Key Macro Points Kept fiscal policy expansionary as deficit grew to 3.1% of GDP FY03/04 revenue under performed by R4.2bn to R300.3bn But still displays fiscal discipline as FY03/04 spending lowered by R2.3bn to R331.7bn and FY05/06 deficit reduced If Rand remains strong it will widen the deficit by lowering growth Little foreign exchange relaxations notwithstanding Rand strength No change to tax on retirement industry (policy proposal 2004) No detail on privatisation, but extraordinary receipts cut to R2.7bn from R4.7bn Debt funding of FY04/05 R46.2bn deficit in the bond market may place upward pressure on interest rates
Forecasts and Assumptions GDP growth %, %, %, % We consider Treasury's 05 and 06 forecasts to being ambitious. We forecast growth of not much more than 3.0% in this period. Deficit FY03/04 2.6%, FY04/05 3.1%, FY05/06 3.0%, FY06/07 2.8% Given our muted GDP forecasts we see a risk of revenue under- runs in FY05/06 and FY06/07, meaning that the deficit could widen. Inflation "comfortably inside" 6% - 3% target band Notwithstanding the impact of the drought, we believe that there has been a structural break in inflation and share the view that inflation will be kept within the target band. 5.6% in 2005 and 5.0% in 2006.
Forecasts and Assumptions Rand/USD Treasury does not provide explicit forecasts for the rand exchange rate, an implicit exchange rate view can perhaps be drawn from estimated rand proceeds from foreign market loans shown in its financing numbers. Current implicit forecast; Q , Q , Q November’s implicit forecast; Q , Q , Q This suggests much greater optimism on the currency versus November’s implicit projections and creates greater internal consistency in government’s macro projections.
Taxation No major changes were announced this year, which underscores that the gradual restructuring has worked to broaden the base and reduced the impact on economic behaviour. The exceptions are with; the taxation of mining companies (following the Commissioners remarks) and the review of the Mineral Royalty Bill and the expected reform to the tax on the retirement industry (policy proposal 2004). No change to VAT was correct decision. Revenue under-run limited relief to R4.0bn. 60% of which is for earners below R150'000 pa. Treasury forecasts 13.4% growth in company receipts (from 8.8% in FY03/04). We consider this to be optimistic, given the extent to which the stronger currency is shrinking exporter profitability.
Employment Creation Is the Minister’s aim of reducing unemployment by half by 2014 realistic? A labour-based public works program requires; Dept of Education and Labour to deliver human capital to serve as a fertile field for the seed of physical capital. Increased savings rate (create and promote a savings culture). Broad-based empowerment. The charter scorecard system correctly reduces the fixation on equity ownership and focuses and employment equity and skills development. Strong governance to prevent the process being hijacked by corruption. State entities as effective agents of change. State financial institutions should behave less like commercial banks and more like development finance institutions. It’s difficult to foretell the next 10 years, but based on the last 10 – then it’s realistic to be optimistic.