1. Parliamentary Budget Office | 19 th February 2014 2014 Pre-Budget Briefing

2. Outline  Objectives  Global Economic Review and Outlook  SA Economic Review and Outlook  Fiscal Review and Outlook  Linking the Budget with the NDP  Risks  Issues for Consideration 2

3. Objectives  To provide members with a review of the global and domestic economic trends that influence policy and budget decisions.  To track key policy developments since 1994.  To highlight key economic, fiscal and policy trends, with implications for the new budget.  To highlight matters for consideration. 3

4. Global Economic Review and Outlook 4 Source: IMF 2013

5. 5 GEAR strategy to stabilise economy Budget surplus South African Economic Review and Outlook RDP Effects of financial crisis ASGISA NGPNIPFNDPPICC

6. Fiscal Review and Outlook 6 ConsolidationExpansionInvest for growthConsolidation Declining deficitIncreased public spending High spending accumulated debt 1994: RDP increase in the delivery of social goods 1996: GEAR strategy to stimulate growth Between 1996 and 2000: Reshape intergovernmental fiscal environment and introduce PFMA 2001: Micro Economic Reform Strategy 2010: New Growth Path 2013: NDP 2012: IPAP

7. Spending Trends 7

8. Exchange Rate 8

9. Inflation 9 Source: Stats SA

10. Budget General Public Service (15.4 %) Outcome 11: Creating a Better SA and Contributing To a Better and Safer Africa in a Better World Outcome 12: An efficient, effective and development oriented public service Defence (3.6%) Outcome 3: All People In South Africa are and Feel Safe Public Order and Safety (9.3%) Outcome 3: All People In South Africa are and Feel Safe Outcome 11: Creating a Better South Africa and Contributing to a Better and Safer Africa in a Better World Social Protection (15%) Outcome 13: An inclusive and responsive social protection system Education (19.6%) Outcome 1: Quality Basic Education Outcome 5: Skilled and capable workforce to support an inclusive growth path Health (12.1%) Outcome 2: A Long and Healthy Life for All South Africans Housing and Community Amenities (11.1%) Outcome 7: Comprehensive Rural Development Outcome 8: Sustainable human settlements and improved quality household life Outcome 9: Responsive, accountable, effective and efficient developmental local government system Environmental Protection (0.6%) Outcome 10: Protect and Enhance Our Environmental Assets and Natural Resources Economic Affairs (12.7%) Outcome 4: Decent Employment through Inclusive Growth Outcome 6: An Efficient, Competitive and Responsive Economic Infrastructure Network Recreation and Culture (0.8%) Outcome 14: Transforming Society and Uniting The Country Linking the 2013 Budget with the NDP 10

11. Global Risks 11  Slower global recovery;  Tapering-down of QE by the US;  Low demand for SA exports; and  Depressed demand for commodities.

12. Domestic Risks 12  Policy uncertainty and discontinuity;  Labour unrest;  Service delivery protests;  Infrastructure bottlenecks (energy, transport; communications, water);  Infrastructure slow spending;  Inflation;  Debt;  Interest rate hikes;  Exchange rate volatility.

13. Issues for Consideration 13 Fiscal Policy and Budget Decisions  The alignment of budget programme structures with plans is ideal to monitor budget performance in respect of outcomes/goals/impact. Are there processes in place to review budget programme structures?  Is the budget reflective of policy priorities i.e. NDP, IPAP, NGP, fiscal policy objectives?  Is the country's budget policy-led? Does it adapt quickly to policy changes?  Will social safety allocations continue to expand in the face of poorer economic performance?  Will the significant infrastructure allocations be maintained if growth slows further?  Which programmes have been sacrificed to meet the budget deficit targets?

14. Issues for Consideration 14 Fiscal Policy and Budget Decisions  Will budget decisions attract foreign investors?  Are measures in place to curb the growth of, and even reduce, the public wage bill component of the national budget?  Are the growth strategies that are formulated in the country given enough time to realise their objectives before moving to the next one?  South Africa responded to the effects of the global financial crisis, low economic growth and high and persistent unemployment, with counter-cyclical fiscal policy. That is, increasing government spending during periods of weaker economic conditions to stimulate economic activity. South Africa consequently began running a fiscal deficit in 2009/10 in the wake of the global financial crisis, after 3 years of surpluses. Will South Africa continue to embrace counter-cyclical policy?

15. Issues for Consideration 15 Economic and Monetary  Certain risks facing South Africa are external, i.e. US Fed tapering, global recovery and commodity prices, but we also face local risks such as labour unrest, a growing public sector wage bill, energy shortages, slow implementation of policy and volatility of the exchange rate. What measures are in place to ensure these risks are mitigated?  Inflation targeting regime. Should the band be reconsidered?  What options does South Africa have to protect the value of the Rand?  Will further depreciation of the Rand result in missing the budget deficit target (4.3% for 2013/14)?

16. Prof. M Jahed Alfred Monnakgotla Mmapula Sekatane Nelia Orlandi Rashaad Amra Thank you 16