2004 Medium Term Budget Policy

StatementA framework for accelerated growth

and development

2

Contents

• Introduction – a platform for growth and development

• Macroeconomic overview

• Fiscal framework

• Tax and revenue issues

• Medium term expenditure framework

• Intergovernmental relations

Introduction

A framework for accelerated growth broad-based development

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A decade of structural economic change…

• Stabilisation of fiscal and monetary policy

• Structural tax reform to encourage efficiency and equity

• Phased liberalisation of capital account

• Trade reform encouraging domestic competition and international opportunity

• Rapid growth in investment spending

• Substantial productivity improvements

• Public finance and budget reforms

• Enhanced public sector delivery capacity

…has broadened the policy room for social development

Macroeconomic review and outlook

Higher public and private investment growth to support accelerated growth

6

Economic performance in 2004

• Broad-based growth well above 3% in 1st half of 2004• Buoyant consumer demand and investment in

productive capacity• Rapid and sustainable adjustment to currency

developments• Inflation comfortably within inflation target range• Steady financial flows contributing to BoP sustainablility• Indications of turnaround in employment prospects

7

Over METF period, accelerated growth driven by…

• Mildly expansionary fiscal stance, focusing on improving economic and social infrastructure

• Moderate interest rates, improved confidence and lower risk underpinning stronger investment growth

• Productivity improvements driven by broad human capital development

• An increasingly open economic environment, promoting opportunities for South African businesses

• Small business, learnerships and BEE to address economic dualism

8

GDP growth and CPIX

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CPIX inflation

2004 Budget GDP

growth

2004 MTBPS

•GDP revised up to average 4% over medium term

•CPIX inflation around 5% on average over medium term

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Strong world growth

Country/region 2002 2003 20041 20051 20041 20051

GDP growth Inflation

World 3.0 3.9 5.0 4.3 3.8 3.6

US 1.9 3.0 4.3 3.5 3.0 3.0

EU 1.2 1.1 2.6 2.5 2.2 2.0

Japan -0.3 2.5 4.4 2.3 -0.2 -0.1

China 8.3 9.1 9.0 7.5 4.0 3.0

Africa 3.6 4.3 4.5 5.4 8.4 8.1

Developing Asia 5.3 6.5 7.6 6.9 4.5 4.1

Central and Eastern Europe 3.9 4.1 5.1 4.4 6.9 5.9

Sub-Saharan Africa (excl RSA and Nigeria) 3.6 3.7 6.0 7.4 14.1 12.0

Source: IMF WEO, September 2004

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Healthy Balance of Payments

• Current account deficit rose to high 3,8% of GDP, but…• Supported by positive capital inflows • Balance of payments surplus remains healthy at R12,1 billion • Gross reserves rose to US$12.2 billion at end-September, international

liquidity position at US$9 billion as SARB continues reserve buildup

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Rand million 'current account'

'financial account'

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100150200250300350400450

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Broad based growth in first half

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Second half of 2003First half of 2004

•GDP up 3,6 and 3,9 per cent in first two quarters respectively

•Broad-based, but particularly firm in construction, communications and financial services

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Low inflation and interest rates

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251985

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% change y-o-y

CP IRepo rateCP IX

•CPIX inflation in target range for 13 months

•Nominal interest rates at lowest level in almost 30 years

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Investment and confidence up…

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Gross fixed capital formationP MI

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Macroeconomic Forecast

Estimate Forecast

Calendar Year 2004 2005 2006 2007

Percentage change unless otherwise indicated

Final Household consumption 4.3 3.9 3.5 3.7

Final Government consumption 5.4 2.9 3.1 3.3

Gross f ixed capital formation 9.6 8.2 7.7 8.0

Exports 2.3 3.7 4.9 6.9

Imports 12.7 5.9 5.7 7.0

Real GDP growth 2.9 3.9 3.7 4.2

GDP at current prices (R billion) 1,315.0 1,433.7 1,564.9 1,715.9

CPIX (Metropolitan & urban,

average for year) 4.4 5.1 5.0 5.1

Current account balance (% of GDP) -2.2 -2.7 -2.5 -2.8

Fiscal framework

Sustainable budgeting promotes broad-based socio-economic development

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Features of the framework

• Revenue forecast for this year revised upwards by about R1,2 bn partly due to amnesty proceeds

• Revenue to GDP rising by about 0,6% over MTEF– Recovery in corporate taxes, but also base-

broadening tax reform• Deficit of 3,2% this year, rising to 3,5% next year

– For sustainability reasons, deficit to be reduced to 2,7% by 2007/08

• Real growth in spending of 4,3% (6,5% next year)• Additional resources available (R50 bn):

– R10.8 bn in 2005/06– R14.4 bn in 2006/07– R24.7 bn in 2007/08

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Fiscal framework2003/04 2004/05 2005/06 2006/07 2007/08

R billion / per cent Estimate

Revenue 299.4 328.2 363.0 399.1 440.5

per cent GDP 24.3% 24.5% 24.7% 25.0% 25.1%

Deficit 29.3 43.5 50.6 50.6 47.7

per cent GDP 2.4% 3.2% 3.5% 3.2% 2.7%

Expenditure 328.7 371.7 413.6 449.7 488.2

per cent GDP 26.7% 27.7% 28.2% 28.1% 27.8%

Debt service costs 46.3 49.6 53.2 58.2 63.7

per cent GDP 3.8% 3.7% 3.6% 3.6% 3.6%

Non-interest expenditure 282.4 322.1 360.5 391.5 424.5

per cent GDP 22.9% 24.0% 24.6% 24.5% 24.2%

per cent real growth 9.3% 9.2% 6.5% 3.4% 3.2% 4.3%

contingency reserve 0 0 3.0 4.0 8.0

nominal GDP 1 232 1 341 1 467 1 599 1 756

expenditure allocated, BR2004 315.0 346.7 373.1 391.8 total

7.1 10.8 14.4 24.7 50.0

MTEF averageProjections

resources available over BR2004 baseline

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Current balance (% of GDP)

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Per

cen

t GD

P

Historical

Projection

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Total additional resources available

• Bulk of resources go to provinces, but significant share to national in 3rd year

2004/05 2005/06 2006/07 2007/08

R million / per cent Estimate

National departments 1 625 2 051 3 499 7 934 13 484

Provinces 4 112 8 171 10 132 15 395 33 698

Equitable share 847 1 520 3 134 6 015 10 669

Conditional grants 3 265 6 651 6 998 9 380 23 029

Local government 200 600 800 1 400 2 800

Equitable share – 600 700 1 000 2 300

Conditional grants 200 – 100 400 500

Non-interest allocations 5 937 10 822 14 431 24 729 49 982

Percentage shares

National departments 27.4% 19.0% 24.2% 32.1% 27.0%

Provinces 69.3% 75.5% 70.2% 62.3% 67.4%

Local government 3.4% 5.5% 5.5% 5.7% 5.6%

totalProjections

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Division of total resources2003/04 2004/05 2005/06 2006/07 2007/08

Prelimin. Estimate

R million outcome

National departments 108 531 122 222 133 098 143 176 154 595

Provinces 161 476 185 201 207 832 226 430 242 508

Equitable share 110 004 122 426 133 647 144 792 154 756

Conditional grants 51 472 62 776 74 185 81 638 87 752

Local government 12 390 14 486 16 559 17 937 19 394

Equitable share 6 350 7 678 9 243 10 065 10 871

Conditional grants 6 039 6 808 7 316 7 872 8 524

Percentage shares

National departments 38.4% 38.0% 37.2% 36.9% 37.1%

Provinces 57.2% 57.5% 58.1% 58.4% 58.2%

Local government 4.4% 4.5% 4.6% 4.6% 4.7%

Percentage growth

National departments 12.6% 8.9% 7.6% 8.0%

Provinces 14.7% 12.2% 8.9% 7.1%

Local government 16.9% 14.3% 8.3% 8.1%

Medium-term estimates

Taxation and revenue issues

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Revenue outcome and projections

• Audited outcome for 2003/04

– Main budget revenue R299,4 billion

– R5,1 billion less than budgeted

– Due to global conditions and stronger rand reducing company profits and

customs value of imports

• Revised forecast for 2004/05

– Main budget revenue R328,2 billion

– R1,2 billion more than 2004 Budget estimate

– Tax revenue up by R1,9 billion mainly due to strong growth in remuneration and

robust consumer spending translating into above budgeted estimates for:

Personal income tax of R3,8 billion

VAT collections of R4 billion

Transfer duty collections of R1,2 billion on back of booming property market

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2004 tax proposals

• 1st and 2nd Revenue Law Amendment Bill have successfully completed the

process of translating 2004 tax proposals into law, including:

– Relaxation of fringe benefit tax on employee share ownership

– Clarifying anti-avoidance rules on certain financial instruments

– Clarification of VAT inconsistencies pertaining to grants and transfers to

public entities

– Customs duty reform in support of regional distribution centre initiatives

– Ad valorem duty exemption on vehicles with a capacity of 15 persons or

more

– Elimination of ad valorem duties on magnetic tapes, magnetic stripes,

certain cosmetic products, print film, photo copying apparatus and

watches & clocks

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Tax policy priorities for 2005 Budget

• Consider simplification of tax compliance burden on SMMEs

• Reviewing tax treatment of medical provision

• Adjustments in claiming business travel cost on the motor vehicle allowance

• Tax reforms relating to retirement funding to be aligned with regulatory reforms of pension fund industry

• Revisions to the Royalty Bill and submission of revised bill to Parliament

• Reassessment of current mining tax structure

• Preparing legislative tax amendments for hosting the FIFA World Cup in 2010

• Release of fiscal policy paper on environmental taxes

• Consideration and review of provincial own tax instruments and options for replacing RSC levy

Key spending priorities

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Key MTEF Priorities

• In 2005/06 and 2006/07

– Stabilising social security grants

– Accelerating the land restitution programme

– Improving salaries for police and educators

• In the outer years

– Supporting the new direction in housing delivery

– Additional resources for road infrastructure

– Improving quality of schooling system & realignment of FET

– Additional funding for National Student Financial Aid Scheme

– Continuing the hospital revitalisation programme

– Investing in water resources infrastructure

– Continued support for the African agenda including the PAP

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Key spending areas

• Social Services…Additional funding of R34,25 billion over MTEF targets: Social security grants Educator salaries NSFAS to increase coverage Health promotion including primary health care

• Justice and Protection Services…

Additional funding of R6, billion over MTEF targets: Salary adjustments for police

Enlisting additional police personnel

Improving court administration

Repair and Maintenance of Defence facilities

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• Economic Services and Infrastructure

Additional funding of R7,45 billion over MTEF targets: Land restitution

Roads infrastructure

Taxi Recapitalisation

Bulk water resource infrastructure

Implementation of new housing delivery strategy

Administrative Services

Additional funding of R3,53 billion over MTEF targets: Supporting Home Affairs turnaround strategy

Municipal services and rates

Census Replacement Survey

Ongoing support for the African agenda

Key spending areas

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Adjusted estimates 2004

• The 2004/05 Adjustments Budget provides for R7,69 billion of additional allocations

R billionsUnforeseen & Unavoidable Expenditure (Provinces) 4,11Unforeseen & Unavoidable Expenditure (National ) 1,65Approved Roll-overs 1,99Self financing expenditure0,17Drought Relief 0,43BEE 0,15Projected State Debt cost(0,82)Total Adjustments R7,69

• After in-year savings, contingency reserve, and other unallocated amounts, net increase in spending is R2,78 billion.

• Taking total revised expenditure to R371,7 billion for 2004/05

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Adjusted Estimates 2004

• Main adjustments to national departments’ appropriations:

DPW: Services/rates backlog R599 million DTI: PBMR project R500 million DPLG and Agriculture: drought R430 million DTI: NEF R150 million DLA: Land restitution R200 million ICASA: VAT Payment R45 million DPW: Prestige Accommodation R43 million DWAF: State forestry assets R40 million

Integovernmental relations

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Provincial finances

• Function shift of social security grants– Conditional grant in the interim

• Equitable share formula adjusted for function shift and new data (Census 2001)

• Equitable share rises by R10,7 bn over three years– Strengthening education and health spending– Revitalising welfare services– Educator personnel adjustments

• Conditional grants grow by R22,9 bn– R20,8 bn for social grants– R1,4 bn for housing– R0,5 bn for infrastructure

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Local government finances

• Local government faces significant developmental challenges

• Municipal transfers grow fastest from 3 spheres• Equitable share rises by R2,3 bn over three years

– Providing basic municipal services• Infrastructure grants grow by R500m

– For expansion of municipal infrastructure networks

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Local Government finances

2004/05 2005/06 2006/07 2007/08

R million Medium term estimates

Local government baseline allocation 14,280 15,959 17,137 17,994

Equitable share and related 1 8,536 9,578 10,355 10,873

Infrastructure 4,980 5,589 5,987 6,323

Capacity building and restructuring 723 749 749 749

Municipal infrastructure grant function shift2 41 44 46 48

Changes to baseline 477 600 800 1,400

Equitable share and related – 600 700 1,000

Infrastructure 477 – 100 400

Total revised allocations 14,757 16,559 17,937 19,394

Equitable share and related 1 8,536 10,178 11,055 11,873

Infrastructure 5,498 5,633 6,133 6,772

Capacity building and restructuring 723 749 749 749

1. Includes water operating subsidy.

2. The municipal infrastructure grant shifts from provinces to local government from 1 April 2005. The 2004/05

number is reflected for comparative purposes.