Medium Term Budget Policy Statement:

Presentation

National TreasuryOctober 2008

2

Introduction

• Global economic context has changed considerably

• Early decisions on fiscal policy, inflation targeting, gradual approach to exchange controls, banking regulation and public spending choices will allow us to weather the storm

• Economic growth is likely to slow

• Budget framework provides for continuing spending on infrastructure, public services and programmes aimed at cushioning the poor against slower growth

• Key budget priorities include:– Improving the quality of education– Transforming health services– Reducing the levels of crime and enhancing citizen safety– Decreasing rural poverty– Expanding the built environment

• Other cross cutting priorities include:– Employment creation– Protecting the environment, reducing carbon emission levels– Improving the capacity of the State

3

The macroeconomic forecast

Calendar year 2005 2006 2007 2008 2009 2010 2011

  Actual Estimate Forecast

Percentage change unless otherwise indicated    

Final household consumption 6.9 8.2 7.0 2.8 1.6 3.2 3.7

Final government consumption 4.8 5.2 5.0 4.5 4.0 4.0 4.0

Gross fixed capital formation 8.9 13.8 14.8 12.6 8.7 8.8 9.3

Gross domestic expenditure 5.7 9.2 6.0 3.6 3.0 5.5 5.2

Exports 8.0 5.6 8.3 2.6 2.9 4.4 6.0

Imports 10.3 18.8 10.4 2.6 3.2 8.9 8.2

Real GDP growth 5.0 5.4 5.1 3.7 3.0 4.0 4.3

GDP inflation 5.2 7.2 9.1 11.3 7.0 6.2 6.0

GDP at current prices (R billion) 1541.1 1741.1 1996.9 2303.6 2538.4 2802.4 3098.2

CPIX inflation 3.9 4.6 6.5 11.6 - - -

Headline CPI Inflation - - - - 6.2 5.3 4.7

Current account balance(percentage of GDP)

-4.0 -6.5 -7.3 -7.6 -7.8 -8.9 -8.8

• Domestic and international factors weigh on South Africa’s economic growth

• Growth slows to 3.7% in 2008 and 3.0% in 2009 before rising to 4.0% in 2010 and 4.3% in 2011.

4

Global economic landscape significantly altered by credit crisis

• Estimated cost of bank write-downs is US$1.4 trillion (IMF, WEO)

• Financial market landscape irrevocably changed

• Unprecedented interventions by Governments and Central Banks to alleviate market stress

• Financial distress resulting in falling asset prices (house prices and equities)

• Lower credit availability constrains consumption, investment and growth

• World economy slowing rapidly

– US growth 1.6% in 2008 and 0.1% in 2009.– UK growth 1% in 2008 and -0.1% in 2009. – EU growth 1.3% in 2008 and 0.2% in 2009.

• Global slowdown will dampen export demand from US, Europe and Japan

• Emerging markets affected by lower commodity prices, reduced export demand, risk aversion.

World GDP growth

01

23

45

67

89

WorldEmerging & developing countriesG7SA growth (NT estimates)

% y

ear-o

n-ye

ar

Source: IMF estimates for 2008 onwards

`

5

GDP growth affected by slowing domestic expenditure, supply side interruptions and slower world economy

• GDP revisions driven by

– Slower global growth as industrialised and developing countries absorb the impact

of the credit crisis

– Declining commodity prices

– Slower consumption growth due to higher than expected inflation and interest rates

– Reduced wealth effects due to falling asset prices (housing and equities)

• Overall growth remains supported by

– Strong growth in real fixed capital formation (9% average over the medium term)

– Lower oil and food prices help to reduce inflation towards target next year

– Normalisation of agricultural output

– A weaker real rand exchange rate may provide an additional stimuli and cushion the

impact of lower commodity prices

6

Investment remains key driver of growth over the MTEF

Investment will account for about 1.5% points of growth

over the medium term

-10

-5

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005 2006 2007 2008H1

per

cen

t y-o

-y

General gov Public corporations Private business enterprises

General gov Public

corporationsPrivate

business

2001 -0.6 -0.5 4.6

2002 0.8 1.1 1.8

2003 1.3 2.0 5.8

2004 0.4 0.7 7.8

2005 -0.1 1.3 7.8

2006 1.9 1.7 10.1

2007 0.1 3.7 11.0

2008 * 0.4 3.6 9.0

* First half of 2008 weighted by sector share in GDFI

Weighted growth rates

Inflation set to decline as pressures from high food and oil prices subside

• From January 2009, new target measure for inflation will be Headline CPI for all urban areas.• Stats SA revamping of inflation statistics is in line with international best practice.• Headline CPI projected to decline within target by 3Q 2009 and average 6.2% next year.• Lower food and oil prices will relieve pressures, but weaker rand poses upside risk.• Inflation target measure will change to headline CPI (including owners equivalent rent)

Major contributors to CPIX inflation

-2

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008

Per

cen

t

OtherTransport Food

Sustaining economic growth

• Global economic weakness places renewed emphasis on promoting productivity

growth, domestic competitiveness, and efficiency gains… implement growth

recommendations.

• Focus on government contribution to reducing costs of economic activity and

expanding markets with infrastructure.

• Well capitalised and prudently regulated banking system along with well

developed and deep domestic capital markets are key strengths.

• Fiscal policy offsets short-term economic slowdown while maintaining positive

saving rate.

• Monetary policy to support rebuilding of household savings in the short-term,

manage inflation expectations and support capital inflows.

• Exchange rate flexibility allows SA to re-price lower to keep in line with other

emerging market economies and (with IT) maintain competitiveness.

9

Revenue trends and tax policy

• Estimated gross tax revenue for 2008/09 to remain unchanged at R642.3 billion

• Tax/GDP ratio revised down to 26.5%, from 27.3% at the time of the Budget

• Tax buoyancy will moderate over the near term.

• Composition of tax revenues for 2008/09 will change– Expect more from PIT due to higher wage inflation and less from some indirect taxes,

e.g Customs duties and Transfer duties

• Key reforms this year– Converting STC into a dividend tax at shareholder level by the end of 2009 or early 2010

• Introduction of electricity tax postponed to 1July 2009 – Significant tax incentives to support

• Industrial development• Construction of low cost housing by employers and landlords• Indirect equity investments in small and medium size businesses and junior mining

exploration companies • Newly constructed and renovated buildings in Urban Development Zones

– Simplification of taxation of lump sum withdrawals (pre-retirement) from retirement funds as from 1 March 2009

– Tax compliance burden of micro businesses reduced with the introduction of a presumptive turnover tax as from 1 March 2009

10

Expenditure

• Additions over 2008 budget baseline totals R170.8 billion

– R60 billion in loan transfer to Eskom between 2008/09 to 2009/10

– R59 billion inflation adjustments

• Real growth averaging 6 per cent over MTEF• Additional expenditure in 2008/09 of R27.7 billion

Expenditure 2007/08 2008/09 2008/09 2009/10 2010/11 2011/12

R billion Budget 2008 Revised estimate

Consolidated National Expenditure 558.0 631.5 650.3 754.3 814.5 868.6per cent GDP 27.1% 27.6% 27.5% 29.0% 28.4% 27.4%Debt service costs 52.9 51.2 53.9 52.7 55.1 56.7per cent GDP 2.6% 2.2% 2.3% 2.0% 1.9% 1.8%

Non-interest expenditure1 505.1 580.3 596.4 701.6 759.3 811.9

per cent GDP 24.5% 25.4% 25.2% 27.0% 26.5% 25.6%per cent GDP (excluding Eskom) 24.5% 25.4% 24.8% 25.8% 25.8% 25.6%real growth(excluding Eskom) 8.1% 7.7% 4.0% 7.0% 4.7% 4.9%

Projection

11

Key spending trends

10,000

20,000

30,000

40,000

50,000

60,000

70,000

R m

illio

n (1

995/

96 p

rices

)

Education Health Social security and welfare Built environment (including roads)Criminal justice sector

12

Proposed allocation of additional resources by sector

Distribution of additional funds per function: MTEF 2009(excl. Eskom)

Education16%

Administration15%

Other economic services

13%

Water, Agriculture and Transport

11%

Justice, police and prisons

9%Defence and intelligence

4%

Housing and community development

4%

Welfare and social security

11% Health17%

13

Components of in-year adjustments 2008/09

• In-year adjustments result in the expenditure level increasing from R611.1 billion to R635.5 billion

• Changes announced in the adjustment budget:– R7.7 billion in inflation-related adjustments

– Disasters such as adverse weather conditions, amounting to R2 billion

– 2010 FIFA World Cup stadium development amounting to R1.4 billion

– ‘Last mile’ Access Network between the world cup stadium venues and the

Telkom National Network amounting to R600 million

– Political Office Bearers Pension Fund amounting to R2.5 billion

– Occupation specific dispensation for nurses amounting to R1 billion

– Road Accident Fund amounting to R2.5 billion

– Social relief of distress amounting to R500 million

14

Provincial Government

• Provincial Government

• R7.6 billion for in-year adjustments for personnel related increases and disasters

• Provincial allocations increased by R51.3 billion over next 3 years or 10.8% increase per year

– R32.3 billion added to equitable share • R7.8 billion for personnel

– Including for new salary scales for doctors and medical professionals and more teachers

• R3.1 billion for extension of no fee schools, lowering of learner/educator ratios and inclusive education

• Rx billion for three new vaccines• R2.4 billion for TB, reducing child mortality and general health• R1 billion for social development and roads

– Conditional grants increased by R19 billion• More for infrastructure, housing and agriculture support• Loan to Gauteng government for Gautrain Rapid Link• School nutrition programme expanded

15

Local government

• LG allocations increases by R8.8 billion over next 3 years or 12.6% increase per year

• R2.9 billion is added to equitable share for increased basic services costs (mainly electricity)

• R5.9 billion is added to infrastructure and related grants– R4.3 billion for Municipal Infrastructure Grant and R184 million for direct

Integrated National Electrification Programme Grant

– R1.3 billion for 2010 FIFA World Cup commitments (transport and stadiums)

– R2.4 billion in-kind transfers to LG include Eskom electrification programme, regional bulk infrastructure (water) and electricity demand-side management

16

Finance Bill 2008

• Unauthorised Expenditure:

Overspending of a vote or a main division within a vote

Expenditure that was not made in accordance with the purpose of a vote or in accordance

with the purpose of the main division

• Schedule 1:

R32.2 million unauthorised due to overspending of a vote, by the Department of Trade and

Industry during 2003/04. Direct charge against the NRF in terms of PFMA s34(1)(a)

• Schedule 2:

• R439.1 million: overspending of individual programmes by Presidency, departments of

Foreign Affairs, Land Affairs, Justice and Constitutional Development and Public Works

in terms of PFMA s34(1)(b)

• R6 million: deviations from tender procedures by the Department of Justice and

Constitutional Development in terms of the since-repealed Exchequer Act.

• These funds were previously surrendered to the NRF and will have no additional

expenditure implications

17

Conclusion

• The budget framework takes account of the more difficult global environment

• The period ahead will see slower growth, but the fiscal position is strong enough to accommodate this environment

• Public investment and expansion of public services will continue

• Country must focus on raising growth potential for the longer term

• This requires– Sound macroeconomic policies– Continued investment and better public services– Better implementation of microeconomic policies to ensure a

more export oriented economy and a more labour intensive growth trajectory