Medium Term Budget Policy Statement 2006

Joint Meeting:Briefing on the MTBPS of the Portfolio

Committee on Finance, Select Committee on Finance and the Joint Budget Committee held

on the 26 October 2006

National Treasury

Expenditure trends… substantial resources over past decade

1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/090.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90Real non-interest expenditure (1997/98 = 1)

1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/090.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90-interest expenditure (1997/98 = 1)

National Treasury

Fiscal stance trending towards smaller deficits & surpluses…

Main Budget Deficit

03/04 04/05 05/06

Original Deficit

forecast

-2,6 -3,1 -3,1

Deficit

outcome

-2,3 -1,5 -0,3

• Strong revenue trends in excess of expenditure trends result in lower fiscal deficits and possibly small surpluses…

• Growth in revenue remains strong as result of good growth rates and commodity prices

• Projected under-spending (gross) of R4.2 billion in 2006/07 will yield deficit of -0,4 per cent this year

National Treasury

Partly due to strong growth trends…

-3

-1

1

3

5

7

9

11

2000

2001

2002

2003

2004

2005

2006

Source: Stats SA and SARB

per

cent

q-o

-q,

s.a.

a.r.

GDP at market prices GDE (excl residual & inventories)

National Treasury

Sustained growth in future years

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009

per

cent

Growth will rise to just over 5 per cent by 2009 in line with AsgiSA targets

National Treasury

Macroeconomic framework

Calendar year 2006 2007 2008 2009

  Estimate Forecast

Percentage change unless otherwise indicated

Final Household consumption 6.6 4.4 4.5 4.7

Final Government consumption 5.6 4.5 4.6 4.6

Gross fixed capital formation 9.5 9.0 9.3 10.0

Gross domestic expenditure 7.2 4.3 5.2 5.7

Exports 2.7 6.5 6.3 6.4

Imports 13.0 5.7 7.4 7.6

Real GDP growth 4.4 4.4 4.8 5.3

GDP deflator 6.5 6.6 4.8 4.5

GDP at current prices (R billion) 1,693.4 1,885.0 2,069.6 2,277.2

CPIX (Metropolitan & urban, average of year)

4.6 5.5 4.4 4.5

Current account balance (% of GDP)

-5.7 -5.3 -5.6 -5.8

National Treasury

International backdrop

• Global environment growth supportive, but risks rising– Persistent twin deficits concern

– Strong capital flows to emerging markets may slow

– Rising interest rates

• World growth projected to rise slightly in 2006 and then moderate

• Developing countries lead growth, particularly China and India

• Commodity prices relatively high

National Treasury

Commodity prices and world growth

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006*

Index 2

000 =

100

0

1

2

3

4

5

6

per c

ent

World growth (RHS) Metals Index Energy Index

Commodity boom underpinned growth in resource rich countries like SA but won’t last forever

National Treasury

Domestic economy

• Growth has been strong, inflation is relatively low, employment growth continues

• Nevertheless a number of macroeconomic policy challenges have emerged

• Short-run challenges: – Managing fiscal-monetary policy mix– Understanding commodity price movements and potential effects

• Long-run challenges:– Reducing poverty and inequality by committing government to a

vision for sustainable long-term growth (ASGI-SA)– Industrial policy in trade performance

National Treasury

• Poor agricultural performance drag on growth

Sectoral performance

-15

-10

-5

0

5

10

15

Agr

icul

ture

Min

ing

Man

ufac

turin

g

Ele

ctric

ity a

ndW

ater

Con

stru

ctio

n

Who

lesa

le a

ndR

etai

l Tra

de

Tra

nspo

rt a

ndC

omm

Fin

ance

and

Bus

Ser

v

Gov

t Ser

vice

s

Per

sona

lS

ervi

ces

Per

cen

t

2005 First half of 2006

National Treasury

Trade balance

15

17

19

21

23

25

27

29

31

2000 2001 2002 2003 2004 2005 2006Q1 2006Q2

Pe

rce

nt

of

GD

P

Exports Imports

15

17

19

21

23

25

27

29

31

2000 2001 2002 2003 2004 2005 2006Q1 2006Q2

Pe

rce

nt

of

GD

P

Exports Imports

Trade Surplus

Trade Deficit

A widening trade deficit since 2004 driven by strong import growth, related to strong rand and consumer demand

National Treasury

Exports by product

Name of export % of total exports (year to August)

% growth (year to August)

Platinum 13.5 44.8

Gold (including gold palted with platinum) 9.0 11.3

Coal 5.2 -8.3

Light motor vehicles 6.3 19.9

Ferro-alloys 4.9 -0.4

Diamonds 4.3 -8.1

Centrifuges (i.e. filtering or purifying machinery)3.9 35.5

National Treasury

Imports by product

Name of import % of total imports (year to

August)

% growth (year to August)

Petroleum oils and oils obtained from bituminous minerals (Crude) 13.3 37.7

Original equipment components for motor vehicles 8.3 15.2

Motor Cars and other 6.5 19.4

Petroleum oil (i.e. refined product) 3.6 138.4

Transmission Apparatus for Radio-telephony,Radio telegraphy, radio broadcasting or television 2.7 9.9

Automatic Data Processing Machines (computers and related machinery) 2.6 22.6

Medicaments 1.7 16.1

National Treasury

Current account deficit

• Rising domestic demand and capacity utilisation

• Increasing reliance on imports

• Thus widening savings and investment imbalance

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: SARB

per

cent of G

DP

Savings-investment gap Current account balance(Difference reflects change in inventories)

National Treasury

Oil prices projected to decline

0

10

20

30

40

50

60

70

2003 2004 2005 2006* 2007* 2008* 2009*

US

$/b

arr

el

Oil prices expected to fluctuate around US$60/ barrel over next year or two and then decline, although new shocks possible

National Treasury

Net saving

-8

-6

-4

-2

0

2

4

6

8

10

12

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: SARB

per

cent of G

DP

Government Households Corporates

Government and household savings are still negative which impacts on the current account deficit…

National Treasury

Government savings and current balance

-10

-8

-6

-4

-2

0

2

4

1991/9

2

1992/9

3

1993/9

4

1994/9

5

1995/9

6

1996/9

7

1997/9

8

1998/9

9

1999/0

0

2000/0

1

2001/0

2

2002/0

3

2003/0

4

2004/0

5

2005/0

6

2006/0

7

2007/0

8

2008/0

9

2009/1

0

per

cent G

DP

Current balance Gen. Gov Savings Forecast savings

Government savings will turn positive over the MTEF through the proposed fiscal stance, producing first budget surplus

National Treasury

Fiscal framework

Main budget framework, 2005/06 – 2009/10

  2005/06 2006/07 2007/08 2008/09 2009/10

R billion Outcome Estimate Medium-term estimates

Total revenue 411.7 466.4 543.0 586.4 633.5

Percentage of GDP 26.3% 26.7% 28.2% 27.7% 27.2%

Budget balance1 -5.0 -7.8 9.3 -3.8 -10.2

Percentage of GDP -0.3% -0.4% 0.5% -0.2% -0.4%

Total expenditure 416.7 474.2 533.7 590.2 643.7

Percentage of GDP 26.7% 27.2% 27.7% 27.8% 27.6%

Debt service cost 50.9 52.6 53.8 54.1 52.4

Percentage of GDP 3.3% 3.0% 2.8% 2.6% 2.2%

Non-interest expenditure 365.8 421.6 479.9 536.1 591.3

Percentage of GDP 23.4% 24.2% 24.9% 25.3% 25.4%

real growth (non-interest expenditure)

9.9% 9.7% 8.3% 7.1% 5.5%

Contingency reserve – – 2.2 6.0 10.0

Gross domestic product 1,562.8 1,745.8 1,928.3 2,119.9 2,330.5

1. A positive number reflects a surplus and a negative number a deficit.

National Treasury

Budget is broadly in balance over the MTEF period

-5

-4

-3

-2

-1

0

119

96/9

7

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

200

5/06

200

6/07

200

7/08

200

8/09

200

9/10

per

cent

of G

DP

National Treasury

• Roll-overs– Unspent in 2005/06 and rolled over to 2006/07

• Unforeseen and unavoidable expenditure– Increased expenditure ito s30(2) of the PFMA

• Self-financing

• Shifting of funds to follow transfer of functions

• Amounts announced but not appropriated to a specific vote

Components of in-year adjustments

National Treasury

• Funds rolled over for N2 Gateway housing project totaling R372 million

• Emergency funding for flood damage totals R654 million

• Initial payment for 2010 WC of R600 million

• R2 billion for the recapitalisation of state-owned enterprises

• Savings by Correctional Services and Land Affairs of R800 million and R1 billion, respectively

Key in-year adjustments in 2006/07

In year adjustments result in expenditure level increasing from R472,7bn to R474,2bn

National Treasury

Focus on infrastructure remains central to development strategy

• Create capacity by accelerating infrastructure investment• Additional funding over MTEF of R28 billion• Total infrastructure expenditure over MTEF is R409,7 bn

– Economic infrastructure: Electrification, roads, rail, housing, bulk infrastructure, etc.– Social infrastructure: hospital revitalisation, schools, water and sanitation

2007 MTEF infrastructure expenditure estimates

    2005/06 2006/07 2007/08 2008/09 2009/10

  R million   Estimate Medium-term estimate

  National departments 1,2 5,178 5,636 6,386 7,075 8,189

Provincial departments 2 22,741 27,414 34,554 40,340 42,910

Municipalities 21,084 22,238 25,537 30,870 32,637

Public private partnerships 3 728 3,368 3,366 4,849 3,947

Extra-budgetary public entities 3,875 4,378 5,257 5,565 6,340

Non-financial public enterprises 26,424 38,322 44,681 50,324 56,929

  Total 80,030 101,356 119,781 139,023 150,952

Percentage of GDP 5.1% 5.8% 6.2% 6.6% 6.5%

  GDP 1,562,785 1,745,795 1,928,295 2,119,871 2,330,459

National Treasury

And Social services remains a major feature of 2007 MTEF

• Consolidated Spending• R80bn new allocations

– R21,7bn Social services– R28bn Infrastructure

investments– R3,6bn for JCPS

Social services57%

Economic services and infrastructure

20%

Administration7%

Protection services16%

National Treasury

Key spending areas

• Investment in stadiums and public transport to ensure a successful 2010 FIFA World Cup

• Stepping up investment in the built environment in the form of housing, electricity, water, sanitation and community facilities

• Contributing to improved economic efficiency through investment in roads, rail, research and development, energy and skills development

• Strengthening the criminal justice sector, with particular emphasis on visible policing and improving court case flows

• Improving the quality of education, health and welfare services through additional resources and targeted interventions to improve public administration

National Treasury

Provincial priorities

• Provincial equitable share grows by 7% in real terms– Improving quality/access to education, health and social

development

– Improving remuneration of educators and health professionals

• Step-up in conditional grants– Provincial infrastructure grant (R4,3bn)

– Hospital revitalisation grant (R1bn)

– Integrated housing and human settlement dev grant (R2,7bn)

– Comprehensive HIV and Aids grant (R750mn)

– National tertiary services grant (R550mn)

• New provincial boundaries have significant impact on provincial finances

National Treasury

Local government priorities

• Local government equitable share grows by 11% in real terms– Increased funding for free basic services to poor households– Improving governance and administrative systems

• R45,7bn Capital transfers to municipalities include:– R24,7bn for infrastructure to roll out basic municipal services– R7,8bn for construction and upgrading stadiums– R6,7bn to host cities for stadium precincts and public transport– R1,4bn for bulk systems for water supply and sanitation– R1,4bn for electricity infrastructure– R3,7bn for neighbourhood development partnership grant

• Capacity-building in municipalities is prioritised– Focus on planning, budgeting, financial management skills– Siyenza Manje programme led by DBSA

National Treasury

• Buoyant economic conditions

• Non-agricultural GDP has grown by 5 per cent a year since 2004

• Growth in GDP per capita has accelerated from 1,4 per cent in 2003 to 3,5 per cent in 2005

• Over 1 million jobs in the last three years

• Main policy responses– Balanced budget over the medium-term– Spending focus on infrastructure– Social services spending is also sustained

MTBPS Highlights

National Treasury

Thank You