presentation to the committee on macroeconomic policy prof charles c. okeahalam national assembly...

Presentation to the Committee on Macroeconomic Policy

Prof Charles C. OkeahalamNational Assembly Wing Parliament of South AfricaCape Town 5 March 2003

www.MinervaGroup.net

Economic Analysis and Commentary

Table of Contents 1. Summary of Some Economic

Variables- 10 Year Average Time Series 2. Issues and Analysis - The Good 3. Issues and Analysis- The Bad 4. Issues and Analysis- The Ugly, or not

so good or whose fault is it anyway ??5 . Conclusions

Data Analysis- Economic Variables

Economic Variables Trade

Net Total Exports Real Merchandise

Exports to GDP ratio Real Merchandise

Imports to GDP ratio GDP per capita

Source of data: SARB

Average Annual Percentage change between 1991-01

3.94% 16%

17.47%

-0.2%


Trade Balance of Payment

GDP (growth rate - actual)

Source of data: 2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

2002 Surplus

3%

(National Treasury forecast)

5468358818091071-262Net Total Exports

19.119.818.620.320.2Real Merchandise Imports to GDP

19.119.317.617.617.2Real Merchandise Exports to GDP

Trade

20012000199919981997(In Rmillions)


Data on Economic variables for the 5 year period 97-2001 incl.


Investment

Direct Investment Total Fixed Capital Stock

Other Variables Gross Domestic Saving

(GDS) GDS / GDP ratio


Average annual percentage change between 1991 - 2001

28.84% 1.79%

9.4% 6.85%

13090331297662128708812742391249568Total Fixed Capital Stock

28687-1878-9659-9841-10381Direct Investment

20012000199919981997Investment(In Rmillions)


Data on economic variables for the 5 year period 97-2001 incl.


Product Market & Investment

Investment (growth rate - actual)

Secondary Sector (manufacturing - actual)

Source of data: 2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb. 2003.

2002

6.3%

Positive growth

Data Analysis- Economic Variable

Government Revenue and Expenditure

Government Revenue Government

Expenditure Net Government

expenditure


Average Annual Percentage change between 1991 – 2001

11.58% 11.85%

-0.27%

Data Analysis -Economic Variable

Inflation CPIX (for the year

ended November 2002)

Inflation target SARB interest

response in 2002

Source of data: 2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb. 2003

200210%

3% - 6%400 basis points

increase

Data Analysis Unemployment - 2002

Unemployment variable Narrow definition (searched

for a job in the last 7 days) Broad definition (willing to

work but cannot find a job) Growth rate of working

population Annual Average percentage

change in labor productivity (1991 – 2001)

Source of data: Stats SA.

Rate 29.4%

40.9%

4.58%

2.81%

Data Analysis - Domestic Growth and Investment

Expected GDP growth rate in 2003: 3.3%

Expected GDP growth rate in 2005: 4%Investment grew by 6.3% in 2002 and

is expected to grow by 6% a year in the medium term.

Expected current account deficit of 0.5% of GDP in 2003.

Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

2. Issues and Analysis THE 2003 BUDGET

COMMENTARY

2. Issues and AnalysisThe Good

Focus on efficiency in service deliveryFocus on input -output relationship on fiscal

relations ie tax payers rewarded for efficient performance of SARS

Recognises the value of human, social and infrastructure capital

Takes a long tem view of development recognising that poverty is intergenerational and there are no quick fixes

Issues and AnalysisThe Good - Debate

Government Debt declinedDebt service reduced - overall cost of

capital declined Expected yield on sovereign and corporate

bonds declinedNon diversified expected rates of return

declined Corporate finance and investment hurdle

rate declined

Direct focus areas for long term development and poverty alleviation

Education Infrastructure Human CapitalHealth and social

expenditureEfficient use of

marginal pricing of fiscal policy ie sin taxes versus incentives for training, investment etc

Delivery and accountability at the local provincial and national government level

Issues and AnalysisThe Good

Time consistent macroeconomic policy -

Reduction in Budget deficit debt

Reduction/distribution

Exchange rate not directly defended with reserves.

Gradual relaxation of exchange controls

Issues and analysis The Good

Time consistent monetary policy - based on inflation target which is now stress tested!!

Inflation expectations transparent

Amnesty with regard to illegal offshore assets

Reasonable balance between Keynesian and supply side - however see next slide!

3. Issues and AnalysisThe Bad ? ? Debate

Begins to look too much supply-side

The problems with supply side economics is that it:

3. Issues and AnalysisThe Bad ? ? Debate

1. Has high expectations with regards to responses

2. Relies on private sector fiscal incentives - trickle down etc

3. Implies ability of private sector to deliver social goods

- Particularly worrying given the stickiness of the Gini-Coefficient in South Africa

- Provides real theoretical clarity on investment -unemployment reduction mechanism- except multiplier principle -vague

Issues and AnalysisThe Bad?? Debate

Mitigating this view somewhat is the

1. increase in expenditure on infrastructure etc &

2. Government Capital spending predicted to increase by 23.3% (2003-04)

3. Medium-term total projected expenditure – 351, 338 Rm (2003/04)

4. Focus on delivery However

insufficient attention to the challenge of HIV.

Issues and AnalysisThe Bad?? Debate

Question?How long can

supply side work?Will supply side

deliver jobs?Are business cycles

redundant ?

Demanding role for SARS to meet enforcement targets

-surely diminishing returns in SARSperformance not too far off

4. Issues and Analysis The Ugly

Inadequate focus on competition issues

eg Stickiness of agricultural prices-despite secondary (futures and forward) markets providing other evidence

Decline in costs of financial intermediation not being passed to ALL consumers

Aggregate savings growing but not in ALL households

Issues and AnalysisThe Ugly

Unfair international terms of trade

Financial Contagion Investor sentiment Regional Political

instabilityExchange Rate

Volatility

Questions How endogenous/exogenouous to any

forecasting and budgeting exercise can these factors be ?

Will standard deviation () of exchange rate decline?? Yes -Comment

5. Conclusions

Sound budgetUnemployment and hence poverty

still a very serious issue which will not be solved only by supply side

Something for everybody!END ! Report-Very good - as always could

still do better!!!

MINERVA SUMMARY OF 2003 BUDGET

See following slides

2003 Budget PrioritiesExtends child support grant and increases

primary school nutrition programme funding Increases spending on social grantsReinforces the enhanced response to

HIV/AIDS Increases municipal resources for free basic

services, infrastructural investment and job creation

Accelerates land restitution spendingSupports further restructuring of Universities

and Technikons

Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb,

2003

2003 Budget Priorities continued

Increases skills development investment.

Strengthens the fight against crime.Increases spending on foreign

representation and NEPAD.Gives a generous tax relief.


Economic OutlookConsumer prices rose 14% and food price

inflation averaged 25% in 1992.The Minister of Finance reported a budget

deficit of 8.6% of GDP in 1992 – 1993 and proposed a 6.8% deficit for the following year.

Planned real spending growth for 2003/04 of 6.8% and 4.5% over the forthcoming MTEF

Planned budget deficit of 2% – 2.5% of GDP in 2003/04.


International Economic Environment

South Africa performed better than most other countries

Potential war in Iraq increases inflation and an uncertain economic outlook


Employment and Broadening Development Annual employment growth in third quarter of

2002 was positive for the first time in 6 years. Policy initiatives to enhance development: 1. skills development programme 2. infrastructure investment & tax incentives 3. land redistribution 4. increased access to financial services 5. easing of the tax burden on poor households


Black Economic Empowerment

Government has set aside R10bn over the next five years to support the funding of new ventures that meet the empowerment criteria.


Budget FrameworkExpansionary stance of government

expenditurePlanned government expenditure of R334bn

in 2003/04Planned government expenditure of

R395.6bn in 2005/06Projected revenue for 2003/04: R304.5bn and

a budget deficit of 1.4% in the current year.Projected revenue for 2006/05: R361.2bn and

a budget deficit of 2.4%.


Budget Framework continued Government provides for an unallocated

contingency reserve of R3bn for 2003/04 and R8bn in 2005/06

Taxi recapitalization, Post Office recapitalizing and critical infrastructural projects may be financed from this contingency reserve.

Debt service costs will fall from 4.2% of GDP 2002-03 to 2005-06.

National Government debt (48.1% of GDP in 1996-97) is projected to decline to 36.8% by the end of the MTEF period.

Spending on health, education, welfare, housing and other social services currently account for 58.3% of non-interest expenditure.


Division of RevenueChild support grant extension to children up

to 14 years and a further R11.9bn to meet the needs of children.

R38bn more allocated for provinces to improve roads, hospitals, purchase medicines and books and enhance response to HIV/AIDS

R6.5bn for extending free basic services, municipal infrastructure, rural water supply and employment.

R2.7bn additional allocation for police and courts.


Division of Revenue continuedR1.7bn allotted higher education and

increased skills development.R1.9bn allocated for land redistributionR2.2bn to improve Home Affairs’

administrative services to citizens and build capacity in SA Revenue Service.

R1bn to supplement research and technology development.

R1.3bn to support peace-keeping missions, NEPAD and an increasing international role.

R1.2bn for food relief projects.


Addressing Poverty and Vulnerability

From April 2003, the pension and disability grants increase from R60 to R700 a month

Child support will also rise by 14% to R160 a month

R1.1bn, R3.4bn and R6.4bn have been set aside for each of the forthcoming three years to phase in extension of the child support grant.


Investing in Health and Education

23.2% of non-interest expenditure is dedicated to educational investment and the deepening of the nation’s skills base.

R900m is set aside for the restructuring of the higher educational system.

R3.3bn is set aside for the next three years for HIV/AIDS.

R1.9bn provided for land restitution.


Infrastructural Investment and Technological Advancement

A further R1bn is set aside for national research and development strategies for health, food security and industrial biotechnology.

Planned spending on physical assets and capital transfers for the next three years exceeds R105bn.


Partnerships with Local Government

The budget sets aside R23.7bn over the next three years to assist municipalities to extend basic service delivery.

A R4.1bn is provided for free basic services including electricity.


Enhancing Safety and Security

The criminal justice sector receives R2.7bn to fight crime and increase safety.

More funds have been allocated for the accommodation of a growing prisoner population.

More resources have been granted for the improvement of court performance, upgrading the Master’s office and improved protection of women and children in the court process.


Tax ProposalsThe past year witnessed a buoyant tax

revenue collection level.Tax revenue is projected to be R275.7bn in

2002/03.The main sources of this year’s higher tax

revenue collected are 1. higher personal income tax receipts 2. robust company tax trends 3. higher VAT receipts Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27

Feb, 2003

Tax Relief for IndividualsPersonal income tax revenue comprise

about 34% of main budget revenue in 2003-04.

Individual income tax is to be reduced by R13.3bn. This will benefit lower and middle-income households.

The primary rebate is increased to R5,400 and the threshold below which no tax is paid is increased by 11.1% to R30,000 a year.

Tax threshold for taxpayers aged over 65 years is increased to R47,222 (10% more than the current level)


Tax Relief for Individuals continued

56% of the total tax relief accrues to taxpayers earning less than R150,000 annually and 23% to those earning between R150,000 and R250,000 annually.

Since 2000, the minimum tax threshold has been increased by more than 50% for individuals and 40% for those over 65 years.


Interest and Dividend Exemption

The exemption is increased from R6,000 to R10,000 for taxpayers under 65 years and from R10,000 to R15,000 to those over 65 years.

This change will come into effect from 1 March, 2003 costing the fiscus R227m.


Taxes on fuel The fuel levy on leaded petrol will rise by 3c/l and

between 6.2c/l and 9.2c/l on unleaded petrol The fuel levy on diesel will increase by 4c/l to 8c/l The Road Accident Fund levy will increase by 3c

from 18.5c/l to 21.5c/l This will raise R642m in 2003-04 for the National

Revenue fund and an additional R474m for the Road Accident find.

These adjustments will take effect from 2 April 2003


Exchange Rate LiberalisationGradual approach to exchange control

liberalisationGovernment has shifted to a system of

prudential regulations to protect policyholders from excessive risk which will take effect on 1 May 2003.

Foreign asset limits for investment: 1. 15% of total assets for long-term insurers, pension funds and fund

managers 2. 20% of total assets for unit trust

companies


Exchange Rate Liberalisation continued

In October 2002 the foreign direct investment limit into Africa was increased from R750m to R2bn.

The foreign direct investment limit outside Africa was increased from R500m to R1bn.

It is proposed that dividends repatriated from foreign subsidiaries should be eligible for an exchange control credit.

In addition the foreign dividend tax will be lifted.

Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27

Feb, 2003

Foreign Exchange Control Amnesty and Accommodating Tax Treatment

An amnesty is offered to those who hold illegal assets offshore to bring them back to South Africa.

The window period for applying for amnesty is 1 May, 2003 – 31 October, 2003.

Any individual can apply for amnesty unless an enforcement investigation has been initiated against him/her.


Foreign Exchange Control Amnesty and Accommodating Tax Treatment continued

The distinction between the settling-in allowance for emigrants and private individual foreign investment allowance for residents will fall away.

A common foreign allowance for both residents and emigrants of R750,000 per individual and R1.5m in respect of family units.


presentation to the committee on macroeconomic policy prof charles c. okeahalam national assembly...

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