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Viewing cable 08CAPETOWN36, SOUTH AFRICA'S 2008 BUDGET

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Reference ID Created Released Classification Origin
08CAPETOWN36 2008-02-21 14:27 2011-08-24 01:00 UNCLASSIFIED Consulate Cape Town
VZCZCXRO3761
RR RUEHDU RUEHJO
DE RUEHTN #0036/01 0521427
ZNR UUUUU ZZH
R 211427Z FEB 08
FM AMCONSUL CAPE TOWN
TO RUEHC/SECSTATE WASHDC 2599
RUCPCIM/CIMS NTDB WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 1929
RUEHSA/AMEMBASSY PRETORIA 5947
RUEHDU/AMCONSUL DURBAN 3067
UNCLAS SECTION 01 OF 02 CAPE TOWN 000036 
 
SIPDIS 
 
DEPT FOR AF/S; AF/EPS; EB/TPP 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR DPETERS 
DEPT PASS USTR FOR PCOLEMAN 
 
SIPDIS 
 
E.O. 12958: N/A 
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. 
 
----------------------- 
POSITIVE FISCAL OUTLOOK 
----------------------- 
 
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. 
 
----------------------------------- 
PUBLIC PRIORITIES AND SPENDING PLAN 
----------------------------------- 
 
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 
 
CAPE TOWN 00000036  002 OF 002 
 
 
Development Goals on the continent. 
 
------------- 
ESKOM SUPPORT 
------------- 
 
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." 
 
------------- 
TAX PROPOSALS 
------------- 
 
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. 
 
---------------------------------- 
CURRENCY EXCHANGE CONTROLS REMOVED 
---------------------------------- 
 
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. 
 
------- 
COMMENT 
------- 
 
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