A time of crisis, a window of opportunity Budget 2009 A time of crisis, a window of opportunity

Macroeconomic environment Sharp deterioration in global economic outlook WEO revised five times in last ten months Our growth forecasts have been revised downwards steadily Major areas of concern Export volumes Fall in manufacturing Private investment slowing This is a difficult period ahead, but we can be confident of the choices we have made Changing GDP forecasts due to changing global environment

Global economic crisis is unprecedented Consistent downgrades to GDP forecasts since April last year. Sharp decline in global industrial production, exports and consumer spending. Unprecedented interventions by governments to prevent prolonged recession. GDP growth forecasts, 2008-2009 Source: IMF World Economic Outlook Update, January 2009

Impact on South Africa SA affected through falling commodity prices, lower exports, reduced capital flows, higher risk appetite, correction in asset prices. Sound banking system provides some protection from global contagion. Countercyclical fiscal and monetary policies can support demand. World GDP growth and SA growth Source: IMF and National Treasury forecasts for South Africa.

Sharp decline in commodity prices and in manufacturing production Oil price plunged 69% since peak of US$145/bbl in July 2008. Platinum price is down 57% from peak. Gold protected by safe-haven status keeping bullion price high. Flexible exchange rate has been a shock-absorber for lower prices Manufacturing production fell in the 2nd half of 2008 Commodity prices relative to long-run average since 1980 Manufacturing production

SA macroeconomic forecasts: 2009-2011 Falling consumption and exports and slowdown in private investment in 2009. Weak domestic demand and lower dividend payments reduce CAD in 2009. Headline CPI inflation within target range by mid-2009. Modest recovery in GDP growth from 2010.

Public finance under pressure Revenue under-collection of R14 billion expected this year For 2009/10 Revenue number revised down by R50 billion Expenditure pressures abound (spending rises by R57 billion above baseline) Pressure from Eskom, personnel costs, social grants extension, bus subsidies, SOEs, So budget balance changes to deficit of R95.6 billion Risks to the revenue forecast Company taxes may fall further VAT receipts declining

Forecast drivers Lower GDP forecast is driven by Weak consumption growth Lower demand for exports impacts on mining and manufacturing Slow down in private investment Lower commodity prices Reduced wealth due to lower asset prices, both housing and equities Overall growth will be supported by Government consumption and public sector investments remain strong Falling inflation and easing monetary policy eases burden on households Weaker real exchange rate improves export competitiveness and reduces import demand. 2010 World Cup Risks to GDP growth are probably on the downside A global economic recovery might not happen for two to three years Commodity prices could fall further, impacting on revenues Global trade could collapse The world could go into as deep depression, in which zero growth for us would be realistic 8

Crafting South Africa’s response to the crisis Drawing on ongoing work of the Presidential task team comprising business, organised labour and government, 5 principles have guides our actions Protect the poor Sustain employment growth and expand training opportunities Accelerate public sector infrastructure spending to enhance our future capacity Take the required steps to enhance competitiveness and to broaden opportunities Maintain sustainable public finances

Budget Framework Real growth in expenditure (excluding transfers to Eskom) will average 5.1% per cent over the MTEF Budget deficit rises to 3.8% next year, before falling to 1.9% as revenue recovers 10

Public sector borrowing requirement Worsening budget balance is a result of: Downward revision of revenue estimates Upward revision of debt service costs Guatrain loan of R4.2 billion R60 billion loan to Eskom 11

Government debt Government debt is set to rise over the MTEF to maintain government infrastructure spending. Government debt 12

Main tax proposals: 2009/10 Individuals: Businesses: Personal income tax relief for individuals amounting to R13.6 billion Adjustments to the tax-free interest income thresholds (savings) Businesses: Delay the implementation of the mineral and royalties to 1 March 2010 Incentives for investments in energy-efficient technologies Favourable tax treatment of income from reduction of green house gasses Other Environmental Fiscal Reforms: Reforms to the motor vehicle ad valorem excise duties Implementation of the electricity levy announced in Budget 2008 The taxation of energy-intensive light bulbs Indirect taxes: Increases in the Road Accident Fund (RAF) and general fuel levies Tax-sharing arrangements with municipalities Increases in excise duties on alcoholic beverages and tobacco products An increase in the international air passenger departure tax.

Key spending proposals Total additions to 2008 Budget forward estimates amount to R161 billion, including R50 billion (of the R60 billion) loan to Eskom R25 billion more for the provincial equitable share R13.2 billion for social grants and grant administration R4.1 billion for EPWP phase 2 R4 billion for school nutrition R5.4 billion for reforms to the criminal justice sector, including integrated fingerprint and DNA databases, more police and courts capacity R4.1 billion more for provincial infrastructure: schools, clinics, hospitals, roads R4.3 billion for municipal infrastructure and R1 billion more for bulk water schemes R3.7 billion for more for housing R6.4 billion additional for transport infrastructure, roads, rail and bus systems R1.6 billion for industrial development R1.8 billion for rural development and land reform/restitution Note that these figures are additions to baseline

Division of revenue Of additional R161 billion, national receives R99 bn (incl. R50 bn for Eskom), provinces R47.8 bn and municipalities R11.3 bn Provincial equitable share transfers R24.8 billion Education: No-fee schools policy to 60% and reducing teacher-learner ratio Health: maternal and child mortality; and TB Early childhood development programmes Municipal equitable share transfers R2.7 billion To extend free basic services Sharing of general fuel levy Metros to get 23% of fuel levy as a replacement for the RSC levies

Western Cape Inherited Debt Relief Bill, 2009 The Bill would authorise R912 million of inherited debts of the former Cape Provincial Administration and the former House of Representatives. The debts relate to pre-1994 unauthorised expenditure, as well as unauthorised expenditure up to 1995/96, incurred when new provincial structures in the Western Cape, Eastern Cape, Northern Cape, and North West province we established. There are no cash flow implications for the national government or the Western Cape province. The Bill provides authorisation of the debts, which will allow for appropriate journal entries to be made between the relevant consolidated accounts.