A rise in tax rates in 2010/11 could be anticipated in order to finance increasing national debt, which may further slow the country's recovery from the current recession. This comes on news that the Budget deficit rose further in August to -R98-billion.

Although there was a notable decline in the monthly deficit in August, the rising overall Budget deficit demands further debt financing.

What may be of concern is the manner in which expenditure is being financed. Long-term foreign loans have increased to R5.5-billion on an YTD basis, notably above the budgeted R3.8-billion in the 2009/2010 National Budget.

Conversely, only R33-billion in domestic long-term loans has come into use on an estimated budget of R61.5-billion. It is likely that the government is taking advantage of lower interest rates in foreign countries, while local financers struggle to provide credit at low reserves in the current recession.

The national debt burden

However, it is concerning that the accumulation of foreign debt will erase the strides the country has made in reducing the national debt burden in the last ten years, over and above the serious effect possible weakness in the rand would have on the size of foreign debt.

August recoded a much lower –R8.7-billion deficit during the month, from a staggering –R31.6-billion in July. Although the decline in the deficit still represents a 50 percent y/y increase in the month's deficit, this is still notably lower than the 66.3 percent rise in the deficit in July.

Furthermore, while government revenue declines by a lower -4.6 percent y/y in August from -8.4 percent in July, expenditure increased by a marginal 1.3 percent y/y in the month, from a rise of 16.4 percent in July. This may be an indication of an improving government balance sheet.

Government revenue declined from R47.5-billion in August 2008 to R45.3-billion in August 2009. Further declines in company, individual and international trade taxes were recorded, as a result of slowed economic activity, rising unemployment, as well as a reduced tax rate in the 2009/2010 fiscal year.

Some relief to household balance sheets

However, a notable rise in taxes on goods and services marked the second consecutive increase in this revenue component. Taxes on goods and services rose to R16.09-billion in August 2009, from R14.61-billion in August 2009. This is an indication of rising domestic demand as the declines in inflation and interest rates provide some relief to household balance sheets.

One expects that with the improvement in domestic household expenditure, company profits will soon begin to improve, resulting in some recovery in company tax revenues. July saw liquidations decline by a notable -7.4 percent in the month, a further indication that economic activity is improving.

However, one should remain cautiously optimistic as high levels of uncertainty are still prevalent in the economy. Although retail and vehicle sales growth is recovering, they are still in negative territory. The recovery in the economy is likely to be slow, subsequently keeping improvements in government revenue moderate.

Government expenditure increased by a mere R0.6-billion to R53.9-billion from August 2008 to August 2009. However, on an YTD basis, expenditure increased to R300.6-billion in August 2009 from R193.1-billion in August 2008.

As Minister of Finance Pravin Gordhan has stated recently, instead of reducing expenditure in the current fiscal year due to lower revenue (as a result of the recession), it has been decided to finance planned expenditure (in order to prevent the delay of planned developments).

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