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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