2005 MTBPS: Macroeconomic Overview & Fiscal Framework

1. 2005 MTBPS25 October 2005 • Introduction • Macroeconomic overview • Fiscal framework • Key issues • Vertical division of resources • Conclusion

2. Introduction Key themes of the 2005 MTBPS: Accelerating growth & investment • Infrastructure development • Education and skills development • Second economy interventions Standing budget priorities • Progressive social security net • Capacity of the state • Community development (the built environment).

3. Accelerated and shared growth Growth initiative supported by the MTBPS in projected allocations for: • Infrastructure development • Education and skills development • Second economy interventions Growth initiative also focuses on removing constraints to growth… Growth initiative supports economic buoyancy in coming years and raises potential growth rate from 5 to 6+…

4. Current economic conditions Long-term rise in GDP and shorter-term buoyancy… due to robust consumption and investment.

5. Sectoral composition of the economy

6. Confidence in economy …arising from high business and consumer confidence levels, and robust property market.

7. Sustained global growth And sustained growth in the world economy, especially across the developing world. Average growth in developing economies in 2005-2006 = 6.3% Average growth in developed economies in 2005-2006 = 2.6%

8. And high commodity prices Foreign demand and commodity prices important to South African growth via exports and imports. Commodity prices remain strong, growing by 89% since 2002.

9. Oil prices Real oil prices remain well below 1979 highs. Risk to domestic inflation.

10. Balanced external accounts

11. Domestic inflation CPIX remains within target range as oil price pressures mitigated by lower unit labour costs and stable prices of imported goods.

12. Macroeconomic overview • Brisk economic growth: 4.4% in 2005, rising to between 4.5 and 5% in outer years. Slight slowdown next year to 4.2% – oil prices, interest rates in US, slower growth in Europe. • Consumer spending buoyant (employment growth and real wages). • Private and public investment robust as GFCF nears 17% of GDP. • Export growth from high commodity prices and some manufacturing improvement. Imports remain high with GDE and investment spending. • Current account deficit to remain high and capital inflows depend on world economy. • Oil price pressures on inflation but some offsetting factors.

13. Growth outlook Growth forecast strongly positive, with a few significant upside and downside risks: • Rising private and public investment by an average 9.7% a year. • Fiscal envelope increasing by R78.3 billion. • Low inflation and low interest rates • Expansion in employment • Consumption growth stable (4.3% a year average) • Potential increase in foreign demand for SA exports • Possible decline in commodity and oil prices (+ and -) • Shifts in capital flows.

14. Investment estimates • MTEF proposals of R31.5 billion • Of which, R14.3 billion for transport, especially roads and rail. • Non-financial public enterprises expected to invest about R37 billion a year over the MTEF (totaling R113 billion). • Public sector capital formation to rise from 5.6% to 6.7% of GDP by 2008/09.

15. GDP forecast GDP to rise by: 2005 2006 2007 2008 4.4 4.2 4.4 4.8

16. Macroeconomic forecast

17. Forecast (fiscal years)

18. Fiscal framework • Fiscal envelope expands by R78.3 billion, 06/07 to 08/09, compared to increase of R73 billion in 2005 Budget. • Increase made possible by strong tax receipts as result of robust economic growth… deficit of 1% expected this year – rising to about 2% over MTEF. • Debt service costs continue to decline as percentage of GDP.

19. Revenue outcome and projections Audited outcome for 2004/05: • Main budget revenue R347,9 billion • R20,9 billion more than budgeted • Due to higher than expected corporate profits mainly in financing, real estate and business services sectors. Revised forecast for 2005/06: • Main budget revenue R400,1 billion • R30,2 billion more than budgeted • Tax revenue up by R33,2 billion mainly due to strong growth in remuneration, robust consumer spending and higher corporate profits.

20. Fiscal framework

21. Some issues in the framework • Framework includes the allocation to municipalities for RSC levies (total of R24 billion). Total above baseline is R102 billion, of which R78 billion is new resources. • Public sector borrowing requirement rises to reflect increased SOE borrowing. • Public sector capital formation increases, with projected capital expenditure rising from 5,6 per cent of GDP in 2005/06 to 6,7 per cent of GDP in 2008/09. • Allocations made for Government Employees Medical Scheme of R6 billion (80% of which is provincial cost).

22. Debt service costs

23. Division of revenue Division of total non-interest expenditure, 2006/07

24. Summary cluster allocations Additional allocations to national departments and conditional grants over the MTEF period include: • R20 billion for investment in the built environment • R12 billion for education, health, libraries, social grants, cultural institutions and sports participation • R9 billion for economic services, including science and technology development and industrial policy initiatives • R7 billion for improved courts, policing, defence equipment and improving access to justice services • R8 billion for investment in improved public administration. The provincial equitable share will receive an additional R30 billion over the next three years, and allocations to municipalities will rise by R24 billion, including compensation for the phasing out of RSC levies.

25. Division of Revenue

26. Division of revenue totals and growth

27. Division of additional resources

28. Consolidated spending by type of service: additions to baseline

29. Service shares Service shares of consolidated national & provincial expenditure (2006/07)

30. Services shares & growth Some increase in economic services and infrastructure relative to social services. Strong growth in all services.

31. Economic classification Consolidated national & provincial expenditure by economic classification (2006/07)

32. Provincial budget framework • R46 billion added to provincial budgets • R30,8 billion for provincial equitable share • R15,1 billion added to conditional grants • R15 billion to be spent on the provincial infrastructure grant

33. Revision to provincial budget framework

34. Provincial government shares

35. Local government budget framework • Receives an additional R2 billion over the 2006 MTEF to improve community infrastructure and quality of services, expand provision of free basic services • The revised framework also makes R24 billion available for the replacement of the RSC levies

36. Revisions to local government budget framework

37. Conclusion • Fiscal expansion (R78 billion or 6.3% growth) continued due to strong economic performance. • Significant increases in resources for each sphere of government. • Suggested targeting of new funding in line with Accelerated and Shared Growth Initiative, new needs, and standing priorities for government service delivery (housing, education…).