1JE\Budget preview to press Feb 2007 Johann Els Senior Economist OMIGSA The 2008 Budget: Facing the biggest challenges in years
2JE\Budget preview to press Feb 2007 Much more uncertain/volatile environment −Worries about USA recession −Will rest of the world decouple from USA? −Will Fed’s interest rate cuts work? −Panic about global credit crisis −Inflation also still a problem Background to the budget Global environment
3JE\Budget preview to press Feb 2007 Start of 2008 marked by heightened pessimism −Worries about global situation −Sharply slower consumer spending growth recently −Worries about electricity problems and impact on economy −Still big current account deficit −Policy uncertainty −High inflation −Rand reflecting these worries Background to the budget Local economy
4JE\Budget preview to press Feb 2007 Background to the budget Rand exchange rate reflecting global & local concerns HUNGARY INDIA BRAZIL ICELAND NEW ZEALAND CZECH REP TURKEY MEXICO EURO AUSTRALIA CANADA SOUTH AFRICA Foreign currency per USD, Indexed Jan 2006 = 100 Weaker Stronger
5JE\Budget preview to press Feb 2007 Y-o-y of quarterly dataY-o-y of monthly data Or is it? Shorter term pressures have shown themselves Background to the budget Slower growth, higher inflation, big current account deficit
6JE\Budget preview to press Feb 2007 Background to the budget Slower growth, higher inflation, big current account deficit
7JE\Budget preview to press Feb 2007 Background to the budget SA’s current account deficit in context
8JE\Budget preview to press Feb 2007 Background to the budget But exports should benefit from commodity prices Exports ($) Big 4 commodity export prices
9JE\Budget preview to press Feb 2007 Growth forecasts revised lower, inflation forecasts higher CPIX (avg) 2009 forecasts 2008 forecasts Actual CPIX inflation GDP Actual GDP growth 2009 forecasts 2008 forecasts Background to the budget Slower growth, higher inflation, big current account deficit
10JE\Budget preview to press Feb 2007 Treasury’s macro assumptions: MTEF October 2007 Likely to be revised lower – DG: “revisions not dramatic” Impact of electricity problems could reduce 2008 GDP growth by as much as ½% – 1%. Thus growth forecasts reduced from 4% - 4.5% to 3.5% - 4% %4.2%5.4% %4.5%4.6% ERU forecast: GDP growth HCE growth CPIX inflation
11JE\Budget preview to press Feb 2007 Reason for budget surplus (quote from Oct 2007 MTEF): “ In the context of current macroeconomic pressures and extraordinary buoyancy in revenue, it is recognised that government should contribute positively to national savings. By not spending the full value of buoyant tax revenues, government helps to limit current account and inflationary pressures, and takes some pressure off domestic interest rates, contributing to the sustainability of economic growth.” This was reconfirmed in president Mbeki’s State of the Nation Address : “At the macro-economic level, we will continue to maintain a fiscal posture that supports continued economic growth and development and reducing our external vulnerability.” Sound fiscal stance expected to continue In light of market turmoil and despite pressures
12JE\Budget preview to press Feb 2007 Background to the budget Windfall revenues “saved” in form of surpluses
13JE\Budget preview to press Feb 2007 Better than budgeted balances (Rbn): 04/05 -R21.3bn 05/06 -R43.0bn 06/07 -R32.6bn 07/08 -R7.0bn Deficit target at time of budget speech Actual deficit outcome Budget balance, % of GDP Background to the budget Actual budget deficits vs initial budgeted target
14JE\Budget preview to press Feb 2007 Budget 2008/09 challenge: How to contribute to macro stability in the face of all the challenges Main focus areas: − Maintain macro-economic stability: Do not repeat 2002 & 2006 ‘errors’ of too big individual tax cuts Continue with sound fiscal policies (including budget surplus) – especially now with financial market turmoil & big current account deficit − Revenue under pressure over next year or so − But budget must still be growth friendly: Infrastructure spending plans already laid out Some extra spending (social & justice clusters) Tax cuts – only fiscal drag relief for individuals; what about companies? − Electricity Eskom’s recapitalisation; incentives for consumers to switch to solar power etc…
15JE\Budget preview to press Feb 2007 Widening spread between Eskom and government debt reflecting concern about Eskom’s financing requirement Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Basis point spread (%) between ES33 and the R209 RSA government bond
16JE\Budget preview to press Feb 2007 Original budgetOMIGSA est Rbn% ChRbn % Ch SPENDING REVENUE Balance Rbn % OF GDP R16.1bn extra revenue Progression of 2007/2008 budget numbers
17JE\Budget preview to press Feb 2007 Weight Budgeted Apr - Dec Increase y-o-y % ch Ind income tax Co’s STC VAT Excise Customs Fuel Levy Extra (likely final less orig budget) (Rbn) Looking back at 2007/08: Revenue surprises strongly on the upside again
18JE\Budget preview to press Feb 2007 Actual revenue growth vs budget projections Sharply reduced extra collection this year Actual outcome Original budgeted revenue growth +R42bn +R35bn +R21bn Overrun % of Rbn Budg 97/ / / / / / / / / / / R16bn % growth
19JE\Budget preview to press Feb 2007 Expenditure % (MTEF numbers) Revenue % (unchanged tax base) Budget balance+20.2 = +0.9% of GDP BUT: Balance target = +0.7% of GDP Rbn% ch Difference between two balance figures = R4.1bn + R3bn in ‘normal’ tax increases ± R7bn available… 2008/09 Budget Projections on unchanged tax base
20JE\Budget preview to press Feb 2007 ±R7bn available: what are the options? Could potentially add to R7bn by budgeting for lower surplus (or balanced position or even deficit) −e.g. Balance from +0.7% to 0.0% extra R16bn −Thus potential give-away-amount could swell to ±R23bn… Budget for higher surplus – possible, but unlikely given pressures this year −e.g. Balance from +0.7% to +1.0% cost R6bn THUS R7bn to R23bn for: −Tax cuts −Extra spending Likely: combination of tax cuts and higher spending What are the options?
21JE\Budget preview to press Feb % 5% 10% 15% 20% 25% 30% 35% 40% 45% FuelOtherIndividualsCo'sVatC&E 00/01 07/08 Revenue sources 2007/08 vs 2000/01
22JE\Budget preview to press Feb 2007 Individual income tax cut vs revenue overrun Individual tax cut Rbn 97/ / / / / / / / / / / / Less likely to be given away this year? Rbn Individual income tax cut Individual inc tax revenue overrun
23JE\Budget preview to press Feb Individual income tax: top marginal rate
24JE\Budget preview to press Feb STC down from 12.5% to 10% from 1 Oct 2007; to be replaced with a dividend withholding tax from 2008 Company tax rates
25JE\Budget preview to press Feb 2007 Maintain conservative approach to fiscal policy −Work with conservative revenue forecasts −Budget for surplus in 08/09 Beware of stimulating consumer −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, Encourage savings, retirement provision: −More detail on social security system A bold move to support growth?: −Announcement of planned further corporate tax rate cuts? Principles in decision over ‘what to do’
26JE\Budget preview to press Feb 2007 R4bn (– R5bn) on individual income tax relief (fiscal drag offset) Some VAT relief on essential foods? Other… company tax rate MTEF budgetERU est current rate 1% cost (Rbn) Vat Co's /2008 Rbn What it will cost to change VAT (highly unlikely) or company tax rate: Tax changes OMIGSA speculation…
27JE\Budget preview to press Feb 2007 What do we prefer? Individuals: no big relief, only for fiscal drag Company tax relief Tax changes OMIGSA speculation…
28JE\Budget preview to press Feb 2007 Wages Other current Capital Interest 34.5% 47.2% 39.8% 35.4% 19.8% 9.8% 7.6% 3% 00/0107/08 Expenditure components
29JE\Budget preview to press Feb 2007 Substantial improvement in 2 big components…
30JE\Budget preview to press Feb 2007 weight Expenditure estimateR599.9bn Wage bill (12.4% increase) 36.0% Interest payments 8.5% 51.2 Other55.5% =11.9% ch Spending increases: (MTEF data) Interest & wage +9.0% (10.3%) Non-interest, non-wage+11.9% (19.9%) Capital spending +15.5% (32.1%) Current (i.e. non-capital)+10.2% (14.2%) Other spending benefiting from lower spending on wages & interest component
31JE\Budget preview to press Feb 2007 MTEF Oct 2007 numbers – likely to be lifted significantly going forward – mainly from Eskom’s side Total of R438bn over this period (from R410bn previously) Total of R611bn over 07/08 to 10/11 period Growth in TOTAL 32.9% 15.5% 8.9% 7.3% Infrastructure spending plans big numbers, but growth slowing
32JE\Budget preview to press Feb 2007 Individuals vs companies −No big individual tax cuts foreseen −But at least some fiscal drag relief for individuals −Company tax rate cut? −Cuts in company taxes Normal sin taxes and fuel levy hikes No VAT change In summary Issues in this budget
33JE\Budget preview to press Feb 2007 Expansion on announcements from State of the Nation Address −Industrial policy action plan −APEX priorities Eskom recapitalisation −Likely combination of cash, loans, debt guarantees −Cash likely to be classified as “extraordinary payments” and thus will not impact on budget balance −Will impact on funding, though More detail on social security system Exchange controls? Extra social spending −Child grants extended −Male pension age lowered from 65 to 60 In summary Issues in this budget
34JE\Budget preview to press Feb 2007 What will be big surprises? −BIG company tax relief −BIG exchange control relaxation −Large budget deficit In summary Issues in this budget