The 2006/7 Budget and Macroeconomic Policy

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The 2006/7 Budget andMacroeconomic Policy

• Ben Smit
• 7 March 2006

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Outline

• Economic background to the Budget
• Recent SA economic developments
• Macroeconomic forecasts
• Macroeconomic policy aspects
• General
• Fiscal variables

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Recent SA developments
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RMB/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)

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Recent developments Purchasing Managers less
optimistic
February 2006
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Consumer confidence at a historical high.
1994 election
2010 Soccer WC announcement
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Black and White consumers are optimistic
Blacks LT average 6 2005Q4 24
Whites LT average - 8 2005Q4 9
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CPIX inflation in mid-target range
CPIX - 4.3 CPI - 4.0 PPI - 5.5
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Balance of payments as of GDP
10
GDP growth 1980Q1 2005Q3
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R/ exchange rate
12
The business cycle upswing continues
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Political constraintManufacturing Total
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Macroeconomic Forecasts
2005 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 -


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Previous 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
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Economic 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

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Macroeconomic policy aspects
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Macro-economic policyGeneral 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

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Fiscal 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

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Fiscal variables Consumption expenditure ( of
GDP)
Forecast
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Fiscal variable Fixed investment ( of GDP)
Forecast
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Taxes total tax burden(Tax as of GDP)
Forecast
23
Taxes Personal Tax Rate
Forecast
24
Government savings ()
Forecast
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Deficit before borrowing( of GDP)
Forecast
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Fiscal variables Government debt ( of GDP)
Forecast
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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

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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

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