1. Medium term budget policy statement November 2003

2. 2 Introduction n 2003 Medium term budget policy statement: –Draws on 10 year review and Growth and Development Summit Agreement –Major themes n Expansionary fiscal stance n Fighting poverty and reducing unemployment n Raising the level of public and private investment n Building sustainable communities n Fighting crime n Fostering regional development through Nepad

3. 3 Macroeconomic overview n Domestic economy resilient –Continued, but slower, positive growth amidst global slowdown –Weak global demand hurts manufacturing exports –Commodity prices rising n Global recovery gains momentum, especially in US and East Asia n Strong investment supports overall growth prospects n GDS policy initiatives will further support growth and poverty alleviation n Growth forecasts for 2003 scaled down but still expected to rise strongly in medium term

4. 4 Global economy n Strong correlation between SA and G7 growth n Global slowdown was longer than anticipated but recovery is gaining momentum n World GDP to accelerate to 3% in 2004 from around 2% in 2003 n Fiscal and monetary stimulus and weaker dollar will support US consumer and export demand n Despite labour market weakness and huge twin deficits, US will remain driver of global recovery n Euro economies will emerge out of recession, although growing more slowly than rest of G7 n Strong commodity prices, but higher oil prices too

5. 5. Global outlook

6. 6 Trade performance n Geographical and product diversification of trade continues n Bilateral and multilateral trade agreements n 19% SA exports to US now duty free under AGOA n Manufacturers dominate exports to US n EU our major trading partner, SA-EU trade agreement to guide further expansion

7. 7 Direction of exports 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% AfricaAmericasAsiaEuropeOceaniaNot allocated 1990 1995 2002

8. 8 Commodity price cycle

9. 9 Balance of payments n Current account deficit of just under 1% of GDP in 2003 after 2002 surplus n Real effective rand appreciation and global slowdown reduced export earnings in H1 2003 n Falling interest rates and fiscal stimuli supported domestic spending n Trade surplus narrowed in H1 2003 as falling exports offset decline in imports n Services and income account deficit widened due to weaker dividend inflows, lower tourist spending n Surplus on financial account sufficient to finance current account deficit

10. 10 Balance of Payments

11. 11 Rand at 2000 levels

12. 12 Real output n Real output growth slowed to 2% in first half of 2003 n Slowdown in 1 st half of 2003 due to global weakness, stronger rand and higher interest rates n Sharp slowdown in manufacturing led by export and import-competing industries n However, strong investment growth and fiscal policy initiatives in manufacturing n Government infrastructure growth will support construction in medium term

13. 13 Primary sector n Contraction in agriculture driven by field crop decline due to bad weather n Modest recovery in mining production n High gold and platinum dollar prices offset negative impact of rand strength n Strong global demand will drive growth and future investments

14. 14 Manufacturing

15. 15 Tourism n Tourism to South Africa increasing amidst decline in worldwide tourism n Continued expansion of tourist capacity

16. 16 Domestic expenditure n GDE growth higher than GDP growth n Household consumption slowed down but remained robust n Falling interest rates will support consumption in coming months n Strong increase in investment in H1 despite high interest rates and overall slowdown

17. 17 Interest rates n Reserve Bank’s 4 percentage points rate hike of 2002 followed by 5 percentage point cuts in 2003 n Inflationary pressures abated partly due to due to rand appreciation n Rate cuts will support consumption, investment and overall growth recovery

18. 18 Inflation targeting n Technical amendments to IT framework –Continuous target instead of annual average –3%-6% target instated beyond 2006 –Escape clause replaced with explanation clause –SARB to inform public through MPC meetings of any shocks and impact on inflation n CPIX will remain target basket n Efficiency of administered pricing being investigated n Improved competition and regulation

19. 19 Inflation

20. 20 SA Growth Forecasts

21. 21 Forecasts

22. 22 Fiscal policy n Expansionary stance began in 2001 Budget continues n Revenue shortfall of about R4,6 billion this year due to economic slowdown n Fiscal policy supports growth through: –Strong real growth in spending –Stable tax to GDP level –Declining debt service costs n Fiscal policy is counter-cyclical –Expansionary but within sustainable framework

23. 23 Key MTEF trends n Additional spending of R37 billion over baseline over the next three years n Real non-interest expenditure growth averages 4,4% per year over 2004 MTEF n Increase in budget deficit to 3,2% of GDP in 2004/05, declining to 2,8% of GDP in 2006/07 –Lower consolidated general govt. deficit due to surpluses on social security funds (under 3%) n Main budget revenue at 24,8% of GDP n Real rise in general government investment, supported by public corporations n Debt service costs decline to 3,7% of GDP

24. 24 Fiscal Framework

25. 25 2003 Tax proposals n Foreign exchange amnesty extended until 29 February 04 n Tax on retirement funds to be reviewed further to consider all aspects of savings n Tax incentive for urban development covers 15 municipalities n Business tax stimulus measures: –Reinvestment tax relief, claim losses for unproductive assets sold, stimulating R&D, allowances for start-up expenses n Remove tax on foreign dividends and the designated country list n Address inconsistent income tax and VAT rules of transfer payments to public entities

26. 26 Revenue outcome and projections n Preliminary outcome for 2002/03 –Main budget revenue R278,2 billion –R13,2 billion higher than budgeted n Due to higher than projected increases in remuneration, GOS of companies, expenditure growth and inflation n Revised forecast for 2003/04 –Main budget revenue R299,9 billion –R4,6 billion less than budgeted n Mainly due to the appreciation in the value of the Rand - reducing company profits and the custom value of imports

27. 27 Tax policy for the 2004 Budget n Review tax impediments to broad-based economic empowerment transactions n Review tax implications of proposed medical aid schemes and health insurance plan, fringe benefit taxation and direct employer provided medical assistance n Review the overlap between VAT and transfer duty n Streamline customs and excise procedures

28. 28 Key spending priorities n Renewed focus on employment creation – EPWP n Step up in infrastructure spending n Further commitment to fighting HIV/Aids - ARVs n Extension of social security grants - CSG n Improving quality of school education -textbooks to poor schools n Continued roll-out of free basic services n Strengthening the safety and security sector n Improving core services of Home Affairs to citizens n Promoting peace and development in the region n Promoting broad-based black economic empowerment

29. 29 Division of additional resources

30. 30 Division of total resources

31. 31 n Social Services –Additional funding of R16,5 billion over 2004 MTEF (9,4 per cent average annual increase) –Additional funds target n New ARV programme n Extension of child support grant n Restructuring of higher education, Social Security Agency n Protection Services –Additional funding of R2 billion over MTEF for JCPS (8,6 per cent increase) –R2,1 billion savings from Defence arising from SDP – Additional funds target n More personnel for SAPS n Modernisation of IJS, particularly courts administration n Peace Support Operations Key spending areas

32. 32 n Economic services and infrastructure –Additional funding of R12,1 billion over MTEF period (9,3 per cent increase) –Targeted towards n Roads, Road traffic management systems n Basic infrastructure services n Land Restitution and reform n Administration –Additional funding of R5,3 billion over MTEF (12,8 per cent) –Targeted towards n Mobile units in rural areas for Home Affairs n Expanded Public Works coordinating unit n Improving quality of economic indicators and statistics Key spending areas

33. 33 Adjusted Estimates 2003 n The 2003 Adjusted Estimates provides for total adjustments of R6,8 billion R billions Provinces Unforeseeable & Unavoidable Expenditure2,1 National Unforeseen & Unavoidable Expenditure2,8 Roll-overs1,1 Salary Adjustments and Self-financing expenditure0,8 Total Adjustments6,8 n The net increase in spending is R1,3 billion after in-year savings, contingency reserve, etc.

34. 34 Adjusted Estimates 2003 n Main adjustments to national departments’ appropriations: RM RM –Communications: Post Office 750 –Defence: Peace support initiatives 500 –National Treasury: Service benefits MPs 400 –Water Affairs: Emergency water, debt water associations 346 –Public Works: Rates, municipal services 180 –Home Affairs: Lindlela, ID campaign 103

35. 35 Provincial finances n Revisions to provincial baselines commitment to reinforcing pro-poor spending –Stepping up spending on non-personnel in education –Further strengthening health sector –By allocating R1,9bn for ARVs –Providing additional resources for take up of CSG & other grants –Provide for expansion of labour-intensive infrastructure delivery n Provinces receive R19,9bn of additional resources over the next three years

36. 36 Provincial transfers

37. 37 Local Government finances n Government has allocated an additional R3,9 billion over the next 3 yrs to municipalities n Government has allocated an additional R3,9 billion over the next 3 yrs to municipalities n Additional transfers intended for service delivery –Accelerate the rollout of free basic services to households –Strengthen municipal infrastructure delivery through the MIG n Increased use of labour- based methods –Improve skills base in planning, budgeting and technical areas

38. 38 Transfers to local govt.