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Budget preview February 2007

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  1. Budget preview February 2007 Johann Els

  2. Background to the budget OMIGSA’s global views for 2007 • Benign world environment • Growth slower than 2006, but still solid • Inflation drifting lower, but still potential pressures • More global tightening, focused in H1, unlikely to be aggressive • Commodity prices may ease further • Risks: • Growth slowdown underestimated • Central Banks overly aggressive (policy error) • Commodity prices collapse JE\Budget preview to press Feb 2007

  3. Background to the budgetOMIGSA’s SA views for 2007 • Still healthy local environment • Growth solid, albeit a little slower • Inflation to peak in H1, drift lower to below 5% by y/e • C/A deficit to narrow a little, but remains uncomfortably wide • Rates in peak territory, no early cuts on demand growth strength • Risks: • Sharp global growth slowdown and/or commodity price downturn • More CB tightening than expected • Cyclical pressures force SARB to tighten more than expected JE\Budget preview to press Feb 2007

  4. Background to the budgetOMIGSA’s ‘Sixties Scenario’ of 4 years ago was spot on GDP growth CPIX inflation 10 10 25 25 20 20 5 5 10 10 0 0 0 0 3 yr m.a. of annual figures 3 yr m.a. of annual figures -4 -4 -5 -5 50 60 70 80 90 00 10 50 60 70 80 90 00 10 JE\Budget preview to press Feb 2007

  5. Background to the budgetStrong local spending growth; big current account deficit Current account balance as % of GDP Year-on-year % change 10 10 20 20 HCE GFCF 5 5 10 10 0 0 0 0 -5 -5 -10 -10 -10 -10 -20 -20 87 92 97 02 07 87 92 97 02 07 JE\Budget preview to press Feb 2007

  6. OMIGSA est (+0.4%) Oct ’06 MTEF (-0.4%) Background to the budget 2006/2007 fiscal surplus + surplus in 07/08 Budget balance, % of GDP (actual & Treasury targets) -2 -2 0 0 2 2 4 4 Feb ’06 budget (-1.5%) 6 6 8 8 85 87 89 91 93 95 97 99 01 03 05 07 09 JE\Budget preview to press Feb 2007

  7. % of GDP -2 -2 OMIGSA estimate Actual deficit outcome 0 0 2 2 4 4 Deficit target at time of budget speech Smaller than budgeted deficits (Rbn): 04/05 -R21.3bn 05/06 -R43.0bn 06/07 -R32.6bn 6 6 8 8 96 98 00 02 04 06 08 Background to the budget Actual budget deficits vs initial budgeted target JE\Budget preview to press Feb 2007

  8. Budget 2007/08 challenge: What to do with all the money, while contributing to macro stability • 2007/8 continuation/strengthening of growth/delivery strategy: • Growth friendly/boosting budget: • Infrastructure spending plans already laid out • Some extra spending (justice cluster?) • Tax cuts – where? • Maintain macro-economic stability: • Do not repeat 2002 & 2006 ‘errors’ • Contribute to savings pool • Maintain fiscal discipline: • Budgeting for surplus, small deficits going forward • Look for progress reports on ‘outstanding issues’: • Retirement fund taxation, mining royalties, liquid fuel windfall tax, etc • Exchange control - maybe • Inflation targeting - unlikely JE\Budget preview to press Feb 2007

  9. +R34bn extra revenue Progression of 2006/2007 budget numbers Original budgetOmigsa est Rbn % ch Rbn % ch SPENDING 472.7 12.8 474.2 13.8 REVENUE 446.4 8.6 480.5 16.7 Balance Rbn -26.3 +6.3 % OF GDP -1.5 +0.4 JE\Budget preview to press Feb 2007

  10. Looking back at 2006/07: Revenue surprises strongly on the upside again WeightBudgeted Apr - Dec Increase y-o-y % ch Ind income tax 29.85.5 10.8 Co’s 21.610.1 34.3 STC 3.1 12.8 34.9 VAT 29.4 14.7 18.6 Excise 3.7 14.310.5 Customs 5.2 26.8 31.7 Fuel Levy 4.9 6.36.1 Other 2.3 -3.6 -2.9 Extra (likely final less orig budget) (Rbn) 7 20 3 4 JE\Budget preview to press Feb 2007

  11. OMIGSA estimates % 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 34.1 7.6 18 18 Actual outcome 16 16 +R42bn 14 14 +R34bn +R21bn 12 12 10 10 8 8 Original budgeted revenue growth 6 6 97 99 01 03 05 07 Actual revenue growth vs budget projectionsR100bn ‘extra’ revenue collected in 3 years! JE\Budget preview to press Feb 2007

  12. BUT: Balance target +9.3 = +0.5% of GDP 2007/08 Budget Projections on unchanged tax base Rbn % ch Revenue 555.0 15.5% (unchanged tax base) Budget balance +21.3 = +1.1% of GDP Expenditure 533.7 12.5% (MTEF numbers) Difference between between two balance figures = R12bn + R3bn (+?) in ‘normal’ tax increases  R15bn available… JE\Budget preview to press Feb 2007

  13. Treasury’s dilemma: what to do with all this money? • ±R15bn available: what are the options? • Could potentially add to R15bn by budgeting for lower surplus (or balanced position or even deficit) • e.g. Balance from +0.5% to +0.2%  extra R5.3bn to give away • Thus potential give-away-amount could swell to ±R20bn… • Budget for higher surplus – possible, but politically acceptable? • e.g. Balance from +0.5% to +0.8%  cost R6bn • THUS R15bn to R20bn for: • Tax cuts • Extra spending • Likely: combination of tax cuts and higher spending JE\Budget preview to press Feb 2007

  14. 45% 2000/2001 2006/2007 40% 35% 30% 25% 20% 15% 10% 5% 0% Fuel Other Individuals Co's VAT Retirement C&E Revenue sources2006/07 vs 2000/01 JE\Budget preview to press Feb 2007

  15. Individual income tax: top marginal rate 65 • Rate Reached at • 1977 60% R 28 000 • 1980 55% R 30 000 • 1981 50% R 40 000 • 1996 45% R 80 000 • 2001 42% R200 000 • 2003 40% R240 000 • 2006 40% R300 000 60 60 55 55 50 50 45 45 42 40 40 35 30 1977 1980 1981 1996 2001 2003 JE\Budget preview to press Feb 2007

  16. Company tax rates 55 50 50 • Rate • 1990 50% • 1991 48% • 1993 40% • 1994 35% • 2000 30% • 2005 29% 48 45 40 40 35 35 30 29 30 25 20 1990 1991 1993 1994 2000 2005 JE\Budget preview to press Feb 2007

  17. Including STC, SA sits here Move SA from here To here? (over time)... Company tax ratesSA compared (SA’s direct company tax rate – does not include STC) 40 35 30 25 20 15 10 5 0 Peru Brazil India China Japan Czech Ireland France Poland Russia Taiwan Georgia Bulgaria Canada Slovenia Hungary Croatia Germany Thailand Chile Botswana Malaysia Mexico Singapore Hong Kong Slovak Rep Australia Switzerland South Korea South Africa Luxembourg Indonesia United States United Kingdom JE\Budget preview to press Feb 2007

  18. Principles in decision over ‘what to do’ • Maintain conservative approach to fiscal policy • Work with conservative revenue forecasts • Budget for surplus in 07/08, thereafter small deficits • Beware of further stimulating consumer boom • 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, small/medium enterprise support, etc) • Encourage savings, retirement provision: • More detail on social security system • Retirement fund taxation lowered further or now scrapped? • A bold move to support growth?: • Announcement of planned further corporate tax rate cuts? • STC cut? JE\Budget preview to press Feb 2007

  19. Individual tax relief in previous fiscal years Rbn FY 97/98 2.8 FY 98/99 3.7 FY 99/00 4.9 FY 00/01 9.9 FY 01/02 8.3 FY 02/03 14.9 FY 03/04 13.3 FY 04/05 4.0 FY 05/06 6.8 FY 06/06 13.5 FY 07/08 4 – 5 ? JE\Budget preview to press Feb 2007

  20. Tax cutsOMIGSA speculation… • R4bn – R5bn on individual income tax relief (fiscal drag offset) • Other… retirement fund tax / company tax rate / STC 2006/2007 Rbn current rate 1% cost (Rbn) MTEF budget ERU est Vat 133 136 14 9.7 Co's 116 118 29 4.0 STC 15 16 12.5 1.3 Retirement 2.4 2.7 9 0.3 JE\Budget preview to press Feb 2007

  21. Tax cutsOMIGSA speculation… What do we prefer? • Individuals: no big relief, only for fiscal drag • Eliminate retirement fund tax • BIG company tax relief • Immediate cut in direct company tax rate OR announce phased downward move over next few years • Cut STC sharply – or eliminate JE\Budget preview to press Feb 2007

  22. Expenditure components Wages 36.0% 39.9% Other current 37.2% 46.4% 3% Capital 6.5% 20.8% Interest 11.1% 98/99 06/07 JE\Budget preview to press Feb 2007

  23. as % of total expenditure Interest payments Wage bill 22 22 41 41 20 20 40 40 39 39 18 18 38 38 16 16 37 37 14 14 36 36 12 12 35 35 10 10 34 34 8 8 93 97 01 05 09 93 97 01 05 09 Substantial improvement in 2 big components… JE\Budget preview to press Feb 2007

  24. Other spending benefiting from lower spending on wages & interest component weight Expenditure estimate R533.7bn Wage bill (11.8% increase) 35.8% 191.1 Interest payments 10.1% 53.8 “Other” 54.1% 288.8 =15.2% ch Spending increases: (MTEF data) Interest & wage +9.6% (9.1%) Non-interest, non-wage +15.2% (18.3%) Capital spending +22.7% (18.5%) Current (i.e. non-capital) +11.8% (13.5%) JE\Budget preview to press Feb 2007

  25. Infrastructure spending plans Infrastructure spending Total of R410bn over next 3 years R410bn split: National & provincial departments = 34%; Municipalities = 22%; Public enterprises (Eskom, Transnet etc) = 37%. JE\Budget preview to press Feb 2007

  26. 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? (spell out plans to reduce to 25% over next few years…?) • STC – big cut in rate or abolish? • Cuts in company taxes vs payroll tax to finance social security system • Retirement fund taxation – eliminate now? • Detail on liquid fuel windfall tax • Normal sin taxes and fuel levy hikes • No VAT change • More detail on replacement of RSC levies – local business tax? JE\Budget preview to press Feb 2007

  27. In summaryIssues in this budget • Exchange controls? • More detail on social security system • President said: “phased implementation… … as soon as possible” • But also: “government will undertake a comprehensive process of consultation with all social partners” • Inflation target – no change expected • Privatisation – nothing expected JE\Budget preview to press Feb 2007

  28. In summaryIssues in this budget • What will be big surprises? • BIG company tax relief • BIG exchange control relaxation JE\Budget preview to press Feb 2007