2010 Budget: Presentation

1. 2010 Budget:Presentation National TreasuryFebruary 2010

2. Five key messages of the budget Our country needs a united effort, drawing in business, labour and community organisations to map out a path to boost growth, raise employment and reduce poverty Today, we table important elements of a new growth path, including proposals to raise employment We will carefully and gradually reduce the budget deficit to more sustainable levels We are not increasing the tax burden this year We are taking firm steps to improve the quality of spending and reduce corruption 2

3. Key aspects of a new growth path that supports faster growth and job creation A concerted effort to reduce joblessness among young people Support for labour-intensive industries through industrial policy interventions, skills development, public employment programmes and a rural development strategy Sustaining high levels of public and private investment and raising our savings level Keeping inflation low, striving for a stable and competitive exchange rate, and providing a buffer against global volatility Improving the performance and effectiveness of the state, especially the provision of quality education and training at all levels Reforms to increase inclusion and participation in the labour market, alongside efforts to improve competition in product markets Raising productivity and competitiveness, opening up the economy to investment and trade opportunities that can boost exports. 3

4. The macroeconomic forecast Growth projections revised higher to 2.3% in 2010 rising to 3.6% in 2012 Recovery supported by improved global environment, rising investment spending, government consumption, gradual rise in household spending 4

5. Risks to recovery Global risks Premature removal of fiscal and monetary policy stimuli Impact of high debt burdens on growth and inflation Overheating of Chinese economy and lower commodity prices Impact of large capital flows to emerging markets on asset prices and exchange rates Lack of reform in global financial system leading to “business as usual” approach and re-emergence of bubbles Domestic risks Slower recovery in employment, credit extension and household spending Impact of increase in electricity prices on growth and inflation Low productivity growth and a stronger real exchange rate constraining competitiveness of exports 5

6. Improved outlook for global growth The IMF expects world growth to recover to 3.9% in 2010 and 4.3% in 2011 Emerging markets grow strongly driven by China, India and Brazil Higher growth supports commodity prices and SA’s terms of trade Risks from weak labour market and growing debt burdens in developed countries IMF growth forecast, by region 6

7. Signs of economic recovery in South Africa A range of indicators point to recovery: The leading indicator up 14.6% between March and November 2009 Improvement in manufacturing and mining output PMI rose to 53.6 in January 2010 Manufacturing capacity utilisation above 80% in the fourth quarter New car sales up 15.4% y-o-y in January 2010 House prices are rising 89 000 jobs created in the fourth quarter Components of the Purchasing Managers Index Mining, manufacturing & electricity output 7

8. Infrastructure investment supports the recovery Capacity expansion in electricity is a major driver of investment Spending on electricity, gas and water increased by 74% in the first nine months of 2009 Spending also increased significantly in the transport sector Investment by public corporations grows at an average rate of 17% a year over MTEF and private investment recovers gradually 8

9. Addressing the employment challenge • Employment growth is likely to be weak in the short-term • The economy must grow faster and raise the absorptive capacity • The employment challenge demands a comprehensive policy framework • Improving education is a key priority in the long-term • Our approach to employment creation includes: • Measures to encourage industries and services that have significant jobs potential • Stepped up implementation of the expanded public works programme • Investment in further education and skills development • Encouragement of small business development and entrepreneurship • A new focus on promoting youth employment 9

10. Employment scenarios Scenario planning – 2010-2019 • Moderate recovery will create about 1 million jobs in the next 5 years • The economy must grow faster and labour absorption need to be higher • If growth averages 6% over 2015-19 then employment will be 1.3 million higher than if the economy grows at 3.5%. 10

11. Youth unemployment is the priority • Young people tend to be unemployed for a long time before finding a job leaving them vulnerable to future unemployment and lower wages • A wage subsidy will create an incentive to hire young and inexperienced workers • The aim is to raise youth employment by 500 000 by 2013 • A discussion document with further details will be tabled by the end of March 11

12. Consolidated government fiscal framework Countercyclical fiscal policy has enabled continued spending on strategic priorities as weak economic activity has reduced revenue Government has increased debt to sustain spending Over the MTEF, the consolidated government deficit is projected to recover from 7.3% of GDP in 2009/10 to 4.1% by 2012/13 Lower deficit due to increased revenue as economy recovers and slower growth in non-interest spending 12

13. Debt and interest costs National net loan debt is forecast to increase from 22.7% in 2008/09 to 39.8% of GDP by 2012/13 Interest costs are the fastest growing area of spending over the MTEF and rise to 3.2% of GDP by 2012/13 To support fiscal sustainability, government will need to reduce borrowing and debt as the economy recovers If revenue does not recover sufficiently, tax rates will need to be adjusted and the tax base broadened, and growth in expenditure moderated further Real growth in areas of expenditure, 2005/06 – 2012/13 13

14. Fiscal sustainability – the primary balance Non-interest spending rose strongly during the economic boom supported by robust revenue growth Revenues are currently insufficient to cover non-interest spending and interest payments, but will rise as economy recovers In addition, real growth in non-interest spending moderates to only 1% on average over the MTEF to stabilise debt This reduces the primary balance from -5% of GDP in 2009/10 to -1% in 2012/13 14

15. Fiscal sustainability – debt Countercyclical fiscal stance enabled government to meet its expenditure commitments during the recession The shortfall between revenue and expenditure has been financed by debt leading to higher debt-service costs over the MTEF Forecasts indicate the debt ratio will peak between 43% and 48% of GDP in 2015/16, before gradually declining over the longer term As the economy recovers government will act to reduce borrowing and pay down debt Long-term forecast of national government debt, % of GDP Possible debt outcomes, % of GDP, 2015/2016 15

16. Fiscal sustainability – how does SA compare? Countries with high levels of debt tend to grow more slowly Several countries are facing the real threat of default, making international markets particularly nervous about sovereign debt accumulation A credible strategy to reduce debt over the medium term supports fiscal sustainability and reduces pressure on South Africa’s credit rating Selected forecasts, real growth and average government debt to GDP, 2009 – 2014 16

17. Public sector infrastructure spending Public sector spending on infrastructure remains strong over the MTEF helping to raise South Africa’s future growth potential R846 billion will be spent over the MTEF period Non-financial public enterprises to spend R454 billion (53.7% of total spend) Provinces and municipalities continue to be significant drivers of infrastructure spending due to capacity expansion in transport, housing, water & sanitation, hospital revitalisation and social infrastructure 17

18. Main tax proposals: 2010/11 Individuals: Personal income tax relief amounting to R6.5 billion Higher monthly cap for medical scheme contributions Tax-free interest income threshold raised Reforms to travel allowances take effect from 1 March 2010 Businesses: Further closure of tax loopholes Promotion of South Africa as gateway into Africa by relaxing rules governing corporate headquarters Reduced interest charges and penalties for voluntary disclosures by non-complaint of taxpayers Environmental fiscal reforms: CO2 motor vehicle emission tax simplified and delayed until 1 Sep 2010 Carbon tax discussion document to be released for comment by mid 2010 Increases in excise duties and fuel taxes: Road Accident Fund (RAF) and general fuel levy, including a levy to contribute towards the construction of a new pipeline Excise duties on alcoholic beverages and tobacco products 18

19. Proposals on exchange control reforms Banks Implementation of the macro-prudential limit on banks Foreign exposure limit will be 25% of total liabilities The previous limit of 40% of liabilities was never implemented, the downward adjustment is due to developments in global financial markets Institutional investors Updating Regulation 28 – technical amendments to allow investments in new products and align with excon foreign investment limits Private equity funds to obtain upfront approvals for up to a year for investments in Africa Exchange Control Modernisation National Treasury to release a discussion document on modernisation of exchange control legislation and approach towards inward and outward investments 19

20. Social security and health care financing The child support grant will be gradually extended to recipients’ 18th birthday while eligibility for the state old age pension will fall to 60 for men, the same age as for women Almost 14 million people now receive grants. Expenditure on grants is expected to be R85 billion this year; this equates to 3.5% of GDP The Unemployment Insurance Fund coped well with a sharp rise in the number of claimants Cabinet has approved the proposed transformation of the RAF into a no-fault road accident benefit scheme to improve the quality of benefits and reduce the leakage of funds to lawyers, minor claims and lengthy disputes The inter-Ministerial committee continues to work on social security reform, retirement industry reform, and proposals for National Health Insurance 20

21. Government spending and saving Spending growth moderates from 17.2%between 2006/07-2009/10 to 8.2% between 2009/10-2010/13 Fiscal framework makes R86.7 billion available over MTEF plus savings of R25.6 billion that are added for reallocation to priorities = R112.2 billion Increased savings due to: Decrease in spending on non-core goods and services, rescheduled expenditure, lower overseas payments, reduced transfers to certain public entities, improved financial management, reduced expenditure on administration Major savings amounts are: Defence and Military Veterans, R4.5 billion (A400M military aircraft contract cancelled) Correctional Services, R4.5 billion (rescheduled prison building plans) Transport, R3.4 billion (including deferred public transport infrastructure projects where planning and design have been delayed) International Relations and Cooperation, R1.5 billion (revised foreign costs and deferred construction of the Pan African Parliament building) Social Development, R1.2 billion (rationalised social grant payments system) 21

22. Service delivery and outcomes Government is shifting to target outcomes in order to increase efficiency and improve performance to support inclusive development The focus on departmental outputs and activities has not resulted in the required step-change in service delivery 5 priorities in 2009 MTSF are unpacked into 12 measurable outcomes Over the next three years, expenditure is channeled towards 5 + 2 priority areas: Improving the quality of education Upgrading health care Promoting public safety Supporting rural development Creating decent jobs Building sustainable human settlements Encouraging efficient local government 22

23. Outcome targets and spending plans Improve the quality of education and training R14.3 billion more for workbooks, annual national assessments, attracting and retaining quality teachers, resources for FET colleges, increasing university subsidies and supporting NASFAS, to: Improve grades 3, 6 and 9 literacy and numeracy scores from less than 38% to 60% Increase Bachelor’s degree qualifiers from 107 000 to 175 000 Increase mathematics passes from 136 184 to 250 000 Increase science passes from 148 678 to 171 600 Increase university, technikon and artisan trade test pass rates from 42% to 50%-70% Upgrade health care to increase life expectancy R12.4 billion extra for Aids and TB treatments, to combat measles and polio, and attract and retain quality health professionals, to: Decrease child deaths from 69-91 to 30-35 per 1 000 live births Increase life expectancy from 47-51 to 55 years Decrease HIV prevalence among 15-24 year olds from 10.7% to 5.2% Increase number of Aids patients on treatment from 700 000 to 2 million Increase successful TB treatment from 65% to 85% of total cases 23

24. Outcome targets and spending plans Build a safe country R1 billion more to fight organised crime, appoint more public defenders, family advocates, family counsellors, sexual offences court officers, court clerks and to recruit additional personnel in detective services, crime intelligence and visible policing, to: Increase contact crime detection rate from 52.5% to 57.5% Increase trio crime detection rate from 13.8% to 34% Decrease court case backlogs from 37 459 to 22 100 cases Increase the percentage of contact/trio crimes reported by victims/the public from 48.9% to 60% Raise Corruption Perception Index Ranking from 160 to within the top 40 countries Develop equitable and sustainable rural communities R2.4 billion extra for comprehensive rural development programme and the Land Bank, to: Increase number of commercial farm holders from 780 000 to 800 000 Increase percentage of small farmers producing for sale from 4.1% to 10% 24

25. Outcome targets and spending plans Build a more inclusive economy, create jobs and develop network infrastructure R10.8 billion extra for the second phase of EPWP, National Roads Agency (coal haulage road network) and construction of fuel pipeline, to: Increase labour absorption rate from 43 to 45% Increase GDP per capita from R46 907 to R57 618 Achieve GDP growth average of 5% (2010-2014) Decrease level of income inequality, lowering Gini coefficient from 0.66 to 0.59 Increase the share of national income going to the poorest 40% of the population Ensure sustainable human settlements R1 billion more to integrated housing and human settlements development grant, to: Decrease number of households with inadequate shelter from 1.1 million to 600 000 Increase number of new affordable rental units from 5 000 to 20 000 a year Increase number of households with access to basic sanitation from 69 to 100% R1.2 billion on rural on-site water and sanitation 25

26. Conclusion Summary of the 5 key messages of the budget Raise economic growth and employment, and reduce poverty Proposals to raise employment, with a focus on the youth Reducing the budget deficit to more sustainable levels No tax increase in the tax burden Improving the quality of government spending 26