The 2006 Budget MINISTER OF FINANCE Presentation to Joint Budget Committee, Select Committee on Finance and Portfolio Committee on Finance 16 February 2006

Content Economic policy and outlook Fiscal framework Revenue trends 2006 Budget priorities and allocations Division of revenue Asset and liabilities management Conclusion

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) Growth in key countries 2005 2006 USA 3,6% 3,4% China 9,0% 8,2% India 7,1% 6,3% Euro area 1,4% 1,9% Commodity price growth: Platinum and oil prices doubled since 2000 Platinum broken through the $1000/oz level in January 2006, SA produced 78% of all platinum production in 2005 World demand for crude oil expected to grow by 1,6 million barrels per day, while supply is expected to grow by 1,3 million barrels per day Gold up by 60%, hovering at $550 levels

Global growth supports commodity prices…

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 Overall GDP: 5,0% 4,9% Gvt consumption: 4,9% 4,8% H/hold consumption: 6,7% 4,7% Investment: 8,0% 9,7% GDE: 4,8% 5,3% Exports: 12,6% 6,7% Imports: 10,9% 7,9% CPIX: 3,9% 4,5%

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 5 10 15 20 25 2004 2005e 2006f 2007f 2008f Per cent growth Real fixed capital formation: Government Public corporations Since 2000, growth driven by household consumption expenditure Over MTEF, growth will be driven by investment particularly government and the public corporations. Government = 10% real Public corporations = 15% real

Current account (% of GDP) Stable growth outlook -6 -4 -2 2 4 6 8 10 2001 2002 2003 2004 2005 e 2006 f 2007 f 2008 f Per cent GDP growth Current account (% of GDP) CPIX inflation

Macroeconomic forecast Calendar 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 4.8 Gross fixed capital formation 8.0 9.4 9.7 9.9 Gross domestic expenditure 5.6 5.0 5.4 Exports 12.6 7.1 6.2 Imports 10.9 7.2 Real GDP growth 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 Current account balance (% of GDP) -4.2 -4.4 -4.3 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 5.3 GDP inflation CPIX (Metropolitan and urban) 4.2

Reserves improve January 2006 US$22.2bln Reserve accumulation contributes to reduced exchange rate volatility and improved international position. 10% increase in reserves = 7% decrease in exchange rate volatility (IMF study) Reserves have increased by 192% since 2001 from US$7,6 billion to US$22,2 billion at the end of January 2006

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

Fiscal Framework 2004/05 2005/06 2006/07 2007/08 2008/09 Revenue 347.9 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% Deficit 20.7 7.9 26.5 27.1 24.3 1.5% 0.5% 1.4% 1.2% Expenditure 368.5 418.9 472.7 519.2 571.3 26.9% 27.6% 27.5% 27.3% Debt service costs 48.9 51.2 52.1 53.3 55.7 3.4% 3.3% 3.0% 2.8% 2.7% Non-interest expenditure 319.7 367.8 418.2 460.8 507.6 22.5% 23.6% 24.7% 24.6% total resources available over BR2005 baseline 5.1 22.4 33.3 50.4 106.2

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

Further changes to tax policy 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

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

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

Total additional MTEF allocations

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

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. National department allocations rise by an annual average of 4.2% in real terms. Provincial allocations rise by an annual average of 7.2% in real terms. Local government allocations rise by an annual average of 11.3%, inclusive of RSC. Provinces receive R42,9 billion of the additional resources: Provincial share of nationally raised revenue increases from R154,5 billion in 2005/06 to R217,5 billion in 2008/09 over the MTEF Conditional grants increase from R19,2 billion in 2005/06 to R30,4 billion in 2008/09 including: R15 billion is for provincial infrastructure to accelerate public infrastructure and job creation R3 billion is added to the Housing Subsidy Grant R1,5 billion for FET colleges R900 million for hospital revitalisation. Local government’s share of national raised revenue increases from R16,9 billion in 2005/06 to R35,6 billion in 2008/09 Equitable share increases from R9,6 billion in 2005/06 to R22,8 billion in 2008/09. Infrastructure grants increase from R6,3 billion in 2005/06 to R11,8 billion in 2008/09. R1,9 billion made available for capacity building and restructuring initiatives LG also receives R4,7 billion in in-kind-allocations via DWAF and Eskom

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 319,690 367,816 418,176 460,850 507,552 Percentage shares 52.6% 53.4% 51.4% 50.8% 50.1% 43.1% 42.0% 42.3% 42.6% 42.8% 4.3% 4.6% 6.3% 6.6% 7.0% Provincial breakdown: Equitable share 120 885 135 292 150 753 167 701 187 100 Conditional grants 16 951 19 237 25 926 28 649 30 382 Local breakdown Equitable share 7 678 9 643 18 058 20 076 22 775 RSC replacement   7 000 8 000 9 000 Conditional grants 6 159 7 215 8 474 10 428 12 801

Financing of net borrowing requirement

Debt service costs Debt costs R100 billion lower over past 9 years Lower debt service costs contribute to economic development and poverty relief

Debt-to-GDP ratio continues to decline

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%