11 BRIEFING TO THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT THE ECONOMIC OUTLOOK AND MILLENNIUM DEVELOPMENT GOALS (MDGS) 14 June 2011 For an Equitable.

11 BRIEFING TO THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT THE ECONOMIC OUTLOOK AND MILLENNIUM DEVELOPMENT GOALS (MDGS) 14 June 2011 For an Equitable Sharing of National Revenue. Briefing on Economic Development and MDGs

OUTLINE OF PRESENTATION
22 OUTLINE OF PRESENTATION Economic Outlook New Growth Path and Modelling Results Status of Millennium Development Goals MDG Simulations and Modelling Results Conclusions Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 2 2

Economic Outlook: Growth
33 Economic Outlook: Growth New Growth Path (NGP) focus Growth rate, labour intensity and composition of economic growth Economic growth in real terms increased from -1.7% in to 2.8% in 2010 Expected to be between 3.4% (IMF, SARB) and 3.8% (BER) in 2011 Well below the expected 6.5% average growth rate expected for developing countries Likely causes: slow pace of international economic recovery and chronic unemployment In terms of sectoral composition of growth, manufacturing as well as mining and quarrying = largest contributors in 2010 These also comprise SA’s main exports - importance of the exchange rate for future growth Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3

Economic Outlook: Fiscal and Monetary Policies
To date, fiscal and monetary policies coordinated and countercyclical – aimed at boosting recovery In 2009/10 tax year, fiscal deficit increased to -7.3% of GDP (worst budget deficit since 1961) Currently at -4.8% of GDP (less than -5.3% budgeted in February 2011) Expected to decrease further over the medium run as SA economy recovers Relatively strong fiscal position threatened by possibility of global economy experiencing a renewed downturn Result in lower government revenue and higher government borrowing Repo rate reduced five times in 2010 to 5.5% (current level) to boost consumption spending Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 44

Economic Outlook: Inflation
55 Economic Outlook: Inflation Inflation Downward pressure: strong Rand and lower demand Upward pressure: food prices (rising commodity prices), wage costs (public sector wage demands) and energy prices Latest CPI figures indicate a rise from 4.1% in March to 4.2% in April 2011 This slight increase indicates that inflation is on the rise Coincides with upward revision of inflation forecasts by SARB Indicates a repo rate increase later this year and further increases in 2012 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 55

Economic Outlook: Exchange Rate
Important tenet of NGP: drive the value of Rand down Render locally-produced goods more competitive and create jobs SARB: increased reserves and capital flow moderation Strong Rand Expected to stay strong in the medium term (around 7 R/$) Assisted by substantial portfolio inflows into the domestic bond market to take advantage of relatively high yields available compared with bonds in other countries Implications for exports (commodity) and imports (manufacturing) Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 66

Economic Outlook: Savings and Investment
77 Economic Outlook: Savings and Investment NGP: savings and investment in SA below levels needed for sustained growth Policies in place to address these Savings To achieve growth of more than 4%, domestic savings rate has to be some 24% of GDP Currently at some 16% (compare to 40% in China) Even worse: current ratio of savings to disposable income of households is -0.3 Investment Modest pick-up in investment rate expected in 2011 (low capacity utilisation) Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 77

Economic Outlook: Unemployment
88 Economic Outlook: Unemployment Unemployment QLFS 2011Q1: unemployment increased across all race groups despite solid economic growth (current figure: 25%) Jobless growth? In terms of sectors: Agriculture, construction, transport and communications, as well as financial and business services all reported job losses between 2010Q1 and 2011Q1 Need to tackle structural impediments to job creation over the coming years: lack of adequate skills and education, labour market legislation and conditions, poor attention to entrepreneurship and small business Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 88

Economic Outlook: Some Challenges
99 Economic Outlook: Some Challenges Government balancing act: inclusive growth and job creation together with fiscal sustainability and low inflation Structural challenges Infrastructure: transport and energy (absence of sufficient electricity generating capacity and implications for NGP) Public service delivery Even though the 2010 GHS indicates a slight improvement in service delivery, management and maintenance of service delivery are also key Private sector development, competition Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 99

MODELLING NGP SIMULATIONS AND RESULTS
MODELLING NGP SIMULATIONS AND RESULTS Methodology Justification Simulations Results Conclusions Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 10

Methodology - Justification
Methodology - Justification CGE analysis that allows taking into account all the linkages between productive sectors, demand, international trade and macroeconomic constraints As measures are known in advance, a forward- looking behaviour (for firms and households) is more suitable Impact of infrastructure on economic growth is taken into account Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 11

Methodology - Overview
Methodology - Overview Multi-sector analysis (multiple industries and commodities) Intertemporal framework: all current and future prices are known and affect firms investment decision and households consumption pattern Taxation options: many tax instruments are explicitly modelled to allow for a wide variety of policy responses Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 12

Briefing on Economic Outlook and MDGs
NGP SIMULATIONS – 2011 TO 2059 Two simulations: Increased current public spending As in Budget Review 2011 up to 2014 2% from 2015 to 2020 back to BAU in 2020 Increased public investment 2% in 2015 to 2020 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 13

Results - Simulations Under three financing mechanisms: Increased income tax rate on households’ income Increased indirect tax rate on commodities Increased debt Caveats: Public investment in infrastructure is assumed to increase total factor productivity But public current spending does not affect productivity (period of increased spending is assumed too short to significantly impact productivity) Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 14

Indirect tax financing
Results - Simulation 1 Increased public expenditures has little impact on GDP, regardless of the timeframe Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 1.18% 0.07% -0.10% -0.54% -0.42% -0.23% 1.14% 0.04% -0.12% GDP deflator 1.19% 0.38% 0.11% -0.56% 0.15% 0.16% 1.15% 0.35% 0.10% Real GDP -0.01% -0.31% -0.20% 0.02% -0.57% -0.39% -0.32% -0.21% Real consumption -1.07% -0.71% -0.24% -1.65% -0.81% -0.40% -1.09% -0.74% -0.27% Real investment -5.56% -0.77% -0.05% -2.54% -1.27% -0.28% -5.69% -0.07% Debt 0.00% 1.97% 2.08% Gov. expenditures 5.92% 1.22% 0.03% 6.23% 1.36% 5.91% 1.43% 0.25% Increase in tax rate 2.65% 0.63% 0.06% 1.01% 0.26% n.a. Briefing on Economic Outlook and MDGs Briefing on Economic Development and MDGs 15

Results - Simulation 1 Affects negatively real investment, especially in the short run and under direct tax and debt financing Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 1.18% 0.07% -0.10% -0.54% -0.42% -0.23% 1.14% 0.04% -0.12% GDP deflator 1.19% 0.38% 0.11% -0.56% 0.15% 0.16% 1.15% 0.35% 0.10% Real GDP -0.01% -0.31% -0.20% 0.02% -0.57% -0.39% -0.32% -0.21% Real consumption -1.07% -0.71% -0.24% -1.65% -0.81% -0.40% -1.09% -0.74% -0.27% Real investment -5.56% -0.77% -0.05% -2.54% -1.27% -0.28% -5.69% -0.07% Debt 0.00% 1.97% 2.08% Gov. expenditures 5.92% 1.22% 0.03% 6.23% 1.36% 5.91% 1.43% 0.25% Increase in tax rate 2.65% 0.63% 0.06% 1.01% 0.26% n.a. Briefing on Economic Outlook and MDGs Briefing on Economic Development and MDGs 16

Results - Simulation 1 Implies increased income tax rates by 2.65 or increased indirect tax rates by 1 (temporary tax) Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 1.18% 0.07% -0.10% -0.54% -0.42% -0.23% 1.14% 0.04% -0.12% GDP deflator 1.19% 0.38% 0.11% -0.56% 0.15% 0.16% 1.15% 0.35% 0.10% Real GDP -0.01% -0.31% -0.20% 0.02% -0.57% -0.39% -0.32% -0.21% Real consumption -1.07% -0.71% -0.24% -1.65% -0.81% -0.40% -1.09% -0.74% -0.27% Real investment -5.56% -0.77% -0.05% -2.54% -1.27% -0.28% -5.69% -0.07% Debt 0.00% 1.97% 2.08% Gov. expenditures 5.92% 1.22% 0.03% 6.23% 1.36% 5.91% 1.43% 0.25% Increase in tax rate 2.65% 0.63% 0.06% 1.01% 0.26% n.a. Briefing on Economic Outlook and MDGs Briefing on Economic Development and MDGs 17

Results - Simulation 1 Debt financing mechanism implies greater debt-to GDP ratio, even in the very long run Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 18

Results - Simulation 2 Increased public investment has greater impact on GDP, especially in the long run (TFP effect) Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 0.02% 0.15% 0.17% -0.22% 0.16% 0.26% GDP deflator -0.34% -0.27% -0.33% -0.25% Real GDP 0.00% 0.49% 0.44% 0.51% Real consumption 0.07% 0.30% 0.37% -0.09% 0.23% 0.38% Real investment -0.21% 0.89% 0.46% 1.12% 0.79% 0.88% Debt -0.15% Gov. expenditures 0.73% -0.07% 0.76% 0.06% -0.10% 0.08% -0.08% Increase in tax rate 0.34% -0.03% -0.11% 0.13% -0.01% -0.04% n.a. Briefing on Economic Outlook and MDGs Briefing on Economic Development and MDGs 19

Results - Simulation 2 Stimulates real consumption (especially in the longer run) Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 0.02% 0.15% 0.17% -0.22% 0.16% 0.26% GDP deflator -0.34% -0.27% -0.33% -0.25% Real GDP 0.00% 0.49% 0.44% 0.51% Real consumption 0.07% 0.30% 0.37% -0.09% 0.23% 0.38% Real investment -0.21% 0.89% 0.46% 1.12% 0.79% 0.88% Debt -0.15% Gov. expenditures 0.73% -0.07% 0.76% 0.06% -0.10% 0.08% -0.08% Increase in tax rate 0.34% -0.03% -0.11% 0.13% -0.01% -0.04% n.a. Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 20

Results - Simulation 2 Affects real investment negatively in the short run, but positively in the medium and long run Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 0.02% 0.15% 0.17% -0.22% 0.16% 0.26% GDP deflator -0.34% -0.27% -0.33% -0.25% Real GDP 0.00% 0.49% 0.44% 0.51% Real consumption 0.07% 0.30% 0.37% -0.09% 0.23% 0.38% Real investment -0.21% 0.89% 0.46% 1.12% 0.79% 0.88% Debt -0.15% Gov. expenditures 0.73% -0.07% 0.76% 0.06% -0.10% 0.08% -0.08% Increase in tax rate 0.34% -0.03% -0.11% 0.13% -0.01% -0.04% n.a. Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 21

Results - Simulation 2 Would require small tax increase in the short run but translate into tax reduction in the longer term Direct tax financing Indirect tax financing Debt financing 2011 2015 2025 GDP 0.02% 0.15% 0.17% -0.22% 0.16% 0.26% GDP deflator -0.34% -0.27% -0.33% -0.25% Real GDP 0.00% 0.49% 0.44% 0.51% Real consumption 0.07% 0.30% 0.37% -0.09% 0.23% 0.38% Real investment -0.21% 0.89% 0.46% 1.12% 0.79% 0.88% Debt -0.15% Gov. expenditures 0.73% -0.07% 0.76% 0.06% -0.10% 0.08% -0.08% Increase in tax rate 0.34% -0.03% -0.11% 0.13% -0.01% -0.04% n.a. Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 22

Results - Simulation 2 Although the debt-to-GDP ratio is above that of BAU in the short term, it would be below in the long run because of economic growth Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 23

Results - Simulation 2 Different values of elasticity would change the amplitude of the impact on GDP by less than 1% Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 24

Results - Simulation 2 Similar conclusion for the debt-to-GDP ratio Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 25

NGP – CONCLUSIONS Current expenditures: Increase in current expenditures has little impact on the economy Including TFP impact would significantly change the results. (Would a 5-year increase be sufficient to impact TFP?) Debt financing would require future intervention in order to go back to the initial debt-to-GDP ratio Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 26

NGP – CONCLUSIONS Investment expenditures: Short term public investment in infrastructure would affect TFP Positive impact on macroeconomic impacts, especially in the medium run Reduces the debt-to-GDP ratio, regardless of the financing mechanism (economic growth) Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 27

Where is South Africa, 4 years before the deadline? Is South Africa “on track” to achieve the MDGs under current public policies and investments? If not: How much additional public spending will be needed? What would be the most feasible financing strategy? Which trade-offs need to be taken into account when identifying a preferred financing strategy? Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 28

2015 target = halve 1990 $1 a day poverty and malnutrition rates
STATUS - MDG1 Eradicate extreme poverty and hunger 1990 1995 2000 2005 2006 2007 2008 2015 target = halve 1990 $1 a day poverty and malnutrition rates Population below $1 a day (%) .. 6.3 11.3 5 Poverty Gap at $1 a day (%) 0.6 3.2 1.1 Percentage share of consumption held by poorest 20% 3.6 2.9 2.8 Prevalence of child malnutrition (% of children under 5) 3 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 2929

2015 target is to have net enrolment of 100%
STATUS - MDG2 Achieve universal primary education 1990 1995 2000 2005 2006 2007 2008 2015 target is to have net enrolment of 100% Net primary enrolment ratio male (%) 90 .. 96 98.1 97.9 98 Net primary enrolment ratio female (%) 98.4 98.6 98.2 98.8 Youth literacy rate (% ages ) 93.9 93.5 88.8 89.5 90.1 90.3 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3030

2005 target is to have education ratio to 100
STATUS - MDG3 Promote gender equality 1990 1995 2000 2005 2006 2007 2008 2005 target is to have education ratio to 100 Ratio of girls to boys in primary education 1:1.05 1:1.03 (1996) 1:1.02 (1999) .. 1:1.04 (2009) Ratio of girls to boys in secondary education 1:0.89 1:0.88 (1996) 1:0.89 (1999) 1:0.95 1:0.94 Ratio of young illiterate females to males (% ages 15-24) 101 99.9 Share of women employed in the nonagricultural sector (%) 42.6 43.6 44.6 44 42.9 Proportion of seats held by women in national parliament (%) 3 25 30 32.8 33 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3131

2015 target = reduce 1990 under 5 mortality by two thirds
STATUS - MDG4 Reduce child mortality 1990 1995 2000 2005 2006 2007 2008 2015 target = reduce 1990 under 5 mortality by two thirds Under 5 mortality rate (per 1,000) 61.7 63.2 77.4 78.5 74.6 69.4 65.3 Infant mortality rate (per 1,000 births) 45 50 55 56 48 Immunization, measles (children under 12 months) 79 76 77 80.1 86.6 87.6 93.3 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3232

2015 target = reduce 1990 maternal mortality by three quarters
STATUS - MDG5 Improve maternal health 1990 1995 2000 2005 2006 2007 2008 2015 target = reduce 1990 maternal mortality by three quarters Maternal mortality ratio (modeled estimate per 100,000 births) 230 260 380 440 400 410 Births attended by skilled health staff (% total) .. 82 84 92 (2003) 94.3 (2009) Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3333

2015 target = halve and begin to reverse prevalence of diseases
STATUS - MDG6 Combat HIV/AIDS, malaria and other diseases 1990 1995 2000 2005 2006 2007 2008 2015 target = halve and begin to reverse prevalence of diseases Prevalence of HIV (% ages 15-49) 0.8 6.2 15.9 18.2 18.1 8.7 Contraceptive prevalence rate (% women aged 15-24) 57 .. 56.3 (1998) 59.9 (2003) 14.8 12.7 Number of children orphaned by HIV/AIDS (thousands) 660 1 200 1400 1 800 Incidence of tuberculosis (per 100,000 people) 224 392.4 580 645 940 948 960 Tuberculosis cases detected under DOTS (%) 72.8 41.2 62.6 71.7 76.6 78. 72.13 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3434

STATUS - MDG7 Briefing on Economic Development and MDGs
ENSURE ENVIRONMENTAL SUSTAINABILITY 1990 1995 2000 2005 2006 2007 2008 2015 target = various Area (% of land area) 7.58 Nationally protected areas (% of total land area) .. 6.1 6.05 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.03 2.74 2.99 .3.15 3.25 3.29 CO2 emissions (metric tons per capita) 9.47 9.03 8.37 8.72 8.74 8.82 Access to an improved water source (% of population) 83 84 89 91.7 92.2 92.7 92 Access to improved sanitation (% of population) 55 56 57 66.7 68.2 70.1 69.7 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3535

STATUS - MDG8 Briefing on Economic Development and MDGs
Develop a global partnership for development 1990 1995 2000 2005 2006 2007 2008 2015 target = various Youth unemployment rate (% of total labour force ages 15-24) .. 44.2 46.9 Fixed line and mobile telephones (per 1,000 people) 94.3 116 302.3 825.1 889 Fixed line and mobile telephones (per 100 people ) 9.43 11.6 30.23 82.51 93.49 97.87 101.5 Personal computers (per 1,000 people) 7.1 28.1 66.4 84.6 Personal computers (per 100 people ) 0.71 2.81 6.59 8.46 Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 3636

MODELLING Use Dynamic CGE Model designed for study of MDGs Retroaction between education/health sectors and labour markets Model that takes into account capital accounts for agents MDGs taken into account in the model: MDG2 (net completion rate) MDG4 (child mortality rate) MDG5 (maternal mortality rate) MDG6 (HIV prevalence) MDG7 (Access to improved water sanitation) MDG8 (Investment over GDP ratio) Targets for each MDG are taken from the South African Country report (2010) Some of the MDGs targets are already achieved (MDG7 and MDG8), some are likely (MDG2 and MDG6), some are unlikely (MDG4 and MDG5) Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 37

SIMULATIONS – ATTAINING MDGs
Simulation 1: Can South Africa achieve ALL the MDG targets by 2015 ? Simulation 2: How much more is needed to reach MDG2 and tradeoffs? Simulation 3: How much more is needed to reach MDG6 and tradeoffs? Simulation 4: Financing MDG6 through indirect tax increase Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 38

Findings Variable SIMULATION 1 SIMULATION 2 SIMULATION 3 SIMULATION 4 MDG2_Education INFES Attained ++ — MDG4_Child Mortality + MDG5_Martenal Mortality MDG6_HIV Prevalence MDG8_Investment/GDP Household Consumption Government Savings Borrowing BAU Education Spending 1.2% to 23.5% Health Spending 3.3% to 17.4% 2.73% to 14.85% Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 39

MAJOR INSIGHTS Results show changes in the intermediate variables, notably the importance of MDG6 (HIV/AIDS) on the computation of other MDGs HIV/AIDS seems to have a massive impact on maternal mortality and child mortality Costs of attaining all outstanding MDGs simultaneously by 2015 too high – implied costs too high to allow model resolution Same for MDG4 and MDG5 because there is too much to do in 4 years Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 40

CONCLUSIONS - MDGs National, provincial and local government should further reprioritise expenditures in respect of the Equitable Share and Conditional Grants for 2012/13 to move towards attaining the MDGs - in this respect: Government should prioritise MDG2 (universal education) and MDG6 (HIV indicators) in the interim as their attainment will have positive impacts on the other MDGs (positive spillovers); and The time frame for attaining all outstanding MDGs simultaneously should be extended beyond 2015 to make the task feasible Government should explore alternative ways of financing the MDGs – Tax Vs Deficit Finance Briefing on Economic Development and MDGs Briefing on Economic Outlook and MDGs 41

Thank You. Briefing on Economic Development and MDGs
Financial and Fiscal Commission Montrose Place (2nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 Tel: Fax: Briefing on Economic Development and MDGs

11 BRIEFING TO THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT THE ECONOMIC OUTLOOK AND MILLENNIUM DEVELOPMENT GOALS (MDGS) 14 June 2011 For an Equitable.

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11 BRIEFING TO THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT THE ECONOMIC OUTLOOK AND MILLENNIUM DEVELOPMENT GOALS (MDGS) 14 June 2011 For an Equitable.

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Presentation on theme: "11 BRIEFING TO THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT THE ECONOMIC OUTLOOK AND MILLENNIUM DEVELOPMENT GOALS (MDGS) 14 June 2011 For an Equitable."— Presentation transcript:

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