The 2006/7 Budget and

Macroeconomic Policy

The 2006/7 Budget and

Macroeconomic Policy

Ben Smit

7 March 2006

OutlineOutline

Economic background to the Budget

– Recent SA economic developments

– Macroeconomic forecasts

Macroeconomic policy aspects

– General

– Fiscal variables

Recent SA developmentsRecent SA developments

0

10

20

30

40

50

60

70

80

90

100

M-80 M-82 M-84 M-86 M-88 M-90 M-92 M-94 M-96 M-98 M-00 M-02 M-04

RMB/BER BCI

RMB/BER Business confidence index at 24 year highRMB/BER Business confidence index at 24 year high

• To 85 in 05Q4 from 86

in 05Q3

• Manufacturing (68)

• Building (92)

• New vehicles (92)

• Retail (82)

• Wholesale (90)

45

50

55

60

65

Sep-99

Mar-00

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

-10

-5

0

5

10

15

20

INVESTEC PMI Mnfr Prod Vol 3m annual %

Recent developments: Purchasing Managers less optimisticRecent developments: Purchasing Managers less optimistic

February

2006

Consumer confidence at a historical high….Consumer confidence at a historical high….

-35

-25

-15

-5

5

15

25

83 85 87 89 91 93 95 97 99 01 03 05

index

FNB/BER CCI 3quarter moving average

2010 Soccer WC announcement

1994 election

Black and White consumers are optimisticBlack and White consumers are optimistic

-40

-30

-20

-10

0

10

20

30

40

86 88 90 92 94 96 98 00 02 04 06

index

White consumers Black consumers

BlacksLT average = 62005Q4 = 24

WhitesLT average = - 8

2005Q4 = 9

CPIX inflation in mid-target rangeCPIX inflation in mid-target range

0

3

6

9

12

15

18

21

J-80 J-85 J-90 J-95 J-00 J-05

CPIX actual 36m mov ave

3-6% target range

CPIX - 4.3

CPI - 4.0

PPI - 5.5

Balance of payments as % of GDPBalance of payments as % of GDP

-8

-6

-4

-2

0

2

4

6

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

GDP growth: 1980Q1 – 2005Q3GDP growth: 1980Q1 – 2005Q3

-6

-4

-2

0

2

4

6

8

1980 1981 1983 1985 1987 1988 1990 1992 1994 1995 1997 1999 2001 2002 2004

Y.o

.Y. %

ch

ang

e

R/$ exchange rateR/$ exchange rate

0

2

4

6

8

10

12

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

R/$

R/$ PPP (1970; PPI)

The business cycle: upswing continuesThe business cycle: upswing continues

44

44 73

100

105

110

115

120

125

130

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73

months since start of upswing

index: base

=100

78-81 1961-1965 99Q3+

0

10

20

30

40

50

60

1988 1990 1992 1994 1996 1998 2000 2002 2004

Political constraintManufacturing: TotalPolitical constraintManufacturing: Total

Macroeconomic ForecastsMacroeconomic Forecasts2005 2006 2007 2008

GDP growth

- National Treasury 5.0 4.9 4.7 5.2

- Reuters consensus 4.5 4.6 4.9

- USB/Beeld/ABSA consensus 4.5 4.5 -

- BER 4.6 4.1 -

Inflation (CPIX)

- National Treasury 3.9 4.3 4.5 4.8

- Reuters consensus 4.3 4.7 4.7

- USB/Beeld?ABSA consensus 4.4 4.7 -

- BER 4.3 5.1 -

Exchange rate (R/$) (Eop)

- Reuters consensus 6.38 6.75 6.89

- USB/Beeld/ABSA consensus 6.63 - -

-BER 6.35 7.30 -

Previous Treasury forecastsPrevious Treasury forecasts

2000 2001 2002 2003 2004 2005

GDP growth

- National Treasury 3.5 3.5 2.3 3.3 2.9 4.3

- Actual 4.2 2.7 3.7 3.0 4.5 4.9

Economic background: summaryEconomic background: summary

Surprisingly strong economic growth (stepped up a notch)

Surprisingly low inflation (sustained) Very strong consumer and business confidence Remarkably stable macro conditions Longest post-war business cycle upswing Domestic demand major growth factor Employment growth but continued high

unemployment Sharply increased BoP deficit, financed by even

larger capital inflows Low savings rate HIV/AIDS

Macroeconomic

policy aspects

Macroeconomic

policy aspects

Macro-economic policy:General commentsMacro-economic policy:General comments

Two classes of economic policy Macro (stabilization) policies: policies designed to moderate short-

term fluctuations in the economy Structural policies: policies aimed improving the longer-term

performance of the economy

Macro-economic policy Monetary and fiscal policy Fiscal policy:

policy with regard to structure and level of government spending, taxation and financing of deficits

Stabilization - changes in above Government expenditure, taxation and financing aspects covered in

Budget both stabilization (macro) and structural issues

Fiscal policy as described in the BudgetFiscal policy as described in the Budget “The budget framework …. Continues the expansionary

fiscal stance announced in the 2001 Budget.” “The fiscal stance outlined here supports growth, while

moderating the impact of consumption expenditure on the current account of the balance of payments, prices and the exchange rate.”

“In the medium term, the tax policy framework supports the goals of accelerated and shared economic growth by promoting long-term retirement savings, reducing the costs of tax compliances and the tax burden on all business, fostering small business development, boosting investment in research and development (R & D), supporting skills development and encouraging home ownership.”

Budget Review pp 43, 63/4

Fiscal variables: Consumption expenditure (% of GDP)Fiscal variables: Consumption expenditure (% of GDP)

14

16

18

20

22

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Perc

enta

ge

Forecast

Fiscal variable: Fixed investment (% of GDP)Fiscal variable: Fixed investment (% of GDP)

0

1

2

3

4

5

6

7

8

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Perc

enta

ge

Forecast

Taxes: total tax burden(Tax as % of GDP)Taxes: total tax burden(Tax as % of GDP)

15

20

25

30

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Perc

enta

ge

Forecast

Taxes: Personal Tax RateTaxes: Personal Tax Rate

4%

6%

8%

10%

12%

14%

16%

18%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Forecast

Government savings (%)Government savings (%)

-8

-6

-4

-2

0

2

4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Perc

enta

ge

Forecast

Deficit before borrowing(% of GDP)Deficit before borrowing(% of GDP)

-10

-8

-6

-4

-2

0

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Perc

enta

ge

Forecast

Fiscal variables: Government debt (% of GDP)Fiscal variables: Government debt (% of GDP)

0

10

20

30

40

50

60

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Perc

enta

ge

Forecast

The Budget and Macroeconomic

policy goals

The Budget and Macroeconomic

policy goals

Economic growth– Support via tax cuts and expenditure

increases– Support via credibility & responsibility– Contain via lower deficits– Personal income vs corporate taxes

Inflation control– Support via credibility and responsibility– Support via sterilization of cash balances– Support/undermine via tax cuts

The Budget and Macroeconomic

policy goals (continued)

The Budget and Macroeconomic

policy goals (continued)

Balance of payments– Worsen deficit via tax cuts– Improve capital inflows via low deficit and

credibility effects Employment

– Improve via growth effects and public programme and SMME support

Savings– Improve via tax cuts

Bureau for Economic Research

Economic information that works for you

Bureau for Economic Research

Economic information that works for you

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