2004 Budget

Growth and Growth and DevelopmentDevelopment

Presentation to Parliament19 February 2004

2

Overview of the 2004 Budget • Budget reviews a decade of structural

change in the economy and society– Economic review highlights– Implementation of RDP reviewed

• Challenges facing us in the decade ahead

• Spending priorities

3

Major social and economic challenges

• Reducing poverty• Halving unemployment rate by 2014

– Particularly among youth• Countering vulnerability• Narrowing inequalities• Nation-building• Culture of ‘ploughing back, not plundering’• Bridging ‘Two economies’ divide

4

2004 Budget priorities

Increasing investment in infrastructure,

industrial capital (16 to 25% of GDP)

Improving education,

training and skills

development to raise

productivityFighting poverty and inequality through work opportunities,

income support and

empowerment

Improved regulation of markets & public entities, and efficient public service delivery

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10 years of growth1984-1993 1994-2003

•Growth a mere 1% a year •Growth around 3% a year•Investment shrinks 2,9% a year

•Investment expands 4.7% a year

•Inflation averages 14,3% •Inflation down to <6%•Deficit up to 7,2% in 1993 •Deficit down to around 3%

•Fin account net outflows of R46,1 bn

•Fin account, net inflows of R169,6 bn

•Investment boycott •Unprecedented ratings upgrades

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Economic overview• Global economic recovery well on track • Domestic investment growing strongly

– Gross fixed capital formation grew by 8% in 2003• Currency up 40% against the dollar• Decline in manufacturing, agriculture in 2003

– However, manufacturing seems to have turned the corner

• Inflation under control• Moderate current account deficit forecast• Insufficient employment growth

7

Economic policy objectives

• Raising rate of sustainable economic growth• Halving unemployment by 2014• Increasing investment• Maintaining macro and fiscal stability• Raising productivity• Improving regulatory frameworks

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Global outlook• Strong pickup in global manufacturing• Drivers of global recovery are USA, Asia• Euro region also emerged from recession• Australia & UK started to raise interest rates;

however, to remain low in US• Strong recovery in Japan, acceleration in China• Rising oil and commodity prices (gold at 8-year high;

oil above US$30/barrel)• African growth supported by commodity prices,

global recovery, NEPAD

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Domestic economy

• Acceleration of world growth and pick up in domestic economy

• CPIX inflation set to remain within target

• Moderate interest rates and falling risk premia

• Investment spending to remain robust• Export growth to improve• Exchange control liberalisation

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Medium-term outlook

-4

-2

0

2

4

6

8

10

Per

cen

t

GDP growth

Current Account (% of GDP)

CPIX inflation

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Macroeconomic forecasts

2003 2004 2005 2006Estimate Forecast

Real growthHousehold consumption 2.9% 3.4% 3.4% 3.8%

Capital formation 8.3% 6.6% 6.9% 7.3%

Exports -2.4% 5.1% 6.2% 6.7%

Imports 8.2% 8.0% 5.9% 6.3%

Gross domestic product 1.9% 2.9% 3.6% 4.0%Consumer price inflation (CPIX) 6.8% 4.8% 5.6% 5.0%Balance of Payments currentaccount (% of GDP) -0.8% -1.3% -1.8% -2.1%

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Black economic empowerment• BEE aimed at broad-based, sustainable

transformation• Emphasis on access to economic opportunity• Financial sector charter complete in 2004

– Facilitate realisation of BEE– Access– Infrastructure investment– Education– Savings

• Procurement reform in government• New BEE framework for PPPs

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Fiscal policy• 2003/04 deficit estimate of 2,6%• Expansionary stance from in 2001 continues• Strong real growth in non-interest spending,

averaging 4,8% a year• Stable tax burden at 24,7%…• Debt service costs decline from 3,9% of GDP

in 2003/04 to 3,6% in 2006/07• Deficit of 3,1% in 2004/05 declining to 2,8% by

2006/07• Significant surpluses in social security funds

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Debt service costs as % of GDP

5.4%

5.1%

4.7%

4.1%

3.6%3.7%

3.8%3.9%

5.7%5.5%

5.2%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

Perc

enta

ge

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Fiscal frameworkMain budget framework

2003/04 2004/05 2005/06 2006/07Revised Medium-term estimates

R billion estimateRevenue 300,3 327,0 360,3 394,0

Percentage of GDP 24,6% 24,6% 24,7% 24,7%Expenditure 331,7 368,9 404,7 439,1

Percentage of GDP 27,1% 27,7% 27,8% 27,6%State debt cost 47,3 50,4 54,0 57,9

Percentage of GDP 3,9% 3,8% 3,7% 3,6%Deficit -31,4 -41,9 -44,4 -45,1

Percentage of GDP -2,6% -3,1% -3,0% -2,8%Gross domestic product 1 223,2 1 331,8 1 455,6 1 592,6

R billion 2003/04 2004/05 2005/06 2006/07Total expenditure 331.7 368.9 404.7 439.1 Less: Debt service costs 47.3 50.4 54.0 57.9 Contingency reserve – 2.5 4.0 8.0 Total allocations 284.4 316.0 346.7 373.1 Percentage increase 16.2% 11.1% 9.7% 7.6%

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Key elements of tax policy over the last 10 years

• Significant improvement in efficiency of tax system and broadening of tax base– Ensured a more equitable tax system by allowing significant

relief, particularly for lower income groups • Fiscal policy reform to broaden tax base

– Introduction of capital gains tax– World wide taxation base

• Administrative reforms to improve efficiency– Enhanced simplicity of the tax system has resulted in increased

compliance & improved taxpayer morality– Improved investor sentiments

• R73 billion in tax relief since 1994

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Tax as percentage of GDP1999/00 Persons and

individuals

Companies

Value-addedtax/sales tax

Levies on fuel

Other

2003/04 Persons andindividuals

Companies

Value-addedtax/sales tax

Levies on fuel

Other

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Key 2004 tax proposals• Direct tax – tax relief

– Income tax on individuals reduced by R4 billion

– Provision made for share transfers

– Interest exemption raised to R11 000 for taxpayers under age 65 and to R16 000 for taxpayers age 65 and over

– Transfer duty threshold on property transactions increased to R150 000

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Key 2004 tax proposals

• Indirect tax – tax relief:– Abolish duties on some cosmetics, recorded music,

computer printers and photo copiers, clocks, photographic film at a cost of R230 million

– Nominal increase of 15 c/litre in total diesel refund for primary producers comprises of:

• General Fuel levy refund increase of 10 c/litre PLUS• RAF levy increase of 5 c/litre

– Diesel fuel rebate

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Key 2004 tax proposals• Indirect tax – tax increases:

– Tax incidence (excise duties + VAT as % of retail selling prices) on tobacco products increased from 50% to 52%.

– Increases in excises:• Cigarettes 16.55% to R4,53 per 20 • Clear Beer 9,0% to R1.15 per 750 ml• Spirits 13,51% to R14.78 per 750 ml• Natural wine 30,7% to R0.88 per 750 ml

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Key MTEF priorities

• Renewed focus on employment creation• Deepening the skills base• Stepping up investment, esp. in infrastructure • Strengthening the social security• Reinforcing security and crime prevention• Improving core admin services to citizens• Land reform and post settlement support to farmers• Promoting multilateral cooperation, incl. AU and

NEPAD

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Additional allocations• Main spending changes over the next 3 yrs

– Infrastructure grants to provinces, municipalities rise by R3,2 billion

– Provinces receive R19,7 billion• HIV and Aids grant get extra R2,1 billion• CSG extension grant R3,3 billion

– Local government gets R3,9 billion– Land reform and farmer support R1,5 billion– R1,9 billion to police– R1,1 billion for peace keeping ops– Home affairs gets extra R850 million– Higher education restructuring gets R910 million

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Key spending changes

• Admin services– Improving Home Affairs services esp. in remote areas – Investment in IT and admin support systems to improve

service delivery– Enhancing diplomatic representation abroad– Funding for general and local govt. elections– Improving key economic and social statistics– Coordination of expanded public works program

• Social services– Restructuring higher education– Quality improvements in school education– National roll-out of ARV treatment– Improving grant administration through new agency– Funding for child support grant extension and other social grants– Scarce skills and rural allowances strategy

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Key spending changes• Protection services

– More police personnel recruitment– New SAPS Division: Protection and Security Services – Improving courts administration – Better access to justice system for vulnerable groups– Remission and Parole Boards– Peace keeping in Burundi, Congo

• Economic services– Land restitution and reform– Post settlement support to beneficiaries of land reform– Rehabilitation of water schemes– Improving public transport (roads, rail)– Increasing housing subsidy– Developing new critical infrastructure

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Provincial priorities

• Comprehensive HIV and Aids prevention and treatment plans

• Providing for social security expansion• Non-personnel inputs into education• Post-settlement support for farmers• Infrastructure investment

– Special focus on labour-intensive projects

• Hospital revitalisation programme• Provinces receive R19,7 billion extra over

MTEF

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Local government priorities

• Increasing basic service provision• Step up in infrastructure spending

– Complements EPWP• Rolling out free basic services• Municipal financial management reforms

– Implementation of Municipal Finance Management Act• Local government receives R3,9 billion extra

– R2,2 billion for equitable share– R1,7 billion for infrastructure

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Division of revenue2003/04 2004/05 2005/06 2006/07

R million Revised Medium-term estimatesNational departments 110,494 120,597 131,047 139,677

Provinces 161,476 181,130 199,704 216,344

Equitable share 144,743 159,971 173,852 186,392

Conditional grants 16,733 21,158 25,853 29,953

Local government 12,390 14,245 15,916 17,091

Equitable share 6,350 7,678 8,643 9,365

Conditional grants 6,039 6,568 7,272 7,726 Total allocations 284,359 315,972 346,667 373,112

Percentage increase 16.2% 11.1% 9.7% 7.6%

Contingency reserve – 2,500 4,000 8,000 Non-interest expenditure 284,359 318,472 350,668 381,113 State debt cost 47,326 50,432 53,986 57,945

Main budget expenditure 331,685 368,904 404,654 439,058 Percentage increase 13.8% 11.2% 9.7% 8.5%

Percentage sharesNational departments 38.9% 38.2% 37.8% 37.4%

Provinces 56.8% 57.3% 57.6% 58.0%

Local government 4.4% 4.5% 4.6% 4.6%