SOUTH AFRICA'S 2008 BUDGET

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TAGS: ECON EFIN EINV ETRD EMIN ENRG BEXP KTDB SF
SUBJECT: SOUTH AFRICA'S 2008 BUDGET



1. (U) Summary. South Africa Minister of Finance Trevor Manuel
delivered his annual Budget Speech before Parliament on February 20,

2008. According to Manuel, South Africa continues to have a
positive fiscal outlook despite global economic turmoil. GDP growth
was projected at 4 percent with the government posting a budget
surplus of 1.0 percent of GDP for 2007/2008 and an estimated 0.8
percent in 2008/2009. Proposed spending plans support further
economic growth and expanded social welfare including additional
incentive funding for the industrial policy framework and increased
social grants. Power utility Eskom will receive a R60 billion
infusion of funds to assist with power generation projects. Manuel
proposed tax relief for corporations while he revealed plans to
impose a levy on revenue from electricity generated by non-renewable
sources. In line with past gradual relaxation of exchange controls,
Manuel announced that exchange controls on institutional investors
will be removed and replaced with prudential regulation. End
Summary.

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POSITIVE FISCAL OUTLOOK
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2. (U) Amid the backdrop of a turbulent global economy and strong
inflationary pressures, Manuel stressed that South Africa's key
macroeconomic policy anchors put in place since 1996 provide a
"solid mooring" that will enable the economy to adapt to current
conditions and allow the country to remain confident that it will
weather the global storm. Manuel reported that once again South
Africa attained a budget surplus; 1 percent of GDP for 2007/2008 and
an estimated surplus of 0.8 percent in 2008/2009. Growth is
projected at 4 percent this year. Government revenue is expected to
be R580 billion in 2007/2008, 15.7 percent more than in 2006/2007.
Government debt is projected to be 16 percent of GDP by 2011, from
33 percent three years ago. Investment in fixed capital expanded
rapidly in 2007 with investment as a share of GDP rising from about
15 percent to 21 percent. Manuel noted, however, that the current
account deficit makes the economy more vulnerable, especially during
times of stress in global financial markets.

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PUBLIC PRIORITIES AND SPENDING PLAN
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3. (U) Manuel announced government spending plans for a progressive
extension of public services for 2008/2009. Budget support for the
industrial policy framework includes R2.3 billion for the Department
of Trade and Industry over the next three years and tax incentives
of R5 billion in support of industrial investment and employment
creation. Social grant increases this year match or exceed
inflation, including an increase in disability and old age grants
and child support grants. Total additional measures to expand the
social security net amount to R12 million over the next three years,
with total expenditure on social assistance equaling R75.3 billion
in 2007/2008.


4. (U) Other categories for proposed expenditures for 2008/2009
include:

-- Allocations to provinces: R238 billion to provide
improvements in education, health, welfare, and housing programs.

-- Health services: 10 percent growth over the next three years
on expenditures for the hospital revitalization program, conditional
grants for HIV/AIDS and additional resources for tuberculosis

-- Education and skills development: Additional allocations over
the R105 billion spent in 2007/2008 are expected for both elementary
and higher education programs.

-- Crime fighting: R10 billion over the next three years in
increased spending.

-- Infrastructure investment: R17 billion will be added to the
budgets of departments of housing, provincial and local government,
water affairs, sport and recreation and transport over three years,
mainly for infrastructure. Transportation parastatal Transnet will
also invest in excess of R78 billion in transportation
infrastructure, while Eskom's capital expansion plans, including
power generation, will amount to R343 billion.

-- Peacekeeping and development: R1.3 billion over the next
three years to support development and attainment of the Millennium

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Development Goals on the continent.

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ESKOM SUPPORT
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5. (U) Manuel addressed the growing concern over Eskom's inability
to finance its much-needed new power stations by proposing "that up
to R60 billion should be provided to support Eskom's investment
program, on terms structured to assist in meeting cash flow
requirements." Manuel noted that this funding is not a grant, but
that the return on investment in power generation is "very long
term."

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TAX PROPOSALS
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6. (U) Manuel announced two major revisions among the tax
proposals: the reduction of corporate tax rates from 29 percent to
28 percent and a new levy to be introduced this year on the sale of
electricity generated from non-renewable sources, at a rate of 2
cents per kilowatt hour. Other tax reforms include proportional
increases for inflation, such as personal income tax relief of R7.2
billion, measures to reduce the tax compliance burden on small
businesses, and allowances to boost job creation.

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CURRENCY EXCHANGE CONTROLS REMOVED
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7. (U) In line with last year's continuation of the gradual
process of relaxing exchange control, Manuel announced that exchange
controls on institutional investors will be removed and replaced
with prudential regulation involving quarterly reporting, and
monitoring of foreign exposures by the Reserve Bank. In addition,
the foreign exposure limits for institutional investors will be
raised and banks will be permitted to undertake foreign investment
within an appropriate macro-prudential limit. Participation in the
rand futures market on the JSE Securities Exchange will also be
opened up.

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COMMENT
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8. Despite speculation that the recent change in ANC leadership
might result in a loosening of fiscal policy, Manuel held his ground
on the budget surplus as a prudent fiscal measure in an uncertain
and turbulent economic environment. South Africa's strong
macroeconomic policies have allowed government to increase annual
spending while still building a budget surplus.

BOST