Economic and Fiscal Review and Outlook

Outline  Purpose  Economic performance  Impact of slower growth  Consolidated fiscal framework  Non-interest expenditure  Interest expenditure  SA’s credit rating  Priority programmes  Priority spending sectors  Implications

Purpose  To provide members:  with an assessment of the current economic situation underlying the fiscal framework  the impact on the estimated growth in revenue, expenditure, the budget deficit and government borrowing  with a review on outcomes of expenditure to consider for possible reprioritisation, strengthening or efficiency gains within sectors  To assist members with making recommendations for possible adjustments to the current appropriations.

Economic Performance  GDP growth in 2013: 1.8 per cent  GDP estimated growth for 2014: 2.7 per cent  1 st quarter of 2014: contraction of 0.61 per cent since the 3.8 per cent growth in the last quarter of 2013  Revised estimates from different institutions for 2014: between 1.9 and 2.3 per cent  There is therefore a possibility that government would also revise the growth forecast over the next medium term.

Impact of slower growth Revenue estimates are based on economic performance:  Slower growth will translate into lower revenue collection rates.  If expenditure levels remain the same, the budget deficit will increase.  Higher deficit translates to higher borrowing requirements and interest expenditure.

Consolidated fiscal framework, 2010/11 – 2016/17

Non interest expenditure

Interest expenditure  The level of interest payments is determined by total outstanding government debt and the cost of debt.  The estimates of interest expenditure are susceptible to two distinct risks:  Total government debt could grow beyond the estimated level.  The downgrade of SA’s sovereign debt by credit rating agencies translate into higher interest costs on foreign borrowing and government’s ability to borrow.

SA’s credit rating  In June 2014, 2 credit rating agencies downgraded South Africa’s sovereign credit rating.  South Africa’s credit rating would be subjected to a further downgrade if the economic position deteriorates.  A further downgrade would raise foreign debt service costs.  Government would have limited space to raise more debt to fund future budget deficits.  This would necessitate expenditure cuts on programmes.  Such cuts would slow down the implementation of the National Development Plan.

Priority programmes To ensure performance on the outcomes of the NDP the national budget is allocated towards programmes clustered together within functional groups.

Implications  Slower growth  Less revenue  Higher budget deficit  Higher cost to borrow  Less funds for spending on programmes  Outcomes of NDP compromised  How do we respond?  Root causes of the constraints to economic growth  Reprioritisation  Efficiency gains  Monitor

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