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Budget 2003 Development as freedom An overview... National Treasury 1 • Overview of 2003 Budget Economic and fiscal outlook: – – – – – SA economy resilient in face of global slowdown Inflation coming down, target range by 2004 Expansionary fiscal stance continues Personal income tax relief Budge deficit of 2,4% of GDP • This budget focuses on: – – – – – Fighting poverty and vulnerability Continued focus on infrastructure Broadening of social security net Strengthening health and education Expansion of municipal services • 4,5% a year real non-interest expenditure growth National Treasury 2 over MTEF Macroeconomic outlook • GDP growth in 2002 of 3% rising to 3,3% in 2003, and 4% by 2005 • Global economic picture uncertain – War in Iraq and high oil prices – Slowdown in OECD growth • Domestic demand and investment spending strong • Declining household debt • Formal sector employment turning around • Healthy current account balance • Declining inflation in 2003 and 2004 National Treasury 3 GDP growth and CPIX 10 CPIX inflation per cent 8 6 2002 estimates 2003 estimates 4 GDP growth 2 0 1999 National Treasury 2000 2001 2002 2003 2004 2005 4 Investment percent change y-o-y 16 Gross fixed capital formation 8 0 -8 -16 National Treasury Mar-02 Mar-01 Mar-00 Mar-99 Mar-98 Mar-97 Mar-96 Mar-95 Mar-94 Mar-93 Mar-92 Mar-91 Mar-90 -24 5 National Treasury Mar-02 Jun-01 Sep-00 Dec-99 Mar-99 Jun-98 Sep-97 Dec-96 Mar-96 Jun-95 Sep-94 Dec-93 Mar-93 Jun-92 Sep-91 Dec-90 Mar-90 Household debt to disposable income Per cent 62 60 58 56 54 52 50 6 Inflation coming down • CPIX averaged 10% in 2002, – down from its peak in November • Downward pressure on food prices – White maize futures down from over R2 100 to R940 this week • Unit labour cost growth still moderate • CPIX set to fall into target range by 2004 National Treasury 7 Food CPIX National Treasury 8 Balance of payments • Small current account surplus projected for 2002 • Shift back to moderate deficit over MTEF period, rising to about 1,6% by 2005 • Positive capital inflows in 2002 of R21,4 bn • Trade performance driving healthy balance of payments National Treasury 9 Financial and current account per cent of GDP 6 Current acco unt Financial acco unt 4 2 0 -2 -4 National Treasury 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 -6 10 Positive data on employment • Labour Force Survey indicates turnaround in formal employment • Growth evident in mining, services • Unemployment is still our biggest challenge • Initiatives aimed at raising employment – Community-based labour works programmes – Learnerships and skills development – SMME development National Treasury 11 Employment … turning 12 per cent change Remuneration per worker 10 Productivity 8 6 4 2 0 -2 -4 Employment National Treasury 12 Jun-02 Dec-01 Jun-01 Dec-00 Jun-00 Dec-99 Jun-99 Dec-98 Jun-98 Dec-97 Jun-97 Dec-96 Jun-96 Dec-95 Jun-95 Dec-94 Jun-94 -6 -4 National Treasury Transport and communications Construction Financial Electricity Trade, catering, accommodation Community and personal service Manufacturing Mining Total per cent Employment … turning 5 4 3 2 1 0 -1 -2 -3 13 Macroeconomic forecasts 2002 2003 Estimate 2004 Forecast 2005 Real growth Household consumption 3,1% 2,9% 3,3% 3,7% Capital formation 6,3% 5,8% 6,4% 6,9% Exports -2,0% 3,0% 6,3% 6,7% 3,0% 10,0% 3,3% 7,7% 3,7% 4,8% 4,0% 5,2% 0,1% -0,5% -1,1% -1,6% Gross domestic product Consumer price inflation (CPIX) Balance of Payments current account (% of GDP) National Treasury 14 Fiscal policy • Deficit widened to 2,4% next year • Real growth in non-interest spending of 4,5% a year over MTEF period • Debt service costs decline from 4,2% in 2002/03 to 3,8% by 2005/06 • Debt projected to drop to 36,8% by 2005/06 • Buoyant tax revenue provides for Personal Income Tax relief of R13,3 billion • Capital spending by general government strongly up National Treasury 15 Key indicators of fiscal policy Deficit (right axis) Total expenditure (left axis) Non-interest expenditure (left axis) Total revenue (left axis) 14% 30% 12% 25% 10% 20% 8% 15% 6% 10% 4% 5% 2% 0% 0% 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 National Treasury 16 per cent GDP per cent GDP 35% National budget framework R billion National Revenue Revenue Expenditure Main budget deficit % of GDP Total expenditure 2002/03 2003/04 2004/05 2005/06 275.7 291.8 16.1 1.4% 291.8 304.5 334.0 29.5 2.4% 334.0 331.0 363.3 32.4 2.4% 363.3 361.2 395.6 34.4 2.3% 395.6 47.3 51.0 53.1 55.1 – 3.0 4.0 8.0 Total allocations 244.6 280.0 306.3 332.5 % increase 13.6% 14.5% 9.4% 8.6% Less: Debt service costs Contingency reserve National Treasury 17 Government debt 1980–2006 600 60 Foreign debt Domestic debt Total gross loan debt as % of GDP (right axis) 50 400 40 300 30 200 20 100 10 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 National Treasury 18 percentage R billion 500 Borrowing Requirement 2003/04 Borrowing requirement R million Budget deficit 29 506 Extraordinary receipts -6 341 Extraordinary payments Net borrowing requirement 7 000 30 165 Financing Net domestic short term loans 6 000 Net domestic long term loans 9 297 Net foreign loans Change in cash and other balances Total financing National Treasury 11 768 3 100 30 165 19 Summary of tax proposals • Personal income tax relief of R13,3 billion – Threshold rises to R30 000 • • • • • • Interest exemption raised to R10 000 Retirement Fund Tax reduced from 25% to 18% Tax allowances for investment in inner city areas Several business stimulus measures Transfer duties reduced further Excise duties on vehicles reduced and eliminated on computers • Inflation-related adjustment to excises on alcohol and tobacco products National Treasury 20 Personal Income Tax Relief • Below age 65: threshold from R27 000 to R30 000 • Above 65: Threshold raised from R42 640 to R47 222 • Maintain progressivity & relief across entire income spectrum • Distribution of tax relief – 56% to income groups earning less than R150 000 – 23% to those earning between R150k and R250k – 21% goes to those earning over R250k National Treasury 21 Taxation of retirement savings • Currently under review - reform scheduled for 2004 • Interim measure - reduction in rate of Retirement Fund Tax from 25% to 18% • Estimated cost of R1,85 billion National Treasury 22 Tax-driven support for growth Accelerated depreciation allowances for Urban Development Zones Accelerated depreciation regime for manufacturing assets becomes permanent Tax relief for reinvestment of business assets Accelerated write-off for research & development Double deduction for first R20 000 of start-up expenses Turnover limit for SMMEs qualifying for 15% rate increased to R5 million National Treasury 23 Tax treatment arising from amnesty • An exchange control amnesty is provided for, aiming to allow people to repatriate money illegitimately taken out of the country and to expand the tax base • In return for amnesty for violations occurring before 28 Feb 2002, a one time 5% charge on asset repatriated & at 10% charge for assets held offshore National Treasury 24 Indirect Taxes • Excises duties: – Alcoholic beverages: 10 – 11% – Tobacco taxes raised by an average 11% • Air passenger departure tax revised upwards • General fuel levy up by average of 4,3 cents for petrol and 4 cents for diesel. RAF levy up by 3 cents a litre • Inflation adjustment of ad valorem excise duty formula for motor vehicles reduces excise charge & car prices costing R243 million • Ad valorem excise duty on computers repealed at cost of R572 million National Treasury 25 Medium term expenditure framework Budget gives priority to: – Reducing poverty and vulnerability – Extending the social security net – Reinforcing the fight against HIV/Aids – Providing free basic services – Increasing infrastructure spending – Accelerating land restitution – Higher education and skills development – Strengthening the fight against crime – NEPAD and peace support operations National Treasury 26 Division of revenue • Total additions to baseline of R105,4 billion • 2003 Budget shifts resources towards provinces and local governments • Adjustments include provision for higher inflation • 6,1% annual average real growth in transfers to provinces • 12,2% growth in local government transfers National Treasury 27 Division of additional amounts Additional allocations in the 2003 MTEF R billion 2002/03 2003/04 2004/05 2005/06 Total Inflation related adjustm ents National departments 1.1 2.3 2.8 3.1 8.2 Provinces 2.2 5.5 6.5 7.0 19.1 Equitable share 2.0 5.2 6.1 6.6 18.0 Conditional grants 0.2 0.3 0.4 0.4 1.1 Local government 0.1 0.2 0.2 0.2 0.6 Subtotal 3.4 8.0 9.5 10.3 27.8 – – – – – National departments 2.3 4.9 6.8 8.9 20.6 Provinces 2.3 10.6 16.6 23.1 50.3 Equitable share 2.0 8.7 12.1 15.6 36.4 Conditional grants 0.3 1.9 4.5 7.4 13.9 Local government 0.1 1.6 2.2 2.9 6.7 Subtotal 4.8 17.1 25.6 34.9 77.6 – – – – – National departments 3.4 7.2 9.6 11.9 28.8 Provinces 4.5 16.1 23.1 30.1 69.3 0.2 1.8 2.4 3.1 8.2 25.1 35.1 45.1 Policy adjustm ents Total additional allocations Local government National Treasury Total 28 7.3 105.4 Main policy additions R billion Extension of the CSG and school nutrition programme 2003/04 2004/05 2005/06 1.3 3.7 6.8 11.8 9.0 12.7 16.3 38.0 1.6 2.2 2.7 6.5 0.6 0.7 1.4 2.7 Higher education and skills development 0.8 1.1 1.4 3.4 Land restitution and land reform 0.6 0.6 0.7 1.9 Administrative systems and services to citizens 0.3 1.0 0.9 2.2 Research and technology development 0.2 0.3 0.5 1.0 Support for NEPAD and international commitments 0.3 0.4 0.5 1.3 Other adjustments 2.4 2.7 3.6 8.7 17.1 25.6 34.9 Enhancement of provincial education, health, welfare and other functions Basic household services, municipal infrastructure and community employment Fighting crime and streamlining of justice process National Treasury Total policy adjustments Total 29 77.6 Recent Budget Reforms Measurable objectives for each programme – section 27.4 of PFMA – quantifiable results within MTEF period – Shifts focus to outputs and their impact • ENE introduces reporting on recent outputs • New expenditure table on infrastructure reporting National Treasury 30 Addressing Poverty and vulnerability • Improving social services – Child Support Grant extended up to a child’s 14th birthday – Improving quality of provincial health and education services – Reinforcement of enhanced response to HIV/Aids • Infrastructure investment3 – Extension of free basic services and municipal infrastructure – Emphasis on broadening access to water and electric3ity services • Investment in skills – – – – National Treasury Increased learnerships in private and public sector Renewal of further education system Replenishment of National Student Financial Aid Scheme Employment creation through community development projects 31 Reinforcing security and crime prevention • Increased efficiencies in courts administration – Budget supports improved case management – Automated Fingerprint Identification System introduced • Strengthening Sector Policing strategy – Five thousand more police in outer year – Modernisation of vehicle fleet • Correctional Services – Focus on rehabilitation – Four new prisons - building to commence in 2003 • Modernisation of intelligence services – New Intelligence Academy – Modernisation of communications technology National Treasury 32 Promoting NEPAD and multilateral cooperation • Support for NEPAD and African Union – Establishment of NEPAD secretariat – Regional development through African Renaissance Fund • Peace support operations in Africa – Continued support for operations in DRC and Burundi • Foreign missions in Africa to be increased – Phased establishment of 16 new missions • Promotion of regional integration through SACU agreement National Treasury 33 Spending by function 2002/03 2003/04 Revised estim ate R billion Budget estim ate R billion Average grow th 2002/03– 2005/06 % Education 62.8 69.1 8.0 Health 34.9 39.1 9.3 Welfare and social security 42.0 48.7 14.5 Housing & other social services 13.7 16.7 13.1 Police, prisons & courts 32.6 36.0 9.3 Defence & intelligence 20.8 22.5 6.7 Economic services General administration 36.2 20.1 43.6 21.7 11.1 263.0 297.4 10.2 47.3 51.0 5.2 – 3.0 – 310.2 348.3 10.2 Non-interest allocations Interest on debt Unallocated Total expenditure National Treasury 10.4 34 Provincial priorities for 2003 • Social Development – Further expansion of the social security net (CSG) – Real increases in values of social security grants • Education – Increasing spending on non-personnel non-capital, especially LSM, ECD, classroom backlogs • Health – – – – – Attracting personnel with scarce skills Further bolstering HIV/Aids programmes Refurbishing health infrastructure Increasing spending on INP Stepping up spending on medicines and other critical supplies taking • Step-up support for other functions, esp.roads National Treasury 35 Transfers to provinces • National transfer to provinces: – Equitable share rises from R123 bn in 2002/03, to R142 bn in 2003/04 and to R168 bn in 2005/06 – Conditional grants which are R13 bn in 2002/03, R17 bn in 2003/04 and R24 bn in 2005/06 • Increase in conditional grants largely due to introduction of child support extension grant which rises from R1,1bn in 2003/04 to R6,4bn in 2005/06 – Transfers to provinces grow by 6,1% a year in real terms National Treasury 36 Summary of transfers & Provincial revenue R million Transfer from national Equitable share Conditional grants Own revenue Total Percentage growth Transfers from national Equitable share Conditional grants Own revenue Total National Treasury 132 420 119 452 12 967 4 103 136 523 estimate 136 919 123 457 13 462 5 458 142 377 158 995 142 386 16 609 5 683 164 678 175 468 155 313 20 155 5 971 181 438 191 590 167 556 24 033 6 278 197 868 – – – – – – – – – – 16.1% 15.3% 23.4% 4.1% 15.7% 10.4% 9.1% 21.3% 5.1% 10.2% 9.2% 7.9% 19.2% 5.1% 9.1% 37 Local government priorities • Extending provision of free basic services – R4,1bn extra over the MTEF (incl. R1,4bn for electricity) • Investing in municipal infrastructure – R1,8 billion more, including R1bn for labourbased programmes • infrastructure grants to be consolidated in future • Reinforcing financial management reforms – R300m set aside for this purpose National Treasury 38 Transfers to local government R million 2002/03 2003/04 2004/05 2005/06 Equitable share & related 4,887 7,180 7,936 8,633 Infrastructure grants 3,416 4,144 4,588 4,996 Capacity building & restructuring Total 498 8,801 677 12,001 724 13,249 995 14,624 National Treasury 39