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The 2006 Budget

MINISTER OF FINANCE. The 2006 Budget. Presentation to Joint Budget Committee, Select Committee on Finance and Portfolio Committee on Finance 16 February 2006. Content. Economic policy and outlook Fiscal framework Revenue trends 2006 Budget priorities and allocations Division of revenue

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The 2006 Budget

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  1. MINISTER OF FINANCE The 2006 Budget Presentation to Joint Budget Committee, Select Committee on Finance and Portfolio Committee on Finance 16 February 2006

  2. Content • Economic policy and outlook • Fiscal framework • Revenue trends • 2006 Budget priorities and allocations • Division of revenue • Asset and liabilities management • Conclusion

  3. Global economic overview • Global growth expected to stay above 4% • US growth remains fairly strong • Growth in Europe expected to gradually improve – but domestic demand remains sluggish • Recovery in Japan, strong growth in China, robust growth in Africa (nearly 6% in 2006) • Commodity price boom lifts mineral prices (gold price reached 25-year highs and platinum at record high)

  4. Global growth supports commodity prices…

  5. Domestic economic overview • Economic growth of 5% in 2005 - averaging more than 5% over the next three years • Inflation to remain within the target • Buoyant demand and investment supports rising production • Higher commodity prices support capital inflows • A strong reserve position reduces rand volatility and vulnerability to global instability • Current account deficit remains high as growth rate rises

  6. Real fixed capital formation: 25 Government Real fixed capital formation: Public corporations 20 15 Per cent growth 10 Transnet: R50 billion over 5 years Eskom: R98 billion over 5 years Gautrain: > R10 billion over five years 5 0 2004 2006f 2007f 2008f 2005e Shift towards investment as the engine of growth

  7. GDP growth 10 Current account (% of GDP) 8 CPIX inflation 6 4 Per cent 2 0 -2 -4 -6 2001 2002 2003 2004 2006 f 2007 f 2008 f 2005 e Stable growth outlook

  8. Macroeconomic forecast

  9. January 2006 US$22.2bln Reserves improve

  10. 2006 MTEF summary • Main budget revenue expected to be R411 billion in this year, compared to R400 billion at time of MTBPS. • Revenue-to-GDP ratio rises to 26,4% for 2005/06 (growth in VAT, CIT and PIT due to robust growth in consumption and commodity exporters’ profits). Ratio remains about 26%.* • Non-interest expenditure grows by R82 billion (annual average real growth of 6,4%), excluding transfers of R24 billion to replace the RSC levies. • Capital expenditure at consolidated government level grows by 11,4% over the MTEF • A revised main budget deficit of 0,5% of GDP for 2005/06; 1,5% for 2006/07; 1,4% for 2007/08 and 1,2% in 2008/09 • Debt service costs expected at 3,3% of GDP for 2005/06; declining to 2,7% in 2008/09. • PSBR grows from 0,6% of GDP in 2005/06 to 2,4% in 2008/09 * General government tax to GDP ratio = 26,8% in 2004/05

  11. Fiscal Framework

  12. Changes to tax policy • Gross income tax relief for individuals = R13,5 billion • Tax threshold for individuals increased to R40 000 • A reduction in the Retirement Fund Tax from 18% to 9% = R2,4 billion relief • The abolition of the RSC levies = R7 billion for the 2006/07 municipal fiscal year • VAT zero-rating of municipal property rates • Transfer duty relief of R4,5 billion • Monetary thresholds for individuals - capital gains tax & estate duty - increased

  13. Further changes to tax policy • Monetary thresholds for small business corporations increased • Tax amnesty for small businesses – commencing with taxi operators • Extension of learnershsip tax incentive to 2011 • Tax incentive for R & D – 150% deduction for current expenditure and accelerated depreciation for capital expenditure (50:30:20) • Biodiesel fuel concession increased for 30% to 40% of general fuel levy

  14. 2006/7 R million Tax revenue 475,914 Non-tax revenue 9,320 Less: SACU payments -19,744 Main budget revenue, before tax proposals 465,489 Budget 2006/07 proposals: -19,127 Taxes on individuals and companies -14,925 -4,540 Taxes on property Stamp duties -10 Taxes on goods and services 348 Main budget revenue (after tax proposals) 446,362 Summary of tax proposals

  15. Key priorities of the 2006 Budget* * All amounts additional over the MTEF

  16. Total additional MTEF allocations

  17. Expenditure reporting changes • Function shift in social grant transfers • Reported as transfer to households on budget of Dept of Social Development • Implemented by SA Social Security Agency with effect from 1 April 2006 • Devolution of accommodation costs • Transfer of costs from public works to user-departments • Responsibility for accommodation decisions reside with respective accounting officer • Consolidation of government accounts include financial statements of 66 public entities out of 195

  18. Division of revenue • Of additional resources of R106 billion, plus unallocated amount of 2005 budget: • National departments receive R30.5 billion (or 28.7% of total addtions) • Provinces receive R42.9 billion, incl Gautrain (40.5% of total additions) • Municipalities receive R33 billion, incl RSC levies (30.8% of total additions) • Unallocated amount of R3 billion for WC2010 • Real non-interest expenditure grows by 6. 4% over 2006 MTEF, after netting out RSC levy amount. Contingency reserve set at R2.5, R5, and R8 billion in each respective year of the MTEF.

  19. Division of nationally raised revenue

  20. Financing of net borrowing requirement

  21. Debt service costs

  22. Debt-to-GDP ratio continues to decline

  23. Concluding comments on support to growth • Growth initiative supported by the 2006 Budget allocations for: • Infrastructure development • Education and skills development • Second economy interventions • Provisions for capitalisation • Growth initiative also focuses on removing constraints to growth • Growth initiative supports economic buoyancy in coming years and will raise the potential growth rate from approximately 4,5% to over 6%

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