Transcript (Nedlac) (2013) (part 2).

Topic 4: Budgeting – Overview,
Borrowing and Deficits
1. Goals of Fiscal Policy
2. Overview of budgeting in SA
3. Types of deficit classifications – actual
deficits, cyclical and structural deficits and
primary deficits
4. What should be the emphasis of fiscal policy
1. Goals Fiscal Policy
• Certain theories have bee developed to explain how
goals of policy makers are determined
• Public Choice / Political Business Cycle Theory
– Where policy makers are assumed to be trying to minimise
their own loss function and get votes to keep themselves
in office rather than do what is optimal for society as a
whole
• Political economy / Partisan Theories
– Where conflicts over the distribution of resources
underlie the policy choices and goal of policy
makers
Political Business Cycle Theory
• There are a number of conditions under which vote maximising
conduct by policy makers (in their own narrow interests) conduct
deviate from social welfare maximising behaviour, such as where:
– Voters are myopic i.e. they are heavily influence by the state of the economy
just before the election being more influenced by higher current growth and
less concerned about likely future inflation, resulting in a political business
cycle where aggregate demand is overly stimulated in the pre-election
period
– Unemployment is more likely to result in vote loss than is inflation because
politicians are more readily blamed for unemployment resulting in an
inflationary bias in fiscal policy
– A deficit bias exists in the budget process as politicians enjoy spending, but
they do not enjoy taxing
Policy prescription of public choice school
of thought
• Optimal fiscal policy is not about counter-cyclical
stabilisation of the macro-economy (in the Keynesian
tradition)
• Optimal policy is about the imposition of rules on
policy makers (such as balanced budget rules) which
eliminate the destabilising effects of deficit spending
which is motivated by myopic, inflationary and
narrow political objectives
The Political Economy or Partisan theory
• Policy makers do not optimise for society as a whole,
rather they are motivated by specific constituency
interests and ideologies. Typically,
– Conservative party favours price stability, low inflation and high
real interest rates (associated with the interests of the wealthy)
– Labour party favours full employment and income and asset
redistribution (associated with the interests of the poor and
working class)
• Fiscal Policy is predicted to follow party cycles:
– Labour party in power – govt spending increases, until inflation
arises and makes the conservatives more popular…
– Conservative party in power – govt spending gets cut, inflation
is combated leading to rising unemployment and recession,
fertile seeds for relection of labour / liberal party….
Note on the “Fiscal Cliff” dispute in the US
• The Republican Party in the US
(1) does not want taxes to rise
(2) does want spending to be cut
(3) does want to place a ceiling on the size of the national debt
• There is stand-off between the Republicans and Democrats in
Congress that might result in taxes rising (as temporary tax relief
will not be extended) and spending programmes will not be
approved) –What is the key problem?
• Spending down, taxes up and limited borrowing will effectively end
the US govt’s fiscal stimulus of the economy
• Going over the “cliff” (Ben Bernanke’s characterisation) in this way
would be suicidal (like a lemming?) as it would tighten up demand
and lead to a loss of growth and a rise in unemployment at the very
time when the US economy is trying to recover from recession
• See J Bradford Long’s article on the issue
2. Overview of SA Budget
Budget 2012: Consolidated governm ent fram ew ork, 2010/11 – 2014/15
2010/11
2011/12
2012/13
Estim ate
R m illion
Revenue
2013/14
2014/15
Projections
757 513
830 210
904 830
1005 871
1118 183
27.5%
27.7%
27.4%
27.8%
28.0%
874 172
972 547
1058 321
1149 125
1239 699
Percentage of GDP
31.7%
32.5%
32.1%
31.7%
31.0%
Non-interest expenditure
807 945
895 903
968 933
1048 319
1130 660
Percentage of GDP
29.3%
29.9%
29.3%
28.9%
28.3%
66 227
76 645
89 388
100 806
109 039
2.4%
2.6%
2.7%
2.8%
2.7%
-116 659
-142 337
-153 491
-143 255
-121 516
-4.2%
-4.8%
-4.6%
-4.0%
-3.0%
Percentage of GDP
Expenditure
Debt-service cost
Percentage of GDP
Budget balance
Percentage of GDP
Average real
grow th
2011/12 –
2014/15
4.8%
2.9%
2.6%
6.7%
Overview of Budget
• Consolidated government deficit improved from a
high of 6.5% in 2009/10 to an estimate of 4.6% in
2012/13 and is expected to further improve to 3.0%
in 2014/15
• Improvement driven by
• a recovery (although remaining weak) in revenue
in line with expected slower economic growth
both domestically and globally
• a stabilisation in non-interest spending – average
annual real growth of 2.6 per cent over the MTEF
Recap on Some budget terminology
•
•
•
•
•
•
Revenue: Total consolidated revenue received by government (e.g. tax revenue
like VAT, personal and corporate income tax as well as departmental revenue), plus
non-tax revenues such as social security fund contributions, provincial ownrevenue (e.g. gambling taxes), income of public entities (e.g. water sales revenue
of the Water Boards) and departmental revenue. Transfers to SACU partners are a
deduction from revenue.
Expenditure: Total expenditure of national government, provinces, social security
funds and extra-budgetary institutions. Total expenditure is split into non-interest
expenditure and interest costs.
Non-interest expenditure: All expenditure excluding interest repayments on
national debt.
Interest cost: Interest repayments and other costs associated with servicing
national debt as well as interest cost of all other institutions included in the
consolidation.
Budget balance: Difference between total revenue and total expenditure. This is
the most common measure of government’s fiscal stance.
Primary balance: Difference between total revenue and non-interest expenditure.
The primary balance is a key driver of government’s debt stock. In general, when
the primary balance is in deficit, the debt-to-GDP ratio can be expected to rise.
When the primary balance is in surplus, the debt-to-GDP ratio can be expected to
fall.
3. Types of deficits: actual, cyclical,
structural and primary
• Actual Deficit (or Budget Balance) =
Total Revenue – Total Spending
• Cyclical Deficit =
the component of the deficit that is due to the ups and down
of the business cycle
• Structural deficit =
the deficit as it would be if the economy was performing at full
potential (not above or below)
• Primary Deficit =
Total Revenue – non-interest expenditure
SA’s recent Budget Balance (actual deficit and surplus)
Automatic Fiscal Stabilisers
• As economic growth increases (as in 2004 to 2007):
– Fiscal policy will restrict i.e. budget deficit is reduced, or
there is a surplus, because of the positive association
between economic growth and tax revenues
– This will have effect of dampen growth (i.e. stabilising the
economy)
• As economic growth slows (as in 2008 to 2012)
– Fiscal policy will expand i.e. budget deficit increases,
because of the negative impact which contraction has on
tax revenues
– This has the effect of stimulating growth (i.e. stabilising the
economy)
Cyclical vs Structural Deficits
• Cyclical deficits – portion of the deficit
resulting from a low level of economic activity
(as part of the working of the automatic fiscal
stabiliser)
• Structural deficits – portion of the deficit that
would exist even if the economy were at its
highest potential level of output (i.e. not due
to behaviour of the economy, but due to
policy decisions such as tax and spending
policies)
Example of structural and cyclical deficits
• Actual deficit = R30-billion
• If economic output was at full potential then
tax would increase by R10-billion and transfer
payments would fall by R3-billion
• Therefore, the structural deficit (deficit at
potential output) = R30bn – R10bn – R3bn =
R17bn
• Therefore, the cyclical deficit = R30bn – R17bn
= R13bn
Estimate of SA Cyclical and Structural Balance circa 2004
See Fig giving an Estimate of SA Cyclical and Structural Balances circa 2004
- eg in 2000/01 when the economy was assumed to be operating slightly below full
potential the actual deficit was around -2% of GDP but once cyclical factors (too little tax,
etc.) were taken into account and removed then the structural deficit was close to -1.5%
of GDP
- See how spectacularly wrong projections of the future can be - look at the projections for
the actual budget surpluses in what turned out to be the global recession
In recession and expansion
• During recession periods – actual deficits tend to rise sharply
above the structural deficit (as cyclical deficits rise due to the
workings of the automatic fiscal stabiliser)
• During expansionary periods – actual deficits tend to trend
downwards reflecting a decline both in structural and cyclical
deficits
[Notes: 1. Economic growth seems better for balancing the
budget than any ideological/legislative intervention.
2. Structural deficits are pushed up by policy decision to cut
taxes and/or increase spending
3. Keynesians would oppose structural deficits associated with
overly expansionary and unsustainable fiscal policy, but firmly
believe in the important role of cyclical deficits/fiscal stabiliser
when the economy is in recession and operating below its
potential output]
Primary Balance or Primary deficit
• Primary balance is the difference between total revenue and noninterest expenditure.
• The primary balance is a key driver of government’s debt stock.
• In general, when the primary balance is in deficit, the debt-to-GDP
ratio can be expected to rise.
• When the primary balance is in surplus, the debt-to-GDP ratio can
be expected to fall.
• Technically: the debt dynamic equation shows that:
• Debt-to-GDP(t+1) = Debt-to-GDP(t)*(real interest rate/real growth
rate) – primary balance
• i.e. your future debt will be increased if:
• interest rates rise
• growth slows
• there is a primary deficit (tax revenues fall short of non-interest
spending) (with a primary surplus tax revenues are greater than noninterest spending so future debt is reduced as some tax revenues are
used to pay off the debt)
SA’s Primary Balance from 2002 to 2012 –
current problem of a primary deficit
34
32
Per cent of GDP
30
28
26
24
22
20
18
16
Budget revenue
Non-interest expenditure
Interest payments now fastest
growing component of spending
25
Debt service costs
Transfers to households
20
Compensation of employees
Capital payments
Average real growth
15
10
5
0
-5
Average 2007/08-2010/11
Average 2011/12-2014/15
But, this has resulted in some years of
borrowing to pay interest costs
Need to re-create fiscal space
• Sharp increase in financing requirement
means interest is now the fastest growing
area of spending over the MTEF
• This eventually leads to a decline in
government resources as rising interest costs
crowd out more productive expenditure
• As it would be prudent to create fiscal space
in time for the next crisis
• Fiscal space created by lowering debt ratio
Attempt to slow debt as a % of GDP
(capped at 40%)
Comparative Fiscal response to the global crisis
Change in debt-to-GDP, 2007 - 2014
0
50
-1
40
Per cent of GDP
Per cent of GDP
Change in the budget balance, 2007 - 2011
-2
-3
-4
-5
30
20
10
0
-10
-6
-20
-7
-30
Argentina
India
Brazil
EM average*
Turkey
China
Korea
Kenya
Mexico
Poland
Malaysia
South Africa
Australia
Euro area
G-7 average
Brazil
Korea
Turkey
Kenya
China
EM average*
Mexico
Argentina
Poland
Euro area
Malaysia
India
Australia
G-7 average
South Africa

Compared to other ‘emerging markets’ South Africa’s fiscal response to the global crisis has been strong and
robust.

Brazil, India and China all reduced debt levels over the last few years.

In South Africa’s case R1 trillion will be added to the stock of debt, once it stabilises at around 40% of GDP in
2015.

Over the next five years there will be significant rescheduling of debt in addition new debt issuance and rising
debt service costs
4. What should be the emphasis of
Fiscal Policy?
• As stated by National Treasury, South Africa’s fiscal
stance is based on three pillars:
- Countercyclicality supports the economic recovery and
assists the return to long-run sustainability and the
creation of fiscal space for future crises
- Long-term debt sustainability: Spending levels must
ensure that debt and interest costs do not rise indefinitely
- Inter-generational equity: the long-term costs of spending
programmes should be considered.
• But, fiscal space gained in the previous period has been used
up so it would be important to return back to a primary
surplus so that the level of debt (as % of GDP) can be
reduced, this can be done by incresing tax revenues (this
needs growth) or contianing growth in expenditure (or both)
Some key fiscal issues
• As stated by Treasury, the quality of spending (i.e. structure, composition and
effectiveness) is the key concern. This arises from:
– Large increase in the stock of debt, diverting resources to interest
payments.
– Some of the increased debt is being used to finance government
consumption
– Escalation of the wage bill faster than improvements in service delivery
– Rising levels of under spending on capital projects
– Growing perception that poor service delivery, waste and corruption
constrain economic growth.
• The budget and the broader public sector balance sheet:
– All public institutions draw from the same pool of domestic savings
– Public enterprise borrowing will accelerate significantly from 2015; the
budget borrowing shouldn’t crowd out other public sector institutions.
• Similalry, public enterprises such as Eskom and Sanral cannot be subsidised
by the fiscus as this would crowd out social spending
Questions
1. Do you think SA could afford to get deeper
into debt in order to stimulate the economy?
2. Do you think it would have been wiser to
have funded infrastructure expansion like
Eskom power station build and Gauteng’s
highways from out of the budget?
3. Do you think that there is sufficient
understanding about why South Africa
should avoid rising its national debt further?
Topic 5: Budgeting - expenditure
1.
2.
3.
4.
Expenditure trends
Classifications of Expenditure
Policy trade-offs
Understanding the redistributive character of state
spending
1. Expenditure trends
• Govt spending has been growing significantly
in real terms over the past ten years,
• But given the fiscal constrains now being faced
real growth is now being projected to slow
down in the years ahead
• Average real growth in non-interest spending
of 11% p.a between 2002/03 - 2008/09
• Over the MTEF – growth will exceed inflation
by 2.6%
9.4
11.9
12
7.1
7.7
6
2015/16
2014/15
2.2
2
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
3.0
2013/14
0
3.0
3.7
4.2
3.9
4
8.3
8.0
8.4
8
11.2
10
Per cent real growth
14
Real growth in non-interest
expenditure
Expenditure growth more modest in
future
Index: 2005/06=100
175
Non-interest expenditure
Per cent of GDP (right axis)
34
32
150
30
125
28
100
26
75
24
50
22
25
20
Per cent of GDP
200
2. Classification of Expenditure
• In the budget, government spending is
classified in two ways:
– Functional classification: by government
department e.g. education, health, defence, etc.
– Economic classification: by type of spending e.g.
• Current spending – salaries, subsidies, welfare transfers
• Capital spending – infrastructure, roads maintenance,
buildings, etc
Economic Classification
100
Per cent of total expenditure
90
80
36.8
32.8
35.4
34.4
18.0
18.2
6.2
6.8
7.6
9.0
15.7
17.1
15.5
17.7
15.7
16.2
70
60
50
40
14.5
5.2
14.4
30
20
10
14.0
15.1
18.2
5.5
10.1
0
Goods and services
Other*
State debt costs
Capital
Transfers to households
Compensation of employees
Real growth of expenditure
components
12
Other transfers and subsidies
Goods and services
Capital payments
Transfers to households
Debt-service costs
Compensation of employees
10
Per cent
8
8.3
6
6.4
5.5
4.8
4
2
3.9
4.3
3.8
3.7
2.6
2.1
1.3
0
2008/09 - 2011/12
2012/13 - 2015/16
1.3
3. Policy trade-offs
• Should we spend more on personnel?
– Government has serious capacity problems
– In some areas, we need to hire more people, in
others we may need better pay
• Should we spend more on infrastructure?
– Capital spending provides highest economic returns,
but capacity constraints limit progress
– Social infrastructure is good for equity
– Economic infrastructure lowers production costs,
crowds in private investment
Policy tradeoffs
• Should we spend more on welfare transfers?
– Social security well targeted towards poor
– Alleviates worst effects of poverty
– Better nutrition may lower costs in health, education
– Do we increase child support grant in value or do we
give more people the grant?
– How do we create jobs, avoid a dependency culture?
4. Understanding the redistributive
character of state spending
• In developmental state seeking to bring greateer
equality and changes the structure of opportunity
clearly patterns of pro-poor expenditure should
prevail
• Gains should not be eroded
– e.g. suggestion that nominal value of the SOAP be
maintained which would have seen a decline in real terms
• The ‘take-up rate’ of social services must be taken
into account
– e.g. where people have the right to access certain services
such as welfare grants, but the state’s administrative
capacity means only a small % of those with the right are
in a position to exercise it
Pro-poor spending
• The redistributive effect of govt. spending must be
monitored to ensure pro-poor spending
• Key question: how much of government spending on a
particular service gets to poor households
• A study of 2006 data by Servaas vd Berg identifies the
following:
– Strong redistributors – Social assistance such as State Old Aged
Pensions (SOAP) (70% to poorest 40% of households), child
maintenance (62%), disability grants (59%) and public clinics
(57%)
– Weak redistributors – spending on school education (49%) and
public hospitals (45%)
– Non-redistributor – spending on tertiary education (4%) and
housing (24%) benefits better-off households more than it
benefits the poorest
Degree to which spending targets the poor – Servaas vd Berg study
Rising social wage over time
600
500
R billion (2011 rand)
400
300
200
100
0
Social protection
Education
Health
Housing and community amenities
Social wage rising
• Social spending (social assistance, education,
health, housing, recreation and community
amenities) accounts for 58% of government
expenditure, up from 49% a decade ago.
• Number of social grant beneficiaries to reach
15.6 million by March 2012.
The Budget also impacts on income inequality ( important with SA’s
high Gini coefficient)
Questions?
1. What it the correct balance for the
developmental state, should it emphasize:
– (1) changing the structure of opportunity through
investing in the skills, health and surroundings of
the poor, or
– (2) changing the structure of the economy –
investing in infrastrustructure, incentivising
investment in line with industrial policy priorities
2. Is South Africa spending too much on
welfare?
Topic 6: Budgeting - taxation
1. Types of taxes and sources of revenue
2. Progressive and regressive taxes
3. Tax incentives and supply-side theory
1. Types of taxes
• Types of tax –
– Direct taxes are levied against a particular person
(natural or jurisitic based on their level of income,
gain or profit, etc)
– Indirect taxes are levied against specific
occurences, events or transactions, etc.
Classification of taxes
Direct taxes
Income tax
Indirect taxes
Property tax Commodotiy
taxes
Personal
Death duty Value added tax
income tax
(VAT)
Corporations tax Donations
Customs duty
tax
Capital gains
Property
Import tariffs
tax
rates /
Wealth tax *
Assessment of direct taxes
• Merits
– Certainty: tax payer know ho mush to pay and state can
estimate its revenue
– Equity: direct taxes can be designed to fall more heavily on the
rich based on the principle of the ability to pay
– Elasticity: govt’s revenue increases with increase in tax rate or
increase in incomes of the people (fiscal drag)
• Demerits
– Inconvenience: taxpayers must submit declaration of income
– Evasion (illegal) prone: as taxpayer can falsify his or her
records
– Can create disincentive to work or save (e.g. if rate is too high
on interest from savings)
Assessment of indirect taxes
• Merits:
– Convenience: indirect taxes are usually paid in small amounts rather than as
large lump-sum, is collected by manufacturers and importers and is included
in the price of purchase
– Evasion is difficult
– Coverage is wide
– Can be used to promote social welfare e.g. increased ‘sin tax’ on alcohol /
cigarettes
– Can target luxury goods with higher rates
• Demerits:
– Regressive: indirect taxes usually fall more heavily on the poor than on the
rich
– Discourage saving: as price of essential commodities increases (unless zerorated)
– Uncertainty: authorities cannot accurately predict the total revenue form
indirect taxes as demand for different goods is influenced by many factors
Sources of revenue in SA
 Improvements in tax administration were the priority
for many years. These improvements widened the tax
base, a critical factor in the stability and sustainability
of democratic state.
 Personal income tax relief was strongly concentrated on
the lower income brackets, benefiting the middle
strata, while South Africa’s marginal tax rates are
amongst the highest for comparable countries.
 There as been a significant shift towards corporate
taxes over the last decade. Unfortunately, 2008 showed
us how pro-cyclical corporate taxes are.
Percentage of GDP
Sources of Revenue
12
Personal income tax
Company income tax
VAT
10
8
6
4
2
0
1996/97
1998/99
2000/01
2002/03
2004/05
2006/07
2008/09
2010/11
Sources of Revenue
100
90
Per cent of total tax revenue
80
4.4
3.6
3.6
70
60
50
3.6
24.7
24.4
24.7
11.5
13.4
40
27.7
19.9
4.4
25.8
26.5
20.6
31.2
33.8
4.2
25.1
19.8
30
20
40.4
39.3
31.3
37.0
10
0
Personal income tax
Company income tax
Value-added tax
Customs duties
2. Progressive and Regressive taxes
• Progressive rate of tax
– The rate of taxation increases with an increase in the tax base
– e.g. the rate of personal income tax in South Africa increases
from around 30% for middle income earners to 42% for the
highest earners
• Regressive rate of tax
– A regressive tax places the same obligation on rich and poor
alike e.g. VAT rate, poll-tax
– Key point: A regressive tax takes a declining proportion of
income as income rises
– e.g. a poor household may pay 14% of it income to VAT (as it
spends all of its income on VAT-able commodities) while a rich
household will only pay say 7% of its income to VAT as not all of
its income goes to VAT-able commodities, but also to savings,
etc.
3. Tax incentives and supply-side theory
• Basic propositions:
– Growth in output is predominantly supply determined by
rates of growth of capital and labour, as well as
technological change (see Fig 20.1)
– Growth of capital is primarily driven by incentives in the
form of high after tax returns for savings and investment
– Labour supply will grow in response to incentives, in the
form of higher after tax real wages (or in the case of a
wage subsidy a tax incentive is created which lowers the
cost of employing new or in some cases younger
employees)
– Excessive government regulation discourages capital
formation
Savings and Investment
• For Keynesians – high income (high capacity
utilisation) leads to high investment
• For supply-side economists – the rate of return is key
determinant of saving and investment, therefore
capital formation depends on tax structure
– Return on investment = pretax profit x (1 – tax on profits)
– Return on saving = nominal interest rate x (1 – tax on
interest) minus expected inflation rate {i.e. after tax real
interest rate}
Example of interaction between inflation
and tax system
• If tax system allows companies to depreciate their
capital investments only at historic/original cost
rather than at replacement value then during periods
of high inflation corporate profits will be overstated
• This results in an effective increase in corporate tax
rates, leading to a decrease in investment levels
• Note: SA introduced accelerated depreciations into
its tax codes in the 1980’s in order to stimulate
some major capital investment
The curve that justified Reaganomics
• Laffer argued that a reduction in taxes would serve to
stimulate supply in the US economy in the early
1980’s
• Laffer argued that this would lead to increased
output, which would see tax cuts associated with an
increase rather than a decrease in tax revenues (see
Laffer curve 20.5)
• Facts: US government suffered a significant deficit
(partly due to increased spending) and criticism that
tax cuts had effect of benefiting the rich at the
expense of the poor
SA does offer extensive tax breaks
and incentives
• From the following tables it is clear that SA loses
about 13-14% of its possible tax revenue due to
incentives and tax breaks
• Some are for reasons of assisting the poor and
low income earners e.g. VAT zero rating costs the
fiscus about R30-bn a year currently
• Others are to incentivise certain industries such
as the motor industry and clothing and textiles
and other industries (e.g. the film industry) and
this costs the fiscus about R19-bn a year currently
Total “Tax Expenditures” lost tax due
to incentives and exemptions
R million
2006/07
2007/08
2008/09
2009/10
Total tax expenditure
65 238
76 101
80 163
84 097
Tax expenditure as % of total gross tax
revenue
13.2%
13.3%
12.8%
14.0%
495 549
572 815
625 100
598 705
3.6%
3.7%
3.5%
3.4%
Total gross tax revenue
Tax expenditure as % of GDP
Personal income tax incentives
R million
2006/07
Personal income tax
1
Pension and retirement annuity
2007/08
2008/09
2009/10
11 968
12 521
15 629
17 209
-pension contributions employees
4 379
4 579
5 799
6 470
-pension contributions employers
4 925
5 150
6 522
7 277
-retirement annuity
2 664
2 793
3 308
3 462
8 290
9 460
10 992
12 370
4 145
4 597
5 701
6 497
4 145
4 863
5 291
5 874
Interest exemptions
1 715
2 283
3 033
3 529
Secondary rebate (65 years and older)
1 111
1 254
1 444
1 484
56
80
109
111
100
123
74
60
23 239
25 721
31 281
34 764
Medical
-medical contributions & deductions employees
-medical contributions - employers
Donations
Capital gains tax (annual exclusion)
Total: Personal income tax
2
Corporate income tax incentives
R million
Small business corporation tax savings
2006/07
627
2007/08
747
2008/09
675
2009/10
732
Research and development (R&D)
449
358
537
432
Learnership allowances
224
424
397
421
Strategic Industrial Policy
281
228
61
25
Film incentive
194
297
20
1
82
120
169
203
1 857
2 174
1 860
1 813
Urban development zones (UDZ)
Total: Corporate income tax
VAT Zero rated supplies
R million
3
19 basic food items
Petrol
4
4
Diesel
4
Paraffin
Municipal property rates
Reduced inclusion rate for "commercial"
accommodation
Subtotal: zero-rated supplies
Exempt supplies (public transport & education)
2006/07
11 376
2007/08
13 107
2008/09
13 907
2009/10
14 606
7 777
9 185
10 619
9 678
730
938
1 269
872
446
505
507
520
2 711
3 081
3 122
3 673
85
95
113
120
23 125
26 912
29 537
29 469
682
785
832
922
Customs and Excise
R million
5
Motor vehicles (MIDP, including IRCCs)
5
Textile and clothing (Duty credits - DCCs)
Furniture and fixtures
Other customs
6
Diesel refund (mining, agriculture and fishing)
Total customs and excise
2006/07
13 179
2007/08
16 169
2008/09
12 089
2009/10
12 673
1 563
1 829
2 024
2 231
145
166
128
153
636
1 141
1 231
787
811
1 205
1 181
1 286
16 335
20 509
16 653
17 129
Questions
1. Do you think some taxes should be raised to
increase revenue for government
programmes – if so, what taxes would you
raise and what expenditures would you
prioritise?
2. Should more tax incentives be offered to
promote business and employment?
3. Should more items be VAT exempt?
Topic 7: Budgeting: Process and
planning
1. Budget process
2. Impact of Census 2011
3. Long-term budget planning
1. Budget process
• What is contained in govt’s budget?
– Expenditure decisions
• How much to spend on what items?
– Revenue decisions
• Who to tax and how much?
– Overall macro-economic decisions
• How much debt should the state get into in order to
stimulate the economy
The steps in the budget process?
• Setting policy priorities
– Cabinet sets political priorities for the budget process
• Fiscal framework is established
– Set revenue target and deficit target to establish the ‘resource envelope’
• Division of revenue
– Vertical : national | provincial | Local (approx. 47% | 44% | 9%)
– Horizontal : - various departments
• Bidding process
– Govt department approach Medium Term Expenditure Committee and bids for
resource allocations – the value of requests is significantly larger than the amount
available, also an incremental process not a zero-based one
• Cabinet and Cabinet Committee scrutnises the proposed allocations and
approves
• Budget documentation is approved and presented on Budget Day
MTEF budget process time frames
Policy review
April
Review, evaluate and
decide on new major
policy proposals
June
July
Aug
Propose fiscal and budget
framework, and division of
resources
Sept
Executive/s consider
frameworks and division of
resources
Oct
Table Medium Term
Budget Policy Statement
Departmental planning and
budgeting
Departments prepare budget,
including detailed spending plans
for new proposals
Intergovernmental and
technical forums
Sector and focused budget hearings
67
MTEF budget process time frames (cont)
Policy review
Nov
Cabinet approves
new MTEF allocations
Departmental planning and
budgeting
Departments revise medium term plans
and finalise budget inputs
Jan
Feb
National Budget tabled
March
Provincial budgets are
tabled (14 days after
National budget is tabled)
68
Division of revenue
Local government 9% Mostly to accommodate
infrastructure investment
National departments 47%
Main factors :
• salary costs & infrastructure
Provinces
44%
Mostly education,
health, and cost of the
increase in the publicsector wage bill
How the MTEF works
• Lets assume the police budget published in 2006 is as follows
– R100 in 2006/07, R105 in 2007/08 and R110 in 2008/09
• For the 2007 budget, the R105 and the R110 are the baseline
figures for police
• To get the new third year, we increase the R110 by a factor related
to inflation. Lets call it R116 in 2009/10
• Now we have a baseline of R105 in 2007/08, R110 in 2008/09 and
R116 in 2009/10
• This is mostly guaranteed to police
• They then bid for changes to their baseline
• Let’s assume that we give them R5, R10 and R20, then their new budget is
R110 in 2007/08, R120 in 2008/09 and R136 in 2009/10
• In the speech, we say that we have added R35 of new money to police…
• …or we say that we have added R35 to the baseline for police
• In each budget, only a small part of total spending is subject to active
decision making
• In 2009, only 7.3% of total spending was the subject of the budget process
Incremental Budgeting over the
Medium Term
According to Treausry, Over the 2013 MTEF, about R40 billion (between 4 to 5% of the
budget) has been moved away from non-performing programmes or programmes that
are not closely aligned to departments’ core mandates.
Funds were also shifted away from programmes that are not expected to disburse
funds as quickly as initially scheduled
Main recipients of these reprioritised funds include:
 Police – Expanded detective and forensic capacity
 Defence – Maritime Security Strategy and military veterans
 Department of Labour – To prepare for amended labour legislation
 Education – Education infrastructure and community libraries
 Transport – Roads and public transport
 Social development – Social workers and grant infrastructure
 Expanded public works – The non-state sector (NGOs)
 Water Affairs: Water infrastructure upgrade and maintenance
2. Impact of Census 2011
• Census 2011 results will affect the division of
revenue
• Impact on Provinces
• Equitable share formula (introduced in 2011 MTEF) to be
updated for 2013 MTEF with latest available data (including
results of Census 2011)
•
Provincial populations and children of school-going age (5-17)
per province
–
–
Provinces with above average increases in population and learners
will benefit (based on the formula the money will follow the people)
Appropriate phase-in strategies will be considered to cushion impact
on provinces adversely affected by data updates (major issues of
resource allocation such as teachers, etc.)
Impact on local government
•
–
–
–
•
–
–
Equitable share
Review of formula underway and will be introduced alongside data
updates
Formula reforms include: improved targeting towards poorly
resourced municipalities; catering for more regular data updates;
and improved costing of municipal services
Appropriate phase-in strategies to be considered to cushion impact
Conditional grants
Comprehensive review to commence in 2013 for
implementation in 2014/15
Census 2011 to help determine areas where backlogs are
most prevalent and to help target grants at areas with the
most urgent needs
3. Long-term budget planning
• In the long run demographic factors need to be take
into account in working out appropriate fiscal
policies
• US – retirement of the baby boom generation as well
as increasing life expectations will push up Social
Security (from 4,3% of GDP in 2010 to 6,4% of GDP in
2040) and medicare costs from 2,9% to 6,6%)
• Initially, strong growth projections (which have
proven incorrect) will allow for budget surpluses until
2020, but due to the demographic shifts a large
deficit of 9,5% of GDP is projected for 2040
Projections for SA
• SA’s fiscal policy is affected by a number of factors:
– Demographic shifts are also taking place which will put pressure on
State Old Aged Pension system in long-run (as SA will have an ageing
population)
– Look at whether key areas of expenditure will be affordable in the long
run such as social security grants, health care, education
– Include high growth and low growth scenarios
– Project the national debt and deficits into the future
• Treasury has announced that it will release a policy document
outlining SA’s long term fiscal choices in the next month or so,
this will assist in taking forward SA’s long term fiscal planning
Questions
1. How could social dialogue on the budget be
increased?
2. Would Nedlac have a role in this process?
3. How will long-term planning impact on the
budgeting process?