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The 2008 Budget: Facing the biggest challenges in years Johann Els Senior Economist OMIGSA Background to the budget Global environment Much more uncertain/volatile environment Worries about USA recession Will rest of the world decouple from USA? Will Fed’s interest rate cuts work?

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Presentation Transcript
slide1

The 2008 Budget:

Facing the biggest challenges in years

Johann Els

Senior Economist

OMIGSA

JE\Budget preview to press Feb 2007

slide2

Background to the budget

Global environment

  • Much more uncertain/volatile environment
    • Worries about USA recession
    • Will rest of the world decouple from USA?
    • Will Fed’s interest rate cuts work?
    • Panic about global credit crisis
    • Inflation also still a problem

JE\Budget preview to press Feb 2007

background to the budget local economy
Background to the budgetLocal economy
  • Start of 2008 marked by heightened pessimism
    • Worries about global situation
    • Sharply slower consumer spending growth recently
    • Worries about electricity problems and impact on economy
    • Still big current account deficit
    • Policy uncertainty
    • High inflation
    • Rand reflecting these worries

JE\Budget preview to press Feb 2007

background to the budget rand exchange rate reflecting global local concerns
Background to the budgetRand exchange rate reflecting global & local concerns

Foreign currency per USD, Indexed Jan 2006 = 100

130

130

120

120

SOUTH AFRICA

110

110

Weaker

ICELAND

MEXICO

100

100

TURKEY

NEW ZEALAND

CANADA

90

90

Stronger

INDIA

HUNGARY

EURO

80

80

AUSTRALIA

BRAZIL

CZECH REP

70

70

2006

2007

2008

JE\Budget preview to press Feb 2007

background to the budget slower growth higher inflation big current account deficit

Underlying picture of strong growth and low inflation seems intact

Or is it? Shorter term pressures have shown themselves

CPIX inflation (annual, 3-year ma)

GDP growth (annual, 3-year ma)

10.0

25

7.5

20

5.0

15

2.5

10

0.0

5

-2.5

Y-o-y of quarterly data

Y-o-y of monthly data

-5.0

0

80

85

90

95

00

05

10

80

85

90

95

00

05

10

Background to the budgetSlower growth, higher inflation, big current account deficit

JE\Budget preview to press Feb 2007

background to the budget slower growth higher inflation big current account deficit6

Much weaker local spending growth; big current account deficit

20

50

Retail sales growth

Current account balance as % of GDP

Car sales growth

40

10

20

0

0

-10

-20

-20

-30

70

75

80

85

90

95

00

05

10

00

02

04

06

08

Background to the budgetSlower growth, higher inflation, big current account deficit

JE\Budget preview to press Feb 2007

slide7

Iceland

Bulgaria

Romania

Serbia

Greece

New Zealand

Croatia

Turkey

South Africa

Fear that SA’s deficit will move higher still…

United States

Hungary

Australia

Poland

Czech Republic

India

Mexico

South Korea

Brazil

Canada

Indonesia

Current account balances as % of GDP

Botswana

Chile

Thailand

Russia

China

Malaysia

Saudi Arabia

Singapore

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Background to the budgetSA’s current account deficit in context

JE\Budget preview to press Feb 2007

slide8

Big 4 commodity export prices

Exports ($)

6750

340

250

5000

4000

180

150

3250

110

2500

2000

80

95

97

99

01

03

05

07

Background to the budgetBut exports should benefit from commodity prices

JE\Budget preview to press Feb 2007

background to the budget slower growth higher inflation big current account deficit9

Growth forecasts revised lower, inflation forecasts higher

GDP

CPIX (avg)

9

7

Actual GDP growth

Actual CPIX inflation

8

2009 forecasts

6

2008 forecasts

5

6

4

2009 forecasts

4

2008 forecasts

3

2

2

04

06

08

04

06

08

Background to the budgetSlower growth, higher inflation, big current account deficit

JE\Budget preview to press Feb 2007

treasury s macro assumptions mtef october 2007 likely to be revised lower dg revisions not dramatic

GDP

growth

HCE

growth

CPIX

inflation

  • 4.5% 4.2% 5.4%
  • 4.8% 4.5% 4.6%
  • ERU forecast:
    • 2008 3.8 3.8 7.1
    • 2009 4.0 4.0 5.0
Treasury’s macro assumptions: MTEF October 2007Likely to be revised lower – DG: “revisions not dramatic”

Impact of electricity problems could reduce 2008 GDP growth by as much as ½% – 1%.

Thus growth forecasts reduced from 4% - 4.5% to 3.5% - 4%.

JE\Budget preview to press Feb 2007

sound fiscal stance expected to continue in light of market turmoil and despite pressures
Sound fiscal stance expected to continueIn light of market turmoil and despite pressures
  • Reason for budget surplus (quote from Oct 2007 MTEF):
  • “ In the context of current macroeconomic pressures and extraordinary buoyancy in revenue, it is recognised that government should contribute positively to national savings. By not spending the full value of buoyant tax revenues, government helps to limit current account and inflationary pressures, and takes some pressure off domestic interest rates, contributing to the sustainability of economic growth.”
  • This was reconfirmed in president Mbeki’s State of the Nation Address:
  • “At the macro-economic level, we will continue to maintain a fiscal posture that supports continued economic growth and development and reducing our external vulnerability.”

JE\Budget preview to press Feb 2007

background to the budget windfall revenues saved in form of surpluses

Budget balance, % of GDP (actual & Treasury targets)

+2

+2

OMIGSA est (+0.9%)

0

0

-2

-2

Oct ’07 MTEF (+0.5%)

(Feb budget was +0.6%)

-4

-4

-6

-6

-8

-8

85

87

89

91

93

95

97

99

01

03

05

07

09

11

Background to the budgetWindfall revenues “saved” in form of surpluses

JE\Budget preview to press Feb 2007

background to the budget actual budget deficits vs initial budgeted target

Budget balance, % of GDP

2

2

Actual deficit outcome

0

0

-2

-2

Better than budgeted balances (Rbn):

04/05 -R21.3bn

05/06 -R43.0bn

06/07 -R32.6bn

07/08 -R7.0bn

-4

-4

Deficit target at time of budget speech

-6

-6

96

98

00

02

04

06

08

10

Background to the budgetActual budget deficits vs initial budgeted target

JE\Budget preview to press Feb 2007

budget 2008 09 challenge how to contribute to macro stability in the face of all the challenges
Main focus areas:

Maintain macro-economic stability:

Do not repeat 2002 & 2006 ‘errors’ of too big individual tax cuts

Continue with sound fiscal policies (including budget surplus) – especially now with financial market turmoil & big current account deficit

Revenue under pressure over next year or so

But budget must still be growth friendly:

Infrastructure spending plans already laid out

Some extra spending (social & justice clusters)

Tax cuts – only fiscal drag relief for individuals; what about companies?

Electricity

Eskom’s recapitalisation; incentives for consumers to switch to solar power etc…

Budget 2008/09 challenge: How to contribute to macro stability in the face of all the challenges

JE\Budget preview to press Feb 2007

slide15
Widening spread between Eskom and government debt reflecting concern about Eskom’s financing requirement

Basis point spread (%) between ES33 and the R209 RSA government bond

0.8

0.7

0.6

0.5

0.4

Jul-07

Apr-07

Oct-07

Jun-07

Jan-08

Mar-07

Aug-07

Sep-07

Dec-07

Nov-07

May-07

JE\Budget preview to press Feb 2007

progression of 2007 2008 budget numbers

+R16.1bn extra revenue

Progression of 2007/2008 budget numbers

Original budgetOMIGSA est

Rbn % Ch Rbn % Ch

SPENDING 533.9 13.5 543.0 15.5

REVENUE 544.6 14.5 560.7 16.3

Balance Rbn +10.7 +17.7

% OF GDP +0.6 +0.9

JE\Budget preview to press Feb 2007

looking back at 2007 08 revenue surprises strongly on the upside again

WeightBudgeted Apr - Dec

Increase y-o-y % ch

Ind income tax 28.711.2 20.1

Co’s 25.6 16.2 22.1

STC 2.9 2.8 21.1

VAT 28.5 15.3 12.1

Excise 3.5 9.110.5

Customs 5.0 14.4 12.0

Fuel Levy 4.4 9.512.1

Extra (likely final less orig budget) (Rbn)

13.4

5.5

2.2

-6.0

Looking back at 2007/08: Revenue surprises strongly on the upside again

JE\Budget preview to press Feb 2007

slide18

Actual revenue growth vs budget projectionsSharply reduced extra collection this year

% growth

20

20

Overrun% of RbnBudg

97/98 1.4 0.9

98/99 7.4 4.2

99/00 6.5 3.4

00/01 5.2 2.5

01/02 15.0 6.4

02/03 13.2 5.0

03/04 -2.0 -0.7

04/05 21.0 6.4

05/06 41.8 11.3

06/07 34.8 7.8

07/08 16.1 3.0

Actual outcome

18

18

16

16

+R16bn

+R42bn

14

14

+R35bn

+R21bn

12

12

10

10

8

8

Original budgeted

revenue growth

6

6

97

99

01

03

05

07

JE\Budget preview to press Feb 2007

2008 09 budget projections on unchanged tax base
2008/09 BudgetProjections on unchanged tax base

Rbn

% ch

Expenditure 599.9 10.6% (MTEF numbers)

Revenue 620.1 10.6% (unchanged tax base)

Budget balance +20.2 = +0.9% of GDP

BUT:

Balance target +16.1 = +0.7% of GDP

Difference between two balance figures = R4.1bn

+ R3bn in ‘normal’ tax increases

± R7bn available…

JE\Budget preview to press Feb 2007

what are the options
What are the options?
  • ±R7bn available: what are the options?
  • Could potentially add to R7bn by budgeting for lower surplus (or balanced position or even deficit)
    • e.g. Balance from +0.7% to 0.0%  extra R16bn
    • Thus potential give-away-amount could swell to ±R23bn…
  • Budget for higher surplus – possible, but unlikely given pressures this year
    • e.g. Balance from +0.7% to +1.0%  cost R6bn
  • THUS R7bn to R23bn for:
    • Tax cuts
    • Extra spending
  • Likely: combination of tax cuts and higher spending

JE\Budget preview to press Feb 2007

revenue sources 2007 08 vs 2000 01
Revenue sources2007/08 vs 2000/01

45%

00/01

07/08

40%

35%

30%

25%

20%

15%

10%

5%

0%

Fuel

Other

Individuals

Co\'s

Vat

C&E

JE\Budget preview to press Feb 2007

individual income tax cut vs revenue overrun

Rbn

Individual tax

cut Rbn

97/98 2.8

98/99 3.7

99/00 4.9

00/01 9.9

01/02 8.3

02/03 14.9

03/04 13.3

04/05 4.0

05/06 6.8

06/06 13.5

07/08 8.4

08/09 4.0

15.0

Individual inc tax

revenue overrun

12.5

Individual income

tax cut

10.0

7.5

5.0

Less likely to be given away this year?

2.5

0.0

-2.5

97

99

01

03

05

07

09

Individual income tax cut vs revenue overrun

JE\Budget preview to press Feb 2007

individual income tax top marginal rate

65

60

60

55

55

50

50

45

45

42

40

40

35

30

1977

1980

1981

1996

2001

2003

Individual income tax: top marginal rate

JE\Budget preview to press Feb 2007

company tax rates

55

50

50

48

45

40

40

35

35

30

29

30

25

20

1990

1991

1993

1994

2000

2005

Company tax rates

STC down from 12.5% to 10% from 1 Oct 2007;to be replaced with a dividend withholding tax from 2008

JE\Budget preview to press Feb 2007

principles in decision over what to do
Principles in decision over ‘what to do’
  • Maintain conservative approach to fiscal policy
    • Work with conservative revenue forecasts
    • Budget for surplus in 08/09
  • Beware of stimulating consumer
    • Personal tax cuts only aimed at offsetting fiscal drag?
  • Functional capacity of economy & social delivery remains key focus:
    • Social support (social security payments)
    • Additional spending on key areas (protection & justice,
  • Encourage savings, retirement provision:
    • More detail on social security system
  • A bold move to support growth?:
    • Announcement of planned further corporate tax rate cuts?

JE\Budget preview to press Feb 2007

tax changes omigsa speculation
Tax changesOMIGSA speculation…
  • R4bn (– R5bn) on individual income tax relief (fiscal drag offset)
  • Some VAT relief on essential foods?
  • Other… company tax rate

What it will cost to change VAT (highly unlikely) or company tax rate:

2007/2008 Rbn

current

rate

1% cost (Rbn)

MTEF budget

ERU est

Vat

147

150

14

10.7

Co\'s

140

144

29

5.0

JE\Budget preview to press Feb 2007

tax changes omigsa speculation27
Tax changesOMIGSA speculation…

What do we prefer?

  • Individuals: no big relief, only for fiscal drag
  • Company tax relief

JE\Budget preview to press Feb 2007

expenditure components

Wages

35.4%

39.8%

Other current

34.5%

47.2%

3%

Capital

7.6%

19.8%

Interest

9.8%

00/01

07/08

Expenditure components

JE\Budget preview to press Feb 2007

substantial improvement in 2 big components

as % of total expenditure

Interest payments

Wage bill

22

41

20

40

18

39

16

38

14

12

37

10

36

8

35

6

93

97

01

05

09

93

97

01

05

09

Substantial improvement in 2 big components…

JE\Budget preview to press Feb 2007

other spending benefiting from lower spending on wages interest component
Other spending benefiting from lower spending on wages & interest component

weight

Expenditure estimate R599.9bn

Wage bill (12.4% increase) 36.0% 215.7

Interest payments 8.5% 51.2

Other 55.5% 333.0

=11.9% ch

Spending increases: (MTEF data)

Interest & wage +9.0% (10.3%)

Non-interest, non-wage +11.9% (19.9%)

Capital spending +15.5% (32.1%)

Current (i.e. non-capital) +10.2% (14.2%)

JE\Budget preview to press Feb 2007

infrastructure spending plans big numbers but growth slowing
Infrastructure spending plansbig numbers, but growth slowing

Growth in TOTAL 32.9% 15.5% 8.9% 7.3%

Total of R438bn over this period (from R410bn previously)

Total of R611bn over 07/08 to 10/11 period

MTEF Oct 2007 numbers – likely to be lifted significantly going forward – mainly from Eskom’s side

JE\Budget preview to press Feb 2007

in summary issues in this budget
In summaryIssues in this budget
  • Individuals vs companies
    • No big individual tax cuts foreseen
    • But at least some fiscal drag relief for individuals
    • Company tax rate cut?
    • Cuts in company taxes
  • Normal sin taxes and fuel levy hikes
  • No VAT change

JE\Budget preview to press Feb 2007

in summary issues in this budget33
In summaryIssues in this budget
  • Expansion on announcements from State of the Nation Address
    • Industrial policy action plan
    • APEX priorities
  • Eskom recapitalisation
    • Likely combination of cash, loans, debt guarantees
    • Cash likely to be classified as “extraordinary payments” and thus will not impact on budget balance
    • Will impact on funding, though
  • More detail on social security system
  • Exchange controls?
  • Extra social spending
    • Child grants extended
    • Male pension age lowered from 65 to 60

JE\Budget preview to press Feb 2007

in summary issues in this budget34
In summaryIssues in this budget
  • What will be big surprises?
    • BIG company tax relief
    • BIG exchange control relaxation
    • Large budget deficit

JE\Budget preview to press Feb 2007

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