2004 Budget Presentation to Parliament 19 February 2004

2 Overview of the 2004 Budget Budget reviews a decade of structural change in the economy and society –Economic review highlights –Implementation of RDP reviewed Challenges facing us in the decade ahead Spending priorities

3 Major social and economic challenges Reducing poverty Halving unemployment rate by 2014 –Particularly among youth Countering vulnerability Narrowing inequalities Nation-building Culture of ‘ploughing back, not plundering’ Bridging ‘Two economies’ divide

Budget priorities Increasing investment in infrastructure, industrial capital (16 to 25% of GDP) Improving education, training and skills development to raise productivity Fighting poverty and inequality through work opportunities, income support and empowerment Improved regulation of markets & public entities, and efficient public service delivery

5 10 years of growth Growth a mere 1% a yearGrowth around 3% a year Investment shrinks 2,9% a year Investment expands 4.7% a year Inflation averages 14,3%Inflation down to <6% Deficit up to 7,2% in 1993Deficit down to around 3% Fin account net outflows of R46,1 bn Fin account, net inflows of R169,6 bn Investment boycottUnprecedented ratings upgrades

6 Economic overview Global economic recovery well on track Domestic investment growing strongly –Gross fixed capital formation grew by 8% in 2003 Currency up 40% against the dollar Decline in manufacturing, agriculture in 2003 –However, manufacturing seems to have turned the corner Inflation under control Moderate current account deficit forecast Insufficient employment growth

7 Economic policy objectives Raising rate of sustainable economic growth Halving unemployment by 2014 Increasing investment Maintaining macro and fiscal stability Raising productivity Improving regulatory frameworks

8 Global outlook Strong pickup in global manufacturing Drivers of global recovery are USA, Asia Euro region also emerged from recession Australia & UK started to raise interest rates; however, to remain low in US Strong recovery in Japan, acceleration in China Rising oil and commodity prices (gold at 8-year high; oil above US$30/barrel) African growth supported by commodity prices, global recovery, NEPAD

9 Domestic economy Acceleration of world growth and pick up in domestic economy CPIX inflation set to remain within target Moderate interest rates and falling risk premia Investment spending to remain robust Export growth to improve Exchange control liberalisation

10 Medium-term outlook

11 Macroeconomic forecasts

12 Black economic empowerment BEE aimed at broad-based, sustainable transformation Emphasis on access to economic opportunity Financial sector charter complete in 2004 –Facilitate realisation of BEE –Access –Infrastructure investment –Education –Savings Procurement reform in government New BEE framework for PPPs

13 Fiscal policy 2003/04 deficit estimate of 2,6% Expansionary stance from in 2001 continues Strong real growth in non-interest spending, averaging 4,8% a year Stable tax burden at 24,7%… Debt service costs decline from 3,9% of GDP in 2003/04 to 3,6% in 2006/07 Deficit of 3,1% in 2004/05 declining to 2,8% by 2006/07 Significant surpluses in social security funds

14 Debt service costs as % of GDP

15 Fiscal framework

16 Key elements of tax policy over the last 10 years Significant improvement in efficiency of tax system and broadening of tax base –Ensured a more equitable tax system by allowing significant relief, particularly for lower income groups Fiscal policy reform to broaden tax base –Introduction of capital gains tax –World wide taxation base Administrative reforms to improve efficiency –Enhanced simplicity of the tax system has resulted in increased compliance & improved taxpayer morality –Improved investor sentiments R73 billion in tax relief since 1994

17 Tax as percentage of GDP

18 Key 2004 tax proposals Direct tax – tax relief –Income tax on individuals reduced by R4 billion –Provision made for share transfers –Interest exemption raised to R for taxpayers under age 65 and to R for taxpayers age 65 and over –Transfer duty threshold on property transactions increased to R

19 Key 2004 tax proposals Indirect tax – tax relief: –Abolish duties on some cosmetics, recorded music, computer printers and photo copiers, clocks, photographic film at a cost of R230 million –Nominal increase of 15 c/litre in total diesel refund for primary producers comprises of: General Fuel levy refund increase of 10 c/litre PLUS RAF levy increase of 5 c/litre –Diesel fuel rebate

20 Key 2004 tax proposals Indirect tax – tax increases: –Tax incidence (excise duties + VAT as % of retail selling prices) on tobacco products increased from 50% to 52%. –Increases in excises: Cigarettes 16.55% to R4,53 per 20 Clear Beer 9,0% to R1.15 per 750 ml Spirits 13,51% to R14.78 per 750 ml Natural wine 30,7% to R0.88 per 750 ml

21 Key MTEF priorities Renewed focus on employment creation Deepening the skills base Stepping up investment, esp. in infrastructure Strengthening the social security Reinforcing security and crime prevention Improving core admin services to citizens Land reform and post settlement support to farmers Promoting multilateral cooperation, incl. AU and NEPAD

22 Additional allocations Main spending changes over the next 3 yrs –Infrastructure grants to provinces, municipalities rise by R3,2 billion –Provinces receive R19,7 billion HIV and Aids grant get extra R2,1 billion CSG extension grant R3,3 billion –Local government gets R3,9 billion –Land reform and farmer support R1,5 billion –R1,9 billion to police –R1,1 billion for peace keeping ops –Home affairs gets extra R850 million –Higher education restructuring gets R910 million

23 Key spending changes Admin services –Improving Home Affairs services esp. in remote areas –Investment in IT and admin support systems to improve service delivery –Enhancing diplomatic representation abroad –Funding for general and local govt. elections –Improving key economic and social statistics –Coordination of expanded public works program Social services –Restructuring higher education –Quality improvements in school education –National roll-out of ARV treatment –Improving grant administration through new agency –Funding for child support grant extension and other social grants –Scarce skills and rural allowances strategy

24 Key spending changes Protection services –More police personnel recruitment –New SAPS Division: Protection and Security Services –Improving courts administration –Better access to justice system for vulnerable groups –Remission and Parole Boards –Peace keeping in Burundi, Congo Economic services –Land restitution and reform –Post settlement support to beneficiaries of land reform –Rehabilitation of water schemes –Improving public transport (roads, rail) –Increasing housing subsidy –Developing new critical infrastructure

25 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 R19,7 billion extra over MTEF

26 Local government priorities Increasing basic service provision Step up in infrastructure spending –Complements EPWP Rolling out free basic services Municipal financial management reforms –Implementation of Municipal Finance Management Act Local government receives R3,9 billion extra –R2,2 billion for equitable share –R1,7 billion for infrastructure

27 Division of revenue