For an Equitable Sharing of National Revenue.

1. BRIEFING TO THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT THE ECONOMIC OUTLOOK AND MILLENNIUM DEVELOPMENT GOALS (MDGS) 14 June 2011 For an Equitable Sharing of National Revenue. Briefing on Economic Development and MDGs

2. Briefing on Economic Development and MDGs OUTLINE OF PRESENTATION • Economic Outlook • New Growth Path and Modelling Results • Status of Millennium Development Goals • MDG Simulations and Modelling Results • Conclusions Briefing on Economic Outlook and MDGs 22

3. Briefing on Economic Development and MDGs Economic Outlook: Growth • New Growth Path (NGP) focus • Growth rate, labour intensity and composition of economic growth • Economic growth in real terms increased from -1.7% in 2009 to 2.8% in 2010 • Expected to be between 3.4% (IMF, SARB) and 3.8% (BER) in 2011 • Well below the expected 6.5% average growth rate expected for developing countries • Likely causes: slow pace of international economic recovery and chronic unemployment • In terms of sectoral composition of growth, manufacturing as well as mining and quarrying = largest contributors in 2010 • These also comprise SA’s main exports - importance of the exchange rate for future growth Briefing on Economic Outlook and MDGs 3

4. Briefing on Economic Development and MDGs Economic Outlook: Fiscal and Monetary Policies • To date, fiscal and monetary policies coordinated and countercyclical – aimed at boosting recovery • In 2009/10 tax year, fiscal deficit increased to -7.3% of GDP (worst budget deficit since 1961) • Currently at -4.8% of GDP (less than -5.3% budgeted in February 2011) • Expected to decrease further over the medium run as SA economy recovers • Relatively strong fiscal position threatened by possibility of global economy experiencing a renewed downturn • Result in lower government revenue and higher government borrowing • Repo rate reduced five times in 2010 to 5.5% (current level) to boost consumption spending Briefing on Economic Outlook and MDGs 44

5. Briefing on Economic Development and MDGs Economic Outlook: Inflation • Inflation • Downward pressure: strong Rand and lower demand • Upward pressure: food prices (rising commodity prices), wage costs (public sector wage demands) and energy prices • Latest CPI figures indicate a rise from 4.1% in March 2011 to 4.2% in April 2011 • This slight increase indicates that inflation is on the rise • Coincides with upward revision of inflation forecasts by SARB • Indicates a repo rate increase later this year and further increases in 2012 Briefing on Economic Outlook and MDGs 55

6. Briefing on Economic Development and MDGs Economic Outlook: Exchange Rate • Exchange rate • Important tenet of NGP: drive the value of Rand down • Render locally-produced goods more competitive and create jobs • SARB: increased reserves and capital flow moderation • Strong Rand • Expected to stay strong in the medium term (around 7 R/$) • Assisted by substantial portfolio inflows into the domestic bond market to take advantage of relatively high yields available compared with bonds in other countries • Implications for exports (commodity) and imports (manufacturing) Briefing on Economic Outlook and MDGs 66

7. Briefing on Economic Development and MDGs Economic Outlook: Savings and Investment • NGP: savings and investment in SA below levels needed for sustained growth • Policies in place to address these • Savings • To achieve growth of more than 4%, domestic savings rate has to be some 24% of GDP • Currently at some 16% (compare to 40% in China) • Even worse: current ratio of savings to disposable income of households is -0.3 • Investment • Modest pick-up in investment rate expected in 2011 (low capacity utilisation) Briefing on Economic Outlook and MDGs 77

8. Briefing on Economic Development and MDGs Economic Outlook: Unemployment • Unemployment • QLFS 2011Q1: unemployment increased across all race groups despite solid economic growth (current figure: 25%) • Jobless growth? • In terms of sectors: • Agriculture, construction, transport and communications, as well as financial and business services all reported job losses between 2010Q1 and 2011Q1 • Need to tackle structural impediments to job creation over the coming years: lack of adequate skills and education, labour market legislation and conditions, poor attention to entrepreneurship and small business Briefing on Economic Outlook and MDGs 88

9. Briefing on Economic Development and MDGs Economic Outlook: Some Challenges • Government balancing act: inclusive growth and job creation together with fiscal sustainability and low inflation • Structural challenges • Infrastructure: transport and energy (absence of sufficient electricity generating capacity and implications for NGP) • Public service delivery • Even though the 2010 GHS indicates a slight improvement in service delivery, management and maintenance of service delivery are also key • Private sector development, competition Briefing on Economic Outlook and MDGs 99

10. Briefing on Economic Development and MDGs MODELLING NGP SIMULATIONS AND RESULTS • Methodology Justification • Simulations • Results • Conclusions Briefing on Economic Outlook and MDGs 10

11. Briefing on Economic Development and MDGs Methodology - Justification • CGE analysis that allows taking into account all the linkages between productive sectors, demand, international trade and macroeconomic constraints • As measures are known in advance, a forward-looking behaviour (for firms and households) is more suitable • Impact of infrastructure on economic growth is taken into account Briefing on Economic Outlook and MDGs 11

12. Briefing on Economic Development and MDGs Methodology - Overview • Multi-sector analysis (multiple industries and commodities) • Intertemporal framework: all current and future prices are known and affect firms investment decision and households consumption pattern • Taxation options: many tax instruments are explicitly modelled to allow for a wide variety of policy responses Briefing on Economic Outlook and MDGs 12

13. Briefing on Economic Development and MDGs NGP SIMULATIONS – 2011 TO 2059 • Two simulations: • Increased current public spending • As in Budget Review 2011 up to 2014 • 2% from 2015 to 2020 • back to BAU in 2020 • Increased public investment • As in Budget Review 2011 up to 2014 • 2% in 2015 to 2020 • back to BAU in 2020 Briefing on Economic Outlook and MDGs 13

14. Briefing on Economic Development and MDGs Results - Simulations • Under three financing mechanisms: • Increased income tax rate on households’ income • Increased indirect tax rate on commodities • Increased debt • Caveats: • Public investment in infrastructure is assumed to increase total factor productivity • But public current spending does not affect productivity (period of increased spending is assumed too short to significantly impact productivity) Briefing on Economic Outlook and MDGs 14

15. Briefing on Economic Development and MDGs Results - Simulation 1 • Increased public expenditures has little impact on GDP, regardless of the timeframe Briefing on Economic Outlook and MDGs 15

16. Briefing on Economic Development and MDGs Results - Simulation 1 • Affects negatively real investment, especially in the short run and under direct tax and debt financing Briefing on Economic Outlook and MDGs 16

17. Briefing on Economic Development and MDGs Results - Simulation 1 • Implies increased income tax rates by 2.65 or increased indirect tax rates by 1 (temporary tax) Briefing on Economic Outlook and MDGs 17

18. Briefing on Economic Development and MDGs Results - Simulation 1 • Debt financing mechanism implies greater debt-to GDP ratio, even in the very long run Briefing on Economic Outlook and MDGs 18

19. Briefing on Economic Development and MDGs Results - Simulation 2 • Increased public investment has greater impact on GDP, especially in the long run (TFP effect) Briefing on Economic Outlook and MDGs 19

20. Briefing on Economic Development and MDGs Results - Simulation 2 • Stimulates real consumption (especially in the longer run) Briefing on Economic Outlook and MDGs 20

21. Briefing on Economic Development and MDGs Results - Simulation 2 • Affects real investment negatively in the short run, but positively in the medium and long run Briefing on Economic Outlook and MDGs 21

22. Briefing on Economic Development and MDGs Results - Simulation 2 • Would require small tax increase in the short run but translate into tax reduction in the longer term Briefing on Economic Outlook and MDGs 22

23. Briefing on Economic Development and MDGs Results - Simulation 2 • Although the debt-to-GDP ratio is above that of BAU in the short term, it would be below in the long run because of economic growth Briefing on Economic Outlook and MDGs 23

24. Briefing on Economic Development and MDGs Results - Simulation 2 • Different values of elasticity would change the amplitude of the impact on GDP by less than 1% Briefing on Economic Outlook and MDGs 24

25. Briefing on Economic Development and MDGs Results - Simulation 2 • Similar conclusion for the debt-to-GDP ratio Briefing on Economic Outlook and MDGs 25

26. Briefing on Economic Development and MDGs NGP – CONCLUSIONS • Current expenditures: • Increase in current expenditures has little impact on the economy • Including TFP impact would significantly change the results. (Would a 5-year increase be sufficient to impact TFP?) • Debt financing would require future intervention in order to go back to the initial debt-to-GDP ratio Briefing on Economic Outlook and MDGs 26

27. Briefing on Economic Development and MDGs NGP – CONCLUSIONS • Investment expenditures: • Short term public investment in infrastructure would affect TFP • Positive impact on macroeconomic impacts, especially in the medium run • Reduces the debt-to-GDP ratio, regardless of the financing mechanism (economic growth) Briefing on Economic Outlook and MDGs 27

28. Briefing on Economic Development and MDGs MDGs • Where is South Africa, 4 years before the deadline? • Is South Africa “on track” to achieve the MDGs under current public policies and investments? • If not: • How much additional public spending will be needed? • What would be the most feasible financing strategy? • Which trade-offs need to be taken into account when identifying a preferred financing strategy? Briefing on Economic Outlook and MDGs 28

29. Briefing on Economic Development and MDGs STATUS - MDG1 Briefing on Economic Outlook and MDGs 2929

30. Briefing on Economic Development and MDGs STATUS - MDG2 Briefing on Economic Outlook and MDGs 3030

31. Briefing on Economic Development and MDGs STATUS - MDG3 Briefing on Economic Outlook and MDGs 3131

32. Briefing on Economic Development and MDGs STATUS - MDG4 Briefing on Economic Outlook and MDGs 3232

33. Briefing on Economic Development and MDGs STATUS - MDG5 Briefing on Economic Outlook and MDGs 3333

34. Briefing on Economic Development and MDGs STATUS - MDG6 Briefing on Economic Outlook and MDGs 3434

35. Briefing on Economic Development and MDGs STATUS - MDG7 Briefing on Economic Outlook and MDGs 3535

36. Briefing on Economic Development and MDGs STATUS - MDG8 Briefing on Economic Outlook and MDGs 3636

37. Briefing on Economic Development and MDGs MODELLING • Use Dynamic CGE Model designed for study of MDGs • Retroaction between education/health sectors and labour markets • Model that takes into account capital accounts for agents • MDGs taken into account in the model: • MDG2 (net completion rate) • MDG4 (child mortality rate) • MDG5 (maternal mortality rate) • MDG6 (HIV prevalence) • MDG7 (Access to improved water sanitation) • MDG8 (Investment over GDP ratio) • Targets for each MDG are taken from the South African Country report (2010) • Some of the MDGs targets are already achieved (MDG7 and MDG8), some are likely (MDG2 and MDG6), some are unlikely (MDG4 and MDG5) Briefing on Economic Outlook and MDGs 37

38. Briefing on Economic Development and MDGs SIMULATIONS – ATTAINING MDGs • Simulation 1: Can South Africa achieve ALL the MDG targets by 2015 ? • Simulation 2: How much more is needed to reach MDG2 and tradeoffs? • Simulation 3: How much more is needed to reach MDG6 and tradeoffs? • Simulation 4: Financing MDG6 through indirect tax increase Briefing on Economic Outlook and MDGs 38

39. Briefing on Economic Development and MDGs Findings Briefing on Economic Outlook and MDGs 39

40. Briefing on Economic Development and MDGs MAJOR INSIGHTS • Results show changes in the intermediate variables, notably the importance of MDG6 (HIV/AIDS) on the computation of other MDGs • HIV/AIDS seems to have a massive impact on maternal mortality and child mortality • Costs of attaining all outstanding MDGs simultaneously by 2015 too high – implied costs too high to allow model resolution • Same for MDG4 and MDG5 because there is too much to do in 4 years Briefing on Economic Outlook and MDGs 40

41. Briefing on Economic Development and MDGs CONCLUSIONS - MDGs • National, provincial and local government should further reprioritise expenditures in respect of the Equitable Share and Conditional Grants for 2012/13 to move towards attaining the MDGs - in this respect: • Government should prioritise MDG2 (universal education) and MDG6 (HIV indicators) in the interim as their attainment will have positive impacts on the other MDGs (positive spillovers); and • The time frame for attaining all outstanding MDGs simultaneously should be extended beyond 2015 to make the task feasible • Government should explore alternative ways of financing the MDGs – Tax Vs Deficit Finance Briefing on Economic Outlook and MDGs 41

42. Briefing on Economic Development and MDGs • Thank You. Financial and Fiscal Commission Montrose Place (2nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038