2004 Medium Term Budget Policy Statement A framework for accelerated growth and development
Jan 20, 2016
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
4
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
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Pe
r ce
nt
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
9
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
10
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
-20000
-10000
0
10000
20000
30000
40000
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Rand million 'current account'
'financial account'
050
100150200250300350400450
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
per c
ent
'Gross reserves/S-t debt'
11
Broad based growth in first half
-20
-15
-10
-5
0
5
10
Perc
en
tag
e g
row
th
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
12
Low inflation and interest rates
0
5
10
15
20
251985
1987
1989
1991
1993
1995
1997
1999
2001
2003
% 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
13
Investment and confidence up…
-15
-10
-5
0
5
10
15S
ep-9
9
Mar
-00
Sep
-00
Mar
-01
Sep
-01
Mar
-02
Sep
-02
Mar
-03
Sep
-03
Mar
-04
Sep
-04
% change y-o-y
40
45
50
55
60P MI
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
16
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
18
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
19
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
22
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
23
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
26
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
27
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
28
• 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
29
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
30
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
32
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
33
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
34
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.