2005 MTBPS 25 October 2005 Introduction Macroeconomic overview Fiscal framework Key issues Vertical division of resources Conclusion

Accelerated and shared growth Growth initiative supported by the MTBPS in projected allocations for: Infrastructure development Education and skills development Second economy interventions Growth initiative also focuses on removing constraints to growth… Growth initiative supports economic buoyancy in coming years and raises potential growth rate from 5 to 6+…

Sectoral composition of the economy

Macroeconomic overview Brisk economic growth: 4.4% in 2005, rising to between 4.5 and 5% in outer years. Slight slowdown next year to 4.2% – oil prices, interest rates in US, slower growth in Europe. Consumer spending buoyant (employment growth and real wages). Private and public investment robust as GFCF nears 17% of GDP. Export growth from high commodity prices and some manufacturing improvement. Imports remain high with GDE and investment spending. Current account deficit to remain high and capital inflows depend on world economy. Oil price pressures on inflation but some offsetting factors.

Growth outlook Growth forecast strongly positive, with a few significant upside and downside risks: Rising private and public investment by an average 9.7% a year. Fiscal envelope increasing by R78.3 billion. Low inflation and low interest rates Expansion in employment Consumption growth stable (4.3% a year average) Potential increase in foreign demand for SA exports Possible decline in commodity and oil prices (+ and -) Shifts in capital flows. Exports to grow by 5.4% a year in forecast. Imports to grow by 7% a year in forecast.

Oil prices Real oil prices remain well below 1979 highs. Risk to domestic inflation.

Forecast (fiscal years)

Medium-term estimates Fiscal framework Main budget framework, 2004/05 – 2008/09   2004/05 2005/06 2006/07 2007/08 2008/09 R billion Outcome Medium-term estimates Total revenue 347.9 400.1 437.0 479.0 527.2 Percentage of GDP 24.7% 25.9% 25.8% Deficit -20.6 -15.7 -37.0 -39.3 -41.5 -1.5% -1.0% -2.2% -2.1% -2.0% Total expenditure 368.5 415.8 474.0 518.3 568.7 26.2% 27.0% 28.0% 27.9% Debt service cost 48.9 51.8 53.9 54.8 56.6 3.5% 3.4% 3.2% 3.0% 2.8% Non-interest exp 319.6 363.9 420.0 463.5 512.1 22.7% 23.6% 24.8% 25.0% 25.2% Real growth (non-interest expenditure) 8.8% 9.9% 5.3% 5.7% Gross domestic product 1,405.5 1,542.2 1,693.7 1,856.7 2,033.3 Note: excluding RSC levies allocation of R24 billion, real growth in non-interest expenditure averages 6.3% per year FISCAL SUMMARY: Fiscal envelope expands by R78.3 billion, 06/07 to 08/09, compared to increase of R73 billion in 2005 Budget. Increase made possible by strong tax receipts as result of robust economic growth… deficit of 1% expected this year – rising to about 2% over MTEF. Debt service costs continue to decline as percentage of GDP. REVENUE OUTCOMES: Audited outcome for 2004/05: Main budget revenue R347,9 billion R20,9 billion more than budgeted Due to higher than expected corporate profits mainly in financing, real estate and business services sectors. Revised forecast for 2005/06: Main budget revenue R400,1 billion R30,2 billion more than budgeted Tax revenue up by R33,2 billion mainly due to strong growth in remuneration, robust consumer spending and higher corporate profits. Budget 2005 estimate of revenue for 2005/06 = R369.9 billion Higher estimates than the 2005 Budget figures: Corporate income tax, an additional R10,4 billion Personal income tax, an additional R8,3 billion VAT collections, an additional R9 billion Customs duties, an additional R3,1 billion

Summary cluster allocations Additional allocations to national departments and conditional grants over the MTEF period include: R20 billion for investment in the built environment R12 billion for education, health, libraries, social grants, cultural institutions and sports participation R9 billion for economic services, including science and technology development and industrial policy initiatives R7 billion for improved courts, policing, defence equipment and improving access to justice services R8 billion for investment in improved public administration. The provincial equitable share will receive an additional R31 billion over the next three years, and allocations to municipalities will rise by R24 billion, including compensation for the phasing out of RSC levies.

Division of Revenue

Provincial budget framework R46 billion added to provincial budgets R30,8 billion for provincial equitable share R15,1 billion added to conditional grants R15 billion to be spent on the provincial infrastructure grant R30,8 billion for provincial equitable share: Up to R20 billion of additional resources targeted for this bolstering education, health and social development Up to R4,2 billion set aside for EPWP in provincial social services sectors R4,8 billion for the implementation of Government’s Employee Medical Scheme R2,6 billion for provincial economic functions R15,1 billion added to conditional grants: R3,5 billion added for the housing programme Additional R900 million for hospital revitalisation R2,4 billion added for social assistance grant R7 billion set aside for strategic infrastructure projects R400 million added for FET colleges

Provincial government shares

Local government budget framework Receives an additional R2 billion over the 2006 MTEF to improve community infrastructure and quality of services, expand provision of free basic services The revised framework also makes R24 billion available for the replacement of the RSC levies

Revisions to local government budget framework Changes to baseline 2005/06 2006/07 2007/08 2008/09 Equitable share and related – 300 450 700 Infrastructure 297 – – 500 Municipal Infrastructure Grant – – – 500 Integrated Electrification 55 – – – Public transport infrastructure 242 – – – Capacity building and restructuring – – – – Total changes 297 300 450 1,200

Conclusion Fiscal expansion (R78 billion or 6.3% growth) continued due to strong economic performance. Significant increases in resources for each sphere of government. Suggested targeting of new funding in line with Accelerated and Shared Growth Initiative, new needs, and standing priorities for government service delivery (housing, education…).