Budget preview february 2007
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Budget preview February 2007 Johann Els 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

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Budget preview february 2007 l.jpg

Budget preview

February 2007

Johann Els


Slide2 l.jpg

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


Background to the budget omigsa s sa views for 2007 l.jpg
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


Slide4 l.jpg

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


Slide5 l.jpg

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


Slide6 l.jpg

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


Slide7 l.jpg

% 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


Budget 2007 08 challenge what to do with all the money while contributing to macro stability l.jpg
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


Progression of 2006 2007 budget numbers l.jpg

+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


Looking back at 2006 07 revenue surprises strongly on the upside again l.jpg
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


Slide11 l.jpg

OMIGSA estimates upside again

% 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


2007 08 budget projections on unchanged tax base l.jpg

BUT: upside again

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


Treasury s dilemma what to do with all this money l.jpg
Treasury’s dilemma: what to do with all this money? upside again

  • ±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


Slide14 l.jpg

45% upside again

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


Individual income tax top marginal rate l.jpg
Individual income tax: top marginal rate upside again

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


Company tax rates l.jpg
Company tax rates upside again

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


Company tax rates sa compared sa s direct company tax rate does not include stc l.jpg

Including STC, SA sits here upside again

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


Principles in decision over what to do l.jpg
Principles in decision over ‘what to do’ upside again

  • 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


Individual tax relief in previous fiscal years l.jpg
Individual tax relief in previous fiscal years upside again

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


Tax cuts omigsa speculation l.jpg
Tax cuts upside againOMIGSA 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


Tax cuts omigsa speculation21 l.jpg
Tax cuts upside againOMIGSA 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


Slide22 l.jpg

Expenditure components upside again

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


Slide23 l.jpg

as % of total expenditure upside again

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


Other spending benefiting from lower spending on wages interest component l.jpg
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


Infrastructure spending plans l.jpg
Infrastructure spending plans interest component

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


In summary issues in this budget l.jpg
In summary interest componentIssues 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


In summary issues in this budget27 l.jpg
In summary interest componentIssues 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


In summary issues in this budget28 l.jpg
In summary interest componentIssues in this budget

  • What will be big surprises?

    • BIG company tax relief

    • BIG exchange control relaxation

JE\Budget preview to press Feb 2007


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