The 2007 MTBPS: short on detail Jac Laubscher Group Economist 2 November 2007
The overriding themes Objectives are still the same: Accelerating growth Creating employment Reducing poverty and inequality Fiscal policy has done its part – it in now over to other policy arms of government, including better execution The gains in government’s financial position must be preserved Economic imbalances and risks require an emphasis on sustainability Fiscal policy must support monetary policy
Agenda Revised macro-economic forecast Revised estimates for 2007/08 Revised projections for 2008/09 to 2010/11 Introduction of structural budget balance Other policy matters Evaluation
Revised macro-economic forecast Higher inflation Higher interest rates Rebalancing of growth from consumption to investment Higher current account deficit Lower growth
Comparative macro-economic forecast 2007 2008 2009 Budget MTBPS Sanlam CPIX inflation 5.1 6.2 6.3 4.7 5.4 5.9 4.5 4.6 4.8 GDP growth 4.9 4.2 Current account -5.3 -6.7 -6.5 -5.7 -6.9 -6.8 -5.9 -7.7
Policy background and implications Growing and persistent imbalances in the economy Accelerating inflation Rising current account deficit International uncertainty abnormally high Implications: Caution required Monetary policy must be supported; tighter fiscal policy reduces need for higher interest rates But why then huge tax relief for individuals in recent years? Emphasis on structural reform
CPIX and Core Inflation
World growth vs. inflation
Flow of private capital to emerging markets
Current account balances (% of GDP) 2005 2006 2007F 2008F Mexico -0.6 -0.2 -1.0 -1.4 India -0.9 -2.2 -2.4 -2.3 Russia 8.8 7.7 5.0 4.3 South Africa -3.8 -6.4 -6.0 China 7.2 9.1 10.0 10.5 Brazil 1.6 1.3 0.8 0.3 Korea 1.9 0.7 Taiwan 4.6 7.1
Introduction of structural budget balance Emphasis on windfalls from buoyant international conditions High commodity prices/ improved terms of trade Strong inflow of capital Economy growing above potential implies revenue growth above potential Sustainability requires conservatism “Soft” concept Difficulty in separation of cyclical and structural change Difficulty of measuring potential output/ growth Should be seen as additional information, not as basis for policy decisions
The commodity price cycle
Terms of Trade
Net foreign portfolio investment
JSE vs. Emerging Market Equities
SA vs. USA 10-year Bond Yield + EM Spread
Revised estimates for 2007/08 Upward revision to gross tax revenue (+R9.5 billion) is more than expected Of upward revision to expenditure (+R8.5 billion), R4 billion (47%) to public corporations
Revised projections for 2008/09 to 2010/11 Projected growth in revenue increased in spite of reduced growth forecasts Introduction of structural balance encouraging boldness? Expenditure revised upwards but by less Resulting in continuing budget surpluses And rising cash balances Discouraging expectations for tax relief Alert: watch the wage bill Alert: watch the tax burden
Revised projections (Amount) 2007/08 2008/09 2009/10 2010/11 Budget MTBPS Revenue 544.6 553.1 591.2 616.0 641.5 679.6 740.5 % growth 14.5 14.9 8.6 11.4 8.5 10.3 8.9 Expenditure 533.9 542.4 594.2 599.9 650.3 665.6 726.2 13.4 15.4 11.3 10.6 9.4 11.0 9.1 % real growth 9.8 6.9 5.9 7.2 5.2 Balance 10.728 10.8 -3.032 16.2 -8.787 14.0 14.3
Policy matters NSSS and wage subsidy: vague Industrial policy: vague to critical; supporting lower tariffs more than incentives Tax policy: very little, e.g. on tax administration burden on small business Inflation targeting: nothing Exchange controls: nothing Eskom financing: nothing No capital injection? Dividend to continue? Not a matter of affordability: refusing fiscal ratios to be adjusted? Treated differently from other public corporations, levels of government: favoring restructuring, transport, communications
Evaluation Accelerating growth Maintaining macro-economic stability Improving sustainability Contributing to national savings Crowding in rather than crowding out Removing infrastructure bottlenecks Tax policy?
Evaluation Creating employment Accelerating growth Industrial and trade reform: raising labour intensity of growth Proposed wage subsidy
Evaluation Reducing poverty and inequality Creating employment Providing safety net Providing social wage Ongoing redistribution Increased allocations to e.g. health, education and training, access to modern economy