Download Medium term budget policy statement

Medium term
budget policy
statement
November 2003
Introduction

2003 Medium term budget policy statement:
– Draws on 10 year review and Growth and Development
Summit Agreement
– Major themes

Expansionary fiscal stance

Fighting poverty and reducing unemployment

Raising the level of public and private investment

Building sustainable communities

Fighting crime

Fostering regional development through Nepad
2
Macroeconomic overview

Domestic economy resilient
– Continued, but slower, positive growth amidst global slowdown
– Weak global demand hurts manufacturing exports
– Commodity prices rising

Global recovery gains momentum, especially in US and
East Asia

Strong investment supports overall growth prospects

GDS policy initiatives will further support growth and
poverty alleviation

Growth forecasts for 2003 scaled down but still expected
to rise strongly in medium term
3
Global economy







Strong correlation between SA and G7 growth
Global slowdown was longer than anticipated but
recovery is gaining momentum
World GDP to accelerate to 3% in 2004 from
around 2% in 2003
Fiscal and monetary stimulus and weaker dollar
will support US consumer and export demand
Despite labour market weakness and huge twin
deficits, US will remain driver of global recovery
Euro economies will emerge out of recession,
although growing more slowly than rest of G7
Strong commodity prices, but higher oil prices too 4
Trade performance
Geographical and product diversification of
trade continues
 Bilateral and multilateral trade agreements
 19% SA exports to US now duty free
under AGOA
 Manufacturers dominate exports to US
 EU our major trading partner, SA-EU trade
agreement to guide further expansion

6
Direction of exports
45.0%
40.0%
35.0%
30.0%
1990
25.0%
1995
20.0%
2002
15.0%
10.0%
5.0%
0.0%
Africa
Americas
Asia
Europe
Oceania
Not
allocated
7
Commodity price cycle
8
Balance of payments






Current account deficit of just under 1% of GDP in
2003 after 2002 surplus
Real effective rand appreciation and global
slowdown reduced export earnings in H1 2003
Falling interest rates and fiscal stimuli supported
domestic spending
Trade surplus narrowed in H1 2003 as falling
exports offset decline in imports
Services and income account deficit widened due
to weaker dividend inflows, lower tourist spending
Surplus on financial account sufficient to finance
current account deficit
9
Balance of Payments
10
Rand at 2000 levels
Rand/US$ exchange rate
12
11
10
9
8
7
2000
2001
2002
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
6
2003
11
Real output





Real output growth slowed to 2% in
first half of 2003
Slowdown in 1st half of 2003 due to global
weakness, stronger rand and higher interest
rates
Sharp slowdown in manufacturing led by export
and import-competing industries
However, strong investment growth and fiscal
policy initiatives in manufacturing
Government infrastructure growth will support
construction in medium term
12
Primary sector
Contraction in agriculture driven by field
crop decline due to bad weather
 Modest recovery in mining production
 High gold and platinum dollar prices offset
negative impact of rand strength
 Strong global demand will drive growth
and future investments

13
Mar-03
Jun-03
Sep-03
Manuf acturing
Jun-02
Sep-02
Dec-02
Sep-01
Dec-01
Mar-02
Mar-01
Jun-01
-4
Jun-00
Sep-00
Dec-00
Sep-99
Dec-99
Mar-00
Manufacturing
14
60
12
10
8
55
6
4
50
2
0
-2
45
PMI
-6
40
14
Tourism
4000000
Tourism by source of origin January-July
3500000
3000000
2001
2500000
2002
2000000
2003
1500000
1000000
500000


Tourism to South Africa increasing amidst
decline in worldwide tourism
Continued expansion of tourist capacity
Total
Africa
Asia
Australasia
Americas
Europe
0
15
Inflation targeting

Technical amendments to IT framework
– Continuous target instead of annual average
– 3%-6% target instated beyond 2006
– Escape clause replaced with explanation clause
– SARB to inform public through MPC meetings of any
shocks and impact on inflation

CPIX will remain target basket

Efficiency of administered pricing being
investigated

Improved competition and regulation
18
00
2
00
3
20
03
Ju
l2
Ja
n
00
1
20
02
Ju
l2
Ja
n
00
0
20
01
Ju
l2
Ja
n
99
9
20
00
Ju
l2
Ja
n
Ju
l1
16
19
99
99
8
18
Ja
n
Ju
l1
Per cent
Inflation
Core inflation
CPIX
PPI
14
12
10
8
6
4
2
0
-2
19
SA Growth Forecasts
10%
CPIX inflation
9%
8%
6%
2003
Budget
5%
2003 MTBPS
4%
3%
2%
GDP
growth
1%
2006
2005
2004
2003
2002
2001
2000
0%
1999
Per cent
7%
20
Forecasts
2002
Calendar year
2003
2004
Estim ate
2005
Forecast
2006
Percentage change unless otherwise indicated
Final household consumption
3.2
2.8
3.2
3.5
3.7
Final government consumption
3.7
3.6
3.3
3.1
3.4
Gross fixed capital formation
6.5
7.7
6.1
6.7
7.0
Gross domestic expenditure
4.2
4.7
3.7
3.8
3.9
Exports
-1.4
-4.2
4.6
6.3
6.9
Imports
3.1
5.8
6.6
6.7
6.4
GDP grow th (real)
3.0
2.2
3.3
3.7
4.0
GDP deflator
8.5
5.8
4.6
5.9
5.0
GDP at current prices (R billion)
1,098.7
1,187.5
1,283.5
1,409.0
1,539.4
CPIX (Metro & urban, year average)
9.3
6.9
4.9
5.4
5.1
Current account balance (% of GDP)
0.3
-0.8
-1.4
-1.7
-2.0
21
Fiscal policy

Expansionary stance began in 2001 Budget
continues

Revenue shortfall of about R4,6 billion this year
due to economic slowdown

Fiscal policy supports growth through:
– Strong real growth in spending
– Stable tax to GDP level
– Declining debt service costs

Fiscal policy is counter-cyclical
– Expansionary but within sustainable framework
22
Key MTEF trends

Additional spending of R37 billion over baseline over the
next three years

Real non-interest expenditure growth averages 4,4% per
year over 2004 MTEF

Increase in budget deficit to 3,2% of GDP in 2004/05,
declining to 2,8% of GDP in 2006/07
– Lower consolidated general govt. deficit due to surpluses on social
security funds (under 3%)

Main budget revenue at 24,8% of GDP

Real rise in general government investment, supported by
public corporations

Debt service costs decline to 3,7% of GDP
23
Fiscal Framework
R billion
2002/03
2003/04
Outcom e
Estim ate
2004/05
2005/06
2006/07
Medium -term estim ates
Total revenue
278.4
299.9
325.7
357.8
391.0
per cent of GDP
24.8%
24.8%
24.8%
24.8%
24.8%
Total expenditure
291.8
331.5
367.5
403.1
435.3
per cent of GDP
26.0%
27.5%
28.0%
28.0%
27.7%
47.3
47.2
51.3
54.6
57.8
4.2%
3.9%
3.9%
3.8%
3.7%
Non-interest expenditure
244.6
284.3
316.2
348.5
377.5
per cent of GDP
real growth (non-interest
expenditure)
Contingency
reserve
21.8%
23.5%
24.1%
24.2%
24.0%
3.4%
–
10.1%
–
5.7%
2.0
4.6%
4.0
3.1%
8.0
Deficit(-)
-13.4
-31.6
-41.8
-45.4
-44.3
per cent of GDP
-1.2%
-2.6%
-3.2%
-3.1%
-2.8%
Debt service cost
per cent of GDP
Gross domestic product
1,124.0
1,207.3
1,313.3
1,440.9
1,573.5
24
2003 Tax proposals

Foreign exchange amnesty extended until 29 February 04

Tax on retirement funds to be reviewed further to consider
all aspects of savings

Tax incentive for urban development covers 15
municipalities

Business tax stimulus measures:
– Reinvestment tax relief, claim losses for unproductive assets sold,
stimulating R&D, allowances for start-up expenses

Remove tax on foreign dividends and the designated
country list

Address inconsistent income tax and VAT rules of transfer
payments to public entities
25
Revenue outcome and
projections

Preliminary outcome for 2002/03
– Main budget revenue R278,2 billion
– R13,2 billion higher than budgeted


Due to higher than projected increases in remuneration, GOS of
companies, expenditure growth and inflation
Revised forecast for 2003/04
– Main budget revenue R299,9 billion
– R4,6 billion less than budgeted

Mainly due to the appreciation in the value of the Rand reducing company profits and the custom value of imports
26
Tax policy for the
2004 Budget

Review tax impediments to broad-based economic
empowerment transactions

Review tax implications of proposed medical aid
schemes and health insurance plan, fringe benefit
taxation and direct employer provided medical
assistance

Review the overlap between VAT and transfer duty

Streamline customs and excise procedures
27
Key spending priorities










Renewed focus on employment creation – EPWP
Step up in infrastructure spending
Further commitment to fighting HIV/Aids - ARVs
Extension of social security grants - CSG
Improving quality of school education -textbooks to
poor schools
Continued roll-out of free basic services
Strengthening the safety and security sector
Improving core services of Home Affairs to citizens
Promoting peace and development in the region
Promoting broad-based black economic empowerment
28
Division of additional
resources
R billion
National
2003/04
Revised
2004/05
2005/06
2006/07
Medium term estim ates
110.8
120.6
131.2
139.1
161.5
179.4
197.4
213.3
12.0
14.2
15.9
17.1
284.3
314.2
344.5
369.5
Changes from baseline 1
4.3
8.0
12.0
17.0
National
1.9
3.0
4.9
5.2
Provincial
2.5
4.0
5.8
10.2
–
1.0
1.3
1.6
Provincial
Local government
Total to be shared
Local government
1. Baseline allocations comprise the medium term estimates published in
the 2003 Budget, together with standard increases of 6 per cent in 2006/07
over the 2005/06 allocations.
29
Division of total resources
2003/04
Per cent
Revised
2004/05
2005/06
2006/07
Medium term estimates
National allocation
39.0%
38.4%
38.1%
37.7%
Provincial allocation
56.8%
57.1%
57.3%
57.7%
50.9%
50.5%
49.9%
49.8%
5.9%
6.6%
7.4%
8.0%
4.2%
4.5%
4.6%
4.6%
100.0%
100.0%
of which
Equitable share
Conditional grants
Local government allocation
Total to be shared
Average annual change
100.0%
100.0%
2003/04 – 2006/07
National allocation
7.9%
Provincial allocation
9.7%
of which
Equitable share
Conditional grants
Local government allocation
Total
8.3%
20.7%
12.5%
9.1%
1. Excludes the contingency reserve which is not allocated to any sphere.
30
Adjusted Estimates 2003


The 2003 Adjusted Estimates provides
for total adjustments of R6,8 billion
Provinces Unforeseeable & Unavoidable Expenditure
National Unforeseen & Unavoidable Expenditure
Roll-overs
Salary Adjustments and Self-financing expenditure
R billions
2,1
2,8
1,1
0,8
Total Adjustments
6,8
The net increase in spending is R1,3 billion after
in-year savings, contingency reserve, etc.
33
Adjusted Estimates 2003

Main adjustments to national
departments’ appropriations:
RM
– Communications: Post Office
750
– Defence: Peace support initiatives
500
– National Treasury: Service benefits MPs
400
– Water Affairs: Emergency water, debt
water associations
346
– Public Works: Rates, municipal services
180
– Home Affairs: Lindlela, ID campaign
103
34
Provincial finances

Revisions to provincial baselines commitment to
reinforcing pro-poor spending
– Stepping up spending on non-personnel in
education
– Further strengthening health sector
– By allocating R1,9bn for ARVs
– Providing additional resources for take up of CSG &
other grants
– Provide for expansion of labour-intensive
infrastructure delivery

Provinces receive R19,9bn of additional resources
over the next three years
35
Local Government finances

Government has allocated an additional
R3,9 billion over the next 3 yrs to municipalities

Additional transfers intended for service delivery
– Accelerate the rollout of free basic services to
households
– Strengthen municipal infrastructure delivery through
the MIG

Increased use of labour- based methods
– Improve skills base in planning, budgeting and
technical areas
37
Transfers to local govt.
2003/04
R m illion
Total local governm ent allocation
2004/05
2005/06
2006/07
Medium term estim ates
12,001
13,248
14,624
15,501
Equitable share & related
7,180
7,936
8,633
9,151
Infrastructure
4,144
4,588
4,996
5,296
677
724
995
1,055
1,000
1,300
1,600
Equitable share & related
600
700
900
Infrastructure
400
600
700
-245
-305
245
305
Capacity Building & Restructuring
Total changes to baseline
Capacity building & Restructuring
Further shifts to equitable share from capacity-building grants
Total Revised allocations
12,001
14,248
15,924
17,101
Equitable share & related
7,180
8,536
9,578
10,356
Infrastructure
4,144
4,988
5,596
5,996
677
724
750
750
Capacity Building & Restructuring
38