The 2009 MTBPS: Managing a fiscal calamity Jac Laubscher Group Economist: Sanlam Ltd.

1. The 2009 MTBPS: Managing a fiscal calamity • Jac Laubscher • Group Economist: Sanlam Ltd. • Parliament 3 November 2009

2. 2009/10 vs. 1992/93: back to square one

3. The fiscal deterioration in 2009 is extremely sharp • Tax revenue -6,2% vs. 2008/09 • in spite of the recession being relatively moderate • tax revenue has become more cyclical

4. Government finances: 2009/10 vs. 1992/93

5. Corporate income tax (% of gross operating surplus)

6. The fiscal deterioration in 2009 is extremely sharp • Tax revenue -6,2% vs. 2008/09 • in spite of the recession being relatively moderate • tax revenue has become more cyclical • Expenditure +17,6% vs. 2008/09 • above-budget increase in wage bill, with long-term consequences • adds 2% of GDP to debt over MTBPS term • Budget deficit 7,6% vs. 1% of GDP in 2008/09 • Government debt from 22,6% to 29,2% of GDP (contingent liabilities to be added) • Increasing cost of debt will constrain discretionary spending

7. Bond yield vs. debt/GDP ratio Debt/GDP 2012/13 Real bond yield

8. The medium-term outlook for revenue • Don’t over respond – we have time on our side • Macroeconomic assumptions are conservative, but global prospects are uncertain • Debt/GDP will continue rising beyond MTBPS • Tax burden too high to accommodate further increases (SA 32% vs. 18,2% average for middle income countries)

9. Fiscal sustainability

10. The medium-term outlook for expenditure • Improvement is excruciatingly slow; expenditure/GDP remaining high • Expenditure/GDP needs to be reduced more aggressively (SA 30.1% vs. 18.6% average for middle income countries) • Expenditure cannot just be added, priorities need to be redefined • Pursuit of (non-contributing) welfare state unusual for stage of development; social protection equals 14% of consolidated expenditure • Greater efficiency and effectiveness in public expenditure is non-negotiable: compensation of employees equals 57% of current payments

11. Macro-economic policy • Inflation targeting • Responsibility remains with NT • Reasoned approach, acknowledging complexities • Discussion with SARB in line with flexible approach to IT • Commitment to low inflation remains • International debate about whether financial stability should be added as a monetary policy objective; about interest rates being too low, not too high

12. Prime overdraft rate vs. household debt burden Household debt Prime rate

13. Macro-economic policy • The value of the rand • Rand is overvalued • Intervention not the answer: too expensive • Competitiveness through greater productivity, not through depreciating currency • Try reducing volatility: encourage greater two-way trade through exchange control relaxation • Exchange rate volatility linked to excessive rand liquidity and volatility in commodity prices • Explore further options, e.g. commodity stabilisation fund, macro-hedging

14. Macro-economic policy • Growth strategy • In need of a new, more labour absorbing growth strategy • A collection of comments rather than a comprehensive, cohesive strategy • A combination of ideas from the past and searching for new ideas • Macro-economic stability is foundational • The social democratic developmental state is a difficult model • First focus on getting the basics right, e.g. education • Government dis-saving is unwelcome turn • Reduce spending and taxes

15. Worrying trends • Permanent increase in expenditure/GDP ratio • Pressure to increase tax burden • Increasing debt/GDP ratio and higher state debt cost • Upward pressure on real long-term interest rates • Reappearance of government dissaving • Lack of cohesive macroeconomic policy

16. Thank you! Questions?