue claims ensure that, notwithstanding a smaller deficit, we still see a significant real increase in government expenditure in Rand terms and as a percentage of GDP in the coming fiscal year. Debt servicing costs over the MTEF also decline further as a result. Though some will rue the opportunity for larger deficits, fiscal conservatism continues globally to be an indicator of good fiscal governance and the risks of challenging this consensus remain large.

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