Summit TV's panel of economists analyse Trevor Manuel's Budget 13...

The Minister of Finance Trevor Manuel showed a healthy and realistic awareness of the extremely negative global developments of the past year and their implications for the South African economy in the coming year.

In this he echoed SARB Governor Mboweni, who only last week warned the nation that it can’t decouple from dire global trends.

Manuel stated that “the next few years are going to be tough”, clearly no overstatement in light of what has come to pass.

Just how hard the impact of events on the economy has been in 2008 was reflected in revised growth estimates, the decline in revenue collections, the consequent increase in the budget deficit, with these tendencies gathering strength into the coming fiscal year.

GDP growth for 2008 was estimated at three percent and for 2009 was lowered further to 1.2 percent. One major consequence was a major decline in tax collections relative to budget, amounting to R14bn in 2008 and R50bn expected in 2009.

At the same time the minister upped his spending estimates for 2009 relative to his budget baseline by some R50bn, indicating the extent to which extra spending is being allocated this coming year, especially for infrastructure and social security.

As a consequence, the budget stance went from a surplus of 1.7 percent of GDP in 2007 to a deficit of one percent of GDP in 2008, a change of 2.7 percent of GDP, indicating the extend to which the Minister borrowed more this past year to keep supporting the economy with state expenditure even as his revenue collections fell away.

In 2009 the minister will be even more accommodative in having to reflect disappointing tax collections as well as undertaking extra spending, allowing the budget deficit to rise to 3.8 percent of GDP.

If reality this year turns out even worse than here assumed, as it did very much so last year, with especially export performance suspect this year in light of still deteriorating global conditions, his budget deficit could ultimately peak at 4-5 percent of GDP in 2009.

Thereafter the deficit is projected to start subsiding again from 2010 onward, as the minister assumes a revival in growth performance and tax collections.

As in previous years, the minister adjusted the tax tables for individual taxpayers for 2009 in order to allow for the fact that inflation pushes us into higher tax brackets which has the effect of upping our average tax rate if no adjustment is made.

No real relief

As the minister didn’t intend to increase the income tax burden, he adjusted his revenue expectations on the old tables downward by R13bn, purely an inflation adjustment and not real relief to taxpayers.

At the same time the minister did push up the fuel and electricity levies and sin levies generally by nearly R10bn, while deferring for another year the mining royalty, worth R2bn to the mining industry.

The budget was ultimately simply structured, absorbing part of the strain on the broader economy from the deepening recession and falloff in tax revenues by increasing government borrowing in 2008 and continuing to do so in 2009.

In this respect the budget fulfills an important function as shock absorber in times of general distress.

Simultaneously, the minister does expect economic recovery ahead, already reflecting this in his reviving tax estimates for 2010, eroding the deficit anew.

So times may be tough, but hang in there. Better times are assumed for next year’s budget, provided the outside world does come right in time.

Cees Bruggemans is chief economist of First National Bank.