1. The 2007 MTBPS: short on detail
Jac Laubscher
Group Economist
2 November 2007

2. The overriding themes Objectives are still the same:
Accelerating growth
Creating employment
Reducing poverty and inequality
Fiscal policy has done its part – it in now over to other policy arms of government, including better execution
The gains in government’s financial position must be preserved
Economic imbalances and risks require an emphasis on sustainability
Fiscal policy must support monetary policy

3. Agenda Revised macro-economic forecast Revised estimates for 2007/08
Revised projections for 2008/09 to 2010/11
Introduction of structural budget balance
Other policy matters
Evaluation

4. Revised macro-economic forecast
Higher inflation
Higher interest rates
Rebalancing of growth from consumption to investment
Higher current account deficit
Lower growth

5. Comparative macro-economic forecast
2007
2008
2009
Budget
MTBPS
Sanlam
CPIX inflation
5.1
6.2
6.3
4.7
5.4
5.9
4.5
4.6
4.8
GDP growth
4.9
4.2
Current account
-5.3
-6.7
-6.5
-5.7
-6.9
-6.8
-5.9
-7.7

6. Policy background and implications
Growing and persistent imbalances in the economy
Accelerating inflation
Rising current account deficit
International uncertainty abnormally high
Implications:
Caution required
Monetary policy must be supported; tighter fiscal policy reduces need for higher interest rates
But why then huge tax relief for individuals in recent years?
Emphasis on structural reform

7. CPIX and Core Inflation

8. World growth vs. inflation

9. Flow of private capital to emerging markets

10. Current account balances (% of GDP)
2005
2006
2007F
2008F
Mexico
-0.6
-0.2
-1.0
-1.4
India
-0.9
-2.2
-2.4
-2.3
Russia
8.8
7.7
5.0
4.3
South Africa
-3.8
-6.4
-6.0
China
7.2
9.1
10.0
10.5
Brazil
1.6
1.3
0.8
0.3
Korea
1.9
0.7
Taiwan
4.6
7.1

11. Introduction of structural budget balance
Emphasis on windfalls from buoyant international conditions
High commodity prices/ improved terms of trade
Strong inflow of capital
Economy growing above potential implies revenue growth above potential
Sustainability requires conservatism
“Soft” concept
Difficulty in separation of cyclical and structural change
Difficulty of measuring potential output/ growth
Should be seen as additional information, not as basis for policy decisions

12. The commodity price cycle

13. Terms of Trade

14. Net foreign portfolio investment

15. JSE vs. Emerging Market Equities

16. SA vs. USA 10-year Bond Yield + EM Spread

17. Revised estimates for 2007/08
Upward revision to gross tax revenue (+R9.5 billion) is more than expected
Of upward revision to expenditure (+R8.5 billion), R4 billion (47%) to public corporations

18. Revised projections for 2008/09 to 2010/11
Projected growth in revenue increased in spite of reduced growth forecasts
Introduction of structural balance encouraging boldness?
Expenditure revised upwards but by less
Resulting in continuing budget surpluses
And rising cash balances
Discouraging expectations for tax relief
Alert: watch the wage bill
Alert: watch the tax burden

19. Revised projections (Amount)
2007/08
2008/09
2009/10
2010/11
Budget
MTBPS
Revenue
544.6
553.1
591.2
616.0
641.5
679.6
740.5
% growth
14.5
14.9
8.6
11.4
8.5
10.3
8.9
Expenditure
533.9
542.4
594.2
599.9
650.3
665.6
726.2
13.4
15.4
11.3
10.6
9.4
11.0
9.1
% real growth
9.8
6.9
5.9
7.2
5.2
Balance
10.728
10.8
-3.032
16.2
-8.787
14.0
14.3

20. Policy matters NSSS and wage subsidy: vague
Industrial policy: vague to critical; supporting lower tariffs more than incentives
Tax policy: very little, e.g. on tax administration burden on small business
Inflation targeting: nothing
Exchange controls: nothing
Eskom financing: nothing
No capital injection?
Dividend to continue?
Not a matter of affordability: refusing fiscal ratios to be adjusted?
Treated differently from other public corporations, levels of government: favoring restructuring, transport, communications

21. Evaluation Accelerating growth Maintaining macro-economic stability
Improving sustainability
Contributing to national savings
Crowding in rather than crowding out
Removing infrastructure bottlenecks
Tax policy?

22. Evaluation Creating employment Accelerating growth
Industrial and trade reform: raising labour intensity of growth
Proposed wage subsidy

23. Evaluation Reducing poverty and inequality Creating employment
Providing safety net
Providing social wage
Ongoing redistribution
Increased allocations to e.g. health, education and training, access to modern economy