2010 MEDIUM TERM BUDGET POLICY STATEMENT

Presenter: Pravin Gordhan | Minister of Finance | 28 October 2010

Summary

• The MTBPS covers– Economic assumptions– Fiscal framework– Spending priorities– Division of revenue– Changes to conditional grants– Mid-term report on spending

• The MTBPS provides the framework within which each sphere has to then prepare detailed budgets

• Parliament is afforded the opportunity to recommend changes to the framework and the division of revenue– … after taking input from civil society, labour, business into account

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Summary (cont)

• Broad themes– We must lift the economy onto a more labour- absorbing growth path…– … and the management of the public services must improve

• The economy has gained strength since the Budget and the growth outlook has improved moderately– GDP is expected to grow by 3% this year and 3.5% in 2011

• Recovery in revenue and moderate growth in public spending lowers the fiscal deficit– Deficit of 5.3% of GDP projected for 2010/11, falling to about 3% by

2013/14. – Government debt stabilises at 40% of GDP in 2015.

• Expenditure rises by R67 billion relative to baseline over the MTEF– Allocations informed by government’s 12 outcomes with priority to

education, health, infrastructure and job creation, especially for young people.

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The macroeconomic forecast

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• Growth of 3.0% in 2010 rising to 3.5% in 2011 and 4.4% by 2013.

• Inflation remains below 6% over MTEF

• Private investment and employment recover gradually

• Current account deficit widens as demand accelerates and imports rise

Macroeconomic projections, 2007 – 2013Calendar year 2007 2008 2009 2010 2011 2012 2013

Estimate

Percentage change unless otherwise indicated

Final household consumption 5.5 2.4 -3.1 2.6 3.4 4.1 4.5

Final government consumption 4.7 4.9 4.7 4.9 4.3 4.2 3.7

Gross f ixed capital formation 14.2 11.7 2.3 0.8 5.6 5.0 5.9

Gross domestic expenditure 6.4 3.3 -1.8 4.1 4.2 4.5 4.9

Exports 5.9 2.4 -19.5 4.1 5.7 6.6 7.6

Imports 9.0 1.4 -17.4 8.4 7.8 7.9 8.7

Real GDP growth 5.5 3.7 -1.8 3.0 3.5 4.1 4.4

GDP inflation 8.2 9.2 7.3 6.1 5.3 5.5 5.6

GDP at current prices (R billion) 2,017.1 2,283.8 2,407.7 2,631.4 2,867.1 3,148.0 3,471.9

Headline CPI inflation 6.1 9.9 7.1 4.4 4.7 5.0 5.2

Current account balance (% of GDP) -7.2 -7.1 -4.0 -4.2 -4.9 -5.3 -5.8

Actual Forecast

Improved global outlook as emerging markets grow strongly

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IMF growth outlook

Region / country 2010 2011 2012

Percentage

World 4.8 4.2 4.5

US 2.6 2.3 3.0

Euro area 1.7 1.5 1.8

UK 1.7 2.0 2.3

Japan 2.8 1.5 2.0

Emerging markets and developing countries

7.1 6.4 6.5

Developing Asia 9.4 8.4 8.4

China 10.5 9.6 9.5

India 9.7 8.4 8.0

Middle East and North Africa 4.1 5.1 4.8

Sub-Saharan Africa 5.0 5.5 5.7

South Africa2 3.0 3.5 4.1

GDP projections

• Upward revisions to global

growth forecasts over

MTEF

• Driven by strong growth in

China, India and Germany

• Recovery in developed

countries is still fragile• High unemployment• Rising debt levels• Deflation risk• Bad debts and banking

sector reform

• Global imbalances remain

large requiring

coordination by the G-20 Source: IMF World Economic Outlook, October 2010

Global environment supports high commodity prices and South Africa’s terms of trade

• Gold price seen as a

store of value in

times of uncertainty.

• Strong growth in

China and India

supporting demand.

• Prices of export

commodities have

increased more than

import commodity

(oil).

6

Index of US$b commodity prices

Low inflation supports expansionary monetary policy stance

7

CPI inflation and the real repo rate

Source: Stats SA, SARB

• Low inflation allows

interest rates to

decline to lowest

level since repo rate

was introduced

Recession caused sharp decline in private & general govt investment

Growth in gross fixed capital formation

Source: SARB8

• Investment ratio fell

to 20.9% of GDP in

2Q 2010 from 22.5%

in 2009 due to

decline in general

govt and private

investment

• Investment by SOE’s

still growing off a

high base.

• Gradual recovery in

private investment

expected as capacity

utilisation rises and

demand strengthens.

The overvalued rand exchange rate poses a risk to balanced and sustainable growth

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• International factors driving capital flows to emerging markets have strengthened the rand.

• The real exchange rate is 12% above its 10 year average.

• Chile has a similar degree of overvaluation, but Brazil is much more stretched.

• The strong rand has costs and benefits.

• Complementary micro reforms needed to support competitiveness.

50

75

100

125

150

175

200

Inde

x 20

00=1

00

Real effective exchange rate

Nominal effective exchange rate

Average real effective exchange rate since 1994

Nominal and real effective exchange rate indices

Financial and regulatory measures to moderate pressures on the rand

10

• NT and SARB will continue to purchase foreign exchange reserves.

• SARB will sterilise inflows associated with foreign direct investment inflows using foreign exchange swaps.

• Exchange control and offshore investment limits on individuals amended.

• To make SA attractive as a corporate investment destination and encourage investment in the rest of the African continent.

• Exchange controls on domestic companies will be reformed to remove barriers to their international expansion from a domestic base.

• Prudential framework for foreign investment by private and public pension funds, including GEPF.

Consolidated government fiscal framework

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Table 3.1 Consolidated government fiscal framework, 2007/08 – 2013/142007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

R billion Preliminary Estimate

Revenue 625.7 684.8 666.9 761.0 843.0 931.7 1,040.2

Percentage of GDP 30.1% 29.5% 27.2% 28.4% 28.7% 28.9% 29.1%

Expenditure 591.3 711.7 832.5 904.1 977.2 1,059.1 1,154.2

Percentage of GDP 28.4% 30.7% 33.9% 33.7% 33.3% 32.8% 32.3%

Budget balance 34.4 -26.8 -165.6 -143.1 -134.2 -127.4 -114.0

Percentage of GDP 1.7% -1.2% -6.7% -5.3% -4.6% -3.9% -3.2%

Medium-term estimatesOutcome

• Consolidated government deficit is projected to recover from 6.3 per cent of GDP in 2010/11 to 3.2 per cent by 2013/14.

• Recovery driven by the strong uptake in revenue and the stabilisation in non-interest spending.

• Growth in expenditure will need to moderate as debt service costs increase over the MTEF.

• Counter-cyclical fiscal policy will aim to grow revenues while gradually reducing non-interest stimulus spending.

• Important to keep the fiscal trajectory on a sustainable path while meeting growth expectations.

Public sector borrowing requirement almost halved over the MTEF

• General government’s borrowing requirement falls significantly as fiscal stimulus is removed.

• The gradual decline is a result of a number of projects being shifted out over the MTEF.

• The reduction in the borrowing requirement is in line with the recovery in government and institutional revenue.

Public sector borrowing requirement

Source: National Treasury

12

-1.5

1.7

7.16.0

5.1 4.63.7

1.2

2.3

1.8 4.5

4.33.4

2.6

-4

-2

0

2

4

6

8

10

12

Per c

ent o

f GD

P

Non-financial public enterprises General government

Fiscal sustainability – the primary balance and net loan debt

• Prior to 2007/08 increased government revenue translated into a pro-cyclical uptake in spending.

• The primary balance grew to reach an unsustainable level of 31.6% in 2009/10 following the sharp drop in revenue from 2007/08.

• Informed counter-cyclical fiscal policy will see the primary balance fall to 29.3% in 2013/14.

Primary balance

Source: National Treasury

13

21

23

25

27

29

31

33

35

Per c

ent o

f GDP

Budget revenue

Non-interest expenditure

Budget adjustments

• Adjustments to baseline comprise the bulk share of budgetary increases, adding R40.8bn over the MTEF.

• The recent above-inflation wage settlement resulted in additional R26.3bn needing to be added to the wage bill.

• The policy reserve was increased by R22.1bn over the MTEF.

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Source: National Treasury

Adjustments to baseline, R

40.8bn

Proposed wage bill adjustments,

R 26.3bn

Policy reserve, R 22.1bn

Core government outcomes over MTEF

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• Over the next three years, government will focus on 12 agreed outcomes, with priority given to those outcomes that have the greatest developmental and economic impact.

• These outcomes are:– Enhancing the quality of basic education and skills development.

– Improving the quality of health care.

– Investing in infrastructure and proper maintenance of economic infrastructure networks.

– Accelerating the creation of jobs.

– Other Growth Path priorities

Value for money in public expenditure

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• Deficiencies in public sector management have to be reduced to ensure greater efficiency with existing resources. Hence, over the period ahead:

– Excessive and inefficient administrative capacity in many departments and agencies is a specific focus.

– Dedicated technical support to address underspending in capital projects by departments, agencies and municipalities is underway.

– Non-departmental agencies will come under scrutiny, with special focus on staff establishments, remuneration and functional mandates.

– Procurement of goods and services, even when compliant with regulations, is frequently neither competitive nor transparent. Under the guidance of an interdepartmental team, this will be reviewed and transformed.

– IT systems and management of consulting services will be subject to additional scrutiny within the supply chain regulatory framework.

• Progress on the outcomes should reflect, at least, the levels of associated expenditure, with greater results evident in the improved quality of frontline services.

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• Recovery very sensitive to global outlook and recovery in consumer demand, but overall growth constrained by electricity capacity.

• MTEF forecasts real GDP growth < 4½%• Inflation pressures ease due to falling food prices allowing interest rates

to stay low, but inflation persistence reinforced by sticky services. • The labour market continues to be weak, with unemployment rising to

25.3% in 3Q2010

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• Public Finance Management Act, Act 1 of 1999 (PFMA), section 30(2), states that the adjustments budget may provide for:– Significant and unforeseeable economic and financial events affecting

the fiscal targets.

– Unforeseeable and unavoidable expenditure recommended by a committee of Cabinet.

– Any expenditure in terms of section 16.

– Money to be appropriated for expenditure already announced by the Minister during the tabling of the annual budget.

– The shifting of funds between and within votes.

– Utilisation of savings under a main division of a vote to be used to defray over-expenditure on another main division in terms of section 43.

– The roll-over of unspent funds from the preceding financial year.

Provisions by the adjustments budget

2010/11 adjusted national budget

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R'thousand

Appropriation by vote 461,517,932 6,769,774 468,287,706

Main appropriation 461,517,932 461,517,932

Adjustments 6,769,774 6,769,774

Roll-ov ers 1,789,445 1,789,445

Unforeseeable and unav oidable ex penditure 2,248,041 2,248,041

Salary adjustment 1,475,001 1,475,001

Housing allow ance adjustment 860,958 860,958

Self-financing 396,329 396,329

Direct charges against the National Revenue Fund 350,625,011 415,004 351,040,015

State debt costs 71,357,578 ( 3,750,699 ) 67,606,879

Prov incial equitable share 260,973,745 4,165,703 265,139,448

- Originally budgeted 260,973,745 260,973,745

- Salary adjustment 2,479,661 2,479,661

- Housing allowance adjustment 1,336,042 1,336,042

- Unforeseeable and unavoidable expenditure 350,000 350,000

Skills lev y and Setas 8,424,228 - 8,424,228

Remuneration of public office bearers 2,327,099 - 2,327,099

General fuel lev y sharing w ith metropolitan

municipalities 7,542,361 - 7,542,361

Subtotal 812,142,943 7,184,778 819,327,721

Contingency reserv e 6,000,000 ( 6,000,000 ) -

Projected underspending ( 1,700,000 ) ( 1,700,000 )

Declared sav ings ( 1,949,083 ) ( 1,949,083 )

Total Estimated Expenditure Level 818,142,943 ( 2,464,305 ) 815,678,638

Adjusted national budget for 2010/2011

Main

appropriation

(ENE)

Total

adjustments

(AENE)

Adjusted

appropriation

(AENE)

National budget adjustments mainly include

• Adjustments – net R2.4 billion reduction:– Roll-overs - R1.8 billion

– Unforeseeable and unavoidable expenditure - R2.6 billion

– Personnel remuneration increases – R6.2 billion

– Self-financing expenditure – R0.4 billion

– State debt costs – R3.8 billion reduction

– Contingency reserve draw down – R6 billion (reduction)

– Declared savings – R1.9 billion (reduction)

– Projected underspending – R1.7 billion reduction

• In-year adjustments result in the expenditure level estimates decreasing from R818.1 billion to R815.7 billion

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Summary of the Division of Revenue Amendment Bill

• Section 12(4) of the Money Bills Amendment Procedure and Related Matters Act, 2009 (Act No. 9 of 2009) requires Minister of Finance to table Division of Revenue Amendment Bill with the revised fiscal framework if the adjustments budget effects changes to the Division of Revenue Act (DoRA) for the relevant year.

• Bill contains two clauses– Clause 1 of the Bill provides for the amendment of Schedules 1 to 8 of the

DoRA, by the substitution of new Schedules.

– Clause 2 of the Bill provides for the short title and commencement of the Bill.

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Clause 1 provides for

• Additional unconditional and conditional allocations to provinces and municipalities.

• The allocation of unallocated conditional allocations to provinces and municipalities.

• The re-allocation of conditional allocations in terms of section 18 of the Division of Revenue Act, 2010.

• Roll-overs of conditional allocations to provinces and municipalities not transferred by national departments during the 2009/10 financial year.

• Increases to a conditional allocation to a province or municipality through a virement under section 43 of the Public Finance Management Act, or section 28(2)(d) of the Municipal Finance Management Act.

• The re-allocation of conditional allocations that were not correctly reflected in the Schedules to the Division of Revenue Act, 2010.

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Schedules to Bill provide for

1. Schedule 1 - equitable division of revenue raised nationally among the three spheres of government.

2. Schedule 2 – determination of each province’s equitable share of the provincial sphere’s share of revenue raised nationally.

3. Schedule 3 – determination of each municipality’s equitable share of the local government sphere’s share of revenue raised nationally.

4. Schedule 4 – allocations to provinces and municipalities to supplement the funding of programmes or functions funded from provincial or municipal budgets.

5. Schedule 5 – specific purpose allocations to provinces.

6. Schedule 6 – specific purpose allocations to municipalities.

7. Schedule 7 – allocations-in-kind to municipalities for designated special programmes.

8. Schedule 8 – incentives to provinces and municipalities to meet targets with regard to priority government programmes.

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2010/11 Adjustments – Provinces

Equitable share

• R3.82b is added to cover cost of wage agreements for 2010 (provision for higher than inflation increase and addition to housing allowance)– Schedule 1 and Schedule 2 (direct charge)

• R350m is added to cover cost of implementation (backdated to July 2009) of OSD for doctors and health therapeutic workers Annexure A– Schedule 1 and Schedule 2 (direct charge)

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2010/11 Adjustments – Provinces (cont)

Conditional grants• R40m is added to health sector for increased demand

– Comprehensive HIV and Aids Grant - Schedule 5 (Dept of Health)

• R769m is added to cover increased property rates based on updated information on property ownership and rates payable– Devolution of Property Rate Funds Grant - Schedule 5 (Dept of Public Works)

• R31.2m is added to cover 2010 wage agreements for Further Education and Training (FET) colleges employees– FET Colleges Grant – Schedule 4 (Dept of Basic Education)

• R204.4m be distributed to provinces through disaster management grants for continued drought conditions (R50m, WC) and damage to roads (KZN)– Agricultural Disaster Management Grant - Schedule 5 – WC (Dept of Agriculture,

Forestry and Fisheries)– Provincial Infrastructure Disaster Relief Grant - Schedule 5 – KZN (Dept of

Cooperative Governance and Traditional Affairs)

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2010/11 Adjustments – Local Government

Equitable share• R390.9m is added for allocation to those municipalities that accounted

for unspent conditional grants from previous financial years– Schedule 1 and Schedule 3

Conditional grants• R92m for drought emergency relief in Western Cape (Mossel Bay

Municipality)– Municipal Drought Relief Grant – Schedule 6 (Dept of Water Affairs)

• R10m is added for the refurbishment of facilities in the Mopani District Municipality– Water Services Operating Grants - Schedules 4 and 7 (Dept of Water Affairs)

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27

Thank you

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Annexures

Capital and government expenditure to moderate in the MTEF

• Capex spending increased significantly in 2009/10 as dtimulatory measure, however this trend declines over the MTEF as economy recovers.

• Total expenditure will fall to 33.7% this year after reaching a high of 33.9% in 2009/10 – will fall further to 32.3% in 2013/14 as capex continues to decline.

• Debt service costs remain moderate but grow over the MTEF.• Expenditure assumes counter-cyclical pattern as stimulus spending is removed in line

with economic recovery.

Consolidated government capital expenditure

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Government expenditure

5.2 5.2 5.5

7.27.8

6.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

1

2

3

4

5

6

7

8

9

Per

cen

tofG

DP

Per

cen

toft

ota

lexp

end

itu

re

Per cent of total

Percent of GDP (right axis)

25.2 25.8 26.3 25.4 25.928.3

31.6 31.2 30.6 29.9 29.3

3.6 3.4 3.22.8 2.5

2.3

2.3 2.5 2.7 2.9 3.0

0

5

10

15

20

25

30

35

40

Per

cen

t o

f G

DP

Debt service cost Non-interest expenditure

Source: National Treasury

Debt – costs and trajectory

• Total net loan debt is projected to rise from 30.8% in 2010/11 to reach 36.9% in 2013/14.• This rise in net loan debt explains the marked increase in debt service costs.• The debt trajectory is positive, showing a strong possibility the overall stock will continue

to increase until 2016/17 – giving weight to the adoption of a counter-cyclical fiscal stance.• The fiscal trajectory remains sustainable with on a very small probability that debt will

breach the 50% of GDP debt level.

Total net loan debt

Source: National Treasury

30

Total net loan debt

20

25

30

35

40

45

50

Pe

r c

en

t o

f G

DP

Total net loan debt

10

20

30

40

50

60

Per

cen

t o

f G

DP

Revising spending baselines

31

• Government’s outcomes approach provides a framework for results-driven performance and enhanced monitoring of service delivery.

• Government’s budget process is undergoing reform, shaped in part by the Money Bills Amendment Procedure and Related Matters Act (2009).

• Departments have been asked to review their baseline allocations to identify savings, reprioritise and realign expenditure in terms of government’s outcomes approach.

• Reviews have been organised by function across three spheres, facilitating more effective comparison of allocations with service delivery trends .

Division of revenue

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Of the R67.1 billion additional resources allocated over the 2011 MTEF, on average:

• 35% goes to national government

– To sustain real growth in social grant provisions and public employment programmes.

• 60% goes to provincial government

– To accommodate higher personnel costs and for spending on infrastructure backlogs in education and health.

• 5% goes to local government– To sustain the provision of

basic services in poor municipalities, and for bulk infrastructure provision.

Local 5%

National 35%Provincial 60%

Source: National Treasury

Budget adjustments

Key funding items

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Education:• Finalisation of outstanding OSD commitments.• Reduction of the number of inappropriately-structured schools, which currently are 3 627.• Additional resources for FET colleges.• The training of an additional 8 800 teachers through Funza Lushaka teacher bursary

scheme.

Health:• Finalisation of outstanding OSD commitments (doctors and therapists).• Increasing hospital infrastructure spending.• Increase allocations to stabilise health budgets.• Spending for maternal and child health as well as HIV and Aids to increase.• President to give guidance on further health support from the unallocated policy reserve.

Built environment• Increasing the regional bulk infrastructure grant for the financing of regional bulk water and

sanitation.• Increasing the public transport infrastructure and systems grant.• Additions to the municipal infrastructure grant.

Key funding items (cont)

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Employment creation:

• Additional resources for EPWP incentive grant to provinces for the social sector.

• Supporting the national youth employment initiative.

Rural development and land reform:

• Improved support to newly settled farmers through the comprehensive agricultural support programme.

• Additions for settling about 603 land claims each year over the MTEF.

Road infrastructure:

• Provincial roads spending to increase as government increase road infrastructure spending by R1.5 billion.

Comprehensive Agricultural Support Programme• Provincial agriculture to rise by an additional R400 million over the MTEF.