1. 2005 MTBPS 25 October 2005 Introduction Macroeconomic overview
Fiscal framework
Key issues
Vertical division of resources
Conclusion

2. Introduction Key themes of the 2005 MTBPS:
Accelerating growth & investment
Infrastructure development
Education and skills development
Second economy interventions
Standing budget priorities
Progressive social security net
Capacity of the state
Community development (the built environment).
Accelerated and shared growth initiative lists five areas of focus:
1. Investment and infrastructure development
2. Sector investment strategies
3. Education and skills development
4. Second Economy interventions
5. Improved capacity of state to provide economic services

3. 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+…

4. Current economic conditions
Long-term rise in GDP
and shorter-term buoyancy… due to robust consumption and investment.

5. Sectoral composition of the economy

6. Confidence in economy
…arising from high business and consumer confidence levels, and robust property market.

7. Sustained global growth
And sustained growth in the world economy, especially across the developing world.
Average growth in developing economies in = 6.3%
Average growth in developed economies in = 2.6%

8. And high commodity prices
Foreign demand and commodity prices important to South African growth via exports and imports.
Commodity prices remain strong, growing by 89% since 2002.
Commodity price increases January 2002 to July 2005:
Commodity prices defined by the metals prices index = 88.9%
Non-fuel primary commodities = 16.9%
All primary commodities (including fuel) = 163%

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

10. Balanced external accounts

11. Domestic inflation
CPIX remains within target range as oil price pressures mitigated by lower unit labour costs and stable prices of imported goods.

12. 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.

13. 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.

14. Investment estimates MTEF proposals of R31.5 billion
Of which, R14.3 billion for transport, especially roads and rail.
Non-financial public enterprises expected to invest about R37 billion a year over the MTEF (totaling R113 billion).
Public sector capital formation to rise from 5.6% to 6.7% of GDP by 2008/09.
Of the R31.5 billion in MTEF proposed new allocations, R26 billion are specific allocations and R5.5 billion remain unallocated (community infrastructure funds and local transport funds/world cup).
Other major sectoral allocations include:
Water and sanitation = R1.2 billion
IDZs and Coega = R1.5 billion
R&D (through DST) = R1.3 billion
Housing = R1.7 billion
Health = R1.3 billion
Justice & protection services = R1.8 billion.
Increases for national departments = R11 billion (05/06 to 08/09)
provinces = R13 billion
municipal = R8 billion.
The total MIG grant rises to R25.3 billion over the MTEF.
The PIG rises by R15.1 billion.
Overall estimate of PPP projects for the MTEF = R18.2 billion.

15. GDP forecast
GDP to rise by:

16. Macroeconomic forecast

17. Forecast (fiscal years)

18. Fiscal framework
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.

19. Revenue outcome and projections
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

20. 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

21. Some issues in the framework
Framework includes the allocation to municipalities for RSC levies (total of R24 billion). Total above baseline is R102 billion, of which R78 billion is new resources.
Public sector borrowing requirement rises to reflect increased SOE borrowing.
Public sector capital formation increases, with projected capital expenditure rising from 5,6 per cent of GDP in 2005/06 to 6,7 per cent of GDP in 2008/09.
Allocations made for Government Employees Medical Scheme of R6 billion (80% of which is provincial cost).

22. Debt service costs

23. Division of revenue
Division of total non-interest expenditure, 2006/07

24. 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 R30 billion over the next three years, and allocations to municipalities will rise by R24 billion, including compensation for the phasing out of RSC levies.

25. Division of Revenue

26. Division of revenue totals and growth
Local share includes RSC levy amounts of R7, R8 and R9 billion – net increase is R2 billion.

27. Division of additional resources
Local share includes RSC levy amounts of R7, R8 and R9 billion – net increase is R2 billion.
Changes to baseline
Social services , , ,158
Education , , ,409
Health , , ,571
Welfare and social security , , ,828
Housing (& comm dev) ,350
Protection services , ,033
Defence , ,858
Justice, police , ,175
Economic services 1, , , ,108
Water and related ,029
Agriculture
Transport , , ,822
Other economic services , , ,226
Administration , , ,509

28. Consolidated spending by type of service: additions to baseline
Totals differ from previous slide as interest costs factored in here .

29. Service shares
Service shares of consolidated national & provincial expenditure (2006/07)

30. Services shares & growth
Some increase in economic services and infrastructure relative to social services. Strong growth in all services.

31. Economic classification
Consolidated national & provincial expenditure by economic classification (2006/07)

32. 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

33. Revision to provincial budget framework

34. Provincial government shares

35. 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

36. Revisions to local government budget framework
Changes to baseline / / / /09
Equitable share and related –
Infrastructure – –
Municipal Infrastructure Grant – – –
Integrated Electrification – – –
Public transport infrastructure – – –
Capacity building and restructuring – – – –
Total changes ,200

37. 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…).