Faster-than-anticipated growth in the South African economy has enabled government to continue to ramp up and accelerate expenditure on economic and social infrastructure, while, at the same time, providing the space for creative and growth-facilitating tax restructuring and even moderate tax cuts.

Speaking in parliament, Finance Minster Trevor Manuel announced an official gross domestic product (GDP) growth estimate of five per cent for 2005, but indicated that he believed the real pace of growth would be as high as 5,5% or even six per cent once all accounting had been completed. This would be significantly above the Accelerated and Shared Growth Initiative (Asgisa) target, which is seeking an average growth rate of 4,5% until 2009, rising, thereafter to an average of six per cent.

Manuel tabled a series of targeted tax proposals in this year's Budget aimed at boosting long-term retirement savings, galvanizing small business, raising the level of research and development expenditure, accelerating skills development and improving the prospects for home ownership.

South African's citizens will receive R12,1-billion in relief, while corporate South Africa will receive a break in terms of the R7-billion in RSC levies that fall away in July, Manuel seeks to intervene to reduce the divide between South Africa's so-called two economies. In addition, South Africa's municipalities will benefit to the tune of R1-billion, as they will no longer have to pay VAT on property, rates and revenue.

At the bottom end of the earning spectrum, a South African earning R3 300 a month would previously have paid 18% tax, now gets relief of R75 a month. At the top end of the scale, the bracket for those paying 40% has been raised from R300 000 to R400 000. The overall impact of tax proposals in the budget is to reduce the tax burden by R19,1-billion, bringing the total main budget revenue to an estimated R446,4-billion for the 2006/7 year. Medical aid benefits have been extended to all across the country, but result in medical expense deductions thresholds being increased at the top end of the scale.

In line with government's aim of fast-tracking the economy, government is projected to increase investment spend by 10% a year between 2004 and 2008, while the private sector is expected to increase spend in capital formation to 15% in the same period. This means that the magic figure of 25% spend on gross fixed-capital formation (GFCF), which analysts say is needed to boost growth in the economy to six per cent, is now in sight - GFCF has been a low 16% of GDP for a number of years.

The tax surplus and the strong GDP growth have led to the budget deficit moving to 0,5% in 2005/6, compared to the 3,1% that was expected. However, due to a decrease in the tax burden and growth in noninterest expenditure, this is expected to reach 1,5% in 2006/6 and 2007/8 before falling to 1,2% in 2008/9.

On the back of a robust economy, Manuel said that stronger growth now rests on a stable macroeconomic foundation and healthy investment trends.

While exports grew by 12% last year, imports also grew and the trade deficit - or the deficit on the current account of the balance of payments - has deteriorated from less than a per cent of GDP to four per cent last year.

“We rely increasingly on capital inflows from abroad to finance the excess of expenditure over the value of domestic production,” said Manuel referring to the need for further deals, such as the Barclays/Absa deal.

The Reserve Bank's gross foreign-exchange position improved from $14,9-billion at the end of December 2004 to $22,2-billion by last month.

While this is a healthy financial development, Manuel cautions that that the country cannot assume that the bank will forever be in a position to increase its store of reserves as a counter to instable currency rates.

“As has happened several times in the past decade, financial flows could swing away from emerging markets, and these enormous shifts in global money cannot be predicted.”

So, says Manuel, the task before government is to turn these opportunities into sustainable growth.

Part of this is to diversify economic activity, and in the tax regime he has done this by increasing the money in South African's back pockets as well as encouraging citizens to save in retirement schemes.

Manuel's tax return is partially funded by an increase in the withholding rate on motor allowances and amended treatment of company car benefits.

Addressing Parliament in Cape Town during this year's Budget speech, Manuel said that the net benefit in personal income returned to taxpayers is R12,1-billion.

Manuel has specifically cut tax for individuals on the lower end of the earning scale, while increasing the level of the top marginal tax rate through raising several thresholds, the first of which is to raise the threshold for individuals paying no tax to R40 000, from R35 000, with effect from the next tax year that starts in March. Taxpayers over 65 see their no-tax threshold move to R65 000.

But Manuel has not stopped here and has granted what he termed significant relief to those earning less than R150 000 a year, where 49% of the relief is aimed at the largest proportion of taxpayers.

Some 24% of relief is aimed at those earning between R150 000 and R250 000, while the maximum marginal rate of tax remains at 40% and the threshold is raised from R300 000 to R400 000.

He has also encouraged South Africans to save more by reducing the tax on retirement savings funds.

“The tax regime aims to encourage South Africans to make provision for their retirement,” said Manuel.

To achieve this he has effectively halved tax on retirement funds, dropping it from 18% to nine per cent from next month, a move that will cost treasury R2,4-billion.

But he has also tightened the noose on travel allowances by increasing the amount that this benefit is taxed by from 50% to 60%, gaining the fiscus R1,4-billion in the 2006/7 tax year.

Manuel had already announced that deemed private usage when working out travel allowances is 18 000 km, but now the monthly taxable benefit on a company car increases to 2,5% from next month.

Medical expenses also received a knock with his announcement that the threshold for individual tax-deductible medical expenses has been raised from five per cent to 7,5% of income, which directly affects those without a medical aid scheme.

The fiscus is encouraging medical aid schemes in a bid to take away some burden from State hospitals and has extended the bottom-end benefit to those who are self-employed.

Previously, only those with employers received a rebate on their salary slips.

However, taxpayers 65 years and older still have a full deduction of medical expenses.

These tax cuts come in the wake of increased tax collection, which has pushed up budget revenue.

Budget revenue in 2005/6 is expected to reach R411,1-billion, some R41,2-billion more than the original estimate and an increase of 18,2% on the 2004/5 revenue.

“We under estimated the impetus of the economic recovery last year, buoyant trade and rising commodity prices have favourably impacted on corporate profits, and there has been a strong demand boost to both VAT receipts and import taxes.

“But the revenue performance is also testimony to the success of the sweeping tax-reform agenda of the past decade, and the growing competence and effectiveness of the South African Revenue Service.”

In keeping with his distribution to those who need it most, Manuel also announced increases in the social-security safety net.

This year sees the administration of social grants moving to the jurisdiction of the South African Social Security Agency, under the auspices of the Department of Social Development.

This means that R61-billion shifts from the provincial share to the national share.

After this transfer, conditional grants to provinces are budgeted to grow from R19,2-billion in 2005/6 to R30,4-billion in 2008/9, largely due to increased allocations for housing and the human settlement grant, the hospital revitalisation programme, forensic pathology services and a new grant for recapitalisation of further education and training colleges.