Expenditure trends… substantial resources over past decade

1. Medium Term Budget Policy Statement 2006Joint Meeting:Briefing on the MTBPS of the Portfolio Committee on Finance, Select Committee on Finance and the Joint Budget Committee held on the 26 October 2006

2. Expenditure trends… substantial resources over past decade Real non - - interest expenditure interest expenditure 1.90 1.90 (1997/98 = 1) (1997/98 = 1) 1.80 1.80 1.70 1.70 1.60 1.60 1.50 1.50 1.40 1.40 1.30 1.30 1.20 1.20 1.10 1.10 1.00 1.00 0.90 0.90 1997/98 1997/98 1998/99 1998/99 1999/00 1999/00 2000/01 2000/01 2001/02 2001/02 2002/03 2002/03 2003/04 2003/04 2004/05 2004/05 2005/06 2005/06 2006/07 2006/07 2007/08 2007/08 2008/09 2008/09 National Treasury

3. Fiscal stance trending towards smaller deficits & surpluses… • Strong revenue trends in excess of expenditure trends result in lower fiscal deficits and possibly small surpluses… • Growth in revenue remains strong as result of good growth rates and commodity prices • Projected under-spending (gross) of R4.2 billion in 2006/07 will yield deficit of -0,4 per cent this year Main Budget Deficit National Treasury

4. Partly due to strong growth trends… National Treasury

5. Sustained growth in future years Growth will rise to just over 5 per cent by 2009 in line with AsgiSA targets National Treasury

6. Macroeconomic framework National Treasury

7. International backdrop • Global environment growth supportive, but risks rising • Persistent twin deficits concern • Strong capital flows to emerging markets may slow • Rising interest rates • World growth projected to rise slightly in 2006 and then moderate • Developing countries lead growth, particularly China and India • Commodity prices relatively high National Treasury

8. Commodity prices and world growth Commodity boom underpinned growth in resource rich countries like SA but won’t last forever National Treasury

9. Domestic economy • Growth has been strong, inflation is relatively low, employment growth continues • Nevertheless a number of macroeconomic policy challenges have emerged • Short-run challenges: • Managing fiscal-monetary policy mix • Understanding commodity price movements and potential effects • Long-run challenges: • Reducing poverty and inequality by committing government to a vision for sustainable long-term growth (ASGI-SA) • Industrial policy in trade performance National Treasury

10. Sectoral performance • Poor agricultural performance drag on growth National Treasury

11. Trade Surplus Trade Deficit Trade balance A widening trade deficit since 2004 driven by strong import growth, related to strong rand and consumer demand National Treasury

12. Exports by product National Treasury

13. Imports by product National Treasury

14. (Difference reflects change in inventories) Current account deficit • Rising domestic demand and capacity utilisation • Increasing reliance on imports • Thus widening savings and investment imbalance National Treasury

15. Oil prices projected to decline Oil prices expected to fluctuate around US$60/ barrel over next year or two and then decline, although new shocks possible National Treasury

16. Net saving Government and household savings are still negative which impacts on the current account deficit… National Treasury

17. Government savings and current balance Government savings will turn positive over the MTEF through the proposed fiscal stance, producing first budget surplus National Treasury

18. Fiscal framework National Treasury

19. Budget is broadly in balance over the MTEF period National Treasury

20. Components of in-year adjustments • Roll-overs • Unspent in 2005/06 and rolled over to 2006/07 • Unforeseen and unavoidable expenditure • Increased expenditure ito s30(2) of the PFMA • Self-financing • Shifting of funds to follow transfer of functions • Amounts announced but not appropriated to a specific vote National Treasury

21. Key in-year adjustments in 2006/07 • Funds rolled over for N2 Gateway housing project totaling R372 million • Emergency funding for flood damage totals R654 million • Initial payment for 2010 WC of R600 million • R2 billion for the recapitalisation of state-owned enterprises • Savings by Correctional Services and Land Affairs of R800 million and R1 billion, respectively In year adjustments result in expenditure level increasing from R472,7bn to R474,2bn National Treasury

22. Focus on infrastructure remains central to development strategy • Create capacity by accelerating infrastructure investment • Additional funding over MTEF of R28 billion • Total infrastructure expenditure over MTEF is R409,7 bn • Economic infrastructure: Electrification, roads, rail, housing, bulk infrastructure, etc. • Social infrastructure: hospital revitalisation, schools, water and sanitation National Treasury

23. Consolidated Spending R80bn new allocations R21,7bn Social services R28bn Infrastructure investments R3,6bn for JCPS And Social services remains a major feature of 2007 MTEF National Treasury

24. Key spending areas • Investment in stadiums and public transport to ensure a successful 2010 FIFA World Cup • Stepping up investment in the built environment in the form of housing, electricity, water, sanitation and community facilities • Contributing to improved economic efficiency through investment in roads, rail, research and development, energy and skills development • Strengthening the criminal justice sector, with particular emphasis on visible policing and improving court case flows • Improving the quality of education, health and welfare services through additional resources and targeted interventions to improve public administration National Treasury

25. Provincial priorities • Provincial equitable share grows by 7% in real terms • Improving quality/access to education, health and social development • Improving remuneration of educators and health professionals • Step-up in conditional grants • Provincial infrastructure grant (R4,3bn) • Hospital revitalisation grant (R1bn) • Integrated housing and human settlement dev grant (R2,7bn) • Comprehensive HIV and Aids grant (R750mn) • National tertiary services grant (R550mn) • New provincial boundaries have significant impact on provincial finances National Treasury

26. Local government priorities • Local government equitable share grows by 11% in real terms • Increased funding for free basic services to poor households • Improving governance and administrative systems • R45,7bn Capital transfers to municipalities include: • R24,7bn for infrastructure to roll out basic municipal services • R7,8bn for construction and upgrading stadiums • R6,7bn to host cities for stadium precincts and public transport • R1,4bn for bulk systems for water supply and sanitation • R1,4bn for electricity infrastructure • R3,7bn for neighbourhood development partnership grant • Capacity-building in municipalities is prioritised • Focus on planning, budgeting, financial management skills • Siyenza Manje programme led by DBSA National Treasury

27. MTBPS Highlights • Buoyant economic conditions • Non-agricultural GDP has grown by 5 per cent a year since 2004 • Growth in GDP per capita has accelerated from 1,4 per cent in 2003 to 3,5 per cent in 2005 • Over 1 million jobs in the last three years • Main policy responses • Balanced budget over the medium-term • Spending focus on infrastructure • Social services spending is also sustained National Treasury

28. Thank You National Treasury