1JE\Budget preview to press Feb 2007 Johann Els Senior Economist OMIGSA The 2008 Budget: Facing the biggest challenges in years

$Page 1: 1JE\Budget preview to press Feb 2007 Johann Els Senior Economist OMIGSA The 2008 Budget: Facing the biggest challenges in years$
JE\Budget preview to press Feb 2007

1

Johann Els Senior Economist

OMIGSA

The 2008 Budget:

Facing the biggest challenges in years


2

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 budgetGlobal environment


3

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 budgetLocal economy


4

Background to the budgetRand exchange rate reflecting global & local concerns

HUNGARYINDIA

BRAZIL

ICELAND

NEW ZEALAND

CZECH REP

TURKEY

MEXICO

EUROAUSTRALIA

CANADA

SOUTH AFRICA

80

90

100

110

120

70

130

80

90

100

110

120

70

130

2006 2007 2008

Foreign currency per USD, Indexed Jan 2006 = 100

Wea

ker

Str

on

ger


5

Underlying picture of strong growth and low inflation seems intact

-2.5

0.0

2.5

5.0

7.5

-5.0

10.0

80 85 90 95 00 05 10

GDP growth (annual, 3-year ma)

0

5

10

15

20

25

80 85 90 95 00

05 10

CPIX inflation (annual, 3-year ma)

Y-o-y of quarterly data Y-o-y of monthly data

Or is it? Shorter term pressures have shown themselves

Background to the budgetSlower growth, higher inflation, big current account deficit


6

Much weaker local spending growth; big current account deficit

-20

0

20

40

-30

50

00 02 04 06 08

Retail sales growth

Car sales growth

-10

0

10

-20

20

70 75 80 85 90 95 00 05 10

Current account balance as % of GDP



7

Background to the budgetSA’s current account deficit in context

-20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0

SingaporeSaudi Arabia

MalaysiaChina

RussiaThailand

ChileBotswanaIndonesia

CanadaBrazil

South KoreaMexico

IndiaCzech Republic

PolandAustraliaHungary

United StatesSouth Africa

TurkeyCroatia

New ZealandGreeceSerbia

RomaniaBulgariaIceland

Current account balances as % of GDP

Fear that SA’s deficit will move higher still…


8

Background to the budgetBut exports should benefit from commodity prices

110

150

180

250

80

340

2500

3250

4000

5000

2000

6750

95 97 99 01 03 05 07

Exports ($) Big 4 commodity export prices


9

Growth forecasts revised lower, inflation forecasts higher

4

6

8

2

9

04 06 08

CPIX (avg)

2009 forecasts

2008 forecasts

Actual CPIX inflation

3

4

5

6

2

7

04 06 08

GDP

Actual GDP growth

2009 forecasts

2008 forecasts



10

Treasury’s macro assumptions: MTEF October 2007Likely 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%.

2008 4.5% 4.2% 5.4%2009 4.8% 4.5% 4.6%

ERU forecast:2008 3.8 3.8 7.12009 4.0 4.0 5.0

GDPgrowth

HCEgrowth

CPIXinflation


11

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 continueIn light of market turmoil and despite pressures


12

OMIGSA est (+0.9%)

Oct ’07 MTEF (+0.5%)(Feb budget was +0.6%)

0

-2

-4

-6

85 87 89 91 93 95 97 99 01 03 05 07 09 11

Budget balance, % of GDP (actual & Treasury targets)

-8

+2

0

-2

-4

-6

-8

+2

Background to the budgetWindfall revenues “saved” in form of surpluses


13

Better than budgeted balances (Rbn):04/05 -R21.3bn05/06 -R43.0bn06/07 -R32.6bn07/08 -R7.0bn

Deficit target at time of budget speech

Actual deficit outcome

2

0

-2

-4

-6

96 98 00 02 04 06 08 10

Budget balance, % of GDP

2

0

-2

-4

-6

Background to the budgetActual budget deficits vs initial budgeted target


14

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…


15

Widening spread between Eskom and government debt reflecting concern about Eskom’s financing requirement

0.4

0.5

0.6

0.7

0.8

Mar-07

Apr-07

May-07Jun-07

Jul-07

Aug-07

Sep-07Oct-0

7

Nov-07Dec-07

Jan-08

Basis point spread (%) between ES33 and the R209 RSA government bond


16

Original budget OMIGSA est

Rbn % Ch Rbn % Ch

SPENDING 533.9 13.5 543.0 15.5

REVENUE 544.6 14.5 560.7 16.3

Balance Rbn +10.7 +17.7

% OF GDP +0.6 +0.9

+R16.1bn extra revenue

Progression of 2007/2008 budget numbers


17

Weight Budgeted Apr - Dec

Increase y-o-y % ch

Ind income tax 28.7 11.2 20.1

Co’s 25.6 16.2 22.1

STC 2.9 2.8 21.1

VAT 28.5 15.3 12.1

Excise 3.5 9.1 10.5

Customs 5.0 14.4 12.0

Fuel Levy 4.4 9.5 12.1

Extra (likely final less orig budget) (Rbn)

13.4

5.5

2.2

-6.0

Looking back at 2007/08: Revenue surprises strongly on the upside again


18

Actual revenue growth vs budget projectionsSharply reduced extra collection this year

Actual outcome

Original budgeted revenue growth

+R42bn

+R35bn

+R21bn

Overrun % of Rbn Budg

97/98 1.4 0.998/99 7.4 4.299/00 6.5 3.400/01 5.2 2.501/02 15.0 6.402/03 13.2 5.003/04 -2.0 -0.704/05 21.0 6.405/06 41.8 11.306/07 34.8 7.807/08 16.1 3.0

+R16bn

8

10

12

14

16

18

6

20

8

10

12

14

16

18

6

20

97 99 01 03 05 07

% growth


19

Expenditure 599.9 10.6% (MTEF numbers)

Revenue 620.1 10.6% (unchanged tax base)

Budget balance +20.2 = +0.9% of GDP

BUT:

Balance target +16.1 = +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


20

±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?


21

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Fuel Other Individuals Co's Vat C&E

00/01 07/08

Revenue sources2007/08 vs 2000/01


22

Individual income tax cut vs revenue overrun

Individual tax

cut Rbn

97/98 2.8

98/99 3.7

99/00 4.9

00/01 9.9

01/02 8.3

02/03 14.9

03/04 13.3

04/05 4.0

05/06 6.8

06/06 13.5

07/08 8.4

08/09 4.0

Less likely to be given away this year?

0.0

2.5

5.0

7.5

10.0

12.5

-2.5

15.0

97 99 01 03 05 07 09

Rbn

Individual income tax cut

Individual inc tax revenue overrun


23

60

55

50

4542

40

30

35

40

45

50

55

60

65

1977 1980 1981 1996 2001 2003

Individual income tax: top marginal rate

Rate Reached at

1977 60% R 28 000

1980 55% R 30 000

1981 50% R 40 000

1996 45% R 80 000

2001 42% R200 000

02/03 40% R240 000

05/06 40% R300 000

06/07 40% R400 000

07/08 40% R450 000


24

5048

40

35

30 29

20

25

30

35

40

45

50

55

1990 1991 1993 1994 2000 2005

STC down from 12.5% to 10% from 1 Oct 2007;to be replaced with a dividend withholding tax from 2008

Company tax rates

Rate

1990 50%

1991 48%

1993 40%

1994 35%

2000 30%

2005 29%


25

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’


26

R4bn (– R5bn) on individual income tax relief (fiscal drag offset) Some VAT relief on essential foods? Other… company tax rate

MTEF budget ERU estcurrent

rate 1% cost (Rbn)

Vat 147 150 14 10.7

Co's 140 144 29 5.0

2007/2008 Rbn

What it will cost to change VAT (highly unlikely) or company tax rate:

Tax changesOMIGSA speculation…


27

What do we prefer?

Individuals: no big relief, only for fiscal drag Company tax relief

Tax changesOMIGSA speculation…


28

Wages

Other current

Capital

Interest

34.5% 47.2%

39.8% 35.4%

19.8%9.8%

7.6%

3%

00/01 07/08

Expenditure components


29

Substantial improvement in 2 big components…

8

10

12

14

16

18

20

6

22

93 97 01 05 09

Interest paymentsas % of total expenditure

36

37

38

39

40

35

41

93 97 01 05 09

Wage bill


30

weight

Expenditure estimate R599.9bn

Wage bill (12.4% increase) 36.0% 215.7

Interest payments 8.5% 51.2

Other 55.5% 333.0

=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


31

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 plansbig numbers, but growth slowing


32

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 summaryIssues in this budget


33

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



34

What will be big surprises?

− BIG company tax relief

− BIG exchange control relaxation

− Large budget deficit


Documents

1JE\Budget preview to press Feb 2007 Johann Els Senior Economist OMIGSA The 2008 Budget: Facing the biggest challenges in years