The 2006/7 Budget and Macroeconomic Policy

1. The 2006/7 Budget andMacroeconomic Policy Ben Smit 7 March 2006

2. Outline • Economic background to the Budget • Recent SA economic developments • Macroeconomic forecasts • Macroeconomic policy aspects • General • Fiscal variables

3. Recent SA developments

4. RMB/BER Business confidence index at 24 year high • To 85 in 05Q4 from 86 in 05Q3 • Manufacturing (68) • Building (92) • New vehicles (92) • Retail (82) • Wholesale (90)

5. Recent developments: Purchasing Managers less optimistic February 2006

6. Consumer confidence at a historical high…. 1994 election 2010 Soccer WC announcement

7. Black and White consumers are optimistic Blacks LT average = 6 2005Q4 = 24 Whites LT average = - 8 2005Q4 = 9

8. CPIX inflation in mid-target range CPIX - 4.3 CPI - 4.0 PPI - 5.5

9. Balance of payments as % of GDP

10. GDP growth: 1980Q1 – 2005Q3

11. R/$ exchange rate

12. The business cycle: upswing continues

13. Political constraintManufacturing: Total

14. Macroeconomic Forecasts

15. Previous Treasury forecasts

16. Economic background: summary • Surprisingly strong economic growth (stepped up a notch) • Surprisingly low inflation (sustained) • Very strong consumer and business confidence • Remarkably stable macro conditions • Longest post-war business cycle upswing • Domestic demand major growth factor • Employment growth but continued high unemployment • Sharply increased BoP deficit, financed by even larger capital inflows • Low savings rate • HIV/AIDS

17. Macroeconomic policy aspects

18. Macro-economic policy:General comments • Two classes of economic policy • Macro (stabilization) policies: policies designed to moderate short-term fluctuations in the economy • Structural policies: policies aimed improving the longer-term performance of the economy • Macro-economic policy • Monetary and fiscal policy • Fiscal policy: • policy with regard to structure and level of government spending, taxation and financing of deficits • Stabilization - changes in above • Government expenditure, taxation and financing aspects covered in Budget both stabilization (macro) and structural issues

19. Fiscal policy as described in the Budget • “The budget framework …. Continues the expansionary fiscal stance announced in the 2001 Budget.” • “The fiscal stance outlined here supports growth, while moderating the impact of consumption expenditure on the current account of the balance of payments, prices and the exchange rate.” • “In the medium term, the tax policy framework supports the goals of accelerated and shared economic growth by promoting long-term retirement savings, reducing the costs of tax compliances and the tax burden on all business, fostering small business development, boosting investment in research and development (R & D), supporting skills development and encouraging home ownership.” Budget Review pp 43, 63/4

20. Fiscal variables: Consumption expenditure (% of GDP) Forecast

21. Fiscal variable: Fixed investment (% of GDP) Forecast

22. Taxes: total tax burden(Tax as % of GDP) Forecast

23. Taxes: Personal Tax Rate Forecast

24. Government savings (%) Forecast

25. Deficit before borrowing(% of GDP) Forecast

26. Fiscal variables: Government debt (% of GDP) Forecast

27. The Budget and Macroeconomic policy goals • Economic growth • Support via tax cuts and expenditure increases • Support via credibility & responsibility • Contain via lower deficits • Personal income vs corporate taxes • Inflation control • Support via credibility and responsibility • Support via sterilization of cash balances • Support/undermine via tax cuts

28. The Budget and Macroeconomic policy goals (continued) • Balance of payments • Worsen deficit via tax cuts • Improve capital inflows via low deficit and credibility effects • Employment • Improve via growth effects and public programme and SMME support • Savings • Improve via tax cuts

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