the 2008/09 national budget review day month year lumkile mondi presentation to the portfolio...
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The 2008/09 National Budget Review
Day Month Year
Lumkile Mondi
Presentation to the Portfolio Committee on Finance
Republic of SA Parliament
26 February 2008
Global economic conditions
• The global economy expanded at a rapid rate over the past five years, mainly due to strong economic growth from emerging markets, such as China, India and Brazil.
• The strong influence of the US economy on the global economic performance seems to have become less significant in more recent years.
According to the IMF:“The overall balance of risks to the global growth outlook is still tilted to the downside.”
Global economic growth
0
1
2
3
4
5
6
7
8
9
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 f
% C
ha
ng
e
World
Advanced economies
Developing economies
Source: IMF
South Africa's export basket in 2007
Japan10.7%
Other34.0%
Africa13.6%
EuropeanUnion30.8%
United States10.9%
Source: SARS
Global economic conditions
USA : GDP growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2003 2004 2005 2006 2007 2008 f
% C
ha
ng
e
Source: IMF
Euro area : GDP growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2003 2004 2005 2006 2007 2008 f
% C
han
ge
Source: IMF
Japan : GDP growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2003 2004 2005 2006 2007 2008 f
% C
han
ge
Source: IMF
Africa : GDP growth
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2003 2004 2005 2006 2007 2008 f
% C
ha
ng
e
Source: IMF
USA : GDP growth
Euro area : GDP growthJapan : GDP growth
Africa : GDP growth
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1970 1975 1980 1985 1990 1995 2000 2005
Global economic conditions
Looming US recession?
Source: Fortune and IDC adaptation
Federal Reserve Chairmen
US President(Dem) ; (Rep)
Arthur F. Burns G.W. Miller Alan Greenspan B. Bernanke(2/06 - )Paul Volcker
Richard M. Nixon Jimmy Carter Ronald Reagan George H.W. Bush George W. BushGerald Ford Bill Clinton
Federal Reserve Chairmen
US President(Dem) ; (Rep)
Arthur F. Burns G.W. Miller (3/78 – 8/79) Alan Greenspan (8/87 – 1/06) Paul Volcker (8/79 – 8/87)
Richard M. Nixon Jimmy Carter Ronald Reagan George H.W. Bush George W. BushGerald Ford Bill Clinton
Bear marketRecession
Bear markets and recessions in the USA
31 Jan ‘08
1973-7448% decline630 days
Dow Jones
1980-8227% decline622 days
198734% decline101 days
199020% decline87 days
2000-0249% decline929 days
• A solid growth performance in recent years, due to strong domestic demand, largely consumption driven.
• Exports and imports remained a drag.
• Fixed investment likely to be the main driver of growth going forward, expanding rapidly at about 10% p.a..
Economic growth and future prospects
Contribution to real GDP growth
-6
-4
-2
0
2
4
6
8
10
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Per
cen
tag
e
Other (e.g.Govt, &Inventories)
Net exports
Fixedinvestment
Consumerspending
Total GDP
Source: SARB
Forecasts by Treasury
IDC forecast for 2008 = 3.4%
A widening output gap
-120
-100
-80
-60
-40
-20
0
20
40
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
R b
illio
n
Source: SARB
Domestic demand
• The sharp increase in domestic demand, including consumer spending and fixed investment, resulted in a widening output gap.
• The situation has also been aggravated by production capacity constraints experienced in various sectors of our economy.
• The country is consuming increasingly more than it is able to produce, hence a rapid rise in import demand for both consumer and capital goods.
• Moderation in demand already being observed.
• Domestic supply must be augmented.
Supply > Demand
Demand > Supply
Inflation according to CPIX
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
% C
han
ge
CPIX excl. food & fuel
CPIX
Source: Stats SA, Budget 2008
Inflation outlook
• South Africa’s inflation environment deteriorated substantially since the beginning of 2007.
• CPIX inflation measured 8.6% in December 2007, its highest level since March 2003 (9.3%).
• Rising food and fuel prices, along with certain administered prices have been the major contributors to this increase.
• Stubbornly high producer prices also do not bode well for the inflation outlook.
• However, growth in demand for credit by the private sector slowed down in recent months, measuring 21% in December 2007.
• A number of upside risks to the inflation outlook remain, including high food and oil prices as well as a weaker currency, and higher global inflation.
Treasury forecast
IDC forecast
Balance of payments outlook
• Strong rise in import levels associated with fixed investment activity and domestic consumption.
• Demand for imported intermediate goods also increased rapidly as many domestic manufacturing enterprises experience capacity constraints and, hence, are not able to meet strong domestic demand. For example:
– Imports of cement and clinker increased by 60% to just over 1.2 million tons in 2007.
– Substantial rise in imported steel.– Rising imports of building materials
(wood, etc.). – Chemicals, rubber & plastics being
increasingly imported.• Robust growth in fixed investment activity
will result in significant pressure exerted on the balance of payments over the next 3 years.
Current account of the balance of payments
-240
-220
-200
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
R b
illio
n
-10
-8
-6
-4
-2
0
2
4
% o
f G
DP
Current account balance: R bn
Current account balance: % of GDP
Source: SARB, Budget 2008
Treasury forecast
IDC forecast similar to
Treasury’s
National Budget 2008/09
The 2008/09 Budget: key objectives
Economic and fiscal policies utilised to underpin: Robust economic growth. Increased levels of job creation. Increasing investment in infrastructure and productive capacity. Dedicated approach towards industrial development. Achieve higher rates of export growth. Providing a more enabling environment for small business development. Promotion of further education and skills development. Improving public service delivery. Improving public expenditure in areas that will support higher rates of economic
growth in the years ahead (e.g. infrastructure, education, health, etc.). Contributing to national savings by planning a fiscal surplus (i.e. generating
government savings).
The 2008/09 Budget in a nutshell
• Continued strong revenue stream on the back of robust economic growth.
• Supply-side measures to support economic growth and job creation.
• A budget surplus average of 0.7% of GDP is being projected over the MTEF period.
• Additional tax relief of R7.7 billion for households.
• Real growth in non-interest expenditure: 6.1% p.a. over the next 3 years.
• Government support to Eskom for its capex programme totalling R60 billion over a five-year period.
• Lower debt service costs in light of increased revenue estimates and lower government debt.
Government Revenue and Expenditure trends
20
21
22
23
24
25
26
27
28
29
30
91-
92
92-
93
93-
94
94-9
5
95-9
6
96-9
7
97-9
8
98-9
9
99-0
0
00-0
1
01-
02
02-
03
03-
04
04-
05
05-
06
06-
07
07-
08
08-
09
09-
10
10-
11
% o
f GD
P
Revenue
Expenditure
Budget deficit
Source: Budget 2008
Treasury forecast
National budget framework
2006/07 2007/08 2008/09 2009/10 2010/11
R billion Estimate
Total revenue 501.6 580.4 650.0 720.1 789.0
Percentage of GDP 27.8% 28.4% 28.4% 28.7% 28.6%
Total expenditure 484.2 560.1 631.5 704.1 768.5
Percentage of GDP 26.8% 27.4% 27.6% 28.1% 27.9%
Debt service cost 52.2 52.8 51.2 51.1 51.2
Percentage of GDP 2.9% 2.6% 2.2% 2.0% 1.9%
Non-interest expenditure 418.0 489.3 559.9 630.5 693.5
Percentage of GDP 23.1% 23.9% 24.5% 25.2% 25.1%
Budget balance 17.4 20.3 18.5 16.0 20.5
Percentage of GDP 1.0% 1.0% 0.8% 0.6% 0.7%
Gross domestic product 1,807.3 2,045.5 2,286.9 2,506.9 2,758.6
Projections
The 2008/09 Budget in a nutshell
Source: Budget 2008
Tax burden: target of around 25%!
The Budget balance
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
91-
92
92-
93
93-
94
94-9
5
95-9
6
96-9
7
97-9
8
98-9
9
99-0
0
00-0
1
01-
02
02-
03
03-
04
04-
05
05-
06
06-
07
07-
08
08-
09
09-
10
10-
11
% o
f G
DP
Source: Budget 2008
The 2008/09 Budget balance
Fiscal balance track record ...• Public finances have benefited
substantially from the higher economic growth in recent years along with large efficiency gains in revenue.
• Hence, non-interest public spending in real terms accelerated by an average of almost 10% p.a. over the past 5 years.
• Some moderation in public spending has been forecast, averaging 6.1% p.a. over the next 3 years.
• Government is now budgeting an average surplus of 0.7% of GDP over the period 2008/09 to 2010/11.
• A new measure for fiscal stability – the cyclically-adjusted budget balance – has been introduced.
• This accounts for substantial cyclical revenue increases in light of strong economic growth and high commodity prices (pointing towards a structural deficit of 1.2% of GDP).
More than R100 bn in additional revenue over the past 4 years
Budget deficit
Budget surplus
Treasury forecast
Budget balance as % of GDP in 2008
-5 -4 -3 -2 -1 0 1 2 3
HungaryIndia
BritainMalaysia
TurkeyFranceGreece
ItalyUnited States
BrazilJapan
TaiwanPoland
IndonesiaEuro area
ChinaSouth Korea
GermanySouth Africa
RussiaArgentinaAustralia
Chile
% of GDPSource: The Economist
5.4%
The 2008/09 Budget balance
South Africa’s budget balance compares extremely favourably in a global context.
The 2008/09 Budget: Government debt
• Sound fiscal policies in recent years led to declining public debt as % of GDP.• Increasing level of foreign debt, from a very low base, exerting less pressure on domestic financial
markets/savings.
Total government debt
0
100
200
300
400
500
600
700
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
R b
illio
n
0
10
20
30
40
50
60
70
% o
f G
DP
Foreign debt
Domestic debt
Total debt as % of GDP
Source: SARB, Budget 2008 Fiscal year: end March
Treasury forecast
The 2008/09 Budget: Government debt
South Africa’s low government debt is well below the global norm of around 60% of GDP.
Corporate & Effective Tax Rates
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Un
ite
d S
tate
s
Fra
nc
e
Mo
na
co
Be
lgiu
m
Ba
ng
lad
es
h
Ind
ia
Ja
pa
n
Zim
ba
bw
e
So
uth
Afr
ica
Bo
liv
ia
Ma
uri
tiu
s
Po
rtu
ga
l
Bo
tsw
an
a
Bra
zil
Corporate Effective
Source: Deloitte Touche
• Corporate tax rate reduced from 29% to 28%.• STC switched to a 10% withholding tax on dividends, thus reducing the effective corporate tax rate
substantially.
Tax proposals
New rate 28%
Tax proposals (cont.)
• Tax regime simplified for small businesses, with VAT registration threshold raised:
From R300 000 to R1 million for businesses in general
From R1.2 million to R1.5 million for farmers & businesses submitting VAT every 6 or 4 months.
• Total tax relief of R10.5 billion.
• R7.7 billion in tax relief for individuals:
Individuals earning < R150 000 get 1/3
R150 000 - R250 000 get 28%
No income tax on annual incomes < R46 000.
• Threshold for over 65 rises to R74 000.
• Tax- free threshold for interest & dividend income:
Raised from R18 000 to R19 000 for the under 65 years of age
Raised from R26 000 to R27 000 for the over 65.
Romans defeat Malachi – “Give to Caesar what belongs to Caesar”
• Electricity levy of 2c/kWh proposed to support energy efficiency.• Fuel levies:
6 cents per liter increase in general fuel levy (petrol and diesel) 5 cents per liter increase in Road Accident Fund levy Biodiesel fuel tax concession raised from 40% to 50% Bioethanol to remain outside the fuel tax net, but subject to VAT
• “Sin” taxes:
Tax proposals (cont.)
R1.72 / l
R1.84 / l
2007 2008
R0.67 / 340ml
R0.72 / 340ml
2007 2008
R6.16 / 20
R6.82 / 20
2007 2008
Tax incentives
Venture capital tax incentive to improve access by SMEs and start-ups:
• General venture capital investments (non-mining): target market is high-growth and high-tech companies with annual turnover up to R14 million or gross assets of up to R7 million:
Qualify for a 30% up-front deduction, with annual deductions capped at R500 000 for individuals, R750 000 for corporations and R7.5 million for venture capital funds.
• Junior mining exploration investments: Gross asset threshold of R30-R50 million:
Qualify for 50% up-front deduction, with annual deductions capped at R1 million for individuals, and R10 million for corporations and venture capital funds.
Replaces the flow-through share incentive mechanism mentioned in 2007.
Urban development zone incentive extended for 5 more years to allow more private sector participation in inner cities.
Sources of Government revenue
• Personal income tax, although moderating, remains the key source of Government revenue.
• High fiscal contribution by corporate sector in relative terms affects aggregate supply negatively (cost-push inflationary?)
• Lower individual taxation stimulates aggregate demand (demand-pull inflationary?)
Sources of government revenue
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Individuals Companies (incl.STC)
VAT Fuel levy Customs Other
% S
hare
1999/00 2007/082008/09
Source: Budget Review
Expenditure highlights
Consolidated government expenditure
MTBPS 2008/2009
Budget 2008/2009
Difference(% of total)
Social Services 347.7 354.4 6.7
Education 120.8 121.1 0.3
Health 71.0 75.5 4.5
Welfare and social security 100.5 105.3 5.3
Housing and community development 55.4 52.6 -2.8
Protection Services 96.8 95.3 -1.5
Defense and intelligence 32.5 30.4 -2.1
Justice, police, and prisons 64.3 64.9 0.6
Economic Services and Infrastructure 127.6 165.2 37.6
Water and related services 18.3 16.8 -1.5
Agriculture, forestry and fishing 14.1 14.6 0.5
Transport and communication 57.4 71.3 13.9
Other economic services 37.8 63.4 25.6
Administration 41.2 40.3 -0.9
Total 613.3 655.3 42.0
Interest 55.4 55.0 -0.4
Contingency reserve 4.0 6.0 2.0
Total Expenditure 672.7 716.2 43.5
Main expenditure changes
• Strong focus on road infrastructure development - R13.4 billion increase.
• Social services spend as % of total expenditure declines to 49.5% (from 51.7%).
• Strong focus on industrial development – tax incentives (R5 billion) and policy initiatives (R2.3 billion).
• Support for electricity expansion (R60 billion loan).
Source: MTBPS Oct ’07 and Budget Review Feb ‘08
Expenditure priorities
Increased spending over previous MTEF allocations:
Municipal and provincial equitable share – R6.5 billion and R33.2 billion respectively.
Social grants – R12 billion.
HIV/AIDS – R2.1 billion.
“Public expenditure is focused on areas that will raise growth over the medium to long term” Budget Review ‘08
Provincial equitable transfers
0 3 6 9 12 15 18 21 24 27
Eastern Cape
Limpopo
KwaZulu-Natal
Nothern Cape
Mpumalanga
Free State
North West
Western Cape
Gauteng
% of GPP
0 5 10 15 20 25 30 35 40 45
R bn
Provincial equitabole transferas % of GPP (lower scale)
Nominal provincial equitabletransfer (upper scale)
14.6%
33.6%
6.4%
6.8%
5.4%
2.2%
16.3%
6.8%
7.8%
% of total GDP
Provincial equitable share formula
Provincial equitable share formula
Education51%
Economic output1%
Health26%
Institutional5%
Basic14%
Poverty3%
Continued strong infrastructure spending
R million2007/200
82008/200
92009/2010
2010/2011
National departments 5 023 6 425 7 539 9 434
Provincial departments 32 481 36 860 42 226 45 766
Municipalities 27 568 31 163 34 471 38 873
Public private partnerships 3 354 8 450 10 321 11 259
Extra-budgetary public 3 814 4 450 5 123 7 014
General Government 72 240 87 348 99 679 110 346
Non-financial public enterprises 52 165 71 243 99 246 100 284
Total 124 405 158 591 198 925 210 629
% of GDP 6.1% 6.9% 7.9% 7.6%
Infrastructure investment will continue to increase strongly in coming years …
Spending by state-owned enterprises
• Treasury has completed financial modeling on the SOEs and assessed their treasury operations – allowing for better financial oversight and ultimately improved performance
• Estimated SOE capex plans increased to R494.5 billion (2008/09 – 2012/13), from R313.4 billion (2007/08 to 2011/12), principally in energy and transport infrastructure:
Provisional capital investment plans by state-owned enterprises
R billion 2008/09 2009/10 2010/11 2011/12 2012/13 Total
Capex
Of which:
82.5 124.2 115.9 95.4 76.5 494.5
Eskom 46.9 80.8 79.7 70.3 65.2 342.9
Transnet 16.9 21.5 17.5 12.7 9.4 78.0
Trade and Industry allocation
Department of trade and Industry expenditure
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
R b
n
Enterprise and economic development
The enterprise organisation
Trade and investment South Africa
Other
Exchange controls
• Limits on foreign diversification by institutional investors: “Prudential regulation” replaces exchange controls. Pre-application process replaced by quarterly reporting and monitoring. Supported by pre-notification requirement for substantial changes in foreign exposure. Foreign exposure limit is raised from 15% to 20% of total retail assets. Foreign exposure limit on collective investment schemes and investment managers is raised to 30% of
total retail assets. Additional allowance equal to 5% of total retail assets for portfolio investment in Africa.
• A single R500 000 annual discretionary allowance is introduced for purposes of travel, gifts, donations and maintenance.
• SA companies et al permitted to participate without restriction in rand futures market on JSE, enabling diversification and hedging of their currency exposure.
• Shift in focus of Financial Surveillance Dept. of SARB (previously Exchange Control Dept.) from pre-approval of applications to monitoring cross-border flows.
Under review / analysis
• Wage subsidy design: Aim is to assist in bringing low-income workers into the system, while contributing to job creation by reducing labour costs to participating employers. Various alternatives being investigated:
A general wage subsidy implemented through the PAYE system, or
More targeted employment/wage subsidies (e.g. a subsidy targeted at 1st time work seekers).
• Private equity transactions:
Deductibility of interest payments in highly geared transactions and the tax treatment of management-carried interest (reward for fund managers in the form of shares/equity) will be investigated in light of the potential to undermine corporate governance and/or the tax system.
Under review / analysis (cont.)
In support of sustainable development:
Cleaner production and emission control:
Will explore introduction of additional emission taxes and charges in 2009.
Possibly implement targeted tax incentives to encourage the uptake and/or development of “cleaner” competitive technologies.
Reform of existing vehicle taxes to encourage fuel efficiency.
Encourage biodiversity conservation through income tax deduction.
Of particular interest to IDC
• Industrial policy support:
R2.3 billion allocated to support industrial policy initiatives and R300 million for small business support.
In addition, R5 billion set aside (to be used over 3 years) for tax incentives in support of key sectors of industrial strategy.
Incentives to be implemented with circumspection, market failures must be clearly identified, cost-benefit analysis undertaken, alternatives should be explored.
• Under Trade and Industry Vote, it is stated that:
“expenditure on the Customised Sector Programmes’ sub-programme rises strongly from R40 million in 2007/08 to R130 million in 2010/11 …
… much of this is accounted for by the introduction of the customised sector programmes in 2008/09, which will be administered by the IDC …
… allocations of R39 million in 2008/09 and R49 million for each of 2009/10 and 2010/11.
Of particular interest to IDC
• Land reform and restitution:
Total budget for land reform increases from R1.6 billion in 20007/8 to R4.1 billion in 2010/11.
Additional R1 billion allocated to settle the outstanding 5 083 land restitution claims.
• Pebble Bed Modular Reactor: Set to receive an additional R3.5 billion, being the remaining portion of the R6 billion committed by government.
• Role of DFIs, including IDC, in supporting economic growth and development, job creation and poverty reduction, is recognised in Budget Review.
• Review of DFIs being completed – overall aim is to ensure DFIs use economic resources more effectively and efficiently in support of Government’s economic and social policy objectives, minimising wasteful competition and overlap with private sector.
• Bursaries for education & training of employees’ dependants: Tax-free fringe benefit increased R10 000 p.a. (previously R3 000) for employees earning up to R100 000 p.a. (previously R60 000).
Implications for IDC
• Support measures for industrial development (e.g. significant industrial policy support, venture capital tax incentive) and tax concessions (e.g. corporate tax reduction, tax incentive amount set aside) will stimulate demand for IDC business.
• Proposed electricity levy on non-renewable energy consumption will affect business partners.
• Economic infrastructure spending highly beneficial for future investment activity and support current investments.
• Corporate tax reduction positive for IDC bottom line.
• Previous STC on IDC dividend will be incurred by Government?
• Alterations to exchange control system will have certain implications.
• IDC employees will get tax relief, particularly lower income groups.
• Higher tax-free fringe benefit on bursaries.
• Perhaps IDC should join Treasury in using Sappi’s Triple Green paper!
Day Month Year
The Industrial Development Corporation19 Fredman Drive, SandownPO Box 784055, Sandton, 2146South AfricaTelephone (011) 269 3000Facsimile (011) 269 2116E-mail [email protected]
Thank you