Presentation to the Committee on Macroeconomic Policy

1. Presentation to the Committee on Macroeconomic Policy Prof Charles C. Okeahalam National Assembly Wing Parliament of South Africa Cape Town 5 March 2003 www.MinervaGroup.net

2. Economic Analysis and Commentary • Table of Contents • 1. Summary of Some Economic Variables- 10 Year Average Time Series • 2. Issues and Analysis - The Good • 3. Issues and Analysis- The Bad • 4. Issues and Analysis- The Ugly, or not so good or whose fault is it anyway ?? • 5 . Conclusions

3. Economic Variables Trade Net Total Exports Real Merchandise Exports to GDP ratio Real Merchandise Imports to GDP ratio GDP per capita Source of data: SARB Average Annual Percentage change between 1991-01 3.94% 16% 17.47% -0.2% Data Analysis- Economic Variables

4. Trade Balance of Payment GDP (growth rate - actual) Source of data: 2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003 2002 Surplus 3% (National Treasury forecast) Data Analysis- Economic Variables

5. Data on Economic variables for the 5 year period 97-2001 incl. Source of data: SARB (In Rmillions) 1997 1998 1999 2000 2001 Trade Real Merchandise Exports to GDP 17.2 17.6 17.6 19.3 19.1 Real Merchandise Imports to GDP 20.2 20.3 18.6 19.8 19.1 Net Total Exports -262 1071 1809 3588 5468

6. Investment Direct Investment Total Fixed Capital Stock Other Variables Gross Domestic Saving (GDS) GDS / GDP ratio Source of data: SARB Average annual percentage change between 1991 - 2001 28.84% 1.79% 9.4% 6.85% Data Analysis- Economic Variables

7. Data on economic variables for the 5 year period 97-2001 incl. Source of data: SARB Investment (In Rmillions) 1997 1998 1999 2000 2001 Direct Investment -10381 -9841 -9659 -1878 28687 Total Fixed Capital Stock 1249568 1274239 1287088 1297662 1309033

8. Product Market & Investment Investment (growth rate - actual) Secondary Sector (manufacturing - actual) Source of data: 2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb. 2003. 2002 6.3% Positive growth Data Analysis- Economic Variables

9. Government Revenue and Expenditure Government Revenue Government Expenditure Net Government expenditure Source of data: SARB Average Annual Percentage change between 1991 – 2001 11.58% 11.85% -0.27% Data Analysis- Economic Variable

10. Inflation CPIX (for the year ended November 2002) Inflation target SARB interest response in 2002 Source of data: 2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb. 2003 2002 10% 3% - 6% 400 basis points increase Data Analysis -Economic Variable

11. Unemployment variable Narrow definition (searched for a job in the last 7 days) Broad definition (willing to work but cannot find a job) Growth rate of working population Annual Average percentage change in labor productivity (1991 – 2001) Source of data: Stats SA. Rate 29.4% 40.9% 4.58% 2.81% Data Analysis Unemployment - 2002

12. Data Analysis - Domestic Growth and Investment • Expected GDP growth rate in 2003: 3.3% • Expected GDP growth rate in 2005: 4% • Investment grew by 6.3% in 2002 and is expected to grow by 6% a year in the medium term. • Expected current account deficit of 0.5% of GDP in 2003. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

13. 2. Issues and Analysis THE 2003 BUDGET COMMENTARY

14. 2. Issues and AnalysisThe Good • Focus on efficiency in service delivery • Focus on input -output relationship on fiscal relations ie tax payers rewarded for efficient performance of SARS • Recognises the value of human, social and infrastructure capital • Takes a long tem view of development recognising that poverty is intergenerational and there are no quick fixes

15. Issues and AnalysisThe Good - Debate • Government Debt declined • Debt service reduced - overall cost of capital declined • Expected yield on sovereign and corporate bonds declined • Non diversified expected rates of return declined • Corporate finance and investment hurdle rate declined

16. Education Infrastructure Human Capital Health and social expenditure Efficient use of marginal pricing of fiscal policy ie sin taxes versus incentives for training, investment etc Delivery and accountability at the local provincial and national government level Direct focus areas for long term development and poverty alleviation

17. Time consistent macroeconomic policy - Reduction in Budget deficit debt Reduction/distribution Exchange rate not directly defended with reserves. Gradual relaxation of exchange controls Issues and AnalysisThe Good

18. Time consistent monetary policy - based on inflation target which is now stress tested!! Inflation expectations transparent Amnesty with regard to illegal offshore assets Reasonable balance between Keynesian and supply side - however see next slide! Issues and analysis The Good

19. Begins to look too much supply-side The problems with supply side economics is that it: 3. Issues and AnalysisThe Bad ? ? Debate

20. 1. Has high expectations with regards to responses 2. Relies on private sector fiscal incentives - trickle down etc 3. Implies ability of private sector to deliver social goods - Particularly worrying given the stickiness of the Gini-Coefficient in South Africa - Provides real theoretical clarity on investment -unemployment reduction mechanism- except multiplier principle -vague 3. Issues and AnalysisThe Bad ? ? Debate

21. Mitigating this view somewhat is the 1. increase in expenditure on infrastructure etc & 2. Government Capital spending predicted to increase by 23.3% (2003-04) 3. Medium-term total projected expenditure – 351, 338 Rm (2003/04) 4. Focus on delivery However insufficient attention to the challenge of HIV. Issues and AnalysisThe Bad?? Debate

22. Question? How long can supply side work? Will supply side deliver jobs? Are business cycles redundant ? Demanding role for SARS to meet enforcement targets -surely diminishing returns in SARSperformance not too far off Issues and AnalysisThe Bad?? Debate

23. Inadequate focus on competition issues eg Stickiness of agricultural prices-despite secondary (futures and forward) markets providing other evidence Decline in costs of financial intermediation not being passed to ALL consumers Aggregate savings growing but not in ALL households 4. Issues and Analysis The Ugly

24. Unfair international terms of trade Financial Contagion Investor sentiment Regional Political instability Exchange Rate Volatility Questions How endogenous/ exogenouous to any forecasting and budgeting exercise can these factors be ? Will standard deviation () of exchange rate decline?? Yes -Comment Issues and AnalysisThe Ugly

25. 5. Conclusions • Sound budget • Unemployment and hence poverty still a very serious issue which will not be solved only by supply side • Something for everybody! • END ! • Report-Very good - as always could still do better!!!

26. MINERVA SUMMARY OF 2003 BUDGET • See following slides

27. 2003 Budget Priorities • Extends child support grant and increases primary school nutrition programme funding • Increases spending on social grants • Reinforces the enhanced response to HIV/AIDS • Increases municipal resources for free basic services, infrastructural investment and job creation • Accelerates land restitution spending • Supports further restructuring of Universities and Technikons Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

28. 2003 Budget Priorities continued • Increases skills development investment. • Strengthens the fight against crime. • Increases spending on foreign representation and NEPAD. • Gives a generous tax relief. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

29. Economic Outlook • Consumer prices rose 14% and food price inflation averaged 25% in 1992. • The Minister of Finance reported a budget deficit of 8.6% of GDP in 1992 – 1993 and proposed a 6.8% deficit for the following year. • Planned real spending growth for 2003/04 of 6.8% and 4.5% over the forthcoming MTEF • Planned budget deficit of 2% – 2.5% of GDP in 2003/04. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

30. International Economic Environment • South Africa performed better than most other countries • Potential war in Iraq increases inflation and an uncertain economic outlook Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

31. Employment and Broadening Development • Annual employment growth in third quarter of 2002 was positive for the first time in 6 years. • Policy initiatives to enhance development: • 1. skills development programme • 2. infrastructure investment & tax • incentives • 3. land redistribution • 4. increased access to financial services • 5. easing of the tax burden on poor households Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

32. Black Economic Empowerment • Government has set aside R10bn over the next five years to support the funding of new ventures that meet the empowerment criteria. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

33. Budget Framework • Expansionary stance of government expenditure • Planned government expenditure of R334bn in 2003/04 • Planned government expenditure of R395.6bn in 2005/06 • Projected revenue for 2003/04: R304.5bn and a budget deficit of 1.4% in the current year. • Projected revenue for 2006/05: R361.2bn and a budget deficit of 2.4%. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

34. Budget Framework continued • Government provides for an unallocated contingency reserve of R3bn for 2003/04 and R8bn in 2005/06 • Taxi recapitalization, Post Office recapitalizing and critical infrastructural projects may be financed from this contingency reserve. • Debt service costs will fall from 4.2% of GDP 2002-03 to 2005-06. • National Government debt (48.1% of GDP in 1996-97) is projected to decline to 36.8% by the end of the MTEF period. • Spending on health, education, welfare, housing and other social services currently account for 58.3% of non-interest expenditure. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

35. Division of Revenue • Child support grant extension to children up to 14 years and a further R11.9bn to meet the needs of children. • R38bn more allocated for provinces to improve roads, hospitals, purchase medicines and books and enhance response to HIV/AIDS • R6.5bn for extending free basic services, municipal infrastructure, rural water supply and employment. • R2.7bn additional allocation for police and courts. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

36. Division of Revenue continued • R1.7bn allotted higher education and increased skills development. • R1.9bn allocated for land redistribution • R2.2bn to improve Home Affairs’ administrative services to citizens and build capacity in SA Revenue Service. • R1bn to supplement research and technology development. • R1.3bn to support peace-keeping missions, NEPAD and an increasing international role. • R1.2bn for food relief projects. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

37. Addressing Poverty and Vulnerability • From April 2003, the pension and disability grants increase from R60 to R700 a month • Child support will also rise by 14% to R160 a month • R1.1bn, R3.4bn and R6.4bn have been set aside for each of the forthcoming three years to phase in extension of the child support grant. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

38. Investing in Health and Education • 23.2% of non-interest expenditure is dedicated to educational investment and the deepening of the nation’s skills base. • R900m is set aside for the restructuring of the higher educational system. • R3.3bn is set aside for the next three years for HIV/AIDS. • R1.9bn provided for land restitution. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

39. Infrastructural Investment and Technological Advancement • A further R1bn is set aside for national research and development strategies for health, food security and industrial biotechnology. • Planned spending on physical assets and capital transfers for the next three years exceeds R105bn. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

40. Partnerships with Local Government • The budget sets aside R23.7bn over the next three years to assist municipalities to extend basic service delivery. • A R4.1bn is provided for free basic services including electricity. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

41. Enhancing Safety and Security • The criminal justice sector receives R2.7bn to fight crime and increase safety. • More funds have been allocated for the accommodation of a growing prisoner population. • More resources have been granted for the improvement of court performance, upgrading the Master’s office and improved protection of women and children in the court process. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

42. Tax Proposals • The past year witnessed a buoyant tax revenue collection level. • Tax revenue is projected to be R275.7bn in 2002/03. • The main sources of this year’s higher tax revenue collected are • 1. higher personal income tax receipts • 2. robust company tax trends • 3. higher VAT receipts Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

43. Tax Relief for Individuals • Personal income tax revenue comprise about 34% of main budget revenue in 2003-04. • Individual income tax is to be reduced by R13.3bn. This will benefit lower and middle-income households. • The primary rebate is increased to R5,400 and the threshold below which no tax is paid is increased by 11.1% to R30,000 a year. • Tax threshold for taxpayers aged over 65 years is increased to R47,222 (10% more than the current level) Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

44. Tax Relief for Individuals continued • 56% of the total tax relief accrues to taxpayers earning less than R150,000 annually and 23% to those earning between R150,000 and R250,000 annually. • Since 2000, the minimum tax threshold has been increased by more than 50% for individuals and 40% for those over 65 years. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

45. Interest and Dividend Exemption • The exemption is increased from R6,000 to R10,000 for taxpayers under 65 years and from R10,000 to R15,000 to those over 65 years. • This change will come into effect from 1 March, 2003 costing the fiscus R227m. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

46. Taxes on fuel • The fuel levy on leaded petrol will rise by 3c/l and between 6.2c/l and 9.2c/l on unleaded petrol • The fuel levy on diesel will increase by 4c/l to 8c/l • The Road Accident Fund levy will increase by 3c from 18.5c/l to 21.5c/l • This will raise R642m in 2003-04 for the National Revenue fund and an additional R474m for the Road Accident find. • These adjustments will take effect from 2 April 2003 Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

47. Exchange Rate Liberalisation • Gradual approach to exchange control liberalisation • Government has shifted to a system of prudential regulations to protect policyholders from excessive risk which will take effect on 1 May 2003. • Foreign asset limits for investment: • 1. 15% of total assets for long-term insurers, pension funds and fund managers 2. 20% of total assets for unit trust companies Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

48. Exchange Rate Liberalisation continued • In October 2002 the foreign direct investment limit into Africa was increased from R750m to R2bn. • The foreign direct investment limit outside Africa was increased from R500m to R1bn. • It is proposed that dividends repatriated from foreign subsidiaries should be eligible for an exchange control credit. • In addition the foreign dividend tax will be lifted. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

49. Foreign Exchange Control Amnesty and Accommodating Tax Treatment • An amnesty is offered to those who hold illegal assets offshore to bring them back to South Africa. • The window period for applying for amnesty is 1 May, 2003 – 31 October, 2003. • Any individual can apply for amnesty unless an enforcement investigation has been initiated against him/her. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003

50. Foreign Exchange Control Amnesty and Accommodating Tax Treatment continued • The distinction between the settling-in allowance for emigrants and private individual foreign investment allowance for residents will fall away. • A common foreign allowance for both residents and emigrants of R750,000 per individual and R1.5m in respect of family units. Source of data:2003 Budget Speech, National Treasury as reported in Business Day, 27 Feb, 2003