2005 Budget

Growth, development and equity

Presentation to Parliament 24 February 2005

2

Overview of the 2005 Budget

Programme of Action: cares for its people, socially just choices, and committed to service delivery

• Supporting economic growth and opportunities

• Strong increases in non-interest expenditure within a framework that is sustainable

• Tax relief to encourage economic opportunities

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Major socio-economic challenges

• Reducing poverty through social wage• Dependence giving way to self-reliance• Halving unemployment rate by 2014

– particularly among youth• Countering vulnerability• Narrowing inequalities• Developing skills• HIV and Aids• Bridging ‘two economies’ divide

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Budget for a season of hope

Sustaining higher growth

Economy growing faster…

…but to sustain this higher growth, we need…

Rising infrastructure investment

Lowering the cost of doing business, especially for small business

Producing more skilled people

Improving the quality of public services, especially to the poor.

Advancing social development

Higher growth to invest in people…

Means-tested social grants

Clean water and electricity

Quality education, health and municipal services

Community housing

Reduce crime and insecurity

Equity and redistribution

To bridge the divide between rich and poor…

Pro-poor budget reflects spending shift towards the poor

Extension of social wage to poor households

Broad-based black economic empowerment

Transport linkages between cities and townships, rural and urban

Renewed investment in small, emerging farmers

5

Economic overview

• Growth breaking 3 – 4% barrier

• Inflation to remain within the target over the MTEF

• Buoyant demand and investment supports rising production

• Economy adjusting well to strong currency – mining and manufacturing resilient

• Steady financial flows reflect robust external financing

• Sustainable current account

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Global economic overview

• Buoyant global growth in 2004, but slowed in second half due to high oil prices

• USA and Asia main drivers of recovery

• Commodity price boom lifts mineral prices (gold price reached 16-year highs)

• Inflation increases in the USA and China cause central banks to increase rates

• Growth to slow in 2005 but likely to pickup if oil prices recede

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Strong global growth

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2003 2004* 2005*

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World USA

China Euro-zone

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Healthy capital flows

• Balance of payments supported by positive capital inflows – R60,4 billion

• Current account deficit estimated at 2,3% of GDP

• Gross reserves rose to US$15,1 billion at end-January

• Strong rand supported low inflation environment

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DP

Balance on financial account

Balance on current account

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Low inflation and interest rates

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1998 1999 2000 2001 2002 2003 2004

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Repurchase rate

CPI

CPIX

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Robust domestic demand and investment

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Per

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GDEHousehold consumptionInvestment

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Broad based growth

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Agricultu

reMining

Manufacturing

Electricity

, gas & water

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Transport & communicatio

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Financial & business services

Community & social services

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2003 2004

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Medium term outlook

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GDP growth

Current account (% of GDP)

CPIX inflation

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Macroeconomic forecasts

Estimate2004 2005 2006 2007

Real growthFinal household consumption 5.9 4.7 3.7 4.2Gross fixed capital formation 7.5 7.0 6.2 7.8Exports 5.0 4.7 3.6 5.7Imports 12.7 5.9 5.5 5.7Real GDP growth 3.7 4.3 3.8 4.4Consumer price inflation 4.3 4.0 5.1 5.4(CPIX)Current account balance -2.3 -3.1 -3.6 -3.6(%of GDP)

Forecast

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Fiscal policy

• 2004/05 deficit estimate 2,3% of GDP

• Expansionary stance from 2001 continues

• Strong real growth in non-interest spending,

averaging 5,5% a year

• Stable tax burden around 24,1% of GDP

• Debt service costs decline from 3,5% of GDP in

2004/05 to 3,2% in 2007/08

• Deficit of 3,1% in 2005/06 declining to 2,7% by

2007/08

• Significant surpluses in social security funds

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Debt service costs as per cent of GDP

Debt service costs

5.6%

5.3%

4.9%

4.5%

3.9%

3.2%3.4%

3.5%3.5%3.6%

4.7%4.9%

5.2%

5.5%

3%

4%

5%

6%

As %

of G

DP

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Fiscal framework

2003/04 2004/05 2005/06 2006/07 2007/08

R million / per cent

Revenue 299 431 337 960 369 869 405 427 444 643

per cent GDP 23.4% 24.1% 24.2% 24.2% 24.1%

Expenditure 328 662 370 113 417 819 456 393 494 894

per cent GDP 25.7% 26.4% 27.3% 27.3% 26.8%

Non-interest expenditure 282 349 321 212 364 694 399 790 435 513

per cent GDP 22.1% 22.9% 23.9% 23.9% 23.6%

per cent real growth 9.3% 9.2% 9.0% 4.1% 3.4%

Deficit 29 231 32 152 47 950 50 966 50 251

2.3% 2.3% 3.1% 3.0% 2.7%

2003/04 2004/05 2005/06 2006/07 2007/08

R million / per cent

Expenditure 328 662 370 113 417 819 456 393 494 894

Debt service costs 46 313 48 901 53 125 56 603 59 381

per cent GDP 3.6% 3.5% 3.5% 3.4% 3.2%

contingency reserve 0 0 2 000 4 000 8 000

Allocated expenditure 282 349 321 212 362 694 395 790 427 513

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2005/06 Funding Strategy

Net borrowing requirement of R53,4 billion

Domestic short-term loans, net R5 billion

Broader range of treasury bills

Domestic long-term loans, net R25,8 billion• New fixed income and floating rate bonds• Continued issuance of retail bonds

Net foreign issuance of R12 billion

• Capital market issuance, equivalent of US$1,5 billion

• Arms procurement loans, equivalent of US$0,8 billion

Cash balances run down by R10,6 billion

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Fiscal indicators

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Conventional balance

Current balance

Net loan debt (right axis)

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Debt to GDP

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Foreign debt

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Total net loan debt as % of GDP (right axis)

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Tax policy overview

Since 1995 tax policy emphasises – • tax base broadening• rate reductions • removing unwarranted tax incentives

Highlights of the tax reform agenda• Introduction of capital gains tax• Converting to residence-based income tax

system

Overall tax relief since 95/96 approx R78 billion

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Implementation of 2003 & 2004 tax proposals

• Amnesty levies of R2,4 billion

• Amnesty: 43 000 applications with R65 billion of foreign assets declared

• Retirement fund tax discussion paper to be released

• 2nd draft of Mineral Royalty Bill available for public comment during first half of 2005

• 9 inner cities qualify for Urban Development Zone tax incentives - 7 more under review

• 2005 tax law amendments for FIFA World Cup commitments

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2005 Budget tax proposals (1)

• Total tax relief of R10,9 billion

• PIT & threshold adjustments – R6,8 billion

• Raising interest exemption thresholds: R15 000 & R22 000

• Increase thresholds of transfer duty on fixed property: 0% up to R190 000

• Corporate tax rate down from 30% to 29% - R2 billion revenue cost

• 2006 introduction of a tonnage tax regime to stimulate shipping industry

• Removal of financial transaction taxes (stamp duty) on all bank debit entries

• Abolish Regional Service Council levies on 30 June 2006

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2005 Budget tax proposals (2)

Small business proposals:

• New benefits for personal services sector firms with minimum of 4 employees

• Turnover limit increased to R6 million

• Graduated rate structure with 0% for first R35 000 of taxable income, 10% up to R250 000 and 29% thereafter

• Enhanced depreciation of 50:30:20 for all depreciable assets, retain 100% for manufacturing assets

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2005 Budget tax proposals (3)

Further small business proposals:

• Filing VAT returns every 4 months – cash flow benefit

• Exempting businesses from Skills Development Levy with payroll limit of up to R500 000/year

• Simplify registration processes & annual tax returns for PBOs

• Administrative measures to support small businesses

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Key MTEF priorities

• Finalising land restitution claims• Increasing salaries for police and teachers• New direction in housing delivery• Improved public transport• Taxi recapitalisation back on track• Focus on road infrastructure• Improving grant administration• Re-invigorate FET colleges • Support for NSFAS

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Additional allocations

Main spending changes over next 3 yrs:

• R6 billion to finalise rural land restitution• R2 billion for new direction in housing• R1,7 billion for municipal infrastructure• R3 billion for public transport and transport

infrastructure• R6,9 billion for teachers• R4,2 billion for police• R1 billion for FET, R776 for NSFAS

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Key spending changes

Admin services• Enhance capacity to monitor service delivery• Consolidate African Agenda → PAP, peacekeeping • Improve business processes in Home Affairs• Management framework for state property• Payment of rates on state properties

Social services• Shift of social grant funding • Establishment of Social Security Grant Agency• Recapitalisation of FET colleges• Increased support to NSFAS• Additional funds for teachers, principals, support

staff and incentives to retain teachers

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Key spending changes

Protection services

• Additional personnel in Correctional Services

• Peace keeping support in Africa

• Improvement in court facilities and court management

• Attention to scarce skills & pay progression in SAPS

Economic services

• Finalise land restitution

• Establish MAFISA and support for AgriBEE

• Taxi recapitalisation back on track

• Upgrading of national roads

• Passenger rail infrastructure

• New technology at SABC

• National Empowerment Fund projects

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Division of revenue2003/04 2004/05 2005/06 2006/07 2007/08

Prelimin. Estimate

R million outcome

National departments 108 459 121 101 136 262 146 800 157 817

Provinces 161 494 185 354 209 273 229 282 248 236

Equitable share 144 743 164 084 134 706 146 757 157 678

Conditional grants 16 751 21 270 74 567 82 525 90 558

Local government 12 396 14 757 17 159 19 708 21 461

Equitable share 6 350 7 678 9 643 10 515 11 371

Conditional grants 6 045 7 080 7 516 9 193 10 090

Non-interest allocations 282,349 321,212 362,694 395,790 427,513

Percentage increase 15.4% 13.8% 12.9% 9.1% 8.0%

State debt cost 46,313 48,901 53,125 56,603 59,381

Contingency reserve – – 2,000 4,000 8,000

Main budget expenditure 328,662 370,113 417,819 456,393 494,894

Percentage increase 12.7% 12.6% 12.9% 9.2% 8.4%

Percentage shares

National departments 38.4% 37.7% 37.6% 37.1% 36.9%

Provinces 57.2% 57.7% 57.7% 57.9% 58.1%

Local government 4.4% 4.6% 4.7% 5.0% 5.0%

Percentage growth

National departments 11.7% 12.5% 7.7% 7.5%

Provinces 14.8% 12.9% 9.6% 8.3%

Local government 19.1% 16.3% 14.9% 8.9%

Medium-term estimates

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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 R43,5 billion extra over MTEF

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Provincial finances

Provincial equitable share formula

Broad ranging review of formula undertaken… 2 new

components added to original 4 (education, health,

institutional and basic):

1) New poverty component to make the formula

redistributive (measures stance of education and

health policies, welfare services)

2) New economic activity component to take into

account revenue raising capacity of provinces

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Local government priorities

Increasing basic service provision

Step up in infrastructure spending

Rolling out free basic services

Municipal financial management reforms

Local government receives R3,9 billion extra

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

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Local government finances

Accelerate the roll out of free basic services to households

Strengthening municipal infrastructure delivery (including the eradication of the bucket sanitation system)

Building in-house capacity in municipalities