1. 1National Treasury Budget 2002 A brief overview...

2. 2National Treasury Overview of 2002 Budget Economic and fiscal outlook: –Growth recovery over years ahead –Healthy balance of payments and fiscal trends –Rand depreciation to boost trade Robust revenue performance allows tax relief Strong spending growth over next 3 years –continued focus on infrastructure –broadening of social security net –reinforcing fight against crime –partnering municipalities in extending services Moderate rise in deficit –debt service ratio continues to fall

3. 3National Treasury Macroeconomic outlook Global economic slowdown more severe than initially thought –Sept 11 –Drastic slowdown in US growth, but seems to have reached bottom –Growth in Euroland still slowing –Japan still deeply depressed Recovery expected in 2 nd half of 2002 SA will benefit from global upturn due to: –Robust export sector –Competitive terms of trade –Greater appetite for emerging markets as risk aversion declines

4. 4National Treasury SA growth consistently positive GDP growth of 2,7% a year between 1994 and 2000 –Excl. 1998, average growth 3,1% Strong export performance Strong growth in company earnings –200019% –200113% (1st 3 quarters) GDP growth of 2,3% expected in 2002, rising to 3,3% in 2003

5. 5National Treasury SA adjusted well to slowdown Export diversification continues Rand depreciation leads to expenditure switching in favour of domestic products External balance stable and strong –Underpinned by strong trade performance and equity inflows NOFP reduced from $4,8 bn to $2,9 bn Competitiveness of the economy improved

6. 6National Treasury Exports to benefit from depreciation

7. 7National Treasury Inflation remains under control Productivity still rising faster than remuneration Unit labour cost growth moderate Domestic producer prices (excl. food moderate in 2001) Administered prices weakening

8. 8National Treasury CPIX and food

9. 9National Treasury Productivity gains drive increases in real remuneration

10. 10National Treasury Solid basis for future growth Global recovery expected in 2002 Fiscal stance stimulatory Tax cuts to boost household consumption spending Capital flows to emerging markets expected to resume Increased capital formation in both general government and parastatals

11. 11National Treasury Household consumption to benefit from tax cuts

12. 12National Treasury Growth in real GDP and CPIX, 1996-2004 GDP is estimated to have grown by 2,2 per cent in 2001 The cyclical strengthening will continue in 2002 with GDP rising by 2,3 per cent and by 3,3 and 3,6 per cent in 2003 and 2004, respectively

13. 13National Treasury Macroeconomic forecasts

14. 14National Treasury Fiscal framework 2001/02 outcome –Additional R15 billion in revenue –Spending R4,3 billion over 2001 Budget –Deficit of 1,4% 2002/03 Budget –Revenue base for estimates revised upwards –Debt services costs decline from 4,8% of GDP in 2001/02 to 4,1% by 2004/05 –Deficit up to 2,1% in 2002/03 –Real growth in non-interest spending of 4,1%

15. 15National Treasury National budget framework

16. 16National Treasury Fiscal consolidation yields higher real spending

17. 17National Treasury Infrastructure Infrastructure expenditure –Capital expenditure across three spheres rises 11,7 per cent a year between 1998/99 and 2004/05. –PPP infrastructure expenditure rises three-fold over MTEF –Non-financial public enterprise investment rises to R25 billion in 2004/05 New infrastructure budgeting process ¯Strengthened evaluation criteria and decision processes ¯Enhanced joint decision making across spheres of government ¯Greater coordination with the budget process ¯More effective oversight of infrastructure priorities –Simple and accessible monitoring, evaluation and reporting procedures

18. 18National Treasury Tax policy issues Strong revenue performance for 2001/02 due to: –Robust corporate tax growth and STC receipts –Mainly from the resource-based exporters Revenue estimates revised upwards over 2001 Budget Income tax reforms to support consumption and investment growth

19. 19National Treasury Revenue summary

20. 20National Treasury Key changes - individuals R15 billion PIT relief Interest and dividend income exemption Transfer duty – R300 million Taxation of deemed foreign income Taxation of trusts Amendment of monetary thresholds and miscellaneous PIT provisions

21. 21National Treasury Key features – companies Accelerated depreciation for new manufacturing assets Tax relief for small business Taxation of trusts – flat 40% rate Further tax reform: –Taxation of retirement industry –Taxation of banking sector

22. 22National Treasury Key features – indirect tax Excises duties: –Alcoholic beverages: 8 – 10% –Tobacco: 10,7% - 43,7% Air passenger tax: no change General fuel levy: no change (RAF: 2c a litre) Extend diesel fuel tax concession Fuel tax regime for environmentally friendly fuel Remove Lloyd’s tax MST/ UST on warrant repurchases Stamp duties

23. 23National Treasury PIT rates and brackets

24. 24National Treasury Nominal PIT rate reductions 2730456080 120300600900 Taxable income (R'000) Under 65 Over 65

25. 25National Treasury Developments in debt management Ratings upgrade by Moody’s up one notch to Baa2 RSA’s Yen 60 billion wins IFR deal of the year award Public Sector Borrowers’ Forum established to effectively coordinate public sector borrowing Liquidity enhanced - Bond turnover reaches R10.7 tn Telkom IPO to take place in 2002/03

26. 26National Treasury Consolidated illiquid bonds through switch auctions into five liquid bonds across the curve Issued CPI-linked bond (R197) in the 2023 maturity Eurobond issue in the 2008 maturity Introduction of STRIPS Switches & Buy backs yield R700 million saving p.a Foreign borrowing contributes to reducing NOFP Shift to active debt management

27. 27National Treasury Borrowing Requirement 2002/03 Borrowing RequirementR million Budget deficit 22 692 Extraordinary receipts -12 000 Extraordinary payments 1 571 Net borrowing requirement 12 263 Financing Net domestic short term loans 4 000 Net domestic long term loans -10 960 Net foreign loans 16 275 Total financing 12 263

28. 28National Treasury Key financing plans R12 Billion Restructuring proceeds expected New CPI bond in 2008 Maturity Area New Floating rate bond in 2007 maturity area Move to single price (Dutch Auction) approach US$ 1 billion equivalent foreign borrowing Cash buy-back of bonds up to R3 billion Switch Auction to continue

29. 29National Treasury Spending priorities over the MTEF Increased political oversight over budget process Priorities over the next three years: –Infrastructure With emphasis on urban renewal and rural development –Addressing poverty and vulnerability Child support grant extended to an additional 1,2 million children Spending on HIV/AIDS exceeds R1 billion/year over the MT – Partnerships with municipalities: Improved access to affordable basic services –Fight against crime 16 000 more police

30. 30National Treasury Main new allocations Local government gets additional R1,6 bn in 2002/03 and R2,4 bn in 2003/04 Provinces get R5,3 bn and R7,0 bn above baseline –Social grant increases cost about R2,2 billion more next year Police to get R5,2 bn more over three years to hire 16 000 additional police Defence gets R3,9 bn over 3 years for currency depreciation Enhanced HIV/Aids programme: Additional R4,1 bn over 3 years

31. 31National Treasury Additional allocations R13,4 billion in 2002/03 and R17,9 billion in 2003/04 Positive real growth in all three spheres: –National R6,6 and R8,5 billion –Provincial R5,3 and R7 billion –Local R1,6 and R2,4billion National share includes restructuring SA Post Office, UIF, currency depreciation and fight against crime Provincial priorities - social security grants, education, capital investment and maintenance Infrastructure and capacity building at local government level

32. 32National Treasury Spending by function

33. 33National Treasury Spending trends Non interest spending goes up 4,1% a year in real terms Balanced growth in all sectors over MTEF, particularly in social services, protection services and general government Interest on debt (as % of consolidated expenditure) declining from 17,5% to 15,7% in 2002/03 Personnel share of consolidated spending is expected to stabilise on 42,2% Capital spending expected to grow at an average of 18,1% over the MTEF

34. 34National Treasury Division of Revenue Strong growth in transfers to provinces (7,9% a year) and local government (18,3% a year) over the MTEF Priority pro-poor programmes: –Early childhood education programme –Bolster health system against the impact of HIV/Aids –Higher social grants and increased take-up of child support grant –Social and economic infrastructure –Extension of basic municipal services

35. 35National Treasury Division of Revenue

36. 36National Treasury Addressing Local Government Challenges Establishment of new municipalities Restructuring service delivery Delivery of free basic services Expanding infrastructure Co-ordination of capacity building Financial management reforms based on Municipal Finance Management Bill

37. 37National Treasury Nat transfers to Local Government Rising rapidly by 18,3% from R6,5 bn in 2001/02 to R10,8 bn in 2004/05 –Increases by R1,1 bn. R1,8 bn and R2,3 bn over MTEF –Forms over 10% of LG finances –Smaller municipalities receive larger share –Include transfers to category C municipalities –Municipal infrastructure development, especially in poor nodes identified in ISRDS and URP

38. 38National Treasury Local government transfers

39. 39National Treasury Conclusion 2002 Budget supports poverty alleviation and growth Strong real growth in spending Especially on social grants, infrastructure, local govt. and fighting crime Large tax cuts for all R15 billion PIT relief Solid base for future economic growth laid Increased competitiveness and rising productivity