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Macro-economic implications of the budget

Explore the economic backdrop, growth forecasts, inflation trends, interest rates, and budget implications in Pieter Laubscher's 2007 BER presentation to the Portfolio Committee on Finance.

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Macro-economic implications of the budget

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  1. Macro-economic implications of the budget BER presentation to the PORTFOLIO COMMITTEE ON FINANCE Pieter Laubscher 27 February 2007

  2. Presentation outline • Macro-economic backdrop • The 2007/8 budget & macro-economic policy • Economic implications of the budget • Economic growth • Inflation & interest rates • BoP & exchange rate • General remarks • Economic forecasts, 2007/8

  3. Macro-economic backdrop

  4. Weaker expectations point to a flattening out of global economic conditions …

  5. Real GDP growth accelerated to a 5% tempo, 2004/6 • Business cycle upswing more than 7 years old • Growth is more stable & sustainable • Household consumption contributed 85% of the growth 2004/6 • But GDFI has been growing in excess of 9% pa since 2003 • Net exports made a strong negative contribution (-2.4%) Ave 2004/6

  6. Business and consumer confidence trend at historical highs … • Relentless increase in business confidence since 1999Q3 • RMB/BER BCI above 80 index points since end-2004 • Consumer confidence increased sharply since 2004/5 – currently close to historical peaks

  7. Up-tick in inflation is expected to be contained … • CPIX inflation has averaged within 3-6% range for 41 consecutive months • CPIX expected for 2007, 5.4%, up from 4.6%, 06Q1 • Inflation outlook improved since the end of 2006 • Inflation expectations appear to be well-anchored 2006Q4

  8. Long-term interest rates at historical low, despite up-tick in CPI and repo rate … • Repo rate increased 200 bps, 2006H2 • Fiscal surplus boosted bond market end-2006 • Bond market discounting lower inflation & growth? • Short-term interest rates probably have peaked, but upside risk …

  9. Current account deficit approaches 6% of GDP … but handsomely financed … • Strong expansion of GDE & imports, 2004/6 • Poor export growth, 2002/6 (3% pa) • Accelerating SACU payments (1.1% of GDP) • Capital account prospects remain promising Forecast

  10. Longest business cycle upswing on record …

  11. Initial phase: 99Q3 – 2002 Steady growth 3.2% pa, particularly GDE (2.5% pa) Fiscal ‘austerity’ Limited formal employment creation Mild household credit spending Supportive net export growth: BCA surplus in 2002 / weak ZAR Domestic economic resilience in face of 2000/1 world recession 2nd phase: 2002/3 – present More rapid growth 4.5% pa, led by GDE (6.7% pa) Moderate fiscal stimulation Stronger employment growth: private sector ‘upsizing’ Strong hhold debt accumulation/ sharp interest rate cuts, 2003/5 Weak export growth: BCA deficit 5.7% of GDP (2006) / strong ZAR Strong capital inflows in BoP The current expansion: 1999Q3 - present

  12. The 2007/8 budget & macro-economic policy

  13. Public sector spending: more expansionary since 2001/2

  14. Consolidated expenditure: economic classification – strong real growth

  15. Budgeting for a balanced budget over the MTEF … • Tax overruns a function of strong economic growth and sound fiscal finances • Real non-interest expenditure grow by 7.7% pa over MTEF • Net R12.4 billion tax relief, 2007/8 • Cyclical stimulus to demand-side of the economy

  16. Tax on individuals (% of total revenue) • Personal tax relief R8.4bn, 2007/8 • Declining personal tax contribution to total revenue • Important driver of the consumer boom

  17. Tax on companies (% of total revenue) • Corporate taxes have been a key source of tax overruns • Corporate tax contribution to total tax revenue has recovered • Could be more scope to consider tax relief to stimulate the production side of the economy

  18. Government debt (% of GDP) • Retirement of state debt 2nd consecutive fiscal year • Smaller debt service burden creates room for additional spending • Fiscal prudence provide solid basis for future budgets & instills confidence

  19. Public sector borrowing requirement … • Projected PSBR 2009/10 R32.3bn (1.4% of GDP) • Conducive to lower long-term interest rates • ‘Crowding-in’ private fixed investment

  20. Economic implications of the budget

  21. Budget supports growth … may not be anti-cyclical enough at this stage … • Stimulates consumer spending - net personal tax relief - R6.6bn (0.6% of HCE) • Real govt. wage growth, 4.7% pa • Company tax proposals marginally positive i.t.o. fixed investment • Bolsters consumer & business confidence

  22. Inflation & interest rates … • Excise & duties neutral i.r.o. inflation • Stimulus of the demand side of economy could put pressure on inflation • Govt. wage growth negative for inflation? • Budget stimulus will keep SARB on the back foot

  23. Balance of payments & exchange rate … • Budget should bolster investor confidence • Gradual exchange control relaxation positive • Current account to remain under pressure • Rand vulnerable in case of capital outflows

  24. General remarks • Mostly upside: • Sound fiscal finances • Generally stable expenditure & tax ratios, implying no dramatic fiscal effects • Attention to savings: government savings positive 2009/10; savings & retirement reform • Some evidence of delivery i.t.o. infrastructure spend (e.g. roads), but needs to be stepped up • Downside, if any: • Combination of ‘dovish’ monetary policy and ‘stable’ fiscal policy at this point may not be enough to address macro-economic imbalance reflected in BCA, which implies risk

  25. Economic Forecasts, 2007/8

  26. Bureau for Economic ResearchEconomic information that works for you Website: www.ber.sun.ac.za E-mail: pl@ber.sun.ac.za Tel No: 021-887 2810

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