1. The 2006/7 Budget and Macroeconomic Policy
Ben Smit
7 March 2006

2. Outline Economic background to the Budget
Recent SA economic developments
Macroeconomic forecasts
Macroeconomic policy aspects
General
Fiscal variables

3. Recent SA developments

4. RMB/BER Business confidence index at 24 year high
To 85 in 05Q4 from 86
in 05Q3
Manufacturing (68)
Building (92)
New vehicles (92)
Retail (82)
Wholesale (90)

5. Recent developments: Purchasing Managers less optimistic
February
2006

6. Consumer confidence at a historical high….
1994 election
2010 Soccer WC announcement

7. Black and White consumers are optimistic
Blacks
LT average = 6
2005Q4 = 24
Whites
LT average = - 8
2005Q4 = 9

8. CPIX inflation in mid-target range
PPI

9. Balance of payments as % of GDP

10. GDP growth: 1980Q1 – 2005Q3

11. R/$ exchange rate

12. The business cycle: upswing continues

13. Political constraint Manufacturing: Total

14. Macroeconomic Forecasts
2005
2006
2007
2008
GDP growth
- National Treasury
5.0
4.9
4.7
5.2
- Reuters consensus
4.5
4.6
- USB/Beeld/ABSA consensus -
- BER
4.1
Inflation (CPIX)
3.9
4.3
4.8
- USB/Beeld?ABSA consensus
4.4
5.1
Exchange rate (R/$) (Eop)
6.38
6.75
6.89
6.63
-BER
6.35
7.30

15. Previous Treasury forecasts
2000
2001
2002
2003
2004
2005
GDP growth
- National Treasury
3.5
2.3
3.3
2.9
4.3
- Actual
4.2
2.7
3.7
3.0
4.5
4.9

16. Economic background: summary
Surprisingly strong economic growth (stepped up a notch)
Surprisingly low inflation (sustained)
Very strong consumer and business confidence
Remarkably stable macro conditions
Longest post-war business cycle upswing
Domestic demand major growth factor
Employment growth but continued high unemployment
Sharply increased BoP deficit, financed by even larger capital inflows
Low savings rate
HIV/AIDS

17. Macroeconomic policy aspects

18. Macro-economic policy: General comments
Two classes of economic policy
Macro (stabilization) policies: policies designed to moderate short-term fluctuations in the economy
Structural policies: policies aimed improving the longer-term performance of the economy
Macro-economic policy
Monetary and fiscal policy
Fiscal policy:
policy with regard to structure and level of government spending, taxation and financing of deficits
Stabilization - changes in above
Government expenditure, taxation and financing aspects covered in Budget both stabilization (macro) and structural issues

19. Fiscal policy as described in the Budget
“The budget framework …. Continues the expansionary fiscal stance announced in the 2001 Budget.”
“The fiscal stance outlined here supports growth, while moderating the impact of consumption expenditure on the current account of the balance of payments, prices and the exchange rate.”
“In the medium term, the tax policy framework supports the goals of accelerated and shared economic growth by promoting long-term retirement savings, reducing the costs of tax compliances and the tax burden on all business, fostering small business development, boosting investment in research and development (R & D), supporting skills development and encouraging home ownership.”
Budget Review pp 43, 63/4

20. Fiscal variables: Consumption expenditure (% of GDP)
Forecast

21. Fiscal variable: Fixed investment (% of GDP)
Forecast

22. Taxes: total tax burden (Tax as % of GDP)
Forecast

23. Taxes: Personal Tax Rate
Forecast

24. Government savings (%)
Forecast

25. Deficit before borrowing (% of GDP)
Forecast

26. Fiscal variables: Government debt (% of GDP)
Forecast

27. The Budget and Macroeconomic policy goals
Economic growth
Support via tax cuts and expenditure increases
Support via credibility & responsibility
Contain via lower deficits
Personal income vs corporate taxes
Inflation control
Support via credibility and responsibility
Support via sterilization of cash balances
Support/undermine via tax cuts

28. The Budget and Macroeconomic policy goals (continued)
Balance of payments
Worsen deficit via tax cuts
Improve capital inflows via low deficit and credibility effects
Employment
Improve via growth effects and public programme and SMME support
Savings
Improve via tax cuts

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