2010 MEDIUM TERM BUDGET POLICY STATEMENT

1. 2010 MEDIUM TERM BUDGET POLICY STATEMENT Presenter: Pravin Gordhan | Minister of Finance | 28 October 2010

2. Summary • The MTBPS covers • Economic assumptions • Fiscal framework • Spending priorities • Division of revenue • Changes to conditional grants • Mid-term report on spending • The MTBPS provides the framework within which each sphere has to then prepare detailed budgets • Parliament is afforded the opportunity to recommend changes to the framework and the division of revenue • … after taking input from civil society, labour, business into account

3. Summary (cont) • Broad themes • We must lift the economy onto a more labour- absorbing growth path… • … and the management of the public services must improve • The economy has gained strength since the Budget and the growth outlook has improved moderately • GDP is expected to grow by 3% this year and 3.5% in 2011 • Recovery in revenue and moderate growth in public spending lowers the fiscal deficit • Deficit of 5.3% of GDP projected for 2010/11, falling to about 3% by 2013/14. • Government debt stabilises at 40% of GDP in 2015. • Expenditure rises by R67 billion relative to baseline over the MTEF • Allocations informed by government’s 12 outcomes with priority to education, health, infrastructure and job creation, especially for young people.

4. The macroeconomic forecast • Growth of 3.0% in 2010 rising to 3.5% in 2011 and 4.4% by 2013. • Inflation remains below 6% over MTEF • Private investment and employment recover gradually • Current account deficit widens as demand accelerates and imports rise

5. Improved global outlook as emerging markets grow strongly • Upward revisions to global growth forecasts over MTEF • Driven by strong growth in China, India and Germany • Recovery in developed countries is still fragile • High unemployment • Rising debt levels • Deflation risk • Bad debts and banking sector reform • Global imbalances remain large requiring coordination by the G-20 Source: IMF World Economic Outlook, October 2010

6. Global environment supports high commodity prices and South Africa’s terms of trade Index of US$b commodity prices • Gold price seen as a store of value in times of uncertainty. • Strong growth in China and India supporting demand. • Prices of export commodities have increased more than import commodity (oil).

7. Low inflation supports expansionary monetary policy stance • Low inflation allows interest rates to decline to lowest level since repo rate was introduced CPI inflation and the real repo rate Source: Stats SA, SARB

8. Recession caused sharp decline in private & general govt investment Growth in gross fixed capital formation • Investment ratio fell to 20.9% of GDP in 2Q 2010 from 22.5% in 2009 due to decline in general govt and private investment • Investment by SOE’s still growing off a high base. • Gradual recovery in private investment expected as capacity utilisation rises and demand strengthens. Source: SARB

9. The overvalued rand exchange rate poses a risk to balanced and sustainable growth • International factors driving capital flows to emerging markets have strengthened the rand. • The real exchange rate is 12% above its 10 year average. • Chile has a similar degree of overvaluation, but Brazil is much more stretched. • The strong rand has costs and benefits. • Complementary micro reforms needed to support competitiveness. Nominal and real effective exchange rate indices

10. Financial and regulatory measures to moderate pressures on the rand • NT and SARB will continue to purchase foreign exchange reserves. • SARB will sterilise inflows associated with foreign direct investment inflows using foreign exchange swaps. • Exchange control and offshore investment limits on individuals amended. • To make SA attractive as a corporate investment destination and encourage investment in the rest of the African continent. • Exchange controls on domestic companies will be reformed to remove barriers to their international expansion from a domestic base. • Prudential framework for foreign investment by private and public pension funds, including GEPF.

11. Consolidated government fiscal framework • Consolidated government deficit is projected to recover from 6.3 per cent of GDP in 2010/11 to 3.2 per cent by 2013/14. • Recovery driven by the strong uptake in revenue and the stabilisation in non-interest spending. • Growth in expenditure will need to moderate as debt service costs increase over the MTEF. • Counter-cyclical fiscal policy will aim to grow revenues while gradually reducing non-interest stimulus spending. • Important to keep the fiscal trajectory on a sustainable path while meeting growth expectations.

12. Public sector borrowing requirement almost halved over the MTEF Public sector borrowing requirement • General government’s borrowing requirement falls significantly as fiscal stimulus is removed. • The gradual decline is a result of a number of projects being shifted out over the MTEF. • The reduction in the borrowing requirement is in line with the recovery in government and institutional revenue. Source: National Treasury

13. Fiscal sustainability – the primary balance and net loan debt Primary balance • Prior to 2007/08 increased government revenue translated into a pro-cyclical uptake in spending. • The primary balance grew to reach an unsustainable level of 31.6% in 2009/10 following the sharp drop in revenue from 2007/08. • Informed counter-cyclical fiscal policy will see the primary balance fall to 29.3% in 2013/14. Source: National Treasury

14. Budget adjustments • Adjustments to baseline comprise the bulk share of budgetary increases, adding R40.8bn over the MTEF. • The recent above-inflation wage settlement resulted in additional R26.3bn needing to be added to the wage bill. • The policy reserve was increased by R22.1bn over the MTEF. Source: National Treasury

15. Core government outcomes over MTEF • Over the next three years, government will focus on 12 agreed outcomes, with priority given to those outcomes that have the greatest developmental and economic impact. • These outcomes are: • Enhancing the quality of basic education and skills development. • Improving the quality of health care. • Investing in infrastructure and proper maintenance of economic infrastructure networks. • Accelerating the creation of jobs. • Other Growth Path priorities

16. Value for money in public expenditure • Deficiencies in public sector management have to be reduced to ensure greater efficiency with existing resources. Hence, over the period ahead: • Excessive and inefficient administrative capacity in many departments and agencies is a specific focus. • Dedicated technical support to address underspending in capital projects by departments, agencies and municipalities is underway. • Non-departmental agencies will come under scrutiny, with special focus on staff establishments, remuneration and functional mandates. • Procurement of goods and services, even when compliant with regulations, is frequently neither competitive nor transparent. Under the guidance of an interdepartmental team, this will be reviewed and transformed. • IT systems and management of consulting services will be subject to additional scrutiny within the supply chain regulatory framework. • Progress on the outcomes should reflect, at least, the levels of associated expenditure, with greater results evident in the improved quality of frontline services.

17. Recovery very sensitive to global outlook and recovery in consumer demand, but overall growth constrained by electricity capacity. • MTEF forecasts real GDP growth < 4½% • Inflation pressures ease due to falling food prices allowing interest rates to stay low, but inflation persistence reinforced by sticky services. • The labour market continues to be weak, with unemployment rising to 25.3% in 3Q2010

18. Provisions by the adjustments budget • Public Finance Management Act, Act 1 of 1999 (PFMA), section 30(2), states that the adjustments budget may provide for: • Significant and unforeseeable economic and financial events affecting the fiscal targets. • Unforeseeable and unavoidable expenditure recommended by a committee of Cabinet. • Any expenditure in terms of section 16. • Money to be appropriated for expenditure already announced by the Minister during the tabling of the annual budget. • The shifting of funds between and within votes. • Utilisation of savings under a main division of a vote to be used to defray over-expenditure on another main division in terms of section 43. • The roll-over of unspent funds from the preceding financial year.

19. 2010/11 adjusted national budget

20. National budget adjustments mainly include • Adjustments – net R2.4 billion reduction: • Roll-overs - R1.8 billion • Unforeseeable and unavoidable expenditure - R2.6 billion • Personnel remuneration increases – R6.2 billion • Self-financing expenditure – R0.4 billion • State debt costs – R3.8 billion reduction • Contingency reserve draw down – R6 billion (reduction) • Declared savings – R1.9 billion (reduction) • Projected underspending – R1.7 billion reduction • In-year adjustments result in the expenditure level estimates decreasing from R818.1 billion to R815.7 billion

21. Summary of the Division of Revenue Amendment Bill • Section 12(4) of the Money Bills Amendment Procedure and Related Matters Act, 2009 (Act No. 9 of 2009) requires Minister of Finance to table Division of Revenue Amendment Bill with the revised fiscal framework if the adjustments budget effects changes to the Division of Revenue Act (DoRA) for the relevant year. • Bill contains two clauses • Clause 1 of the Bill provides for the amendment of Schedules 1 to 8 of the DoRA, by the substitution of new Schedules. • Clause 2 of the Bill provides for the short title and commencement of the Bill.

22. Clause 1 provides for • Additional unconditional and conditional allocations to provinces and municipalities. • The allocation of unallocated conditional allocations to provinces and municipalities. • The re-allocation of conditional allocations in terms of section 18 of the Division of Revenue Act, 2010. • Roll-overs of conditional allocations to provinces and municipalities not transferred by national departments during the 2009/10 financial year. • Increases to a conditional allocation to a province or municipality through a virement under section 43 of the Public Finance Management Act, or section 28(2)(d) of the Municipal Finance Management Act. • The re-allocation of conditional allocations that were not correctly reflected in the Schedules to the Division of Revenue Act, 2010.

23. Schedules to Bill provide for • Schedule 1 - equitable division of revenue raised nationally among the three spheres of government. • Schedule 2 – determination of each province’s equitable share of the provincial sphere’s share of revenue raised nationally. • Schedule 3 – determination of each municipality’s equitable share of the local government sphere’s share of revenue raised nationally. • Schedule 4 – allocations to provinces and municipalities to supplement the funding of programmes or functions funded from provincial or municipal budgets. • Schedule 5 – specific purpose allocations to provinces. • Schedule 6 – specific purpose allocations to municipalities. • Schedule 7 – allocations-in-kind to municipalities for designated special programmes. • Schedule 8 – incentives to provinces and municipalities to meet targets with regard to priority government programmes.

24. 2010/11 Adjustments – Provinces Equitable share • R3.82b is added to cover cost of wage agreements for 2010 (provision for higher than inflation increase and addition to housing allowance) • Schedule 1 and Schedule 2 (direct charge) • R350m is added to cover cost of implementation (backdated to July 2009) of OSD for doctors and health therapeutic workers Annexure A • Schedule 1 and Schedule 2 (direct charge)

25. 2010/11 Adjustments – Provinces (cont) Conditional grants • R40m is added to health sector for increased demand • Comprehensive HIV and Aids Grant - Schedule 5 (Dept of Health) • R769m is added to cover increased property rates based on updated information on property ownership and rates payable • Devolution of Property Rate Funds Grant - Schedule 5 (Dept of Public Works) • R31.2m is added to cover 2010 wage agreements for Further Education and Training (FET) colleges employees • FET Colleges Grant – Schedule 4 (Dept of Basic Education) • R204.4m be distributed to provinces through disaster management grants for continued drought conditions (R50m, WC) and damage to roads (KZN) • Agricultural Disaster Management Grant - Schedule 5 – WC (Dept of Agriculture, Forestry and Fisheries) • Provincial Infrastructure Disaster Relief Grant - Schedule 5 – KZN (Dept of Cooperative Governance and Traditional Affairs)

26. 2010/11 Adjustments – Local Government Equitable share • R390.9m is added for allocation to those municipalities that accounted for unspent conditional grants from previous financial years • Schedule 1 and Schedule 3 Conditional grants • R92m for drought emergency relief in Western Cape (Mossel Bay Municipality) • Municipal Drought Relief Grant – Schedule 6 (Dept of Water Affairs) • R10m is added for the refurbishment of facilities in the Mopani District Municipality • Water Services Operating Grants - Schedules 4 and 7 (Dept of Water Affairs)

27. Thank you

28. Annexures

29. Capital and government expenditure to moderate in the MTEF Consolidated government capital expenditure Government expenditure Source: National Treasury • Capex spending increased significantly in 2009/10 as dtimulatory measure, however this trend declines over the MTEF as economy recovers. • Total expenditure will fall to 33.7% this year after reaching a high of 33.9% in 2009/10 – will fall further to 32.3% in 2013/14 as capex continues to decline. • Debt service costs remain moderate but grow over the MTEF. • Expenditure assumes counter-cyclical pattern as stimulus spending is removed in line with economic recovery.

30. Debt – costs and trajectory Total net loan debt Total net loan debt Source: National Treasury • Total net loan debt is projected to rise from 30.8% in 2010/11 to reach 36.9% in 2013/14. • This rise in net loan debt explains the marked increase in debt service costs. • The debt trajectory is positive, showing a strong possibility the overall stock will continue to increase until 2016/17 – giving weight to the adoption of a counter-cyclical fiscal stance. • The fiscal trajectory remains sustainable with on a very small probability that debt will breach the 50% of GDP debt level.

31. Revising spending baselines • Government’s outcomes approach provides a framework for results-driven performance and enhanced monitoring of service delivery. • Government’s budget process is undergoing reform, shaped in part by the Money Bills Amendment Procedure and Related Matters Act (2009). • Departments have been asked to review their baseline allocations to identify savings, reprioritise and realign expenditure in terms of government’s outcomes approach. • Reviews have been organised by function across three spheres, facilitating more effective comparison of allocations with service delivery trends .

32. Division of revenue • Of the R67.1 billion additional resources allocated over the 2011 MTEF, on average: • 35% goes to national government • To sustain real growth in social grant provisions and public employment programmes. • 60% goes to provincial government • To accommodate higher personnel costs and for spending on infrastructure backlogs in education and health. • 5% goes to local government • To sustain the provision of basic services in poor municipalities, and for bulk infrastructure provision. Budget adjustments Source: National Treasury

33. Key funding items • Education: • Finalisation of outstanding OSD commitments. • Reduction of the number of inappropriately-structured schools, which currently are 3 627. • Additional resources for FET colleges. • The training of an additional 8 800 teachers through Funza Lushaka teacher bursary scheme. • Health: • Finalisation of outstanding OSD commitments (doctors and therapists). • Increasing hospital infrastructure spending. • Increase allocations to stabilise health budgets. • Spending for maternal and child health as well as HIV and Aids to increase. • President to give guidance on further health support from the unallocated policy reserve. • Built environment • Increasing the regional bulk infrastructure grant for the financing of regional bulk water and sanitation. • Increasing the public transport infrastructure and systems grant. • Additions to the municipal infrastructure grant.

34. Key funding items (cont) • Employment creation: • Additional resources for EPWP incentive grant to provinces for the social sector. • Supporting the national youth employment initiative. • Rural development and land reform: • Improved support to newly settled farmers through the comprehensive agricultural support programme. • Additions for settling about 603 land claims each year over the MTEF. • Road infrastructure: • Provincial roads spending to increase as government increase road infrastructure spending by R1.5 billion. • Comprehensive Agricultural Support Programme • Provincial agriculture to rise by an additional R400 million over the MTEF.