1national treasury budget 2002 a brief overview

1 National Treasury

Budget 2002A brief overview...

2 National Treasury

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

3 National Treasury

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

4 National Treasury

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

5 National Treasury

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

6 National Treasury

Exports to benefit from depreciation

-30 000

-20 000

-10 000

0

10 000

20 000

30 000M

ar-

94

Ju

l-94

No

v-9

4

Mar-

95

Ju

l-95

No

v-9

5

Mar-

96

Ju

l-96

No

v-9

6

Mar-

97

Ju

l-97

No

v-9

7

Mar-

98

Ju

l-98

No

v-9

8

Mar-

99

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Mar-

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No

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Mar-

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ran

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-15

-10

-5

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15

perc

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tag

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ge

Trade balance

3 per. Mov. Avg. (Merchandise exports)

3 per. Mov. Avg. (Merchandise imports)

7 National Treasury

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

8 National Treasury

CPIX and food

Consumer prices (monthly percentage changes)

5

6

7

8

9

P e rc e nt c ha ng e o v e r the ye a rCP IXCP IX exc l fo o d and fue lCP IX ex fue l

9 National Treasury

Productivity gains drive increases in real remuneration

60

70

80

90

100

110

120

130

140

ind

ex,

199

5=1

00

Real private sector remuneration

Real remuneration

Labour productivity

10 National Treasury

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


Household consumption to benefit from tax cuts

-6

-4

-2

0

2

4

6

8

10

pe

r c

en

t c

ha

ng

e

HCE

Disposable income ofhouseholds


Growth in real GDP and CPIX, 1996-2004

• 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

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

per c

en

t

0

1

2

3

4

5

6

7

8

9

Real GDP

CPIX


Macroeconomic forecasts

2001 2002 2003 2004

Real growth

Household consumption 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%

Consumer price inflation (CPIX) 6.6% 6.9% 5.8% 4.7%

Balance of Payments currentaccount (% of GDP)

0.0% -0.5% -0.5% -0.7%


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%


R billion 2001/02 2002/03 2003/04 2004/05

National Revenue FundRevenue 248.4 265.2 288.7 313.2 Expenditure 262.6 287.9 311.2 334.6 Main budget deficit 14.1 22.7 22.5 21.4 % of GDP 1.4 2.1 1.9 1.7 RDP Fund & foreign technical cooperation Receipts 1.0 0.8 0.8 0.8 Social security fundsRevenue 8.6 9.6 10.0 10.3 Expenditure 8.2 9.1 9.6 10.2 Consolidated national budgetRevenue 257.4 275.2 299.2 324.1 % of GDP 26.0 25.4 25.4 25.4 Expenditure 270.7 297.4 321.4 345.4 Deficit 13.3 22.1 22.2 21.2 % of GDP 1.3 2.0 1.9 1.7 GDP 990.0 1,082.8 1,178.9 1,277.5

National budget framework


Fiscal consolidation yields higher real spending

60.0

80.0

100.0

120.0

140.0

160.0

180.0

1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Real non-interest expenditure

Debt service costs as % of GDP


InfrastructureInfrastructure 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¯ 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


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


Revenue summary2001/02 2002/03 2003/04 2004/05

Revised Medium-term estimates

R billion estimate

Taxes on income and profits 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

Domestic taxes on goods 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

Total tax revenue 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

Grants – – – –

Less: SACU payments -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 1,082.8 1,178.9 1,277.5


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


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


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


PIT rates and bracketsTable 4.7 Personal income tax rate and bracket adjustments

Taxable income (R) Rates of tax Taxable income (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 Tax threshold

Below age 65 R23 000 Below age 65 R27 000

2001/02 2002/03


Nominal PIT rate reductions

0102030405060708090

100P

er c

ent

red

uct

ion

27 30 45 60 80 120

300

600

900

Taxable income (R'000)

Under 65Over 65


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


• 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

Shift to active debt management


Borrowing Requirement 2002/03

Borrowing Requirement R million

Budget deficit 22 692

Extraordinary receipts -12 000

Extraordinary payments 1 571

Net borrowing requirement 12 263

Financing

Net domestic short term loans 4 000

Net domestic long term loans -10 960

Net foreign loans 16 275

Total financing 12 263


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


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


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


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


Spending by function2001/02 2002/03 2003/04 2004/05 2001/02–

2003/04

Revised Ave.

R billion estimate growth %

Protection Services 47 52 56 59 8%

Social Services 130 145 156 166 9%

of which

Education 55 60 65 68 7%

Health 32 34 38 41 9%

Welfare (incl. social security) 34 41 43 46 10%

Economic Services 27 32 33 35 9%

General government services – – – –

and unallocated expenditure 21 23 26 28 10%

Allocated expenditure 224 252 271 288 9%

Interest 48 48 50 52 3%

Unallocated – 4 5 9

Consolidated expenditure 272 303 326 350 9%

Medium-term estimates


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


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


Division of Revenue

2001/02 2002/03 2003/04 2004/05

R billion Revised Medium-term estimates

National allocation 87.3 96.1 103.3 109.9

Provincial allocation 121.2 132.4 142.8 152.4 Equitable share 107.5 119.5 128.5 137.1 Conditional grants 13.7 13.0 14.4 15.3

Local government allocation 6.6 8.6 10.2 10.9 Equitable share 2.6 3.9 5.0 5.5 Conditional grants 3.9 4.7 5.2 5.4

Allocated expenditure 215.1 237.1 256.4 273.1

Percentage shares

National 40.6% 40.5% 40.3% 40.2%

Provinces 56.4% 55.8% 55.7% 55.8%

Local government 3.0% 3.6% 4.0% 4.0%


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


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


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

Capacity building & restructuring 456 548 577 624

Total transfers to local government 6,552 8,581 10,234 10,854


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

1national treasury budget 2002 a brief overview

Documents

growth recovery

positivegdp growth

us growth

average growth

quartersgdp growth

tax cuts growth

real gdp

fiscal outlook