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The 2008/09 National Budget Review

Day Month Year. The 2008/09 National Budget Review. Lumkile Mondi Presentation to the Portfolio Committee on Finance Republic of SA Parliament 26 February 2008. Global economic conditions.

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The 2008/09 National Budget Review

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  1. Day Month Year The 2008/09 National Budget Review Lumkile Mondi Presentation to the Portfolio Committee on Finance Republic of SA Parliament 26 February 2008

  2. Global economic conditions • The global economyexpanded 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.”

  3. Global economic conditions USA : GDP growth Africa : GDP growth Euro area : GDP growth Japan : GDP growth

  4. Global economic conditions Bear markets and recessions in the USA 2000-02 49% decline 929 days Bear market Recession Looming US recession? 1990 20% decline 87 days 1987 34% decline 101 days 1980-82 27% decline 622 days 1973-74 48% decline 630 days Dow Jones 31 Jan ‘08 Federal Reserve Federal Reserve Arthur F. Burns G.W. Miller Arthur F. Burns G.W. Miller (3/78 – 8/79) Alan Greenspan Alan Greenspan (8/87 – 1/06) B. Bernanke (2/06 - ) Chairmen Chairmen Paul Paul Volcker Volcker (8/79 – 8/87) US President US President Richard M. Nixon Richard M. Nixon Jimmy Carter Jimmy Carter Ronald Reagan Ronald Reagan George H.W. Bush George H.W. Bush George W. Bush George W. Bush (Dem) ; (Dem) ; (Rep) (Rep) Gerald Ford Gerald Ford Bill Clinton Bill Clinton Source: Fortune and IDC adaptation

  5. Economic growth and future prospects • 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.. Forecasts by Treasury IDC forecast for 2008 = 3.4%

  6. 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

  7. IDC forecast 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

  8. 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. Treasury forecast IDC forecast similar to Treasury’s

  9. National Budget 2008/09

  10. 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).

  11. 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. Treasury forecast

  12. The 2008/09 Budget in a nutshell Tax burden: target of around 25%! Source: Budget 2008

  13. 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). Treasury forecast Budget surplus Budget deficit More than R100 bn in additional revenue over the past 4 years

  14. The 2008/09 Budget balance South Africa’s budget balance compares extremely favourably in a global context.

  15. The 2008/09 Budget: Government debt Treasury forecast • 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.

  16. The 2008/09 Budget: Government debt South Africa’s low government debt is well below the global norm of around 60% of GDP.

  17. Tax proposals • 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. New rate 28%

  18. 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. Tax proposals (cont.) Romans defeat Malachi – “Give to Caesar what belongs to Caesar”

  19. Tax proposals (cont.) • 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: R1.84 / l R0.72 / 340ml R6.82 / 20 R1.72 / l R0.67 / 340ml R6.16 / 20 2007 2008 2007 2008 2007 2008

  20. 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.

  21. 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?)

  22. Expenditure highlights • 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

  23. Expenditure priorities “Public expenditure is focused on areas that will raise growth over the medium to long term” Budget Review ‘08 • Increased spending over previous MTEF allocations: • Municipal and provincial equitable share – R6.5 billion and R33.2 billionrespectively. • Social grants – R12 billion. • HIV/AIDS – R2.1 billion.

  24. Provincial equitable share formula

  25. Continued strong infrastructure spending Infrastructure investment will continue to increase strongly in coming years …

  26. 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

  27. Trade and Industry allocation

  28. 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.

  29. 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.

  30. 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.

  31. 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 beadministered by the IDC … • … allocations of R39 million in 2008/09 and R49 million for each of 2009/10 and 2010/11.

  32. 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 & trainingof 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).

  33. 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!

  34. Day Month Year Thank you The Industrial Development Corporation 19 Fredman Drive, Sandown PO Box 784055, Sandton, 2146 South Africa Telephone (011) 269 3000 Facsimile (011) 269 2116 E-mail callcentre@idc.co.za

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