Economic Assessment of the 2008 National Budget in South Africa

1. BUSINESS UNITY SOUTH AFRICA (BUSA) AND CHAMBERS OF COMMERCE AND INDUSTRY (CHAMSA) Presentation to the Portfolio Committee on Finance On the 2008 National Budget 29 February 2008, Cape Town

2. OUTLINE OF THE PRESENTATION: • Introductory remarks – Mr Abdul Waheed Patel, Chief Parliamentary Officer, Business Parliamentary Office • Economic overview – Prof. Raymond Parsons, overall Business Convener, NEDLAC and BUSA • Economic assessment of the budget – Mr Roger Baxter, Chairman – BUSA Committee on Economic Policy • Taxation aspects of the budget – Adv. Abri Meiring. • Concluding Remarks – Miss Simi Siwisa, Director-Economic Policy, BUSA • Questions.

3. ECONOMIC OVERVIEW

4. Economic assessment of the budget : • The 2008 National Budget is another example of government’s outstanding fiscal management. • The 2008 budget consolidates the gains made of 14 years of democracy in terms of good macroeconomic policy making. • Complementary fiscal and monetary policies have created a sound macroeconomic platform for the growth “escalator” to lift the whole economy. • Business is fully behind the need to grow the economy at >6% which would help double the economy every 12 years.

5. Economic assessment of the budget : “BUSA believes that the broad decisions in the budget embody a realistic balance between the need to build on the already sound macroeconomic foundation for growth, employment creation, transformation and poverty alleviation on the one hand, as well as the need to weather the international storm and local microeconomic challenges.”

6. Economic assessment of the budget : • BUSA is fully behind the need to have flexible buffers, through appropriate fiscal, monetary and exchange rate policies, while at the same time continuing to grow the productive base of the economy. • BUSA is firmly behind the approach of “all hands on deck”. • “SIYABUMBA”

7. Economic assessment of the budget : • Business fully supports the APEX priorities: • Increasing employment. • Reducing poverty and inequality. • Investing in productive capacity • Strengthening delivery by the public sector. • Raising net exports • As embodied in the ASGISA initiative under the astute leadership of our Deputy-President. ASGISA targets a 6% growth rate by 2009.

9. SA’s current growth rate Where ASGISA points

10. Macroeconomic policies provide foundation for the growth escalator. Budget has also done much in terms of microeconomic policies: Providing for government savings in face of lower household & business savings Reduced red tape on SMMEs Reduced corporate tax rate and replaced STC Industrial incentives Enhancing venture capital availability for SMMEs Big push on skills Broadening the social security net Increasing resources for justice and security Large focus on the efficiency of the public service The Budget Continues to Provide an Enabling Environment These measures will promote greater investment in the economy

11. Growth in real GFCF has gone from 6.2% over the past decade to 15.9% in 2007 (1st 3 quarters). GFCF has improved to 20.8% of GDP. Strong growth in parastatal fixed investment (off low base) of 32%. Growth in private sector investment strong 14%. Challenge is that parastatal and general government investment is mostly catch-up on the deficits on capital spending over the past 3 decades. At the net investment level (after depreciation) the private sector still accounts for 80% of the total (70% at the gross level). Net investment is a key component of providing the foundation for long term growth. Trends in fixed investment and economic growth

18. Economic assessment of the budget : • Nevertheless, BUSA believes that a number of microeconomic challenges will continue to confront the country - • Regulatory red tape continues to undermine investment (B: focus on improving capacity of state to deliver, lowering red tape). • Skills shortages (B: extra focus on skills). • Reducing crime (B: extra allocations to crime/justice) • Electricity (B: extra allocations and 2c/kwh tax)

19. Top quartile Where we should aim

20. Note on the electricity emergency: • We want to shake everyone’s complacency on this matter. • South Africa faces the serious challenge of providing enough electricity to feed our growing economy. The problem is slow growth in supply & s/t supply disruptions, demand curtailment & load shedding became necessary in January 2008. • Given slow pace of growth of new supply, the only way out is reducing demand and ensuring that generation, transmission and distribution components of electricity supply system have no more “unplanned outages”. • For sectors with electricity intensive production processes the impact of curtailment of electricity supply is significant, with concomitant negative impacts on economic growth, investment and employment. • “Business unusual” requires concerted efforts from all stakeholders – but the key issue is the need for URGENCY. • Current situation undermines progress towards AsgiSA targets, but impacts can be mitigated if we take a strategic approach to the problem. • Lessons for other network industries? (water, liquid fuels)

21. Challenge: SA consumes and invests more than it produces or saves. Result is a high current account deficit (8.1% Sept quarter 2008). This is funded by foreign savings into the financial account of BOP. Despite Budget propping up domestic savings, export sectors have had weak growth. Electricity crisis has significant impact on export sectors and ability of the country to attract foreign savings (80% of capital flows in 2007 went into equities). BUSA supports Minister’s call for promotion of exports to reduce this vulnerability. Need a strategic approach to electricity rationing, reducing red tape and building export infrastructure. Having flexible exchange rate has greatly assisted the country as a shock absorber. External balances remain vulnerability

24. Move towards prudential regulation and proper surveillance away from specific exchange controls, is simply bringing South Africa in line with best global practice and is a welcome development. Continues strategy of integrating South Africa into the global market place. Exchange controls

25. For past 4 years Treasury has been more optimistic versus consensus forecasts and has been closer to the actual outcomes. For 2008, in face of slowing global economy, domestic microeconomic challenges (electricity), slowing domestic demand and strong investment growth, Treasury has downgraded its growth forecast to 4% from 4.5%. This is prudent. Economic projections in the BUDGET

27. TAXATION ASPECTS OF THE BUDGET • Introduction • Macro taxation Environment • The Tax-to-GDP ratio • The split between Direct and Indirect Taxation • Tax Administration and Collection

28. TAXATION ASPECTS OF THE BUDGET (cont.) • The Business Tax Environment • The Corporate Income Tax rate • STC reforms • So-called “Closely held (passive) Companies” • Simplified Tax System for Small Business • Electricity levy • Venture Capital Incentives • Industrial policy incentives

29. TAXATION ASPECTS OF THE BUDGET (cont.) • Employer Provided Benefits • Bursaries • Share incentive • Low cost housing • Environmental Conservation • “Cleaner technologies” • Biodiversity Conservation • Social Security and Retirement Fund Reform • Conclusion on specific tax matters

30. CONCLUDING REMARKS • The success of the country in weathering the international storm and addressing local microeconomic challenges rests heavily on the continued cooperation between business, government and labour. • But Parliament has a very special oversight role in checking that the path is true. • We look forward to working with Parliament in this important oversight role in the year ahead.