Economic and Fiscal Review and

Outlook

22 July 2014

Brandon Ellse

Outline Purpose Economic performance Impact of slower growth Consolidated fiscal framework Non-interest expenditure Interest expenditure SA’s credit rating Priority programmes Priority spending sectors Implications

PurposeTo provide members:

with an assessment of the current economic situation underlying the fiscal framework

the impact on the estimated growth in revenue, expenditure, the budget deficit and government borrowing

with a review on outcomes of expenditure to consider for possible reprioritisation, strengthening or efficiency gains within sectors

To assist members with making recommendations for possible adjustments to the current appropriations

Economic Performance

Impact of slower growth

Consolidated fiscal framework 2010/11 – 2016/17

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

R billion/percentage of GDP Outcome Estimate

Revenue 762.9 842.3 909.3 1 010.5 1 099.3 1 201.3 1 324.7 9.4%

% of GDP 27.8% 28.3% 28.4% 29.2% 29.0% 28.9% 29.1%

Non-interest expenditure 804.7 871.4 951.7 1 041.6 1 131.1 1 218.1 1 306.5 7.8%

% of GDP 29.6% 29.4% 29.9% 30.3% 30.0% 29.5% 28.8%

Interest payments 75.3 81.7 93.5 107.7 121.2 133.5 145.1 10.5%

% of GDP 2.7% 2.7% 2.9% 3.1% 3.2% 3.2% 3.2%

Expenditure 880.0 953.1 1 045.2 1 149.3 1 252.3 1 351.6 1 451.7 8.1%

% of GDP 32.0% 32.0% 32.7% 33.2% 33.1% 32.6% 31.9%

Budget balance -117.1 -110.8 -135.9 -138.8 -153.1 -150.3 -126.9 -2.9%

% of GDP -4.3% -3.7% -4.3% -4.0% -4.0% -3.6% -2.8%

GDP at current prices (R billion) 3 197.9 3 464.9 3 789.6 4 150.5 4 552.9 9.5%

Medium-term estimates

Average annual growth

over MTEF

Compensation expenditure

Interest expenditure The level of interest payments is determined by

total outstanding government debt and the cost of debt

The estimates of interest expenditure are susceptible to two distinct risks:

total government debt could grow beyond the estimated level

the downgrade of SA’s sovereign debt by credit rating agencies translate into higher interest costs on foreign borrowing and government’s ability to borrow

SA’s credit rating In June 2014, Fitch and S&P downgraded South Africa’s

sovereign credit rating South Africa’s credit rating could be subjected to a further

downgrade if the economic outlook deteriorates A further downgrade would raise foreign debt service costs Government would have limited space to raise more debt to

fund future budget deficits This would necessitate expenditure cuts on programmes

which would slow down the implementation of the National Development Plan

Priority programmesTo ensure performance on the outcomes of the NDP the national budget is allocated towards programmes clustered together within functional groups

1. Quality basic education

2. A long and healthy life for all South Africans

3. All people in South Africa are and feel safe

4. Decent employment through inclusive growth

5. Skilled and capable workforce to support an inclusive growth path

6. An efficient, competitive and responsive economic infrastructure network

7. Comprehensive rural development

8. Sustainable human settlements and improved quality of household life

9. Responsive, accountable, effective and efficient developmental local government system

10. Protect and enhance our environmental assets and natural resources

11. Creating a better South Africa and contributing to a better and safer Africa in a better world

12. An efficient, effective and development oriented public service

13. An inclusive and responsive social protection system

14. Transforming society and uniting the country

Priority spending sectors

Implications Slower growth

Lower than expected revenue higher budget deficit higher cost to borrow

Less funds for spending on programmes outcomes of NDP compromised

How do we respond? address root causes of the constraints to economic growth reprioritise realise efficiency gains monitor

Thank you

Provincial equitable share formula The formula is largely population driven Six factors capture the relative demand for services

between provinces education (48%) health (27%) basic share (16%) poverty (3%) economic activity (1%) institutional (5%)

The PES formula is reviewed and updated with new data annually

Provincial allocations

2014/15 % share 2015/16 % share 2016/17 % share

R million

Eastern Cape 52 154 14.39% 55 389 14.28% 57 876 14.05%

Free State 20 883 5.76% 22 223 5.73% 23 158 5.62%

Gauteng 68 673 18.95% 74 214 19.13% 80 244 19.47%

Kw aZulu-Natal 78 138 21.56% 83 348 21.48% 87 887 21.33%

Limpopo 43 274 11.94% 46 109 11.88% 48 622 11.80%

Mpumalanga 29 355 8.10% 31 449 8.11% 33 728 8.19%

Northern Cape 9 652 2.66% 10 277 2.65% 10 941 2.66%

North West 24 707 6.82% 26 528 6.84% 28 386 6.89%

Western Cape 35 631 9.83% 38 431 9.91% 41 196 10.00%

Total 362 468 100% 387 967 100% 412 039 100%

Provincial allocations (cont.)

percentage change in share

Provincial allocations (cont.)