1. 2004 Medium Term Budget Policy Statement
A framework for accelerated growth and development

2. Contents Introduction – a platform for growth and development
Macroeconomic overview
Fiscal framework
Tax and revenue issues
Medium term expenditure framework
Intergovernmental relations

3. A framework for accelerated growth broad-based development
Introduction
A framework for accelerated growth broad-based development

4. A decade of structural economic change…
Stabilisation of fiscal and monetary policy
Structural tax reform to encourage efficiency and equity
Phased liberalisation of capital account
Trade reform encouraging domestic competition and international opportunity
Rapid growth in investment spending
Substantial productivity improvements
Public finance and budget reforms
Enhanced public sector delivery capacity
…has broadened the policy room for social development

5. Macroeconomic review and outlook
Higher public and private investment growth to support accelerated growth

6. Economic performance in 2004
Broad-based growth well above 3% in 1st half of 2004
Buoyant consumer demand and investment in productive capacity
Rapid and sustainable adjustment to currency developments
Inflation comfortably within inflation target range
Steady financial flows contributing to BoP sustainablility
Indications of turnaround in employment prospects

7. Over METF period, accelerated growth driven by…
Mildly expansionary fiscal stance, focusing on improving economic and social infrastructure
Moderate interest rates, improved confidence and lower risk underpinning stronger investment growth
Productivity improvements driven by broad human capital development
An increasingly open economic environment, promoting opportunities for South African businesses
Small business, learnerships and BEE to address economic dualism

8. GDP growth and CPIX GDP revised up to average 4% over medium term
CPIX inflation around 5% on average over medium term

9. Strong world growth

10. Healthy Balance of Payments
Current account deficit rose to high 3,8% of GDP, but…
Supported by positive capital inflows
Balance of payments surplus remains healthy at R12,1 billion
Gross reserves rose to US$12.2 billion at end-September, international liquidity position at US$9 billion as SARB continues reserve buildup

11. Broad based growth in first half
GDP up 3,6 and 3,9 per cent in first two quarters respectively
Broad-based, but particularly firm in construction, communications and financial services

12. Low inflation and interest rates
CPIX inflation in target range for 13 months
Nominal interest rates at lowest level in almost 30 years

13. Investment and confidence up…

14. Macroeconomic Forecast

15. Sustainable budgeting promotes broad-based socio-economic development
Fiscal framework
Sustainable budgeting promotes broad-based socio-economic development

16. Features of the framework
Revenue forecast for this year revised upwards by about R1,2 bn partly due to amnesty proceeds
Revenue to GDP rising by about 0,6% over MTEF
Recovery in corporate taxes, but also base-broadening tax reform
Deficit of 3,2% this year, rising to 3,5% next year
For sustainability reasons, deficit to be reduced to 2,7% by 2007/08
Real growth in spending of 4,3% (6,5% next year)
Additional resources available (R50 bn):
R10.8 bn in 2005/06
R14.4 bn in 2006/07
R24.7 bn in 2007/08

17. Fiscal framework

18. Current balance (% of GDP)

19. Total additional resources available
Bulk of resources go to provinces, but significant share to national in 3rd year

20. Division of total resources

21. Taxation and revenue issues

22. Revenue outcome and projections
Audited outcome for 2003/04
Main budget revenue R299,4 billion
R5,1 billion less than budgeted
Due to global conditions and stronger rand reducing company profits and customs value of imports
Revised forecast for 2004/05
Main budget revenue R328,2 billion
R1,2 billion more than 2004 Budget estimate
Tax revenue up by R1,9 billion mainly due to strong growth in remuneration and robust consumer spending translating into above budgeted estimates for:
Personal income tax of R3,8 billion
VAT collections of R4 billion
Transfer duty collections of R1,2 billion on back of booming property market

23. 2004 tax proposals
1st and 2nd Revenue Law Amendment Bill have successfully completed the process of translating 2004 tax proposals into law, including:
Relaxation of fringe benefit tax on employee share ownership
Clarifying anti-avoidance rules on certain financial instruments
Clarification of VAT inconsistencies pertaining to grants and transfers to public entities
Customs duty reform in support of regional distribution centre initiatives
Ad valorem duty exemption on vehicles with a capacity of 15 persons or more
Elimination of ad valorem duties on magnetic tapes, magnetic stripes, certain cosmetic products, print film, photo copying apparatus and watches & clocks

24. Tax policy priorities for 2005 Budget
Consider simplification of tax compliance burden on SMMEs
Reviewing tax treatment of medical provision
Adjustments in claiming business travel cost on the motor vehicle allowance
Tax reforms relating to retirement funding to be aligned with regulatory reforms of pension fund industry
Revisions to the Royalty Bill and submission of revised bill to Parliament
Reassessment of current mining tax structure
Preparing legislative tax amendments for hosting the FIFA World Cup in 2010
Release of fiscal policy paper on environmental taxes
Consideration and review of provincial own tax instruments and options for replacing RSC levy

25. Key spending priorities

26. Key MTEF Priorities In 2005/06 and 2006/07
Stabilising social security grants
Accelerating the land restitution programme
Improving salaries for police and educators
In the outer years
Supporting the new direction in housing delivery
Additional resources for road infrastructure
Improving quality of schooling system & realignment of FET
Additional funding for National Student Financial Aid Scheme
Continuing the hospital revitalisation programme
Investing in water resources infrastructure
Continued support for the African agenda including the PAP

27. Key spending areas Social Services…
Additional funding of R34,25 billion over MTEF targets:
Social security grants
Educator salaries
NSFAS to increase coverage
Health promotion including primary health care
Justice and Protection Services…
Additional funding of R6, billion over MTEF targets:
Salary adjustments for police
Enlisting additional police personnel
Improving court administration
Repair and Maintenance of Defence facilities

28. Key spending areas Economic Services and Infrastructure
Additional funding of R7,45 billion over MTEF targets:
Land restitution
Roads infrastructure
Taxi Recapitalisation
Bulk water resource infrastructure
Implementation of new housing delivery strategy
Administrative Services
Additional funding of R3,53 billion over MTEF targets:
Supporting Home Affairs turnaround strategy
Municipal services and rates
Census Replacement Survey
Ongoing support for the African agenda

29. Adjusted estimates 2004
The 2004/05 Adjustments Budget provides for R7,69 billion of additional allocations
R billions
Unforeseen & Unavoidable Expenditure (Provinces) 4,11
Unforeseen & Unavoidable Expenditure (National ) 1,65
Approved Roll-overs 1,99
Self financing expenditure 0,17
Drought Relief ,43
BEE ,15
Projected State Debt cost (0,82)
Total Adjustments R7,69
After in-year savings, contingency reserve, and other unallocated amounts, net increase in spending is R2,78 billion.
Taking total revised expenditure to R371,7 billion for 2004/05
National Treasury

30. Adjusted Estimates 2004 DPW: Services/rates backlog R599 million
Main adjustments to national departments’ appropriations:
DPW: Services/rates backlog R599 million
DTI: PBMR project R500 million
DPLG and Agriculture: drought R430 million
DTI: NEF R150 million
DLA: Land restitution R200 million
ICASA: VAT Payment R45 million
DPW: Prestige Accommodation R43 million
DWAF: State forestry assets R40 million

31. Integovernmental relations

32. Provincial finances Function shift of social security grants
Conditional grant in the interim
Equitable share formula adjusted for function shift and new data (Census 2001)
Equitable share rises by R10,7 bn over three years
Strengthening education and health spending
Revitalising welfare services
Educator personnel adjustments
Conditional grants grow by R22,9 bn
R20,8 bn for social grants
R1,4 bn for housing
R0,5 bn for infrastructure

33. Local government finances
Local government faces significant developmental challenges
Municipal transfers grow fastest from 3 spheres
Equitable share rises by R2,3 bn over three years
Providing basic municipal services
Infrastructure grants grow by R500m
For expansion of municipal infrastructure networks

34. Local Government finances
2004/05
2005/06
2006/07
2007/08
R million
Medium term estimates
Local government baseline allocation
14,280
15,959
17,137
17,994
Equitable share and related 1
8,536
9,578
10,355
10,873
Infrastructure
4,980
5,589
5,987
6,323
Capacity building and restructuring
723
749
Municipal infrastructure grant function shift 2 41 44 46 48
Changes to baseline
477
600
800
1,400 –
700
1,000
100
400
Total revised allocations
14,757
16,559
17,937
19,394
10,178
11,055
11,873
5,498
5,633
6,133
6,772
1. Includes water operating subsidy.
2. The municipal infrastructure grant shifts from provinces to local government from 1 April The 2004/05
number is reflected for comparative purposes.