2010 Budget Breakfast A balancing act

1. 2010 Budget BreakfastA balancing act Kay Walsh Economist 18 February 2010

2. Abnormal circumstances, extraordinary measuresThe global backdrop to the 2010 budget In 2008 and 2009 the Global economy suffered the worst decline since the 1930's 34 million jobs were lost worldwide, nearly 900 000 of these in South Africa A massive fiscal and monetary expansion programme in major developed and developing countries has stabilised the world economy The IMF forecast a 3.9% growth in world GDP in 2010, buoyed by strong growth in India and China. Treasury expects a gradual recovery in the South African Economy 2.3% GDP growth in 2010 and 3.2% in 2011 But the recovery has come at a cost – the global economy is carrying a massive public debt burden that will weigh on economics for years to come – rising debt service costs compete with productive expenditure

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4. While Treasury believes the basis for a sustained economic recovery has been established some risks to the global outlook remain: • Reliance on stimulus :Countries are beginning to withdraw stimulus and craft ‘exit’ strategies even although employment remains weak • PIGS are going ‘belly-up’: Portugal, Ireland, Greece and Spain face ballooning debt levels and collapsing investor confidence • Growth in China may be unsustainable: supported by massive fiscal and monetary stimulus which is inflating asset prices • Loose monetary policy and another glut of global liquidity: strong capital inflows could hurt growth in countries like SA • Business as usual at banks: another crisis waiting in the wings? Footer

5. But state of SA public finances not as bad as many feared... Budget balance % of GDP • The consolidated budget deficit for 2009/10 is expected to come in at 7.3% of GDP – while substantial it is an improvement on their October forecast (7.6%). • The consolidated budget deficit is still expected to narrow to 4.1% of GDP by 2012/13 • Treasury has become more optimistic on prospects for the economy and has revised its GDP forecasts for 2010, 2011 and 2012 somewhat higher. GDP growth Footer

6. Putting the size of the current budget deficit into perspective, it is large by historical standards... Main budget balance % of GDP Footer

7. But South Africa is one of many countries currently running high budget deficits... Source: Deloitte, data from EIU and SA Budget Review Footer

8. But unlike the ‘PIGS’ South Africa is in a better position to run big deficits because of low initial levels of government indebtedness Budget balance % of GDP Forecast Public Debt % of GDP (2009-2014) Footer

9. But budget deficit together with the sizeable borrowing needs Eskom and other SOE’s has however resulted in a record total public borrowing requirement of 11.8% of GDP in 2009/10... • In the four years to 2012/12 government and SOE’s are forecast to need access to over R1 trillion worth of financing • Government aims to raise most of this in the domestic debt market, but will assist Eskom to raise 35 to 40% of its debt offshore (multilateral institutions) to take pressure of the domestic debt market. Footer

10. How will government close the gap? Slowly… • A recovery in tax revenues is expected as the economy expands • Government plans to restrain growth in expenditure through re-prioritisationof expenditure • Cancelled R4.5bn military aircraft contract • Rationalised social grant payments (R1.2bn) • Deferred R3.4bn transport projects • Limiting growth in government employment costs (specifically moderating salary increases which were between 6 and 13% last year) • Debt-service costs are however, expected to increase quite sharply • Risk of higher tax rates in future was aknowledged Footer

11. What are government’s medium-term outcome targets? • Improve quality of education – national literacy and numeracy assessments in grades 3, 6 &9, additionall R9bn for teacher salaries to retain experience, FunzaLushakabusary programme continues, support material. • Create decent employment through inclusive growth - investment in economic infrastructure, expanded public works programme (R2.5bn to support labour intensive projects) • Develop a skilled workforce – a wage subsidy for young people is proposed • Improve health care and life expectancy – Additional R8.4bn for ARV treatment, R3.9 billion to retain doctors and therapeutic practitioners • Build a safer country – recruiting an additional 15 000 police in specific areas, R1bn to criminal justice system • Build competitive economic infrastructure network – public infrastructure investment of R845 bn in next three years, R52bn in public works programmes Footer

12. What are government’s medium-term outcome targets? • Accelerated rural development – resolve all land claims by 2019, review land reform, review water allocation and pricing • Protection of the environment – finalise white paper on climate change by end-2010, develop and implement water conservation strategy, electricity system operator independent of Eskom by 2010 • Sustainable human settlements – guarantee scheme to support ‘gap’ in the housing market (income R3000 to R9000 a month) • Build effective and efficient local government system – auditing of skills in top posts, capacity building grants • A better South Africa, Africa and World • Effective government, empowered citizenship Footer

13. Breakdown of expenditure 2010/11 Footer

14. Economic policy developments • Flexible inflation targetingframework to stay, goal of low stable inflation re-affirmed • No direct intervention in the currency but Reserve bank to ‘lean against the wind’ when rand exchange rate strengthens due to strong capital inflows, further relaxation of exchange controls proposed • Wage subsidy proposed to encourage employers to hire youth lacking work experience • Government is considering the design of a standard, basic retirement saving and income protection scheme that is affordable simple and cost –effective for low income earners and those with irregular earnings. Contributions could be compulsory for all employed persons. • Research is underway to investigate options around a National Health Insurance Schemethat might enable a transition to the model over the next 5 years. • An inter-ministerial committee is overseeing work on social security and retirement reform– they will be tasked with assessing the options and financial implications Footer