Armed with a R41bn revenue overrun, Manuel has delivered a stimulus to economic growth in a generally expansionary budget. It's a budget that seeks to balance the need to power up the economy by encouraging investment with measures to address the poverty most South Africans are still experiencing.
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Thanks to the massive revenue overrun, which was double last year's, the 2005/2006 fiscal deficit falls to 0,5% of GDP (and not the expected 1%), making it the lowest under the ANC government and the second-lowest in SA history. (The lowest was 0,1% of GDP, achieved in 1980 during the gold boom.)
Declaring that the economic outlook is "more promising than has been seen in 40 years", Manuel has upped the treasury's real GDP growth estimate to 5% on average for the next three years, compared with 4,4% previously.
Moreover, Manuel has budgeted for SA to achieve this pace of growth while holding the budget deficit down to 1,4% of GDP over this period.
And though the budget deficit is expected to remain well contained, successive budgets will continue the expansionary stance begun in 2001, with government spending (excluding debt interest payments) set to increase by a real 6,4%/year on average over the next three years.
It's an enviable position for any finance minister to find himself in, but Manuel has not allowed this year's bounty to go to his head. Showing customary restraint, he plans to use the extra R40bn wisely - to pay off debt, raise expenditure and provide moderate tax relief.
While R19bn has been provided in tax relief, mostly to low-and middle-income earners, a total of R82bn in new money will be added to departments' expenditure plans over the next three years. Notably, though, Manuel has not raised expenditure over and above October's mini-budget estimates, even though the projected revenue overrun has climbed by another R11bn since then. All this additional revenue will be used to reduce debt.
As a result, government's debt position will continue to improve. The treasury estimates that with stable interest rates and lower than expected borrowing, debt service costs will decline from 3,3% of GDP now to 2,7% by 2008/2009.
What has made all this good news possible? Manuel credits a whole list of factors: sound financial policy and debt management; continued buoyancy and confidence in the economy, supported by sound macroeconomic, fiscal and monetary policies; and the economic restructuring and policy reforms he has shepherded over the past decade.
"Our task now," he says , "is to turn the opportunities before us into lasting progress, to translate the resource gains of an economic upswing into real investment in productive capacity, to moderate our consumption tendency, and to broaden and diversify economic activity."
The two main challenges are investment and skills development.
The 2006 budget provides further stimulus to government's ambitious investment programme, which aims to provide a platform for expanding economic activity and creating jobs.
Though the provinces had spent only 55% of their 2005/2006 capital budgets by December, which implies that unspent funds will once again have to be rolled over, the 2006 budget allocates an additional R34bn to capital projects over the next three years.
But this is not all the money available to spend on infrastructure. If the parastatals and other extrabudgetary public entities are included, total public expenditure on infrastructure is budgeted at R372bn over the next three years - or growth of 14,2%.
The money will go towards improving SA's basic economic, housing and community infrastructure, including rail, road, port, water, sewerage and power generation systems. Hospitals and schools have also been prioritised.
The Budget review acknowledges, however, that to raise the growth rate, efficient public service delivery is as important as broad-based capital formation.
"Economic growth that is not accompanied by improved productivity and more effective public service delivery will inevitably lose momentum ," it states.
For the first time, Manuel has tackled the beast of state incapacity head on , announcing a number of initiatives, some involving the private sector, to provide support for provincial and municipal planning and construction contract management.
This is to be welcomed, as the efficiency of the public sector will remain the most crucial factor in meeting government's ambitious plans.
SA's other growth inhibitor is the skills constraint. In acknowledgement of this, education remains the single largest category of spending in the budget, accounting for 20% of allocated spending in 2006/2007. It will also receive average annual budgetary increases of 9,7% over the medium term.
Over this period, R1,9bn is to be made available for recapitalising the 50 further education & training colleges, which offer a variety of vocational education programmes.
The learnership allowance will also be extended for five years and be increased in value at a cost of R80m. Substantial allocations are made for investment in critical teaching skills and in expanding the Dinaledi initiative to create centres of excellence in maths and science at 400 high schools.
Manuel says he has also provided the funds to pay differentiated salaries to teachers in recognition of skill, though the education department is battling to implement the plan.
Given that the extent of this year's R41bn revenue overrun was anticipated, expectations were high that Manuel would make several grand gestures on the tax front.
He has not disappointed in handing out R19bn in tax relief, though individuals rather than companies are the prime beneficiaries.
Business was hoping for a lot more - big cuts in the company tax rate, or at least a phased reduction in the corporate tax rate, the abolition of the secondary tax on companies (STC), and possibly the end of regional services council (RSC) levies.
It got only the latter. However, the abolition of these levies is worth at least R7bn/year and so is equivalent to a 2,5 percentage point cut in the corporate tax rate.
The treasury says no replacement tax is envisaged for RSC levies in the foreseeable future, though it has not closed the door entirely on this possibility.
In defending his decision not to reduce either the corporate tax rate or STC, and for favouring personal over corporate tax relief, Manuel told journalists it was important to recognise that SA had enormous responsibilities in dealing with underdevelopment.
Moreover, the treasury felt that SA's corporate tax rate was not internationally uncompetitive or a barrier to investment, whereas the "hassle factor" of complying with RSC levies was exactly the sort of red tape that business was urging government to eradicate.
Business is also less than happy over the fact that the overall tax burden is set to stabilise at around 26,5% of GDP, given previous commitments by government to keep this ratio down to 25%.
At a budget briefing, SA Revenue Service commissioner Pravin Gordhan said government had never been married to keeping SA's overall tax burden down to 25% of GDP and would raise it to 27% if circumstances required it.
There were arguments that the ratio should be higher, given SA's development challenges, he said, but the treasury attempted to strike a balance between the need to meet society's development challenges and that of not stifling business. All of SA's important taxes were pitched at "reasonable levels" in international terms, Gordhan added.
Throughout the budget documentation, the treasury pays lip service to the need not to further stimulate consumer demand and so increase SA's reliance on capital inflows to cover the yawning current-account deficit.
But the reality is that the budget is pro-cyclical and will encourage consumption through additional personal tax relief.
Deputy finance minister Jabu Moleketi says the treasury expects that consumers' appetite for imports will ease and that exports will pick up in line with the investment boom, helping to balance the deficit. Halving the retirement fund tax from 18% to 9% should also prompt individuals to save more.
However, the treasury has pencilled in average annual import growth of 7,9% over the medium term, and export growth of about 6,7%, and expects the current-account deficit to remain uncomfortably large at 4,3% of GDP over this period.
Sanlam economist Jac Laubscher acknowledges that the budget is pro-growth, but he would have preferred to see more stimulus on the demand side of the economy through greater tax relief for corporates.
He is concerned that government is not practising proper risk management, in further stimulating consumer spending despite the risks posed by the growing current-account deficit.
On the other hand, he notes that Manuel is budgeting for only 8,6% revenue growth this year (compared with the 18% that has been achieved over the past year), but is expecting GDP growth to remain strong at around 5%.
The likely upshot, he says, is that revenue will once again wildly overshoot Manuel's targets .
By implication, Manuel is either poor at estimating revenue or he is taking the politically more palatable route of budgeting for a deficit so as to appease popular demands for greater spending.
"The problem is that the economy has to catch up with the minister," says Stanlib Asset Management economist Kevin Lings, who likens Manuel to a sleek racehorse, champing at the bit while waiting for the rest of government to become productive and efficient.
Lings says the huge revenue windfall is a unique opportunity for SA to change the economic environment from merely good to great. "This type of opportunity, where government has the scope to restructure taxes or redirect expenses, doesn't come along often," he says, "so there needed to be creativity and boldness in how Manuel made use of it."
For Lings that missing "wow factor" would have been a big reduction in the corporate tax rate to make SA stand out among emerging markets as an attractive tax proposition, thereby boosting its chances of raking in more foreign direct investment.
"The reason there's no wow factor in this budget is that Manuel has to wait for the rest of government to reach the starting gate and for the private sector to demonstrate a greater willingness to expand business," he says.
Given the constraints, Manuel has done well in balancing not only the books but the competing demands of a complex society.
