Parliamentary Budget Office | 19th February 2014

2014 Pre-Budget Briefing

Outline

Objectives Global Economic Review and Outlook SA Economic Review and Outlook Fiscal Review and Outlook Linking the Budget with the NDP Risks Issues for Consideration

2

Objectives

To provide members with a review of the global

and domestic economic trends that influence

policy and budget decisions.

To track key policy developments since 1994.

To highlight key economic, fiscal and policy trends,

with implications for the new budget.

To highlight matters for consideration.

3

Global Economic Review and Outlook

4

Source:IMF 2013

5

-3

-2

-1

0

1

2

3

4

5

6

7

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

annu

al gr

owth

(%)

GDP growth

Actual growth Forecast: MTBPS 2011 Forecast: MTBPS 2012 Forecast: MTBPS 2013

Asian financialcrisis

Global financial crisis

National Treasury forecasts

After '94: Economic sanctions lifted andSA economy reintegration with the global economy

GEAR strategy to stabilise economy

Budget surplus

South African Economic Review and Outlook

RDP

Effects of financial crisis

ASGISA

NGPNIPF NDPPICC

Fiscal Review and Outlook6

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Revenue, Expenditure and Budget Balance as % of GDP% Budget Balance of GDP % Revenue of GDP % Expenditure of GDP

Consolidation Expansion Invest for growth Consolidation

Declining deficitIncreased public spending

High spending accumulated debt

1994: RDP increase in the delivery of social goods

1996: GEAR strategy to stimulate growth

Between 1996 and 2000: Reshape intergovernmental fiscal environment and introduce PFMA

2001: Micro Economic Reform Strategy 2010: New Growth Path

2013: NDP

2012: IPAP

Spending Trends7

Exchange Rate8

Inflation9

Source: Stats SA

Linking the 2013 Budget with the NDP

10

Global Risks 11

Slower global recovery; Tapering-down of QE by the US; Low demand for SA exports; and Depressed demand for commodities.

Domestic Risks12

Policy uncertainty and discontinuity; Labour unrest; Service delivery protests; Infrastructure bottlenecks (energy, transport;

communications, water); Infrastructure slow spending; Inflation; Debt; Interest rate hikes; Exchange rate volatility.

Issues for Consideration13

The alignment of budget programme structures with plans is ideal to monitor budget performance in respect of outcomes/goals/impact. Are there processes in place to review budget programme structures?

Is the budget reflective of policy priorities i.e. NDP, IPAP, NGP, fiscal policy objectives?

Is the country's budget policy-led? Does it adapt quickly to policy changes?

Will social safety allocations continue to expand in the face of poorer economic performance?

Will the significant infrastructure allocations be maintained if growth slows further?

Which programmes have been sacrificed to meet the budget deficit targets?

Issues for Consideration14

Will budget decisions attract foreign investors?

Are measures in place to curb the growth of, and even reduce, the public wage bill component of the national budget?

Are the growth strategies that are formulated in the country given enough time to realise their objectives before moving to the next one?

South Africa responded to the effects of the global financial crisis, low economic growth and high and persistent unemployment, with counter-cyclical fiscal policy. That is, increasing government spending during periods of weaker economic conditions to stimulate economic activity. South Africa consequently began running a fiscal deficit in 2009/10 in the wake of the global financial crisis, after 3 years of surpluses. Will South Africa continue to embrace counter-cyclical policy?

Issues for Consideration15

Certain risks facing South Africa are external, i.e. US Fed tapering, global recovery and commodity prices, but we also face local risks such as labour unrest, a growing public sector wage bill, energy shortages, slow implementation of policy and volatility of the exchange rate. What measures are in place to ensure these risks are mitigated?

Inflation targeting regime. Should the band be reconsidered?

What options does South Africa have to protect the value of the Rand?

Will further depreciation of the Rand result in missing the budget deficit target (4.3% for 2013/14)?

Prof. M Jahed

Alfred Monnakgotla

Mmapula Sekatane

Nelia Orlandi

Rashaad Amra

Thank you16