1

The 2006 Budget

Presentation to Joint Budget Committee, Select Committee on Finance and Portfolio Committee on Finance

16 February 2006

MINISTER OF FINANCE

2

Content

• Economic policy and outlook

• Fiscal framework

• Revenue trends

• 2006 Budget priorities and allocations

• Division of revenue

• Asset and liabilities management

• Conclusion

3

Global economic overview

• Global growth expected to stay above 4%

• US growth remains fairly strong

• Growth in Europe expected to gradually improve – but domestic demand remains sluggish

• Recovery in Japan, strong growth in China, robust growth in Africa (nearly 6% in 2006)

• Commodity price boom lifts mineral prices (gold price reached 25-year highs and platinum at record high)

4

Global growth supports commodity prices…

75

95

115

135

155

175

195

2000

2001

2002

2003

2004

2005

20

00

Q1

=1

00

Platinum indexGold index

5

Domestic economic overview

• Economic growth of 5% in 2005 - averaging more than 5% over the next three years

• Inflation to remain within the target

• Buoyant demand and investment supports rising production

• Higher commodity prices support capital inflows

• A strong reserve position reduces rand volatility and vulnerability to global instability

• Current account deficit remains high as growth rate rises

6

Shift towards investment as the engine of growth

Transnet: R50 billion over 5 years

Eskom: R98 billion over 5 years

Gautrain: > R10 billion over five years

0

5

10

15

20

25

2004

2005

e

2006

f

2007

f

2008

f

Per

cen

t gr

owth

Real fixed capital formation:GovernmentReal fixed capital formation:Public corporations

7

Stable growth outlook

-6

-4

-2

0

2

4

6

8

10

2001

2002

2003

2004

2005

e

2006

f

2007

f

2008

f

Per

cen

t

GDP growth

Current account (% of GDP)

CPIX inflation

8

Macroeconomic forecastCalendar year 2005 2006 2007 2008

 Percentage change unless otherwise indicated

Estimate Forecast

Final household consumption 6.7 4.9 4.4 4.7

Final government consumption 4.9 4.8 4.7 4.8

Gross fixed capital formation 8.0 9.4 9.7 9.9

Gross domestic expenditure 4.8 5.6 5.0 5.4

Exports 12.6 7.1 6.2 6.7

Imports 10.9 9.4 7.2 7.2

Real GDP growth 5.0 4.9 4.7 5.2

GDP at current prices (R billion) 1,518.9 1,674.6 1,839.0 2,038.9

CPIX (Metropolitan and urban, year) 3.9 4.3 4.5 4.8

Current account balance (% of GDP) -4.2 -4.4 -4.3 -4.2

Fiscal year 2005/06 2006/07 2007/08 2008/09

Percentage change unless otherwise indicated      

GDP at current prices (R billion) 1,559.6 1,714.5 1,884.9 2,095.9

Real GDP growth 4.9 4.8 4.7 5.3

GDP inflation 4.7 4.9 5.0 5.6

CPIX (Metropolitan and urban) 4.2 4.2 4.5 5.0

9

-30

-20

-10

0

10

20

30

US

$ bi

llion

International liquidity position

Total gross gold and other foreign reserves

Reserves improve

January 2006

US$22.2bln

10

2006 MTEF summary

• Main budget revenue expected to be R411 billion in this year, compared to R400 billion at time of MTBPS.

• Revenue-to-GDP ratio rises to 26,4% for 2005/06 (growth in VAT, CIT and PIT due to robust growth in consumption and commodity exporters’ profits). Ratio remains about 26%.*

• Non-interest expenditure grows by R82 billion (annual average real growth of 6,4%), excluding transfers of R24 billion to replace the RSC levies.

• Capital expenditure at consolidated government level grows by 11,4% over the MTEF

• A revised main budget deficit of 0,5% of GDP for 2005/06; 1,5% for 2006/07; 1,4% for 2007/08 and 1,2% in 2008/09

• Debt service costs expected at 3,3% of GDP for 2005/06; declining to 2,7% in 2008/09.

• PSBR grows from 0,6% of GDP in 2005/06 to 2,4% in 2008/09

* General government tax to GDP ratio = 26,8% in 2004/05

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Fiscal Framework

R billion / per cent 2004/05 2005/06 2006/07 2007/08 2008/09

Revenue 347.9 411.1 446.4 492.0 547.1

per cent GDP 24.5% 26.4% 26.0% 26.1% 26.1%

Deficit 20.7 7.9 26.5 27.1 24.3

per cent GDP 1.5% 0.5% 1.5% 1.4% 1.2%

Expenditure 368.5 418.9 472.7 519.2 571.3

per cent GDP 26.0% 26.9% 27.6% 27.5% 27.3%

Debt service costs 48.9 51.2 52.1 53.3 55.7

per cent GDP 3.4% 3.3% 3.0% 2.8% 2.7%

Non-interest expenditure 319.7 367.8 418.2 460.8 507.6

per cent GDP 22.5% 23.6% 24.5% 24.7% 24.6%

total

resources available over BR2005 baseline

5.1 22.4 33.3 50.4 106.2

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Changes to tax policy

• Gross income tax relief for individuals = R13,5 billion

• Tax threshold for individuals increased to R40 000

• A reduction in the Retirement Fund Tax from 18% to 9% = R2,4 billion relief

• The abolition of the RSC levies = R7 billion for the 2006/07 municipal fiscal year

• VAT zero-rating of municipal property rates

• Transfer duty relief of R4,5 billion

• Monetary thresholds for individuals - capital gains tax & estate duty - increased

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• Monetary thresholds for small business corporations increased

• Tax amnesty for small businesses – commencing with taxi operators

• Extension of learnershsip tax incentive to 2011

• Tax incentive for R & D – 150% deduction for current expenditure and accelerated depreciation for capital expenditure (50:30:20)

• Biodiesel fuel concession increased for 30% to 40% of general fuel levy

Further changes to tax policy

14

Summary of tax proposals

R million

Tax revenue 475,914

Non-tax revenue 9,320

Less: SACU payments -19,744

Main budget revenue, before tax proposals 465,489

Budget 2006/07 proposals: -19,127

Taxes on individuals and companies -14,925

Taxes on property -4,540

Stamp duties -10

Taxes on goods and services 348

Main budget revenue (after tax proposals) 446,362

2006/7

15

Key priorities of the 2006 Budget*

• Improving performance of the labour market and strengthening education

– Higher education and recapitalisation of FET (R2,4 billion)

• Accelerated housing delivery, coupled with municipal capacity building

– Housing subsidy (R3,5 billion)

– Municipal Infrastructure Grant (R21,5 billion)

• Building sustainable human settlements – private and public sector cooperation

– Neighbourhood Development Partnership Grant (R2,5 billion)

• Upgrading economic infrastructure – energy, rail, transport networks, communications and water resource management

– National roads and rail rehabilitation (R3,5 billion)

• Reducing crime and improving the performance of courts and security services (R5,4 billion)

• Public administration capacity

– Municipal equitable share & project consolidate (R2,3 billion)

* All amounts additional over the MTEF

16

Total additional MTEF allocations

0

2

4

6

8

10

12

14

16

18

Education, health andwelfare

Housing andcommunity

development

Economicinfrastructureinvestment

Industrialdevelopment, science

& technology

Justice and crimeprevention

International relationsand defence

Public administrationcapacity

R b

illio

n

17

Expenditure reporting changes

• Function shift in social grant transfers– Reported as transfer to households on budget of Dept of

Social Development– Implemented by SA Social Security Agency with effect from 1

April 2006

• Devolution of accommodation costs– Transfer of costs from public works to user-departments– Responsibility for accommodation decisions reside with

respective accounting officer

• Consolidation of government accounts include financial statements of 66 public entities out of 195

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Division of revenue

• Of additional resources of R106 billion, plus unallocated amount of 2005

budget:

– National departments receive R30.5 billion (or 28.7% of total addtions)

– Provinces receive R42.9 billion, incl Gautrain (40.5% of total additions)

– Municipalities receive R33 billion, incl RSC levies (30.8% of total additions)

– Unallocated amount of R3 billion for WC2010

• Real non-interest expenditure grows by 6. 4% over 2006 MTEF, after netting out

RSC levy amount.

Contingency reserve set at R2.5, R5, and R8 billion in each respective year of the

MTEF.

19

Division of nationally raised revenue

Division of Revenue

    2004/05 2005/06 2006/07 2007/08 2008/09

Prelimin. Estimate Medium-term estimates

  R million outcome        

   

National departments 168 018 196 429 214 964 233

996 254 495

Provinces 137 836 154 528 176

679 196

351 217 481

Local government 13 837 16 859 26

532 30

503 35 575

Non-interest allocations

319,690

367,816 418,1

76

460,8

50

507,552

Percentage shares          

National departments 52.6% 53.4% 51.4% 50.8% 50.1%

Provinces 43.1% 42.0% 42.3% 42.6% 42.8%

Local government 4.3% 4.6% 6.3% 6.6% 7.0%

20

Financing of net borrowing requirement

2005/06 2006/07 2007/08 2008/09R million RevisedDomestic short-term loans 5,850 5,800 5,750 5,750Domestic long-term loans 23,306 8,694 16,529 22,996Foreign loans 742 2,415 3,638 2,362 Change in cash and other balances-19,633 7,754 -196 -8,381 Total 10,265 24,663 25,721 22,727

Medium-term estimates

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0

2

4

6

8

10

12

14

16

18

20

22

24

Pe

r c

en

t

As % of total revenueAs % of total expenditure

Debt service costs

22

26

32

38

44

50

Net

deb

t (

% o

f G

DP

)

Debt-to-GDP ratio continues to decline

23

Concluding comments on support to growth

• Growth initiative supported by the 2006 Budget allocations for:

• Infrastructure development

• Education and skills development

• Second economy interventions

• Provisions for capitalisation

• Growth initiative also focuses on removing constraints to growth

• Growth initiative supports economic buoyancy in coming years and will raise the potential growth rate from approximately 4,5% to over 6%