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FISCAL POLICY AND THE BUDGET FRAMEWORK

31 FISCAL POLICY AND THE BUDGETFRAMEWORKThe FISCAL POLICY frameworkGovernment s FISCAL POLICY seeks to support structural reforms of theSouth African economy consistent with long run growth,employment creation and an equitable distribution of income. It aimsto promote investment and export expansion while enablingGovernment to finance public services, redistribution anddevelopment in an affordable and sustainable BUDGET POLICY aimsFiscal POLICY seeks to: ensure a sound and sustainable balance between Government sspending, tax and borrowing requirements; improve domestic savings to support a higher level of investmentand reduce the need to borrow abroad; keep government consumption spending at an affordable level,contributing to lower inflation and a sustainable balance ofpayments; support an export-friendly trade and industrial strategy toimprove South Africa s competitiveness.

1998 Medium Term Budget Policy Statement 34 Table 3.1: Baseline and revised medium term budget framework 1998/99 1999/00 2000/01 2001/02 R billion Baseline Revised Baseline Revised Baseline Revised Revenue 177,6 178,0 193,4 191,3 210,5 206,2 220,1

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Transcription of FISCAL POLICY AND THE BUDGET FRAMEWORK

1 31 FISCAL POLICY AND THE BUDGETFRAMEWORKThe FISCAL POLICY frameworkGovernment s FISCAL POLICY seeks to support structural reforms of theSouth African economy consistent with long run growth,employment creation and an equitable distribution of income. It aimsto promote investment and export expansion while enablingGovernment to finance public services, redistribution anddevelopment in an affordable and sustainable BUDGET POLICY aimsFiscal POLICY seeks to: ensure a sound and sustainable balance between Government sspending, tax and borrowing requirements; improve domestic savings to support a higher level of investmentand reduce the need to borrow abroad; keep government consumption spending at an affordable level,contributing to lower inflation and a sustainable balance ofpayments; support an export-friendly trade and industrial strategy toimprove South Africa s competitiveness.

2 And ensure that pay increases within the public sector are market andproductivity related, and are fiscally term fiscalWithin the current medium term planning horizon, Government aimsobjectivesto: reduce the level of borrowing used to finance current spending; reduce the overall tax burden as a share of GDP over time; and31998 medium Term BUDGET POLICY Statement32 reduce government consumption spending as a share of to soundGovernment remains committed to a sound and stable FISCAL POLICY ,public finances aimed at ensuring the sustainability of South Africa s economictransformation, promoting jobs and investment, and ensuring thatpublic services reflect Government s Government s commitment to sound public finances and asustainable deficit has protected South Africa from the worst of thecurrent international financial crisis, and has contributed to thestructural changes needed to strengthen the long run performance ofthe revenue.

3 Expenditure and borrowingRecent trends in the broader public finances, including the nationaland provincial authorities, extra-budgetary accounts and funds,social security funds and local government, are summarised generalTax revenue, including social security contributions and local ratesgovernment revenueand taxes, has risen steadily from 25,6 per cent of GDP in 1992/93 toan estimated 28,5 per cent in 1997/98. Non-tax revenue of thegeneral government has remained at about 4,0 per cent of GDP overthis non-interest Consumption expenditure by general government grew strongly inexpenditurereal terms in 1997/98, amounting to an estimated 21,7 per cent ofGDP, compared to 20,6 per cent recorded in the previous FISCAL remuneration accounts for 58,8 per cent of governmentconsumption expenditure.

4 Transfers and subsidies amounted to about5,1 per cent of GDP in 1997/98, mainly comprising social grants andunemployment on public debtInterest on debt absorbed 6,7 per cent of GDP in 1997/98, comparedto about 3,6 per cent five years dissaving (that is, current expenditure on interest,consumption, subsidies and transfers in excess of revenue) has fallensignificantly from a peak of 6,4 per cent of GDP in 1993. Afteradjustments for depreciation and inventory valuation, Governmentdissaving in 1997 amounted to 3,7 per cent of expenditure by the general government increased by 12,4 percent in 1997/98, reflecting a real growth rate of 5 per cent. Thisreflects a significant improvement in the contribution of governmentto infrastructure 3: FISCAL POLICY and the BUDGET Framework33 Public sector borrowingTaking into account the overall general government accounts, andrequirementthe surpluses or deficits of public enterprises, the public sectorborrowing requirement has been reduced from 10,4 per cent of GDPin 1993/94, to 5,2 per cent in 1997/98.

5 In nominal terms , the publicsector borrowing requirement declined by 7 per cent in 1997/98 toan estimated R31,3 s medium term FISCAL strategy envisages further steadyreductions in the borrowing requirement over the next three years, inline with the projected reduction in the national BUDGET FISCAL projectionsLower growth reducesInternational developments and the extended slowdown in theavailable resourcesSouth African economy this year have led to downward adjustmentsin expected growth for the next three years. Lower growth reducesgovernment revenue and constrains the resources available to thefiscus and the broader toWithin the context of the FISCAL POLICY FRAMEWORK outlined above,baseline projectionsGovernment has made the following revisions to the baselinemedium term FISCAL projections set out in the March 1998 BUDGET : a BUDGET deficit for 1998/99 of 3,9 per cent of GDP is nowexpected (compared to a March estimate of 3,5 per cent); debt interest costs will be R1,2 billion more in 1998/99 thanoriginally budgeted and a projected R3,0 billion more insubsequent years.

6 Revenue of 27,1 per cent of GDP is expected in 1998/99, fallingto 26,5 per cent in 2001/02 about 0,7 per cent of GDP highereach year than in the baseline projections; and a BUDGET deficit of 3,5 per cent of GDP is projected in 1999 /00(compared to a baseline 3,0 per cent), falling to 3,0 per cent insubsequent adjustments to the baseline medium term BUDGET frameworkare summarised below and discussed in more detail in the paragraphsthat medium Term BUDGET POLICY Statement34 Table : Baseline and revised medium term BUDGET framework1998/991999/002000/012001/02R billionBaselineRevisedBaselineRevisedBas elineRevisedRevenue177,6178,0193,4191,32 10,5206,2220,1 as per cent of GDP26,5%27,1%26,3%26,9%26,0%26,8%26,5%Ex penditure201,3203,9215,7216,5235,0229,62 45,0 Interest on debt42,543,745,048,048,051,054,0 Non-interest spending158,8160,2170,7168,5187,0178,619 1,0 Deficit23,725,922,325,224,523,424,9 as per cent of GDP3,5%3,9%3,0%3,5%3,0%3,0%3,0%GDP669,06 56,9734,3710,2809,6768,1830,8 Note: Repayments and recoveries of loans and advances are included in revenue in these taxTotal national BUDGET revenue amounted to 27,2 per cent of GDP inperformance1997/98.

7 Despite the slower economic growth recorded in the firsthalf of 1998/99, revenue collection remains buoyant. CombinedCustoms and Excise and Inland Revenue collections increased by9,3 per cent up to September 1998, compared to the same period of1997 revenueRevenue in 1998/99 is expected to exceed the BUDGET target slightly,projectionsand will amount to 27,1 per cent of the revised GDP estimate. Therevised BUDGET FRAMEWORK allows for a phased reduction in thenational revenue aggregate to 26,5 per cent of GDP in 2001 debt service Higher interest rates than anticipated this year have sharplycostincreased debt service costs, highlighting the importance ofGovernment s commitment to reducing the annual borrowingrequirement.

8 The reduction in the BUDGET deficit as a share of GDPsince 1994 has already released about R4 billion in interest costs thatwould otherwise have had to be found in the 1998/99 higher debt service costs reflected in the revised budgetframework are mainly the consequence of adverse financial marketconditions this year. Higher capital market rates have significantlyraised the costs of financing this year s deficit and refinancingmaturing government stock. In addition, the revised frameworkprojects higher deficits in 1998/99 and 1999 /00, in turn leading toincreased interest costs in subsequent deficit Revised BUDGET deficit projections of 3,9 per cent in 1998/99 andtargets3,5 per cent in 1999 /00 reflect the impact on the fiscus of lower GDPgrowth and unusually high interest costs, together with aconsideration of social and developmental spending 3: FISCAL POLICY and the BUDGET Framework35 Adverse economic conditions have necessitated substantialdownward adjustments in non-interest spending over the 1999 /00-2001/02 period.

9 In addition, the revenue and deficit targets havebeen reviewed. In adjusting the BUDGET FRAMEWORK consideration hasbeen given to the overall balance of spending, revenue andborrowing in a context of an unanticipated slowdown in theeconomy. Government has been mindful also of the need forstability in funding basic services and for a realistic phasing in offiscal adjustments. While retaining Government s commitment to asustainable FISCAL POLICY , the deficit reduction target has accordinglybeen postponed by a year. The BUDGET deficit is still expected toreach 3,0 per cent of GDP in 2000/01 and : BUDGET deficit 1997/98-2001/02 Spending objectivesWithin the projected spending totals, Government is committed toreprioritising spending to meet reconstruction and developmentobjectives, with additional emphasis in the revised medium termexpenditure FRAMEWORK on job creation, infrastructure investment,strengthening the integrated justice system and the consolidation ofeducation, health and welfare services.

10 Chapter 4 provides to the medium term BUDGET framework1998/99 adjustmentsThe Adjustments Estimate reflects the following additions to the1998/99 expenditure estimates: R1,2 billion in additional debt interest costs;051015202530351997/981998/991999/0 0 2000/01 2001/02R billion012345R billionPercent of GDPP ercent of GDP1998 medium Term BUDGET POLICY Statement36 R1,0 billion in additional expenditure for national governmentdepartments; R1,2 billion in additional expenditure for the provinces, of whichR200 million is to supplement provision for textbook supplies; R300 million in additional expenditure for the improvement inconditions of service of both national and provincial governmentemployees; and R2,0 billion of expenditure rolled over from 1997/98, offset byexpected savings and allocations to be rolled forward to 1999 /00amounting to R2,1 this stage additional revenue of R384 million is anticipated,including a R350 million receipt to the Exchequer following theclosing of the Post Office taking into account the contingency reserve of R1,0 billion setaside in the 1998/99 B


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