CABRI and World Bank Institute Training Programme Budget Management and Public Financial Accountability Presented by: Matthew Simmonds Chief Director: Fiscal Policy National Treasury, South Africa

South Africa is an upper middle income country Per capita GDP of US$ 4,798 –Similar income levels to Malaysia, Chile, Argentina, Turkey, Poland Economic growth of over 5% –Has accelerated from lower levels Unemployment remains very high –But recent economic success has boosted employment growth

Recent fiscal policy divided into 4 periods : late apartheid Fiscal policy very expansionary Large deficits: –Global slowdown in 1992 –Politically motivated expenditure –Limited political legitimacy to increase tax revenue further Political isolation limited access to foreign capital –Therefore had to run a current account surplus to access foreign exchange Monetary policy needed to protect the exchange rate (high interest rates, high inflation) Fiscal + external constraints + monetary = short-run boom/bust cycles

Recent fiscal policy divided into 4 periods (cont) 1993 – 1996: Transition Reconstruction and Development Programme (RDP) Large deficits –Driven by need to begin addressing historical inequalities –Effort to meet basic needs Demand driven growth impetus –Deficit seen as important element of growth –Multiplier effect –Wage bill accelerated strongly –However: –Economic growth remained subdued –Negative employment growth –Debt costs continued increasing

1997 – 2000 Consolidation Growth, Employment and Redistribution (GEAR) Policy informed by need to stabilise macro economy –High deficit resulting in interest eroding productive expenditures –Interest costs crowding out private sector investment –Inflation pressures eroding stability, competitiveness, and incomes Interest costs come down with a lag GEAR successful in stabilisation, however: –Economic growth subdued –Negative employment growth Recent fiscal policy divided into 4 periods (cont)

2001 – 2004 Expansion Fiscal consolidation under GEAR provided room for fiscal expansion –Strong real growth in expenditure Main focus: –Welfare grants –Capital expenditure Lower interest rates and inflation keep interest costs declining Employment growth recovers However: –Growth remains subdued Recent fiscal policy divided into 4 periods (cont)

2005 – 2006 The economy comes to the party Strong growth in expenditure continues Main Focus: –Infrastructure –Education –Criminal/Justice sector Strong economic base leads to exceptional revenue performance –Deficit declines Interest costs continue to decline Employment continues to grow positively Recent fiscal policy divided into 4 periods (cont)

Revenue reform and effort played a key role 1994 independent commission on taxation. –Rationalise income tax brackets (individuals) and exemptions (corporates) –Single VAT rate –Strengthen tax administration 1995 customs and tax administration unified in independent revenue authority (SARS) Administrative reform, SARS effort, economic growth have allowed: –Successive and progressive reductions in PIT –Reduction in CIT from 40% (1995) to 29% –Tax dividends from 25% (1995%) to 10% –Aggressive trade liberalisation in late 1990’s

Expenditure consolidation allowed four current expansion Burden of consolidation carried by: –Compensation of employees (initially), goods and services, subsidies, (capex) Post consolidation: –Debt service costs continued to create fiscal space –Goods and services, compensation of employees recovered –Fiscal space allowed for growth in social benefits and capital

What next? 2007 budget shows: –Economic environment strong –Tax revenue remains buoyant –Non-interest expenditure growing strongly –Interest costs continue to decline However: –Economic environment is unbalanced: low savings, current account deficit and reliance on foreign capital inflows Therefore –Fiscal position has been improved: balanced budget in support of national savings, current account.