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Budget 2002 A brief overview... National Treasury 1 Overview of 2002 Budget • Economic and fiscal outlook: – Growth recovery over years ahead – Healthy balance of payments and fiscal trends – Rand depreciation to boost trade • Robust revenue performance allows tax relief • Strong spending growth over next 3 years – – – – continued focus on infrastructure broadening of social security net reinforcing fight against crime partnering municipalities in extending services • Moderate rise in deficit – debt service ratio continues to fall National Treasury 2 Macroeconomic outlook • Global economic slowdown more severe than initially thought – Sept 11 – Drastic slowdown in US growth, but seems to have reached bottom – Growth in Euroland still slowing – Japan still deeply depressed • Recovery expected in 2nd half of 2002 • SA will benefit from global upturn due to: – Robust export sector – Competitive terms of trade – Greater appetite for emerging markets as risk aversion declines National Treasury 3 SA growth consistently positive • GDP growth of 2,7% a year between 1994 and 2000 – Excl. 1998, average growth 3,1% • Strong export performance • Strong growth in company earnings – 2000 19% – 2001 13% (1st 3 quarters) • GDP growth of 2,3% expected in 2002, rising to 3,3% in 2003 National Treasury 4 SA adjusted well to slowdown • Export diversification continues • Rand depreciation leads to expenditure switching in favour of domestic products • External balance stable and strong – Underpinned by strong trade performance and equity inflows • NOFP reduced from $4,8 bn to $2,9 bn • Competitiveness of the economy improved National Treasury 5 Exports to benefit from depreciation 30 000 15 T rade balance 3 per. Mov. Avg. (Merchandise exports) 3 per. Mov. Avg. (Merchandise imports) 10 10 000 5 0 0 National Treasury Jul-01 Mar-01 Nov-00 Jul-00 Mar-00 Nov-99 Jul-99 Mar-99 Nov-98 Jul-98 Mar-98 Nov-97 Jul-97 Mar-97 Nov-96 Jul-96 Mar-96 Nov-95 -15 Jul-95 -30 000 Mar-95 -10 Nov-94 -20 000 Jul-94 -5 Mar-94 -10 000 6 percentage change rand millions 20 000 Inflation remains under control • Productivity still rising faster than remuneration • Unit labour cost growth moderate • Domestic producer prices (excl. food moderate in 2001) • Administered prices weakening National Treasury 7 CPIX and food National Treasury 8 Productivity gains drive increases in real remuneration 140 Real private sector remuneration 130 Real remuneration index, 1995=100 120 Labour productivity 110 100 90 80 70 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 60 National Treasury 9 Solid basis for future growth • Global recovery expected in 2002 • Fiscal stance stimulatory • Tax cuts to boost household consumption spending • Capital flows to emerging markets expected to resume • Increased capital formation in both general government and parastatals National Treasury 10 ar -9 Ju 4 n9 Se 4 p9 D 4 ec -9 M 4 ar -9 Ju 5 n9 Se 5 p9 D 5 ec -9 M 5 ar -9 Ju 6 n9 Se 6 p9 D 6 ec -9 M 6 ar -9 Ju 7 nSe 97 p9 D 7 ec -9 M 7 ar -9 Ju 8 n9 Se 8 p9 D 8 ec -9 M 8 ar -9 Ju 9 n9 Se 9 p9 D 9 ec -9 M 9 ar -0 Ju 0 nSe 00 p0 D 0 ec -0 M 0 a M per cent change Household consumption to benefit from tax cuts 10 8 6 4 2 0 -2 HCE -4 National Treasury Disposable income of households -6 11 Growth in real GDP and CPIX, 1996-2004 5 9 4.5 Real G DP 8 C P IX 4 7 3.5 p er cen t 6 3 5 2.5 4 2 3 1.5 2 1 1 0.5 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 • GDP is estimated to have grown by 2,2 per cent in 2001 • The cyclical strengthening will continue in 2002 with GDP rising by 2,3 per cent and by 3,3 and 3,6 per cent in 2003 and 2004, respectively National Treasury 12 Macroeconomic forecasts 2001 2002 2003 2004 2.7% 2.5% 2.8% 3.1% Capital formation 3.2% 4.5% 5.5% 7.1% Gross domestic product 2.2% 2.3% 3.3% 3.6% 6.6% 6.9% 5.8% 4.7% 0.0% -0.5% -0.5% -0.7% Real grow th Household consumption Consumer price inflation (CPIX) Balance of Payments current account (% of GDP) National Treasury 13 Fiscal framework • 2001/02 outcome – Additional R15 billion in revenue – Spending R4,3 billion over 2001 Budget – Deficit of 1,4% • 2002/03 Budget – Revenue base for estimates revised upwards – Debt services costs decline from 4,8% of GDP in 2001/02 to 4,1% by 2004/05 – Deficit up to 2,1% in 2002/03 – Real growth in non-interest spending of 4,1% National Treasury 14 National budget framework R billion 2001/02 National Revenue Fund Revenue 248.4 Expenditure 262.6 Main budget deficit 14.1 % of GDP 1.4 RDP Fund & foreign technical cooperation Receipts 1.0 Social security funds Revenue 8.6 Expenditure 8.2 Consolidated national budget Revenue 257.4 % of GDP 26.0 Expenditure 270.7 Deficit 13.3 % of GDP 1.3 GDP 990.0 National Treasury 2002/03 2003/04 2004/05 265.2 287.9 22.7 2.1 288.7 311.2 22.5 1.9 313.2 334.6 21.4 1.7 0.8 0.8 0.8 9.6 9.1 10.0 9.6 10.3 10.2 275.2 25.4 297.4 22.1 2.0 1,082.8 299.2 25.4 321.4 22.2 1.9 1,178.9 324.1 25.4 345.4 21.2 1.7 1,277.5 15 Fiscal consolidation yields higher real spending National Treasury 16 Infrastructure Infrastructure expenditure – Capital expenditure across three spheres rises 11,7 per cent a year between 1998/99 and 2004/05. – PPP infrastructure expenditure rises three-fold over MTEF – Non-financial public enterprise investment rises to R25 billion in 2004/05 New infrastructure budgeting process ¯ ¯ ¯ ¯ – National Treasury Strengthened evaluation criteria and decision processes Enhanced joint decision making across spheres of government Greater coordination with the budget process More effective oversight of infrastructure priorities Simple and accessible monitoring, evaluation and reporting procedures 17 Tax policy issues • Strong revenue performance for 2001/02 due to: – Robust corporate tax growth and STC receipts – Mainly from the resource-based exporters • Revenue estimates revised upwards over 2001 Budget • Income tax reforms to support consumption and investment growth National Treasury 18 Revenue summary 2001/02 Revised R billion Taxes on income and profits 2002/03 2003/04 2004/05 Medium -term estim ates estim ate 149.6 155.7 171.5 187.7 Skills levy 2.8 3.0 3.2 3.4 Taxes on property 4.5 4.6 5.1 5.5 84.3 92.8 99.1 106.4 Taxes on trade 9.2 10.6 10.9 11.1 Stamp duties and fees 1.9 1.8 2.2 2.3 252.2 268.5 291.9 316.4 Non-tax current revenue 4.3 4.9 5.5 6.0 Capital revenue 0.0 0.0 0.0 0.0 Recoveries of loans 0.1 0.1 0.1 0.1 – – – – -8.2 -8.3 -8.8 -9.3 Main budget revenue 248.4 265.2 288.7 313.2 Per cent of GDP 25.1% 24.5% 24.5% 24.5% Gross domestic product 990.0 Domestic taxes on goods Total tax revenue Grants Less: SACU payments National Treasury 1,082.8 1,178.9 1,277.5 19 Key changes - individuals • R15 billion PIT relief • Interest and dividend income exemption • Transfer duty – R300 million • Taxation of deemed foreign income • Taxation of trusts • Amendment of monetary thresholds and miscellaneous PIT provisions National Treasury 20 Key features – companies • Accelerated depreciation for new manufacturing assets • Tax relief for small business • Taxation of trusts – flat 40% rate • Further tax reform: – Taxation of retirement industry – Taxation of banking sector National Treasury 21 Key features – indirect tax • Excises duties: – Alcoholic beverages: 8 – 10% – Tobacco: 10,7% - 43,7% • • • • • • • Air passenger tax: no change General fuel levy: no change (RAF: 2c a litre) Extend diesel fuel tax concession Fuel tax regime for environmentally friendly fuel Remove Lloyd’s tax MST/ UST on warrant repurchases Stamp duties National Treasury 22 PIT rates and brackets Personal income tax rate and bracket adjustments 2001/02 2002/03 Taxable incom e (R) Rates of tax Taxable incom e (R) Rates of tax 0 – 38 000 18% of each R1 0 – 40 000 18% of each R1 38 001 – 55 000 R6 840 + 26% 40 001 – 80 000 R7 200 + 25% 55 001 – 80 000 R11 260 + 32% 80 001 – 110 000 R17 200 + 30% 80 001 – 100 000 R19 260 + 37% 110 001 – 170 000 R26 200 + 35% 100 001 – 215 000 R26 660 + 40% 170 001 – 240 000 R47 200 + 38% 215 001 and above R72 660 + 42% 240 001 and above R73 800 + 40% Rebates Rebates Primary R4 140 Primary R4 860 Secondary R3 000 Secondary R3 000 Tax threshold Below age 65 National Treasury Tax threshold R23 000 Below age 65 R27 000 23 900 600 300 120 80 60 45 Under 65 Over 65 30 100 90 80 70 60 50 40 30 20 10 0 27 Per cent reduction Nominal PIT rate reductions Taxable income (R'000) National Treasury 24 Developments in debt management • Ratings upgrade by Moody’s up one notch to Baa2 • RSA’s Yen 60 billion wins IFR deal of the year award • Public Sector Borrowers’ Forum established to effectively coordinate public sector borrowing • Liquidity enhanced - Bond turnover reaches R10.7 tn • Telkom IPO to take place in 2002/03 National Treasury 25 Shift to active debt management • Consolidated illiquid bonds through switch auctions into five liquid bonds across the curve • Issued CPI-linked bond (R197) in the 2023 maturity • Eurobond issue in the 2008 maturity • Introduction of STRIPS • Switches & Buy backs yield R700 million saving p.a • Foreign borrowing contributes to reducing NOFP National Treasury 26 Borrowing Requirement 2002/03 Borrowing Requirement Budget deficit Extraordinary receipts Extraordinary payments Net borrowing requirement Financing Net domestic short term loans Net domestic long term loans Net foreign loans Total financing National Treasury R million 22 692 -12 000 1 571 12 263 4 000 -10 960 16 275 12 263 27 Key financing plans • R12 Billion Restructuring proceeds expected • New CPI bond in 2008 Maturity Area • New Floating rate bond in 2007 maturity area • Move to single price (Dutch Auction) approach • US$ 1 billion equivalent foreign borrowing • Cash buy-back of bonds up to R3 billion • Switch Auction to continue National Treasury 28 Spending priorities over the MTEF • Increased political oversight over budget process • Priorities over the next three years: – Infrastructure • With emphasis on urban renewal and rural development – Addressing poverty and vulnerability • Child support grant extended to an additional 1,2 million children • Spending on HIV/AIDS exceeds R1 billion/year over the MT – Partnerships with municipalities: • Improved access to affordable basic services – Fight against crime • 16 000 more police National Treasury 29 Main new allocations • Local government gets additional R1,6 bn in 2002/03 and R2,4 bn in 2003/04 • Provinces get R5,3 bn and R7,0 bn above baseline – Social grant increases cost about R2,2 billion more next year • Police to get R5,2 bn more over three years to hire 16 000 additional police • Defence gets R3,9 bn over 3 years for currency depreciation • Enhanced HIV/Aids programme: Additional R4,1 bn over 3 years National Treasury 30 Additional allocations • R13,4 billion in 2002/03 and R17,9 billion in 2003/04 • Positive real growth in all three spheres: – National R6,6 and R8,5 billion – Provincial R5,3 and R7 billion – Local R1,6 and R2,4billion • National share includes restructuring SA Post Office, UIF, currency depreciation and fight against crime • Provincial priorities - social security grants, education, capital investment and maintenance • Infrastructure and capacity building at local government level National Treasury 31 Spending by function 2001/02 2002/03 2003/04 2004/05 2001/02– 2003/04 Revised R billion Protection Services Medium -term estim ates Ave. estim ate grow th % 47 52 56 59 8% 130 145 156 166 9% Education 55 60 65 68 7% Health 32 34 38 41 9% Welfare (incl. social security) 34 41 43 46 10% 27 32 33 35 9% – – – – 21 23 26 28 10% 224 252 271 288 9% 48 48 50 52 3% – 4 5 9 272 303 326 350 Social Services of which Econom ic Services General governm ent services and unallocated expenditure Allocated expenditure Interest Unallocated Consolidated expenditure National Treasury 9% 32 Spending trends • Non interest spending goes up 4,1% a year in real terms • Balanced growth in all sectors over MTEF, particularly in social services, protection services and general government • Interest on debt (as % of consolidated expenditure) declining from 17,5% to 15,7% in 2002/03 • Personnel share of consolidated spending is expected to stabilise on 42,2% • Capital spending expected to grow at an average of 18,1% over the MTEF National Treasury 33 Division of Revenue • Strong growth in transfers to provinces (7,9% a year) and local government (18,3% a year) over the MTEF • Priority pro-poor programmes: – Early childhood education programme – Bolster health system against the impact of HIV/Aids – Higher social grants and increased take-up of child support grant – Social and economic infrastructure – Extension of basic municipal services National Treasury 34 Division of Revenue 2001/02 R billion National allocation Revised 2002/03 2003/04 2004/05 Medium-term estimates 87.3 96.1 103.3 109.9 121.2 107.5 13.7 6.6 2.6 3.9 215.1 132.4 119.5 13.0 8.6 3.9 4.7 237.1 142.8 128.5 14.4 10.2 5.0 5.2 256.4 152.4 137.1 15.3 10.9 5.5 5.4 273.1 National 40.6% 40.5% 40.3% 40.2% Provinces 56.4% 55.8% 55.7% 55.8% 3.0% 3.6% 4.0% 4.0% Provincial allocation Equitable share Conditional grants Local government allocation Equitable share Conditional grants Allocated expenditure Percentage shares Local government National Treasury 35 Addressing Local Government Challenges • • • • • • Establishment of new municipalities Restructuring service delivery Delivery of free basic services Expanding infrastructure Co-ordination of capacity building Financial management reforms based on Municipal Finance Management Bill National Treasury 36 Nat transfers to Local Government • Rising rapidly by 18,3% from R6,5 bn in 2001/02 to R10,8 bn in 2004/05 – Increases by R1,1 bn. R1,8 bn and R2,3 bn over MTEF – Forms over 10% of LG finances – Smaller municipalities receive larger share – Include transfers to category C municipalities – Municipal infrastructure development, especially in poor nodes identified in ISRDS and URP National Treasury 37 Local government transfers R million 2001/02 2002/03 2003/04 2004/05 Equitable share & related 3,856 4,752 5,798 6,229 Capital 2,241 3,282 3,859 4,000 456 548 577 624 6,552 8,581 10,234 10,854 Capacity building & restructuring Total transfers to local government National Treasury 38 Conclusion • 2002 Budget supports poverty alleviation and growth • Strong real growth in spending • Especially on social grants, infrastructure, local govt. and fighting crime • Large tax cuts for all • R15 billion PIT relief • Solid base for future economic growth laid • Increased competitiveness and rising productivity National Treasury 39