2005 Budget Growth, development and equity Presentation to Parliament 24 February 2005

2 Overview of the 2005 Budget Programme of Action: cares for its people, socially just choices, and committed to service delivery Supporting economic growth and opportunities Strong increases in non-interest expenditure within a framework that is sustainable Tax relief to encourage economic opportunities

3 Major socio-economic challenges Reducing poverty through social wage Dependence giving way to self-reliance Halving unemployment rate by 2014 –particularly among youth Countering vulnerability Narrowing inequalities Developing skills HIV and Aids Bridging ‘two economies’ divide

4 Budget for a season of hope Sustaining higher growth Economy growing faster… …but to sustain this higher growth, we need… Rising infrastructure investment Lowering the cost of doing business, especially for small business Producing more skilled people Improving the quality of public services, especially to the poor. Advancing social development Higher growth to invest in people… Means-tested social grants Clean water and electricity Quality education, health and municipal services Community housing Reduce crime and insecurity Equity and redistribution To bridge the divide between rich and poor… Pro-poor budget reflects spending shift towards the poor Extension of social wage to poor households Broad-based black economic empowerment Transport linkages between cities and townships, rural and urban Renewed investment in small, emerging farmers

5 Economic overview Growth breaking 3 – 4% barrier Inflation to remain within the target over the MTEF Buoyant demand and investment supports rising production Economy adjusting well to strong currency – mining and manufacturing resilient Steady financial flows reflect robust external financing Sustainable current account

6 Global economic overview Buoyant global growth in 2004, but slowed in second half due to high oil prices USA and Asia main drivers of recovery Commodity price boom lifts mineral prices (gold price reached 16-year highs) Inflation increases in the USA and China cause central banks to increase rates Growth to slow in 2005 but likely to pickup if oil prices recede

7 Strong global growth

8 Healthy capital flows Balance of payments supported by positive capital inflows – R60,4 billion Current account deficit estimated at 2,3% of GDP Gross reserves rose to US$15,1 billion at end-January Strong rand supported low inflation environment

9 Low inflation and interest rates

10 Robust domestic demand and investment

11 Broad based growth

12 Medium term outlook

13 Macroeconomic forecasts

14 Fiscal policy 2004/05 deficit estimate 2,3% of GDP Expansionary stance from 2001 continues Strong real growth in non-interest spending, averaging 5,5% a year Stable tax burden around 24,1% of GDP Debt service costs decline from 3,5% of GDP in 2004/05 to 3,2% in 2007/08 Deficit of 3,1% in 2005/06 declining to 2,7% by 2007/08 Significant surpluses in social security funds

15 Debt service costs as per cent of GDP

16 Fiscal framework

/06 Funding Strategy Net borrowing requirement of R53,4 billion Domestic short-term loans, net R5 billion Broader range of treasury bills Domestic long-term loans, net R25,8 billion New fixed income and floating rate bonds Continued issuance of retail bonds Net foreign issuance of R12 billion Capital market issuance, equivalent of US$1,5 billion Arms procurement loans, equivalent of US$0,8 billion Cash balances run down by R10,6 billion

18 Fiscal indicators

19 Debt to GDP

20 Tax policy overview Since 1995 tax policy emphasises – tax base broadening rate reductions removing unwarranted tax incentives Highlights of the tax reform agenda Introduction of capital gains tax Converting to residence-based income tax system Overall tax relief since 95/96 approx R78 billion

21 Implementation of 2003 & 2004 tax proposals Amnesty levies of R2,4 billion Amnesty: applications with R65 billion of foreign assets declared Retirement fund tax discussion paper to be released 2 nd draft of Mineral Royalty Bill available for public comment during first half of inner cities qualify for Urban Development Zone tax incentives - 7 more under review 2005 tax law amendments for FIFA World Cup commitments

Budget tax proposals (1) Total tax relief of R10,9 billion PIT & threshold adjustments – R6,8 billion Raising interest exemption thresholds: R & R Increase thresholds of transfer duty on fixed property: 0% up to R Corporate tax rate down from 30% to 29% - R2 billion revenue cost 2006 introduction of a tonnage tax regime to stimulate shipping industry Removal of financial transaction taxes (stamp duty) on all bank debit entries Abolish Regional Service Council levies on 30 June 2006

Budget tax proposals (2) Small business proposals: New benefits for personal services sector firms with minimum of 4 employees Turnover limit increased to R6 million Graduated rate structure with 0% for first R of taxable income, 10% up to R and 29% thereafter Enhanced depreciation of 50:30:20 for all depreciable assets, retain 100% for manufacturing assets

Budget tax proposals (3) Further small business proposals: Filing VAT returns every 4 months – cash flow benefit Exempting businesses from Skills Development Levy with payroll limit of up to R /year Simplify registration processes & annual tax returns for PBOs Administrative measures to support small businesses

25 Key MTEF priorities Finalising land restitution claims Increasing salaries for police and teachers New direction in housing delivery Improved public transport Taxi recapitalisation back on track Focus on road infrastructure Improving grant administration Re-invigorate FET colleges Support for NSFAS

26 Additional allocations Main spending changes over next 3 yrs: R6 billion to finalise rural land restitution R2 billion for new direction in housing R1,7 billion for municipal infrastructure R3 billion for public transport and transport infrastructure R6,9 billion for teachers R4,2 billion for police R1 billion for FET, R776 for NSFAS

27 Key spending changes Admin services Enhance capacity to monitor service delivery Consolidate African Agenda → PAP, peacekeeping Improve business processes in Home Affairs Management framework for state property Payment of rates on state properties Social services Shift of social grant funding Establishment of Social Security Grant Agency Recapitalisation of FET colleges Increased support to NSFAS Additional funds for teachers, principals, support staff and incentives to retain teachers

28 Key spending changes Protection services Additional personnel in Correctional Services Peace keeping support in Africa Improvement in court facilities and court management Attention to scarce skills & pay progression in SAPS Economic services Finalise land restitution Establish MAFISA and support for AgriBEE Taxi recapitalisation back on track Upgrading of national roads Passenger rail infrastructure New technology at SABC National Empowerment Fund projects

29 Division of revenue

30 Provincial priorities Comprehensive HIV and Aids prevention and treatment plans Providing for social security expansion Non-personnel inputs into education Post-settlement support for farmers Infrastructure investment –special focus on labour-intensive projects Hospital revitalisation programme Provinces receive R43,5 billion extra over MTEF

31 Provincial finances Provincial equitable share formula Broad ranging review of formula undertaken… 2 new components added to original 4 (education, health, institutional and basic): 1)New poverty component to make the formula redistributive (measures stance of education and health policies, welfare services) 2)New economic activity component to take into account revenue raising capacity of provinces

32 Local government priorities Increasing basic service provision Step up in infrastructure spending Rolling out free basic services Municipal financial management reforms Local government receives R3,9 billion extra R2,2 billion for equitable share R1,7 billion for infrastructure

33 Local government finances Accelerate the roll out of free basic services to households Strengthening municipal infrastructure delivery (including the eradication of the bucket sanitation system) Building in-house capacity in municipalities