Medium-term Budget Policy Statement November 2003

1. Medium term budget policy statementNovember 2003

2. Introduction • 2003 Medium term budget policy statement: • Draws on 10 year review and Growth and Development Summit Agreement • Major themes • Expansionary fiscal stance • Fighting poverty and reducing unemployment • Raising the level of public and private investment • Building sustainable communities • Fighting crime • Fostering regional development through Nepad

3. Macroeconomic overview • Domestic economy resilient • Continued, but slower, positive growth amidst global slowdown • Weak global demand hurts manufacturing exports • Commodity prices rising • Global recovery gains momentum, especially in US and East Asia • Strong investment supports overall growth prospects • GDS policy initiatives will further support growth and poverty alleviation • Growth forecasts for 2003 scaled down but still expected to rise strongly in medium term

4. Global economy • Strong correlation between SA and G7 growth • Global slowdown was longer than anticipated but recovery is gaining momentum • World GDP to accelerate to 3% in 2004 from around 2% in 2003 • Fiscal and monetary stimulus and weaker dollar will support US consumer and export demand • Despite labour market weakness and huge twin deficits, US will remain driver of global recovery • Euro economies will emerge out of recession, although growing more slowly than rest of G7 • Strong commodity prices, but higher oil prices too

5. Trade performance • Geographical and product diversification of trade continues • Bilateral and multilateral trade agreements • 19% SA exports to US now duty free under AGOA • Manufacturers dominate exports to US • EU our major trading partner, SA-EU trade agreement to guide further expansion

6. 45.0% 40.0% 35.0% 30.0% 1990 25.0% 1995 20.0% 2002 15.0% 10.0% 5.0% 0.0% Africa Americas Asia Europe Oceania Not allocated Direction of exports

7. Commodity price cycle

8. Balance of payments • Current account deficit of just under 1% of GDP in 2003 after 2002 surplus • Real effective rand appreciation and global slowdown reduced export earnings in H1 2003 • Falling interest rates and fiscal stimuli supported domestic spending • Trade surplus narrowed in H1 2003 as falling exports offset decline in imports • Services and income account deficit widened due to weaker dividend inflows, lower tourist spending • Surplus on financial account sufficient to finance current account deficit

9. Balance of Payments

10. Rand at 2000 levels

11. Real output • Real output growth slowed to 2% in first half of 2003 • Slowdown in 1st half of 2003 due to global weakness, stronger rand and higher interest rates • Sharp slowdown in manufacturing led by export and import-competing industries • However, strong investment growth and fiscal policy initiatives in manufacturing • Government infrastructure growth will support construction in medium term

12. Primary sector • Contraction in agriculture driven by field crop decline due to bad weather • Modest recovery in mining production • High gold and platinum dollar prices offset negative impact of rand strength • Strong global demand will drive growth and future investments

13. Manufacturing

14. Tourism • Tourism to South Africa increasing amidst decline in worldwide tourism • Continued expansion of tourist capacity

15. Inflation targeting • Technical amendments to IT framework • Continuous target instead of annual average • 3%-6% target instated beyond 2006 • Escape clause replaced with explanation clause • SARB to inform public through MPC meetings of any shocks and impact on inflation • CPIX will remain target basket • Efficiency of administered pricing being investigated • Improved competition and regulation

16. Inflation

17. SA Growth Forecasts

18. Forecasts

19. Fiscal policy • Expansionary stance began in 2001 Budget continues • Revenue shortfall of about R4,6 billion this year due to economic slowdown • Fiscal policy supports growth through: • Strong real growth in spending • Stable tax to GDP level • Declining debt service costs • Fiscal policy is counter-cyclical • Expansionary but within sustainable framework

20. Key MTEF trends • Additional spending of R37 billion over baseline over the next three years • Real non-interest expenditure growth averages 4,4% per year over 2004 MTEF • Increase in budget deficit to 3,2% of GDP in 2004/05, declining to 2,8% of GDP in 2006/07 • Lower consolidated general govt. deficit due to surpluses on social security funds (under 3%) • Main budget revenue at 24,8% of GDP • Real rise in general government investment, supported by public corporations • Debt service costs decline to 3,7% of GDP

21. Fiscal Framework

22. 2003 Tax proposals • Foreign exchange amnesty extended until 29 February 04 • Tax on retirement funds to be reviewed further to consider all aspects of savings • Tax incentive for urban development covers 15 municipalities • Business tax stimulus measures: • Reinvestment tax relief, claim losses for unproductive assets sold, stimulating R&D, allowances for start-up expenses • Remove tax on foreign dividends and the designated country list • Address inconsistent income tax and VAT rules of transfer payments to public entities

23. Revenue outcome and projections • Preliminary outcome for 2002/03 • Main budget revenue R278,2 billion • R13,2 billion higher than budgeted • Due to higher than projected increases in remuneration, GOS of companies, expenditure growth and inflation • Revised forecast for 2003/04 • Main budget revenue R299,9 billion • R4,6 billion less than budgeted • Mainly due to the appreciation in the value of the Rand - reducing company profits and the custom value of imports

24. Tax policy for the 2004 Budget • Review tax impediments to broad-based economic empowerment transactions • Review tax implications of proposed medical aid schemes and health insurance plan, fringe benefit taxation and direct employer provided medical assistance • Review the overlap between VAT and transfer duty • Streamline customs and excise procedures

25. Key spending priorities • Renewed focus on employment creation – EPWP • Step up in infrastructure spending • Further commitment to fighting HIV/Aids - ARVs • Extension of social security grants - CSG • Improving quality of school education -textbooks to poor schools • Continued roll-out of free basic services • Strengthening the safety and security sector • Improving core services of Home Affairs to citizens • Promoting peace and development in the region • Promoting broad-based black economic empowerment

26. Division of additional resources

27. Division of total resources

28. Adjusted Estimates 2003 • The 2003 Adjusted Estimates provides for total adjustments of R6,8 billion R billions Provinces Unforeseeable & Unavoidable Expenditure 2,1 National Unforeseen & Unavoidable Expenditure 2,8 Roll-overs 1,1 Salary Adjustments and Self-financing expenditure 0,8 Total Adjustments 6,8 • The net increase in spending is R1,3 billion after in-year savings, contingency reserve, etc.

29. Adjusted Estimates 2003 • Main adjustments to national departments’ appropriations: RM • Communications: Post Office 750 • Defence: Peace support initiatives 500 • National Treasury: Service benefits MPs 400 • Water Affairs: Emergency water, debt water associations 346 • Public Works: Rates, municipal services 180 • Home Affairs: Lindlela, ID campaign 103

30. Provincial finances • Revisions to provincial baselines commitment to reinforcing pro-poor spending • Stepping up spending on non-personnel in education • Further strengthening health sector • By allocating R1,9bn for ARVs • Providing additional resources for take up of CSG & other grants • Provide for expansion of labour-intensive infrastructure delivery • Provinces receive R19,9bn of additional resources over the next three years

31. Local Government finances • Government has allocated an additional R3,9 billion over the next 3 yrs to municipalities • Additional transfers intended for service delivery • Accelerate the rollout of free basic services to households • Strengthen municipal infrastructure delivery through the MIG • Increased use of labour- based methods • Improve skills base in planning, budgeting and technical areas

32. Transfers to local govt.