1. The 2006 Budget MINISTER OF FINANCE
Presentation to Joint Budget Committee, Select Committee on Finance and Portfolio Committee on Finance
16 February 2006

2. Content Economic policy and outlook Fiscal framework Revenue trends
2006 Budget priorities and allocations
Division of revenue
Asset and liabilities management
Conclusion

3. Global economic overview
Global growth expected to stay above 4%
US growth remains fairly strong
Growth in Europe expected to gradually improve – but domestic demand remains sluggish
Recovery in Japan, strong growth in China, robust growth in Africa (nearly 6% in 2006)
Commodity price boom lifts mineral prices (gold price reached 25- year highs and platinum at record high)
Growth in key countries
USA ,6% 3,4%
China ,0% 8,2%
India ,1% 6,3%
Euro area 1,4% 1,9%
Commodity price growth:
Platinum and oil prices doubled since 2000
Platinum broken through the $1000/oz level in January 2006, SA produced 78% of all platinum production in 2005
World demand for crude oil expected to grow by 1,6 million barrels per day, while supply is expected to grow by 1,3 million barrels per day
Gold up by 60%, hovering at $550 levels

4. Global growth supports commodity prices…

5. Domestic economic overview
Economic growth of 5% in averaging more than 5% over the next three years
Inflation to remain within the target
Buoyant demand and investment supports rising production
Higher commodity prices support capital inflows
A strong reserve position reduces rand volatility and vulnerability to global instability
Current account deficit remains high as growth rate rises
Overall GDP: ,0% ,9%
Gvt consumption: ,9% ,8%
H/hold consumption: ,7% ,7%
Investment: ,0% ,7%
GDE: ,8% ,3%
Exports: ,6% ,7%
Imports: ,9% ,9%
CPIX: ,9% ,5%

6. Shift towards investment as the engine of growth
Transnet: R50 billion over 5 years
Eskom: R98 billion over 5 years
Gautrain: > R10 billion over five years 5 10 15 20 25
2004
2005e
2006f
2007f
2008f
Per cent growth
Real fixed capital formation:
Government
Public corporations
Since 2000, growth driven by household consumption expenditure
Over MTEF, growth will be driven by investment particularly government and the public corporations.
Government = 10% real
Public corporations = 15% real

7. Current account (% of GDP)
Stable growth outlook -6 -4 -2 2 4 6 8 10
2001
2002
2003
2004
2005 e
2006 f
2007 f
2008 f
Per cent
GDP growth
Current account (% of GDP)
CPIX inflation

8. Macroeconomic forecast
Calendar year
2005
2006
2007
2008
 Percentage change unless otherwise indicated
Estimate
Forecast
Final household consumption
6.7
4.9
4.4
4.7
Final government consumption
4.8
Gross fixed capital formation
8.0
9.4
9.7
9.9
Gross domestic expenditure
5.6
5.0
5.4
Exports
12.6
7.1
6.2
Imports
10.9
7.2
Real GDP growth
5.2
GDP at current prices (R billion)
1,518.9
1,674.6
1,839.0
2,038.9
CPIX (Metropolitan and urban, year)
3.9
4.3
4.5
Current account balance (% of GDP)
-4.2
-4.4
-4.3
Fiscal year
2005/06
2006/07
2007/08
2008/09
Percentage change unless otherwise indicated
GDP at current prices (R billion)
1,559.6
1,714.5
1,884.9
2,095.9
5.3
GDP inflation
CPIX (Metropolitan and urban)
4.2

9. Reserves improve January 2006 US$22.2bln
Reserve accumulation contributes to reduced exchange rate volatility and improved international position.
10% increase in reserves = 7% decrease in exchange rate volatility (IMF study)
Reserves have increased by 192% since 2001 from US$7,6 billion to US$22,2 billion at the end of January 2006

10. * General government tax to GDP ratio = 26,8% in 2004/05
2006 MTEF summary
Main budget revenue expected to be R411 billion in this year, compared to R400 billion at time of MTBPS.
Revenue-to-GDP ratio rises to 26,4% for 2005/06 (growth in VAT, CIT and PIT due to robust growth in consumption and commodity exporters’ profits). Ratio remains about 26%.*
Non-interest expenditure grows by R82 billion (annual average real growth of 6,4%), excluding transfers of R24 billion to replace the RSC levies.
Capital expenditure at consolidated government level grows by 11,4% over the MTEF
A revised main budget deficit of 0,5% of GDP for 2005/06; 1,5% for 2006/07; 1,4% for 2007/08 and 1,2% in 2008/09
Debt service costs expected at 3,3% of GDP for 2005/06; declining to 2,7% in 2008/09.
PSBR grows from 0,6% of GDP in 2005/06 to 2,4% in 2008/09
* General government tax to GDP ratio = 26,8% in 2004/05

11. Fiscal Framework 2004/05 2005/06 2006/07 2007/08 2008/09 Revenue 347.9
R billion / per cent
2004/05
2005/06
2006/07
2007/08
2008/09
Revenue
347.9
411.1
446.4
492.0
547.1
per cent GDP
24.5%
26.4%
26.0%
26.1%
Deficit
20.7
7.9
26.5
27.1
24.3
1.5%
0.5%
1.4%
1.2%
Expenditure
368.5
418.9
472.7
519.2
571.3
26.9%
27.6%
27.5%
27.3%
Debt service costs
48.9
51.2
52.1
53.3
55.7
3.4%
3.3%
3.0%
2.8%
2.7%
Non-interest expenditure
319.7
367.8
418.2
460.8
507.6
22.5%
23.6%
24.7%
24.6%
total
resources available over BR2005 baseline
5.1
22.4
33.3
50.4
106.2

12. Changes to tax policy
Gross income tax relief for individuals = R13,5 billion
Tax threshold for individuals increased to R40 000
A reduction in the Retirement Fund Tax from 18% to 9% = R2,4 billion relief
The abolition of the RSC levies = R7 billion for the 2006/07 municipal fiscal year
VAT zero-rating of municipal property rates
Transfer duty relief of R4,5 billion
Monetary thresholds for individuals - capital gains tax & estate duty - increased

13. Further changes to tax policy
Monetary thresholds for small business corporations increased
Tax amnesty for small businesses – commencing with taxi operators
Extension of learnershsip tax incentive to 2011
Tax incentive for R & D – 150% deduction for current expenditure and accelerated depreciation for capital expenditure (50:30:20)
Biodiesel fuel concession increased for 30% to 40% of general fuel levy

14. Summary of tax proposals
R million
Tax revenue
475,914
Non-tax revenue
9,320
Less: SACU payments
-19,744
Main budget revenue, before tax proposals
465,489
Budget 2006/07 proposals:
-19,127
Taxes on individuals and companies
-14,925
Taxes on property
-4,540
Stamp duties
-10
Taxes on goods and services
348
Main budget revenue (after tax proposals)
446,362
2006/7

15. Key priorities of the 2006 Budget*
Improving performance of the labour market and strengthening education
Higher education and recapitalisation of FET (R2,4 billion)
Accelerated housing delivery, coupled with municipal capacity building
Housing subsidy (R3,5 billion)
Municipal Infrastructure Grant (R21,5 billion)
Building sustainable human settlements – private and public sector cooperation
Neighbourhood Development Partnership Grant (R2,5 billion)
Upgrading economic infrastructure – energy, rail, transport networks, communications and water resource management
National roads and rail rehabilitation (R3,5 billion)
Reducing crime and improving the performance of courts and security services (R5,4 billion)
Public administration capacity
Municipal equitable share & project consolidate (R2,3 billion)
* All amounts additional over the MTEF

16. Total additional MTEF allocations

17. Expenditure reporting changes
Function shift in social grant transfers
Reported as transfer to households on budget of Dept of Social Development
Implemented by SA Social Security Agency with effect from 1 April 2006
Devolution of accommodation costs
Transfer of costs from public works to user-departments
Responsibility for accommodation decisions reside with respective accounting officer
Consolidation of government accounts include financial statements of 66 public entities out of 195

18. Division of revenue
Of additional resources of R106 billion, plus unallocated amount of 2005 budget:
National departments receive R30.5 billion (or 28.7% of total addtions)
Provinces receive R42.9 billion, incl Gautrain (40.5% of total additions)
Municipalities receive R33 billion, incl RSC levies (30.8% of total additions)
Unallocated amount of R3 billion for WC2010
Real non-interest expenditure grows by 6. 4% over 2006 MTEF, after netting out RSC levy amount.
Contingency reserve set at R2.5, R5, and R8 billion in each respective year of the MTEF.
National department allocations rise by an annual average of 4.2% in real terms.
Provincial allocations rise by an annual average of 7.2% in real terms.
Local government allocations rise by an annual average of 11.3%, inclusive of RSC.
Provinces receive R42,9 billion of the additional resources:
Provincial share of nationally raised revenue increases from R154,5 billion in 2005/06 to R217,5 billion in 2008/09 over the MTEF
Conditional grants increase from R19,2 billion in 2005/06 to R30,4 billion in 2008/09 including:
R15 billion is for provincial infrastructure to accelerate public infrastructure and job creation
R3 billion is added to the Housing Subsidy Grant
R1,5 billion for FET colleges
R900 million for hospital revitalisation.
Local government’s share of national raised revenue increases from R16,9 billion in 2005/06 to R35,6 billion in 2008/09
Equitable share increases from R9,6 billion in 2005/06 to R22,8 billion in 2008/09.
Infrastructure grants increase from R6,3 billion in 2005/06 to R11,8 billion in 2008/09.
R1,9 billion made available for capacity building and restructuring initiatives
LG also receives R4,7 billion in in-kind-allocations via DWAF and Eskom

19. Division of nationally raised revenue
Division of Revenue
2004/05
2005/06
2006/07
2007/08
2008/09
Prelimin.
Estimate
Medium-term estimates
R million
outcome
National departments
Provinces
Local government
13 837
16 859
26 532
30 503
35 575
Non-interest allocations
319,690
367,816
418,176
460,850
507,552
Percentage shares
52.6%
53.4%
51.4%
50.8%
50.1%
43.1%
42.0%
42.3%
42.6%
42.8%
4.3%
4.6%
6.3%
6.6%
7.0%
Provincial breakdown:
Equitable share
Conditional grants
Local breakdown
Equitable share
RSC replacement  
Conditional grants

20. Financing of net borrowing requirement

21. Debt service costs Debt costs R100 billion lower over past 9 years
Lower debt service costs contribute to economic development and poverty relief

22. Debt-to-GDP ratio continues to decline

23. Concluding comments on support to growth
Growth initiative supported by the 2006 Budget allocations for:
Infrastructure development
Education and skills development
Second economy interventions
Provisions for capitalisation
Growth initiative also focuses on removing constraints to growth
Growth initiative supports economic buoyancy in coming years and will raise the potential growth rate from approximately 4,5% to over 6%