The 2007 MTBPS: Short on Detail

1. The 2007 MTBPS: short on detail Jac Laubscher Group Economist 2 November 2007

2. The overriding themes • Objectives are still the same: • Accelerating growth • Creating employment • Reducing poverty and inequality • Fiscal policy has done its part – it in now over to other policy arms of government, including better execution • The gains in government’s financial position must be preserved • Economic imbalances and risks require an emphasis on sustainability • Fiscal policy must support monetary policy

3. Agenda • Revised macro-economic forecast • Revised estimates for 2007/08 • Revised projections for 2008/09 to 2010/11 • Introduction of structural budget balance • Other policy matters • Evaluation

4. Revised macro-economic forecast • Higher inflation • Higher interest rates • Rebalancing of growth from consumption to investment • Higher current account deficit • Lower growth

5. Comparative macro-economic forecast

6. Policy background and implications • Growing and persistent imbalances in the economy • Accelerating inflation • Rising current account deficit • International uncertainty abnormally high • Implications: • Caution required • Monetary policy must be supported; tighter fiscal policy reduces need for higher interest rates • But why then huge tax relief for individuals in recent years? • Emphasis on structural reform

7. CPIX and Core Inflation

8. World growth vs. inflation

9. Flow of private capital to emerging markets

10. Current account balances (% of GDP)

11. Introduction of structural budget balance • Emphasis on windfalls from buoyant international conditions • High commodity prices/ improved terms of trade • Strong inflow of capital • Economy growing above potential implies revenue growth above potential • Sustainability requires conservatism • “Soft” concept • Difficulty in separation of cyclical and structural change • Difficulty of measuring potential output/ growth • Should be seen as additional information, not as basis for policy decisions

12. The commodity price cycle

13. Terms of Trade

14. Net foreign portfolio investment

15. JSE vs. Emerging Market Equities

16. SA vs. USA 10-year Bond Yield + EM Spread

17. Revised estimates for 2007/08 • Upward revision to gross tax revenue (+R9.5 billion) is more than expected • Of upward revision to expenditure (+R8.5 billion), R4 billion (47%) to public corporations

18. Revised projections for 2008/09 to 2010/11 • Projected growth in revenue increased in spite of reduced growth forecasts • Introduction of structural balance encouraging boldness? • Expenditure revised upwards but by less • Resulting in continuing budget surpluses • And rising cash balances • Discouraging expectations for tax relief • Alert: watch the wage bill • Alert: watch the tax burden

19. Revised projections (Amount)

20. Policy matters • NSSS and wage subsidy: vague • Industrial policy: vague to critical; supporting lower tariffs more than incentives • Tax policy: very little, e.g. on tax administration burden on small business • Inflation targeting: nothing • Exchange controls: nothing • Eskom financing: nothing • No capital injection? • Dividend to continue? • Not a matter of affordability: refusing fiscal ratios to be adjusted? • Treated differently from other public corporations, levels of government: favoring restructuring, transport, communications

21. Evaluation • Accelerating growth • Maintaining macro-economic stability • Improving sustainability • Contributing to national savings • Crowding in rather than crowding out • Removing infrastructure bottlenecks • Tax policy?

22. Evaluation • Creating employment • Accelerating growth • Industrial and trade reform: raising labour intensity of growth • Proposed wage subsidy

23. Evaluation • Reducing poverty and inequality • Creating employment • Providing safety net • Providing social wage • Ongoing redistribution • Increased allocations to e.g. health, education and training, access to modern economy