Satisfaction with continuity of fiscal discipline and its benefits
It is rather satisfying to see how the government's long-term commitment to fiscal discipline continues to yield ever more benefits in terms of government's flexibility to promote economic growth from different directions. With yet another decline in the budget deficit, to just 1.7% of GDP in 2001/02, the public debt has declined to just 43.6% of GDP in 2001/02 from 48.2% five years ago. The result is that interest on public debt has declined to just 4.8% of GDP, compared with almost 6% of GDP five years ago. This amounts to a saving of some R10bn per annum in interest payments alone which is available to be redirected towards more worthy causes. Much of this benefit in this budget is being spent on invoking substantial real increases in pensions and social welfare grants, whose share of total expenditure rises from 12.5% to 13.5%, to be compared with the decline in the share of interest to 15.7% of the budget compared with 17.5% last year and 19.0% the year before. Furthermore, these ratios are expected to decline further, to 37.4% and 4.1% respectively over the next three years, paving the way for an additional saving of R10bn per annum by 2004/05. It is with this favourable outcome in mind that government is now in a position to embark upon its most expansionary fiscal policy since taking office in 1994.

7% growth in real non-interest expenditure
Even though the budget deficit is set to increase only modestly, to 2.1% of GDP in 2002/03, this is sufficient to pave the way for an 11.5% increase in total government expenditure and 13.9% in non-interest expenditure in the coming fiscal year. Given the forecast of a 6.9% CPIX inflation rate, these figures translate into real increases of no less than 4.6% and 7.0% respectively in total expenditure and non-interest expenditure. Especially strong are the forecast increases of 17.2% of in transfers and 30.9% in capital expenditure. The former is presumably aimed at empowering the provinces to spend more than before, whilst the latter is linked to the intention of developing infrastructure at a much more rapid rate than has been the case over the past year. Should expenditure increases of the magnitude envisaged materialise, there is no doubt that the economy's growth rate, especially in the context of the substantial personal tax cuts introduced, will exceed consensus forecasts of around 2% for 2002. Under the circumstances, government's forecast of 2.3% GDP growth for 2002 is credible. So too to some extent is the 4.5% growth rate in fixed investment which is also way above consensus forecasts. Presumably the acceleration of depreciation on capital investment allowed for tax purposes from five years to four years is also meant to contribute to this high growth in fixed investment. However, much will depend on whether government does indeed succeed in translating its expansionary budget into reality. Too often in recent years government has lacked the capacity to take decisions on, implement and administer infrastructural investment projects. Although Finance Minister Trevor Manuel encouragingly made a point of government's determination to improve delivery by putting more effective administrative systems into place and trying to develop skills more appropriately, investors are likely to wait for evidence of success in this sphere before accepting a positive investment outcome as a fait accompli.

Biggest cuts in personal taxes for decades
On the tax front, private consumption is set to receive a significant boost from the biggest reduction in personal tax rates in decades. The burden of personal income tax declines to 34.6% of government revenue in 2002/03 compared with 37.3% in 2001/02 and 44.3% in three years ago. No wonder that the government is quite optimistic in forecasting growth in consumption of 2.5% in 2002, significantly better than one had forecast. Tax revenue as a whole is set to increase by 6.7%, which represents a marginal reduction in the overall tax burden when related to the budgeted inflation rate of 6.9%. However, within this relatively stable overall tax burden, personal income tax revenue is set to decline by 1.1% in nominal terms, representing a real reduction in personal taxation of 8.0%. In contrast, ordinary taxation of companies, which already rose by 49% in the 2001/02 year, is set to rise by a still substantial 15.6% in 2002/03, i.e. a real increase of 8.7%. The huge increase in company tax appears to be a function both of the boost to profits provided by the steep fall in the Rand and the introduction of Capital Gains Tax at a time when the exchange rate is falling sharply. Despite the apparent huge reduction in tax rates for lower income groups, these groups still see their effective tax rates not benefiting commensurately because of the phenomenon of bracket creep. For those earning between R30,000 and R60,000, average tax rates adjusted for inflationary salary increases decline by about 1.0%. In contrast, the effective reduction in average tax rates for those earning between R100,000 and R200,000 adjusted for inflation is a whopping 3.5% so , with the benefit declining to around 2.5% for those earning in excess of R300,000 . Both the reduction in the top marginal tax rate from 42% to 40%, as well as the increase in the threshold at which this tax rate is paid, from R215,000 to R240,000, i.e. an above inflation increase of 11.6%, exceed expectations of the kind of tax relief which would be afforded to middle and upper income groups. Accordingly, this budget is likely to prevent a slump in the sale of durable goods of the magnitude originally feared.

The disappointments in the budget were the absence of a more definite commitment to privatisation, the absence of any commitment to further relaxation of exchange controls and the relatively small tax concessions afforded to small businesses, the key source of job creation. The absence of definite privatisation, together with the expansionary nature of the budget and the intention to try and achieve inflation targets in 2003 and 2004, which implies ongoing tight monetary policy, have logically been received negatively by the bond market. However, in the longer run the attempt to quell inflation should benefit this market.