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2004 Medium Term Budget Policy Statement Hearing Portfolio Committee: Finance 02/11/2004 Cllr M Mvoko Format of Presentation This presentation is structured as follows: Introduction Macroeconomic developments Fiscal framework & Tax considerations Medium term expenditure framework Financing Provincial Government Budgets Financing Municipal Budgets Conclusion Introduction • 2004 MTBPS provides a useful platform for a stabilization of fiscal policy in the light of an assessment of efficacy of existing policy. • Provides an overview on how the economy will perform & expectation of financial performance in accelerating service delivery. • Presents opportune to reflect government strategies to assist the poor & provide security for households • But most important, it presents a fairly optimistic picture of the economy for the next three years. Macroeconomic Developments Evaluating economic performance • The MTBPS presented favourable inflation situation targeted between 3-6% which implies Conditions conducive to poverty reduction via capital investment & services and income providing programmes Increased consumer demand due to reasonable or low increases in administered prices of goods & services Macroeconomic Developments(cont) • The higher economic growth rates projected at 2.9% in 2004, 3.9% in 2005, 3.7% in 2006 & 4.2% in 2007 means Increased job creation in the private sector Consolidate current strength of domestic spending Future budgets that can give undivided priority to low-and middle income households, enhancing their living standards Macroeconomic Developments(cont) Policy priorities • The policy aimed at reducing the regulatory burden on businesses investing in skills and education, land reform and agricultural development, improved municipal development planning and administration and a comprehensive response to HIV and Aids is a positive innovation for South African communities. Macroeconomic Developments(cont) • It is positive that the budget policy aims to provide considerable direct income support to poor people and contribution to investment in housing, local services, human development and creating environment conducive to development. • Creating global expansion and international competitiveness of South African companies via abolishment of exchange control limits on new outward foreign direct investments. Macroeconomic Developments(cont) • There is emphasis on softening pressure exporters and import-competing firms are experiencing and support smaller business and the poor against economic risks via government’s exchange rate policy that aims to reduce the rand volatility. • SALGA also welcomes the policy that encourages domestic savings as this will reduce the economy’s exposure to foreign capital flows as well as providing security for vulnerable household. Macroeconomic Developments(cont) • Furthermore, SALGA view it as positive that there is emphasis on implementation of appropriate microeconomic reforms, including streamlining of regulatory arrangements and effective sectoral development strategies. • However there are still concerns that despite measures to stimulate faster economic growth and more labour absorption in the first economy demand for unskilled labour may have limited positive spin off. Fiscal Frameworks & Tax Considerations Fiscal Framework • To support the positive expansionary shift in fiscal policy MTBPS presented the budget deficit that will increase to 3.5% of GDP in 2005/06 due to planned increase in total spending on: Providing better salary for educators and police personnel Supporting social assistance to the poor Investment in economic infrastructure, housing & municipal services Fiscal Frameworks & Tax Considerations(cont.) • Increase in transfers for social infrastructure over the next three years emphasises the government’s commitment to finding measures that will assist the unemployed with employment opportunities through labour intensive construction methods via the Expanded Public Works Programme. • There has been an emphasis on the need for implementation of appropriate microeconomic Fiscal Frameworks & Tax Considerations(cont.) Tax considerations • Although tax relief will not be a prominent feature of the 2005 budget, this MTBPS still advances positive tax policy issues: Simplifying income tax system and reducing compliance burden on small businesses Tax relief for investments from countries within the common monetary area Fiscal Frameworks & Tax Considerations(cont.) Encouragement of broad-based employee equity participation Consideration of reforms of the treatment of medical scheme membership and health insurance Clarification of tax treatment of government grants Amendments to facilitate hosting the 2010 Soccer World Cup Medium Term Expenditure Frameworks Financing Provincial Government Budget • Provincial governments are the prime agents of income and capability poverty reduction and as such share to this sphere will increase by 4% and remains stable at about 58% as we move to the year of the next MTEF. • SALGA appreciates that the primary cost-driver of provincial spending are centered around addressing poverty & improving income level of low and medium earners: Social assistance funds soon to be transferred to national agency Financing Provincial Government Budget (Cont.) Increased spending on education including improvement of educators remuneration Raise on health spending include improvement of professional staff remuneration and comprehensive HIV and Aids prevention and treatment programmes Expanded Public Works Programme & Comprehensive Agriculture Support Programme Financing Provincial Government Budget (Cont.) • The review of provincial equitable share formula to update weights of components and other economic development and poverty related policy taking into account FFC recommendations is another positive aspect when going to 2005 MTEF. Financing Municipal Budgets • Although additional R2.8 billion will be allocated to local government it should be recognized that municipal budgets still constitute of about 90% of own revenue and as such many municipalities are still finding it difficult to meet their developmental mandate. • SALGA supports the review of local government equitable share allocation formula in order to develop simple formula that balances demand for basic services and into account revenue raising capacity. Financing Municipal Budgets (Cont.) • Completion of the process of reviewing the local government fiscal framework which focus on the reform of regional services council levies, the introduction of new property rating and the assessment of impact of the restructuring of the electricity distribution industry on municipal finances is crucial. Conclusion • SALGA supports MTBPS, but would like to put forward the following issues relating to budget: Financial sustainability of municipalities is imperative & is the responsibility of all spheres of government. Some municipalities have not yet fully established themselves as constitutional governments by complying with constitutional laws. Care must be taken to achieve economies without compromising service delivery & national policy Conclusion (Cont.) • Furthermore SALGA anticipate that MTBPS and the next three years to reflect with more emphasis on further measures to create more jobs for unskilled labour.