1. Medium Term Budget Policy Statement 2007

2. Medium term policy objectives
To secure higher growth on a sustainable basis, we must focus on:
Accelerating economic growth and the rate of investment
Creating more work opportunities
Investing in community services and growing the social wage
Improving the effectiveness of the state, including combating crime and promoting a service oriented culture
Building regional and international partnerships for growth and development

3. Economic growth has been good for South Africa
Living standards boosted by:
Higher wages, lower interest rates and personal income tax relief
Rising employment
Increased house and asset prices
Significant share of economic success redistributed through fiscus
The economy has boosted taxes and lowered interest rates - allowing government expenditure to grow strongly
Social wage consistently expanded
Transfers to households have grown
Public sector remuneration and employment recently boosted
Growth in capital spending has improved access to and quality of services

4. Consumption and investment demand strong

5. Commodity prices exceptionally high
Exceptional increase in commodity prices
High volatility is concerning
Supply response is underway and slower growth in developed markets poses a risk to prices

6. But we have lived beyond our means
We are spending more than we earn and rely on the international community to finance our spending (at present R2 billion a week)
Resulting current account and inflation imbalances are not sustainable
Savings, investment imbalance is a key constraint to faster growth

7. High current account deficit exposes SA to changes in global environment
Red bars reflect countries with similar credit rating to SA

8. Supply-side pressures push up inflation
CPIX has been outside the inflation target range since April 2007
Supply-side price pressures include
High global prices for agricultural commodities and low domestic production
Oil prices at record high levels
High capacity utilisation in many sectors of the economy
Average wage settlements above 8 per cent
Major contributors to CPIX inflation
Component
Contribution at September 2007
Food
3,2
Transport
0,4
Medical care and health expenses
0,5
Housing (excluding mortgage rates)
All groups
0,8
6.7
Source: StatsSA

9. Global risks now sharper
Greater risks of a global economic slowdown now than a year ago due to:
Slowing growth in the US
Unraveling of sub-prime mortgage crisis not yet over
Steps to curb inflation in China may slow growth there
What can be done to mitigate the risks?
Fiscal policy must contribute to the sustainability of economic growth and employment creation by ensuring that:
Fiscal decisions do not place excessive burdens on the economy
We save enough so we can increase demand to protect jobs and investment when the cycle turns
Fiscal policy does not add pressure to interest rates
The proposed fiscal framework attempts to balance these macroeconomic concerns with the microeconomic objectives of government

10. Growth revised down, but still relatively strong

11. Cyclical factors in revenue
To-date, we have implicitly taken account of cyclical factors in revenue to adjust fiscal policy
We introduce the concept of a structural budget balance, which adjusts the fiscal balance for:
Cyclical deviations in the rate of economic growth, interest rates and inflation
Cyclical changes to the composition of growth (e.g. higher consumption would mean more VAT receipts)
Changes to our terms of trade or to commodity prices (terms of trade reflect the ratio of export prices to import prices)
We estimate that in 2008/09, the cyclical component of our revenue is about R22 billion or 1% of GDP. The proposed budget surplus for that year is R16 billion, implying that we are only saving a proportion of cyclical revenue.

12. Conventional budget balance
An estimate is made of cyclical revenue
Conventional budget balance is simply total revenue less expenditure

13. Structural budget balance
Cyclical revenue is removed
Structural budget balance is now total revenue less cyclical revenue less expenditure

14. Main budget and structural budget balances

15. Why budget for a surplus?
A cyclical increase in revenue should be managed differently from a permanent increase
Given that capital spending is rising as a share of spending, the fiscal framework recommends that only part of that cyclical revenue be saved
By saving a part of the cyclical revenue, we also take some pressure off interest rates and the current account deficit, allowing for more balanced growth
Budget surpluses are used to:
Pay back debt which lowers debt service costs; or
Help in the process of building foreign exchange reserves, further cushioning the economy against external volatility
The structural budget balance reflects a deficit rising to about 1% of GDP by 2010/11

16. Strong real growth in public spending
Real non-interest expenditure
100
120
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280
1995/96
1996/97
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2007/08
2008/09
2009/10
R billions deflated to 1995/96

17. Highlights of 2007/08 adjustments
Funds rolled over for:
Municipal infrastructure projects totaling R818 million
Health laboratories, forensic pathology, HIV and Aids and Hospital Revitalisation amounting to R385 million
Capital costs for the Kimberley correctional centre in the amount of R513 million
Unforeseeable and unavoidable expenditure for:
Natural disasters like floods, fire and adverse weather amounting to R654 million
Treatment of MDR and XDR TB and HIV and Aids totaling R450 million
SAA for restructuring to put the airline on a sustainable footing totaling R744 million
Bus subsidies due to higher passenger demand to the amount of R300 million
Capital expenditure to facilitate investment at Coega and final payments in respect of the Small Medium Enterprise Development incentive programme totals R525 million
R28 million to Alexcor and R2.5 billion for the PBMR project for commitments of the 2007 Budget
R1.9 billion for public service salary adjustments
In-year adjustments result in national expenditure level increasing from R533.9 billion to R542.4 billion

18. Fiscal stance remains prudent
Economic cycle requires that fiscal policy moderate demand
Budget balance improves from 0.5% of GDP (2007/08) to 0.7% (2008/09), before declining back to 0.5% of GDP (2010/11)
Real growth in expenditure still high, averaging 6.4% a year
Total resources available over BR 2007 baseline = R81.4 bn

19. Medium-term spending priorities
Investing in economic and social infrastructure
Improving the quality of education, health and other social services
Supporting job creation and expanding labour intensive programmes
Improving efficacy in the criminal justice sector
Raising the productive capacity of the economy through regulation and support for business
GDP growth of 4,9 per cent for 2006, averaging about 5,1 per cent over the forecast period.
Real growth in national government non-interest expenditure by an annual average of 7,3 per cent over the period.
A main budget balance of 0,0 per cent for 2006/07, a budget surplus of 0,6 per cent for 2007/08, moving to deficits of 1,4 per cent in 2008/09 and 1,2 per cent in 2008/09.
Provincial expenditure rises by an annual average of 12 per cent over the MTEF.
National budget revenue increases to R474,2 billion in 2006/07, or R7,8 billion more than expected at the time of the 2006 Medium Term Budget Policy Statement.
Borrowing costs decline as a percentage of GDP from 3 per cent in 2006/07 to 2,2 per cent in 2009/10.

20. Shift towards provinces and local government
The Division of Revenue reflects a shift towards provinces and local government
To sustain the delivery of basic services
To fund broad built environment initiatives
Both spheres receive 59.8 per cent or R48.6 billion of the additional resources over the MTEF.
15.4 per cent or R12.6 billion for local government
44.4 per cent or R36.1 billion for provinces
National government gets 40.2 per cent or R32.7 billion to fund
Service delivery improvement initiatives (particularly in Home Affairs)
Crime prevention and economic growth
Investing in economic infrastructure and services

21. Division of revenue
2003/04
2009/10

22. Provincial priorities
R11.7 billion is to implement the recently concluded wage agreement
Including provision for OSD in the social sector
This is in addition to the R12.2 billion currently in provincial baselines
In education
Grade R; learners with special needs (inclusive education); LSM for grades 10 to 12 (NSM); education infrastructure needs
In health
General baseline adjustment to stabilise the public health system; TB (MDR and XDR); Comprehensive HIV and Aids strategy (preventative, HBC and ARVs); and hospital revitalisation
In social development
ECD (in collaboration with education); secure care services for children in conflict with the law; access home and community based care
Roads, agriculture and SMME development
Housing and human settlements

23. Local government priorities
Increasing the equitable share envelope in acknowledgement of:
increased service delivery costs due to tariff increases
increased demand following the rollout of basic infrastructure to the poor
Support for poorer municipalities (minimum MIG alloc raised to R5m)
Step up of the MIG to accelerate progress in meeting targets on water, electricity and sanitation
Further ensuring the readiness of the host cities for the 2010 FWC

24. To meet our development objectives we must:
Policy conclusions
To meet our development objectives we must:
Invest in infrastructure and skills
Broaden access to household services and public transport
Expand the social wage and maintain a progressive social security system
Focus on microeconomic reforms to lower costs, reduce red tape and enhance labour absorption
Increase exports through productivity improvements and trade and industrial policy reforms
Improve the quality and breadth of public services
Cushion public spending from risk