2004 Medium Term Budget Policy Statement

1. 2004 Medium Term Budget Policy Statement A framework for accelerated growth and development

2. Contents • Introduction – a platform for growth and development • Macroeconomic overview • Fiscal framework • Tax and revenue issues • Medium term expenditure framework • Intergovernmental relations

3. Introduction A framework for accelerated growthbroad-based development

4. A decade of structural economic change… • Stabilisation of fiscal and monetary policy • Structural tax reform to encourage efficiency and equity • Phased liberalisation of capital account • Trade reform encouraging domestic competition and international opportunity • Rapid growth in investment spending • Substantial productivity improvements • Public finance and budget reforms • Enhanced public sector delivery capacity …has broadened the policy room for social development

5. Macroeconomic review and outlook Higher public and private investment growth to support accelerated growth

6. Economic performance in 2004 • Broad-based growth well above 3% in 1st half of 2004 • Buoyant consumer demand and investment in productive capacity • Rapid and sustainable adjustment to currency developments • Inflation comfortably within inflation target range • Steady financial flows contributing to BoP sustainablility • Indications of turnaround in employment prospects

7. Over METF period, accelerated growth driven by… • Mildly expansionary fiscal stance, focusing on improving economic and social infrastructure • Moderate interest rates, improved confidence and lower risk underpinning stronger investment growth • Productivity improvements driven by broad human capital development • An increasingly open economic environment, promoting opportunities for South African businesses • Small business, learnerships and BEE to address economic dualism

8. GDP growth and CPIX • GDP revised up to average 4% over medium term • CPIX inflation around 5% on average over medium term

9. Strong world growth

10. Healthy Balance of Payments • Current account deficit rose to high 3,8% of GDP, but… • Supported by positive capital inflows • Balance of payments surplus remains healthy at R12,1 billion • Gross reserves rose to US$12.2 billion at end-September, international liquidity position at US$9 billion as SARB continues reserve buildup

11. Broad based growth in first half • GDP up 3,6 and 3,9 per cent in first two quarters respectively • Broad-based, but particularly firm in construction, communications and financial services

12. Low inflation and interest rates • CPIX inflation in target range for 13 months • Nominal interest rates at lowest level in almost 30 years

13. Investment and confidence up…

14. Macroeconomic Forecast

15. Fiscal framework Sustainable budgeting promotes broad-based socio-economic development

16. Features of the framework • Revenue forecast for this year revised upwards by about R1,2 bn partly due to amnesty proceeds • Revenue to GDP rising by about 0,6% over MTEF • Recovery in corporate taxes, but also base-broadening tax reform • Deficit of 3,2% this year, rising to 3,5% next year • For sustainability reasons, deficit to be reduced to 2,7% by 2007/08 • Real growth in spending of 4,3% (6,5% next year) • Additional resources available (R50 bn): • R10.8 bn in 2005/06 • R14.4 bn in 2006/07 • R24.7 bn in 2007/08

17. Fiscal framework

18. Current balance (% of GDP)

19. Total additional resources available • Bulk of resources go to provinces, but significant share to national in 3rd year

20. Division of total resources

21. Taxation and revenue issues

22. Revenue outcome and projections • Audited outcome for 2003/04 • Main budget revenue R299,4 billion • R5,1 billion less than budgeted • Due to global conditions and stronger rand reducing company profits and customs value of imports • Revised forecast for 2004/05 • Main budget revenue R328,2 billion • R1,2 billion more than 2004 Budget estimate • Tax revenue up by R1,9 billion mainly due to strong growth in remuneration and robust consumer spending translating into above budgeted estimates for: • Personal income tax of R3,8 billion • VAT collections of R4 billion • Transfer duty collections of R1,2 billion on back of booming property market

23. 1st and 2nd Revenue Law Amendment Bill have successfully completed the process of translating 2004 tax proposals into law, including: Relaxation of fringe benefit tax on employee share ownership Clarifying anti-avoidance rules on certain financial instruments Clarification of VAT inconsistencies pertaining to grants and transfers to public entities Customs duty reform in support of regional distribution centre initiatives Ad valorem duty exemption on vehicles with a capacity of 15 persons or more Elimination of ad valorem duties on magnetic tapes, magnetic stripes, certain cosmetic products, print film, photo copying apparatus and watches & clocks 2004 tax proposals

24. Tax policy priorities for 2005 Budget • Consider simplification of tax compliance burden on SMMEs • Reviewing tax treatment of medical provision • Adjustments in claiming business travel cost on the motor vehicle allowance • Tax reforms relating to retirement funding to be aligned with regulatory reforms of pension fund industry • Revisions to the Royalty Bill and submission of revised bill to Parliament • Reassessment of current mining tax structure • Preparing legislative tax amendments for hosting the FIFA World Cup in 2010 • Release of fiscal policy paper on environmental taxes • Consideration and review of provincial own tax instruments and options for replacing RSC levy

25. Key spending priorities

26. Key MTEF Priorities • In 2005/06 and 2006/07 • Stabilising social security grants • Accelerating the land restitution programme • Improving salaries for police and educators • In the outer years • Supporting the new direction in housing delivery • Additional resources for road infrastructure • Improving quality of schooling system & realignment of FET • Additional funding for National Student Financial Aid Scheme • Continuing the hospital revitalisation programme • Investing in water resources infrastructure • Continued support for the African agenda including the PAP

27. Key spending areas • Social Services… Additional funding of R34,25 billion over MTEF targets: • Social security grants • Educator salaries • NSFAS to increase coverage • Health promotion including primary health care • Justice and Protection Services… Additional funding of R6, billion over MTEF targets: • Salary adjustments for police • Enlisting additional police personnel • Improving court administration • Repair and Maintenance of Defence facilities

28. Key spending areas • Economic Services and Infrastructure Additional funding of R7,45 billion over MTEF targets: • Land restitution • Roads infrastructure • Taxi Recapitalisation • Bulk water resource infrastructure • Implementation of new housing delivery strategy • Administrative Services Additional funding of R3,53 billion over MTEF targets: • Supporting Home Affairs turnaround strategy • Municipal services and rates • Census Replacement Survey • Ongoing support for the African agenda

29. Adjusted estimates 2004 • The 2004/05 Adjustments Budget provides for R7,69 billion of additional allocations R billions Unforeseen & Unavoidable Expenditure (Provinces) 4,11 Unforeseen & Unavoidable Expenditure (National ) 1,65 Approved Roll-overs 1,99 Self financing expenditure 0,17 Drought Relief 0,43 BEE 0,15 Projected State Debt cost (0,82) Total Adjustments R7,69 • After in-year savings, contingency reserve, and other unallocated amounts, net increase in spending is R2,78 billion. • Taking total revised expenditure to R371,7 billion for 2004/05

30. Adjusted Estimates 2004 • Main adjustments to national departments’ appropriations: • DPW: Services/rates backlog R599 million • DTI: PBMR project R500 million • DPLG and Agriculture: drought R430 million • DTI: NEF R150 million • DLA: Land restitution R200 million • ICASA: VAT Payment R45 million • DPW: Prestige Accommodation R43 million • DWAF: State forestry assets R40 million

31. Integovernmental relations

32. Provincial finances • Function shift of social security grants • Conditional grant in the interim • Equitable share formula adjusted for function shift and new data (Census 2001) • Equitable share rises by R10,7 bn over three years • Strengthening education and health spending • Revitalising welfare services • Educator personnel adjustments • Conditional grants grow by R22,9 bn • R20,8 bn for social grants • R1,4 bn for housing • R0,5 bn for infrastructure

33. Local government finances • Local government faces significant developmental challenges • Municipal transfers grow fastest from 3 spheres • Equitable share rises by R2,3 bn over three years • Providing basic municipal services • Infrastructure grants grow by R500m • For expansion of municipal infrastructure networks

34. 2004/05 2005/06 2006/07 2007/08 Medium term estimates R million Local government baseline allocation 14,280 15,959 17,137 17,994 1 8,536 9,578 10,355 10,873 Equitable share and related Infrastructure 4,980 5,589 5,987 6,323 Capacity building and restructuring 723 749 749 749 2 41 44 46 48 Municipal infrastructure grant function shift Changes to baseline 477 600 800 1,400 Equitable share and related – 600 700 1,000 Infrastructure 477 – 100 400 Total revised allocations 14,757 16,559 17,937 19,394 1 8,536 10,178 11,055 11,873 Equitable share and related Infrastructure 5,498 5,633 6,133 6,772 Capacity building and restructuring 723 749 749 749 1. Includes water operating subsidy. 2. The municipal infrastructure grant shifts from provinces to local government from 1 April 2005. The 2004/05 number is reflected for comparative purposes. Local Government finances