Medium term Medium term budget policy budget policy

statementstatement

November 2003November 2003

2

IntroductionIntroduction 2003 Medium term budget policy statement:2003 Medium term budget policy statement:

– Draws on 10 year review and Growth and Draws on 10 year review and Growth and Development Summit AgreementDevelopment Summit Agreement

– Major themesMajor themes Expansionary fiscal stanceExpansionary fiscal stance Fighting poverty and reducing unemploymentFighting poverty and reducing unemployment Raising the level of public and private investmentRaising the level of public and private investment Building sustainable communitiesBuilding sustainable communities Fighting crimeFighting crime Fostering regional development through NepadFostering regional development through Nepad

3

Macroeconomic Macroeconomic overviewoverview

Domestic economy resilientDomestic economy resilient– Continued, but slower, positive growth amidst global Continued, but slower, positive growth amidst global

slowdownslowdown

– Weak global demand hurts manufacturing exportsWeak global demand hurts manufacturing exports

– Commodity prices risingCommodity prices rising

Global recovery gains momentum, especially in US Global recovery gains momentum, especially in US

and East Asiaand East Asia

Strong investment supports overall growth prospectsStrong investment supports overall growth prospects

GDS policy initiatives will further support growth and GDS policy initiatives will further support growth and

poverty alleviationpoverty alleviation

Growth forecasts for 2003 scaled down but still Growth forecasts for 2003 scaled down but still

expected to rise strongly in medium termexpected to rise strongly in medium term

4

Global economyGlobal economy Strong correlation between SA and G7 growthStrong correlation between SA and G7 growth Global slowdown was longer than anticipated but Global slowdown was longer than anticipated but

recovery is gaining momentumrecovery is gaining momentum World GDP to accelerate to 3% in 2004 from World GDP to accelerate to 3% in 2004 from

around 2% in 2003around 2% in 2003 Fiscal and monetary stimulus and weaker dollar Fiscal and monetary stimulus and weaker dollar

will support US consumer and export demand will support US consumer and export demand Despite labour market weakness and huge twin Despite labour market weakness and huge twin

deficits, US will remain driver of global recoverydeficits, US will remain driver of global recovery Euro economies will emerge out of recession, Euro economies will emerge out of recession,

although growing more slowly than rest of G7 although growing more slowly than rest of G7 Strong commodity prices, but higher oil prices tooStrong commodity prices, but higher oil prices too

6

Trade performanceTrade performance Geographical and product diversification Geographical and product diversification

of trade continuesof trade continues Bilateral and multilateral trade Bilateral and multilateral trade

agreementsagreements 19% SA exports to US now duty free 19% SA exports to US now duty free

under AGOAunder AGOA Manufacturers dominate exports to USManufacturers dominate exports to US EU our major trading partner, SA-EU EU our major trading partner, SA-EU

trade agreement to guide further trade agreement to guide further expansionexpansion

7

Direction of exportsDirection of exports

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Africa Americas Asia Europe Oceania Notallocated

1990

1995

2002

8

Commodity price cycleCommodity price cycle

-40-30-20-10

010203040506070

Mar-

97

Sep-9

7

Mar-

98

Sep-9

8

Mar-

99

Sep-9

9

Mar-

00

Sep-0

0

Mar-

01

Sep-0

1

Mar-

02

Sep-0

2

Mar-

03

Sep-0

3

-0.50.00.51.01.52.02.53.03.54.04.5

platinum

G7 growth

Gold

Commodity P rices

9

Balance of paymentsBalance of payments Current account deficit of just under 1% of GDP in Current account deficit of just under 1% of GDP in

2003 after 2002 surplus2003 after 2002 surplus Real effective rand appreciation and global Real effective rand appreciation and global

slowdown reduced export earnings in H1 2003slowdown reduced export earnings in H1 2003 Falling interest rates and fiscal stimuli supported Falling interest rates and fiscal stimuli supported

domestic spendingdomestic spending Trade surplus narrowed in H1 2003 as falling Trade surplus narrowed in H1 2003 as falling

exports offset decline in importsexports offset decline in imports Services and income account deficit widened due Services and income account deficit widened due

to weaker dividend inflows, lower tourist spending to weaker dividend inflows, lower tourist spending Surplus on financial account sufficient to finance Surplus on financial account sufficient to finance

current account deficitcurrent account deficit

10

Balance of PaymentsBalance of Payments

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

Mar-

94

Dec-9

4

Sep-9

5

Jun-9

6

Mar-

97

Dec-9

7

Sep-9

8

Jun-9

9

Mar-

00

Dec-0

0

Sep-0

1

Jun-0

2

Mar-

03

Current accountFinancial account

11

Rand at 2000 levelsRand at 2000 levels

Rand/US$ exchange rate

6

7

8

9

10

11

12

Jan

Feb

Mar

Ap

r

May

Jun

Jul

Au

g

Se

p

Oct

Nov

Dec

2000 2001 2002 2003

12

Real outputReal output Real output growth slowed to 2% in Real output growth slowed to 2% in

first half of 2003 first half of 2003 Slowdown in 1Slowdown in 1stst half of 2003 due to global half of 2003 due to global

weakness, stronger rand and higher interest weakness, stronger rand and higher interest ratesrates

Sharp slowdown in manufacturing led by Sharp slowdown in manufacturing led by export and import-competing industriesexport and import-competing industries

However, strong investment growth and However, strong investment growth and fiscal policy initiatives in manufacturingfiscal policy initiatives in manufacturing

Government infrastructure growth will Government infrastructure growth will support construction in medium termsupport construction in medium term

13

Primary sectorPrimary sector Contraction in agriculture driven by Contraction in agriculture driven by

field crop decline due to bad weatherfield crop decline due to bad weather Modest recovery in mining productionModest recovery in mining production High gold and platinum dollar prices High gold and platinum dollar prices

offset negative impact of rand strengthoffset negative impact of rand strength Strong global demand will drive growth Strong global demand will drive growth

and future investmentsand future investments

14

ManufacturingManufacturing

-6

-4

-2

0

2

4

6

8

10

12

14

Sep-9

9

Dec-9

9

Mar-

00

Jun-0

0

Sep-0

0

Dec-0

0

Mar-

01

Jun-0

1

Sep-0

1

Dec-0

1

Mar-

02

Jun-0

2

Sep-0

2

Dec-0

2

Mar-

03

Jun-0

3

Sep-0

3 40

45

50

55

60

Manufacturing PMI

15

TourismTourism

Tourism to South Africa increasing amidst decline in worldwide tourismTourism to South Africa increasing amidst decline in worldwide tourism Continued expansion of tourist capacityContinued expansion of tourist capacity

Tourism by source of origin January-July

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

Euro

pe

Am

erica

s

Austr

ala

sia

Asia

Afr

ica

Tota

l

2001

2002

2003

18

Inflation targetingInflation targeting Technical amendments to IT frameworkTechnical amendments to IT framework

– Continuous target instead of annual averageContinuous target instead of annual average

– 3%-6% target instated beyond 20063%-6% target instated beyond 2006

– Escape clause replaced with explanation clauseEscape clause replaced with explanation clause

– SARB to inform public through MPC meetings of any shocks SARB to inform public through MPC meetings of any shocks and impact on inflationand impact on inflation

CPIX will remain target basketCPIX will remain target basket

Efficiency of administered pricing being Efficiency of administered pricing being

investigatedinvestigated

Improved competition and regulationImproved competition and regulation

19

InflationInflation

-2

0

2

4

6

8

10

12

14

16

18

Jul 1

998

Jan

1999

Jul 1

999

Jan

2000

Jul 2

000

Jan

2001

Jul 2

001

Jan

2002

Jul 2

002

Jan

2003

Jul 2

003

Per

cen

t

Core inflationCPIXPPI

20

SA SA Growth ForecastsGrowth Forecasts

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%1

99

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Pe

r ce

nt

CPIX inflation

2003 Budget

GDP growth

2003 MTBPS

21

ForecastsForecasts2002 2003 2004 2005 2006

Calendar year Estimate Forecast

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 f ixed 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 growth (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

22

Fiscal policyFiscal policy Expansionary stance began in 2001 Budget Expansionary stance began in 2001 Budget

continuescontinues

Revenue shortfall of about R4,6 billion this Revenue shortfall of about R4,6 billion this

year due to economic slowdownyear due to economic slowdown

Fiscal policy supports growth through:Fiscal policy supports growth through:– Strong real growth in spendingStrong real growth in spending

– Stable tax to GDP levelStable tax to GDP level

– Declining debt service costsDeclining debt service costs

Fiscal policy is counter-cyclicalFiscal policy is counter-cyclical– Expansionary but within sustainable frameworkExpansionary but within sustainable framework

23

Key MTEF trendsKey MTEF trends Additional spending of R37 billion over baseline Additional spending of R37 billion over baseline

over the next three yearsover the next three years Real non-interest expenditure growth averages Real non-interest expenditure growth averages

4,4% per year over 2004 MTEF4,4% per year over 2004 MTEF Increase in budget deficit to 3,2% of GDP in Increase in budget deficit to 3,2% of GDP in

2004/05, declining to 2,8% of GDP in 2006/072004/05, declining to 2,8% of GDP in 2006/07– Lower consolidated general govt. deficit due to surpluses Lower consolidated general govt. deficit due to surpluses

on social security funds (under 3%)on social security funds (under 3%)

Main budget revenue at 24,8% of GDPMain budget revenue at 24,8% of GDP Real rise in general government investment, Real rise in general government investment,

supported by public corporationssupported by public corporations Debt service costs decline to 3,7% of GDPDebt service costs decline to 3,7% of GDP

24

Fiscal FrameworkFiscal Framework2002/03 2003/04 2004/05 2005/06 2006/07

R billion Outcome Estimate Medium-term estimates

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%

Debt service cost 47.3 47.2 51.3 54.6 57.8

per cent of GDP 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 21.8% 23.5% 24.1% 24.2% 24.0%

real growth (non-interest expenditure)

3.4% 10.1% 5.7% 4.6% 3.1%

Contingency reserve – – 2.0 4.0 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%

Gross domestic product 1,124.0 1,207.3 1,313.3 1,440.9 1,573.5

25

2003 Tax proposals2003 Tax proposals Foreign exchange amnesty extended until 29 February Foreign exchange amnesty extended until 29 February

0404 Tax on retirement funds to be reviewed further to Tax on retirement funds to be reviewed further to

consider all aspects of savingsconsider all aspects of savings Tax incentive for urban development covers 15 Tax incentive for urban development covers 15

municipalitiesmunicipalities Business tax stimulus measures: Business tax stimulus measures:

– Reinvestment tax relief, claim losses for unproductive assets Reinvestment tax relief, claim losses for unproductive assets sold, stimulating R&D, allowances for start-up expensessold, stimulating R&D, allowances for start-up expenses

Remove tax on foreign dividends and the designated Remove tax on foreign dividends and the designated country listcountry list

Address inconsistent income tax and VAT rules of Address inconsistent income tax and VAT rules of transfer payments to public entitiestransfer payments to public entities

26

Revenue outcome and Revenue outcome and projectionsprojections

Preliminary outcome for 2002/03Preliminary outcome for 2002/03

– Main budget revenue R278,2 billionMain budget revenue R278,2 billion

– R13,2 billion higher than budgetedR13,2 billion higher than budgeted Due to higher than projected increases in remuneration, Due to higher than projected increases in remuneration,

GOS of companies, expenditure growth and inflationGOS of companies, expenditure growth and inflation

Revised forecast for 2003/04Revised forecast for 2003/04

– Main budget revenue R299,9 billionMain budget revenue R299,9 billion

– R4,6 billion less than budgetedR4,6 billion less than budgeted Mainly due to the appreciation in the value of the Rand Mainly due to the appreciation in the value of the Rand

- reducing company profits and the custom value of - reducing company profits and the custom value of

importsimports

27

Tax policy for the Tax policy for the 2004 Budget2004 Budget

Review tax impediments to broad-based Review tax impediments to broad-based

economic empowerment transactionseconomic empowerment transactions

Review tax implications of proposed medical Review tax implications of proposed medical

aid schemes and health insurance plan, aid schemes and health insurance plan,

fringe benefit taxation and direct employer fringe benefit taxation and direct employer

provided medical assistanceprovided medical assistance

Review the overlap between VAT and transfer Review the overlap between VAT and transfer

dutyduty

Streamline customs and excise proceduresStreamline customs and excise procedures

28

Key spending prioritiesKey spending priorities Renewed focus on employment creation – EPWPRenewed focus on employment creation – EPWP Step up in infrastructure spendingStep up in infrastructure spending Further commitment to fighting HIV/Aids - ARVsFurther commitment to fighting HIV/Aids - ARVs Extension of social security grants - CSGExtension of social security grants - CSG Improving quality of school education -textbooks to Improving quality of school education -textbooks to

poor schoolspoor schools Continued roll-out of free basic servicesContinued roll-out of free basic services Strengthening the safety and security sectorStrengthening the safety and security sector Improving core services of Home Affairs to citizensImproving core services of Home Affairs to citizens Promoting peace and development in the regionPromoting peace and development in the region Promoting broad-based black economic empowermentPromoting broad-based black economic empowerment

29

Division of additional Division of additional resourcesresources

2003/04 2004/05 2005/06 2006/07

R billion Revised Medium term estimates

National 110.8 120.6 131.2 139.1

Provincial 161.5 179.4 197.4 213.3

Local government 12.0 14.2 15.9 17.1

Total to be shared 284.3 314.2 344.5 369.5

Changes from baseline1 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

Local government – 1.0 1.3 1.6

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.

30

Division of total Division of total resourcesresources

2003/04 2004/05 2005/06 2006/07

Per cent Revised Medium term estimates

National allocation 39.0% 38.4% 38.1% 37.7%

Provincial allocation 56.8% 57.1% 57.3% 57.7%

of which

Equitable share 50.9% 50.5% 49.9% 49.8%

Conditional grants 5.9% 6.6% 7.4% 8.0%

Local government allocation 4.2% 4.5% 4.6% 4.6%

Total to be shared 100.0% 100.0% 100.0% 100.0%

Average annual change 2003/04 – 2006/07

National allocation 7.9%

Provincial allocation 9.7%

of which

Equitable share 8.3%

Conditional grants 20.7%

Local government allocation 12.5%

Total 9.1%

1. Excludes the contingency reserve which is not allocated to any sphere.

33

Adjusted Estimates 2003Adjusted Estimates 2003 The 2003 Adjusted Estimates provides The 2003 Adjusted Estimates provides

for total adjustments of R6,8 billionfor total adjustments of R6,8 billion

R billionsProvinces Unforeseeable & Unavoidable Expenditure 2,1National Unforeseen & Unavoidable Expenditure 2,8Roll-overs 1,1Salary Adjustments and Self-financing expenditure 0,8

Total Adjustments 6,8

The net increase in spending is R1,3 billion The net increase in spending is R1,3 billion after in-year savings, contingency reserve, etc.after in-year savings, contingency reserve, etc.

34

Adjusted Estimates 2003Adjusted Estimates 2003

Main adjustments to national Main adjustments to national departments’ appropriations:departments’ appropriations:

RMRM

– Communications: Post OfficeCommunications: Post Office 750 750

– Defence: Peace support initiativesDefence: Peace support initiatives 500 500

– National Treasury: Service benefits MPsNational Treasury: Service benefits MPs 400 400

– Water Affairs: Emergency water, debt Water Affairs: Emergency water, debt

water associationswater associations 346 346

– Public Works: Rates, municipal servicesPublic Works: Rates, municipal services 180 180

– Home Affairs: Lindlela, ID campaignHome Affairs: Lindlela, ID campaign 103 103

35

Provincial financesProvincial finances

Revisions to provincial baselines Revisions to provincial baselines commitment to reinforcing pro-poor commitment to reinforcing pro-poor spending spending – Stepping up spending on non-personnel in Stepping up spending on non-personnel in

educationeducation– Further strengthening health sectorFurther strengthening health sector

– By allocating R1,9bn for ARVsBy allocating R1,9bn for ARVs

– Providing additional resources for take up of Providing additional resources for take up of CSG & other grantsCSG & other grants

– Provide for expansion of labour-intensive Provide for expansion of labour-intensive infrastructure deliveryinfrastructure delivery

Provinces receive R19,9bn of additional Provinces receive R19,9bn of additional resources over the next three yearsresources over the next three years

37

Local Government Local Government financesfinances

Government has allocated an additional Government has allocated an additional R3,9 billion over the next 3 yrs to municipalitiesR3,9 billion over the next 3 yrs to municipalities   

Additional transfers intended for service deliveryAdditional transfers intended for service delivery– Accelerate the rollout of free basic services to Accelerate the rollout of free basic services to

householdshouseholds

– Strengthen municipal infrastructure delivery through Strengthen municipal infrastructure delivery through the MIG the MIG

Increased use of labour- based methodsIncreased use of labour- based methods

– Improve skills base in planning, budgeting and Improve skills base in planning, budgeting and technical areastechnical areas

38

2003/04 2004/05 2005/06 2006/07

R million Medium term estimates

Total local government allocation 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

Capacity Building & Restructuring 677 724 995 1,055

Total changes to baseline 1,000 1,300 1,600

Equitable share & related 600 700 900

Infrastructure 400 600 700

Capacity building & Restructuring -245 -305

Further shifts to equitable share from capacity-building grants 245 305

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

Capacity Building & Restructuring 677 724 750 750

Transfers to local govt.Transfers to local govt.