Budget 2007

22 FebruaryMinister of Finance

National Treasury

The 2007 Budget adds R89.5 billion to forward estimates - providing R534 billion in total spending for 2007/08 to support key policy objectives:

•Accelerating economic growth

•Creating sustainable work opportunities

•Reducing poverty and inequality

•Modernising service delivery institutions

•Investing in long-term income security and protecting the vulnerable

Medium Term Policy Objectives

National Treasury

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Real GDP growth

CPIX inflation

GDP and CPIX forecast

Growth will rise to just over 5 per cent by 2009 in line with AsgiSA targets

Inflation expectations remain within target band of 3 – 6 percent

National Treasury

Macroeconomic framework

Calendar year 2003 2004 2005 2006 2007 2008 2009

  Actual Estimate Forecast

Percentage change unless otherwise indicated    

Final household consumption 3.5 6.7 6.6 7.0 5.7 4.8 5.0

Final government consumption 6.3 6.3 5.2 5.6 4.5 4.6 4.5

Gross fixed capital formation 9.1 9.6 9.6 12.0 10.7 10.9 11.1

Gross domestic expenditure 5.2 7.9 5.9 7.9 5.1 5.8 6.1

Exports 0.1 2.9 8.0 3.9 7.3 6.3 6.4

Imports 8.1 14.5 10.7 14.3 7.9 8.4 8.5

Real GDP growth 3.1 4.8 5.1 4.9 4.8 5.1 5.4

GDP deflator 4.6 5.8 4.8 5.8 5.8 4.9 5.4

GDP at current prices (R billion)

1,260.7 1,398.2 1,539.3 1,709.1 1,893.8 2,087.3 2,318.1

CPIX (Metropolitan and urban, average for year)

6.8 4.3 3.9 4.6 5.1 4.7 4.5

Current account balance(percentage of GDP)

-1.1 -3.2 -3.8 -5.5 -5.3 -5.7 -5.9

Investment and consumption to remain strong

National Treasury

Global growth

• Developing countries lead growth, particularly China and India

• Commodity boom continued with prices reaching record highs in 2006

• Net FDI to:– Emerging Markets (US$263.3 billion in 2006; US$246.1 billion in 2007)

– Africa (US$27.6 billion in 2006; US$27.8 billion in 2007)

– South Africa (US$4.8 billion in first three quarters of 2006)

• But risks remain

– US current account deficit: US$869 billion in 2006; US$959 billion in 2007

– China current account surplus: US$184 billion in 2006; US$206 billion in 2007

– Financial market volatility and spillover effects to South Africa a risk

2003 2004 2005 2006 2007

Advanced economies 1.9 3.2 2.6 3.1 2.7

Emerging markets & Developing economies

6.7 7.7 7.4 7.3 7.2

National Treasury

Improving growth in domestic economy

Growth in non-agricultural sectors remains strong

Fast growing sectors include construction, financial and transport

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Overall GDP

Construction

Transport

Finance

Wholesale & Retail

Manufacturing

Mining

Agriculture

National Treasury

Consumption and investment led growth

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GFCF

Household consumptionInvestment spending gathers momentum as consumption moderates

National Treasury

Inflation

A combination of rising producer prices and high consumer demand have exerted upward pressure on inflation…

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GDP

CPI

PPI

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Households

Corporates

Net savings

Investment drive is constrained by low national savings…

National Treasury

Balance of payments

…increasing reliance on importsContribute to widening savings and investment imbalance

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National Treasury

Growth challenge

• Improve export performance through appropriate trade and industrial policy

• Generate more low-skilled jobs and raise levels of productivity

• Minimise bureaucratic red tape and regulatory burden

• Improve performance of public sector

• Enhance infrastructure capacity in network industries

National Treasury

Expenditure trends… substantial resources over past decade

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Non-intrest expenditure

Revenue

Expenditure grew at 9 per cent in real terms but revenue has grown even faster in recent years

National Treasury

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Current balance

Net government savings

Government savings and current balance

Increases in capital expenditure relative to current expenditure and a broadly balanced budget improves savings

Government savings were positive in third quarter of 2006

National Treasury

Budget is broadly in balance over the MTEF period

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National Treasury

Summary of main tax proposals

The Budget provides net tax relief of R12,4 billion.

• In 2007 - reduce the STC rate from 12,5 per cent to 10,0 per cent and broadening the base.

• In 2008 - replace the secondary tax on companies with a dividend tax

• Abolishing the retirement fund tax

• Streamlining tax and regulatory aspects of retirement funds

• Increasing the tax-free interest and dividend income monetary thresholds

• Treating the sale of shares (equities) held for more than three years as capital gains

• Personal income tax relief for individuals amounting to R8,4 billion

• Increasing various monetary thresholds:

– Estate duty, CGT on death & donations tax.

National Treasury

State debt cost continues to decline, 1997/98 – 2009/10

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National Treasury

Key spending areas

• Investing in stadiums and public transport to ensure a successful 2010 FIFA World Cup

• Increasing the social wage through investments in bulk water and sanitation and other essential services

• Eliminating backlogs in social services delivery, with special attention to salaries/skills of professionals in health, education and social development

• Modernising the state, including improved access to justice, greater policing capacity and a reduction in court case backlogs

• Strengthening regional and international partnerships for peacekeeping and development

National Treasury

Skills, education, health and welfare

• Budget for assistance grants to households increase from R58 billion in 2006/07 to R74 billion in 2009/10

• R8.1 billion for teachers’ pay progression, increasing number of clerical and support staff in schools; R2.2 billion for higher education subsidy; R850 million for adult literacy programme

• Additional R4.6 billion for new remuneration dispensation for health professionals, through the provincial equitable share

• R 1.7 billion for Comprehensive HIV and Aids programme

• R1 billion hospital revitalisation for 26 hospitals

• R681 million for bursaries and curriculum development in FET college sector

National Treasury

Infrastructure and economic services

• R13.3 billion – 2010 FIFA World Cup stadiums and supporting infrastructure, takes total to R17.4 billion

• R7.4 billion – national roads, rail and provincial infrastructure

• R1.6 billion for targeted sector support and incentive schemes

• Additional R125 million for the expanded public works programme for monitoring and evaluation functions

• Infrastructure grant for provinces increased by R4.3 billion up to R21 billion

• R2.7 billion for integrated housing and human settlement development grant

National Treasury

Public administration and crime prevention

• R2.4 billion for policing equipment, facilities and personnel

• R1.5 billion to improve the administration of justice

• Correctional facilities and security systems is allocated R2,9 billion

• R4.3 billion for defence modernisation and military skills development

• R1.1 billion for service delivery improvement in Home Affairs

• R1.3 billion to SARS for core systems and upgrade of customs scanners

• Statistics SA receives R730 million for more frequent surveys

National Treasury

Division of revenue

Local8%

National49%

Provincial43%

Local4%

National53%

Provincial43%

2003/04

2009/10

National Treasury

Recent social security reforms

Over the past five years:

•Child Support Grant (up to 14 yrs)

•SASSA

•Definitions and assessment criteria for disability grants

•Social Security Funds administration reforms (UIF, Road Accident Fund, Compensation Fund)

•A risk equalization fund (medical schemes environment)

•Proposals for reform of the retirement funding system

•Government now proposes a broad-based social security framework to be ready by 2010

National Treasury

Conditions of vulnerability and dependence

• Vulnerability to illness or disability, high burden of caring for others

• ‘Poverty trap’

• Cash transfers to the poor paid for out of general revenue comprise 3,4 per cent of GDP and over 15 per cent of non-interest government expenditure.

• Social assistance programme will continue to provide minimum benefits in years ahead

Social grants expenditure as a percentage of GDP, 2003/04 to 2009/10

  2003/04 2006/07 2007/08 2008/09 2009/20

Preliminary Medium term estimates

R million   outcome      

Social grant expenditure 37 010 57 720 62 238 67 633 73 037

Percentage of GDP 2.9% 3.4% 3.3% 3.3% 3.2%

National Treasury

Second social security pillar

• Equity – fair and equitable uniform rates of contribution and benefits for all participants

• Pooling of risks – collective funding arrangements and non-discriminatory rules and entitlements

• Mandatory participation – compulsory participation of employees and inclusion of self-employed individuals on reasonable terms

• Administrative efficiency – streamlined use of payroll-based contributions, modern information systems and efficient payment arrangements

• Solidarity – minimum benefits assured through redistributive funding or cross-subsidisation.

National Treasury

Proposed standard payroll tax

• 13 – 18 per cent of earnings for all people in formal employment

• Individual benefits: – retirement savings, – basic disability and death benefits, – unemployment insurance and – administration

• Use SARS’s SITE system (individual contributor accounts) for threshold of >R 60 000 a year

• Supplementary retirement funding may be optional (above threshold)

National Treasury

Wage subsidy and Collective administration

Wage subsidy

• Encourage job creation and raise wages of working poor• Fully offset social security contribution for low-wage workers• Total annual cost: R20 – R30 billion• Broad sectoral coverage

Collective administration

• Consolidate payments by State: social grants, the UIF, compensation funds and the Road Accident Fund

• Benefits: economies of scale in administration, simplicity and accessibility for beneficiaries, standardization of systems and integrated fraud control arrangements

• SASSA is largest payments infrastructure • Contractual employment of private sector administrative capacity

not precluded

National Treasury

Questions

National Treasury

Medium term tax reforms – agenda for 2008

• Reduce the tax compliance burden for businesses, especially small businesses, to promote entrepreneurship and the formalisation of informal businesses.

– A more simplified tax regime for very small businesses to be introduced in 2008.

• Investigate feasibility of introducing flow-through shares – a mechanism that could help junior mining exploration companies to raise funds for high-risk investments.

• The tax treatment of collective investment schemes in property and property loan stock companies is fragmented. It is based on the legal form (i.e., trusts versus companies), rather than their common purpose. The regulatory and tax regime relating to property holding entities to be reviewed.

National Treasury

Real oil prices

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deflated by US CPIModerating real oil prices will relieve pressures on global growth and inflation

National Treasury

Commodity prices and world growth

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World Growth (right axis)

Metals index

Energy price index

Commodity boom has been underpinned by growth in commodity hungry countries

National Treasury

Capacity utilisation

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Investment in machinery andequipmentCapacity utilisation (right axis)

…Supply side constraints have been a further constraint

National Treasury

Household saving falling, debt rising to record highs

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Household saving

Household debt (right axis)

Consumer spending and household debt increase while household savings at record low

National Treasury

Investment by Economic Activity

Community, social and personal services

17%Manufacturing

24%

Electricity, gas and water

6%

Transport, storage and communication

17%

Financial intermediation, insurance, real-estate and business services

29%

Mining and quarrying7%

Strong investment growth across various sectors of the economy

National Treasury

Main budget framework, 2004/05 – 2009/10

      2004/05 2005/06 2006/07 2007/08 2008/09 2009/10MTEF

averageR million / per cent     Estimate Projections  

Revenue 347,854 411,748 475,836 544,602 591,166 641,515

per cent GDP 24.3% 26.06% 27.11% 28.1% 27.60% 27.0%

Budget Balance -20,687 -5,012 5,221 10,728 -3,032 -8,787

per cent GDP -1.4% -0.3% 0.3% 0.55% -0.1% -0.4%

Expenditure 368,541 416,760 470,614 533,873 594,198 650,301

per cent GDP 25.8% 26.4% 26.8% 27.5% 27.7% 27.3%

Debt service costs 48,851 50,912 52,178 52,916 52,967 50,915

per cent GDP 3.4% 3.2% 3.0% 2.7% 2.5% 2.1%

Non-interest expenditure 319,690 365,848 418,436 480,957 541,231 599,386

per cent GDP 22.3% 23.2% 23.8% 24.8% 25.3% 25.2%

per cent real growth 8.8% 9.9% 9.0% 9.5% 7.5% 6.0% 7.7%

contingency reserve       – 3,000 8,000 13,000

Nominal GDP   1,430,673 1,580,119 1,755,340 1,938,934 2,141,747 2,379,299  

National Treasury

Division of revenue

 

2007/08 2008/09 2009/10

R million Medium-term estimates

Division of available funds

National departments 240,881 262,092 286,333

Provinces 202,765 229,296 254,444

Equitable share 171,271 193,474 215,784

Conditional grants 31,494 35,822 38,660

Local government 34,311 41,843 45,608

Equitable share 20,676 23,775 29,444

Conditional grants 13,636 18,069 16,164

Total 477,957 533,231 586,386

Percentage shares

National departments 50.4% 49.2% 48.8%

Provinces 42.4% 43.0% 43.4%

Local government 7.2% 7.8% 7.8%

National Treasury

Summary of main tax proposals (2)

• Further relief for Public Benefits Organisations

• Stamp duties on short term leases abolished• Improved depreciation allowances for rail transport, introduce

depreciation allowances for new commercial buildings and certain environmental capital expenses

• Protecting South Africa’s intellectual property rights tax base

• The introduction of a tax on the windfall gains of synthetic fuel producers and a progressive incentive mechanism for new investments in synthetic and biofuel plants

• Increasing excise duties on tobacco products and alcoholic beverages

• Increasing the general fuel levy and the Road Accident Fund (RAF) levy.

National Treasury

Sterilisation deposits, 2005 - 2007

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Supporting accumulation of foreign exchange reserves

National Treasury

Contingent liabilities, 1994/95 – 2005/06

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Contingent liabilities and net debt

Tolerance benchmark

National Treasury

Adjustments to 2006/07 appropriations

• Revised expenditure level for 2006/07 is R470.6 billion which is R5.2 billion lower than budget

• R1 billion - unforeseen and unavoidable expenditures

• R3.4 billion - approved rollovers arising from unspent balances

• R3 billion - recapitalisation of state-owned enterprises and initial stadium construction works

• R2.1 billion – declared savings

• R2.1 billion - projected underspending