A Macroeconomic Perspective on the 2009 National Budget

1. A Macroeconomic Perspective on the2009 National Budget Jac Laubscher Group Economist 16 February 2009

2. Overall assessment • A pragmatic response to a challenging economic environment over which SA has little control • Taking counter-cyclical fiscal policy to the next level without abandoning fiscal discipline, but the strains are showing • Balancing immediate needs with strategic thrust • Confirming the national budget as the outcome of government policy in its entirety • Reiterating the necessity of effective and efficient policy implementation

3. The global recession

4. Industrial production and merchandise trade Source: IMF World Economic Outlook Update January 2009

5. SA manufacturing production collapsing

6. Global GDP growth Source: IMF World Economic Outlook Update January 2009

7. Economic growth : SA vs. OECD Source: I-Graph

8. Real commodity prices Source: IMF World Economic Outlook Update January 2009

9. Capital flows to emerging markets Source: Institute for International Finance January 2009

10. International capital flow Net foreign portfolio purchases Source: I-Graph

11. Fiscal balances Source: IMF World Economic Outlook Update January 2009

12. Likely fiscal stimulus Source: The Economist, 31 January 2009; IMF Revised WEO, 28 January 2009

13. The downturn in the domestic economy

14. Economic growth: last 6 months on previous 6 months Source : I-Graph

15. Household consumption expenditure Source : I-Graph

16. Private sector investment spending Source : I-Graph

17. SARB Leading indicator vs. GDP Growth Source: I-Graph

18. Outlook for interest rates Source: I-Graph

19. Effective exchange rate of the rand Source: I-Graph

20. Budget macro-economic projections

21. Budget macro-economic projections 2

22. Revenue projections (R billion)

23. Do’s of fiscal stimulus • Increased investment spending • Targeted transfer payments • Temporary reduction in consumption tax rates • Lump sum targeted tax rebates • Temporary reduction in UIF contributions Source: “Fiscal Policy for the Crisis”. IMF Staff Position Note. 29 December 2008

24. Don'ts of fiscal stimulus • Large-scale new entitlement programs • Increase in public sector wage bill • Increased subsidies to specific industries • Reduction in corporate tax rates, dividends and capital gains tax • Amnesties/exemptions for troubled companies • Tax distortions, e.g. increases in tariffs • Bolstering financial markets and prices Source: “Fiscal Policy for the Crisis”. IMF Staff Position Note. 29 December 2008

25. National budget balance (% of GDP) Source: Medium Term Budget Policy Statement 2008

26. SA fiscal stimulus in perspective Source: The Economist, 31 January 2009; IMF Revised WEO, 28 January 2009

27. Combined stimulus • Fiscal policy: 2.6% of GDP • Monetary policy: repo rate -4,5%? • Exchange rate: nominal effective -42% from peak; real effective -26% from peak

28. Fiscal sustainability • Primary balance turning negative • Government savings turning negative • Government expenditure/GDP ratio increasing

29. Primary budget balance (% of GDP) Source: Medium Term Budget Policy Statement 2008

30. Net loan debt (% of GDP) Source: Medium Term Budget Policy Statement 2008

31. State debt cost (% of GDP) Source: Medium Term Budget Policy Statement 2008

32. Government bond yield vs. debt/GDP Source: I-Graph

33. Current account vs. government savings Source: I-Graph

34. Government expenditure to GDP ratio Source: Medium Term Budget Policy Statement 2008

35. Tax-to GDP ratio (% of GDP) Source: Medium Term Budget Policy Statement 2008

36. “Government is not the proximate cause of growth. That role falls to the private sector, to investment and entrepreneurship responding to price signals and market forces. But stable, honest, and effective government is critical in the long run. The remit of the government, for example, includes maintaining price stability and fiscal responsibility, both of which influence the risks and returns faced by private investors.” “The Growth Report. Strategies for Sustained Growth and Inclusive Development” Commission on Growth and Development. 2008