‘We need a new national consensus
IHAVE the privilege to present our government’s budget for the fiscal year 2017/18, and the framework for the next three years. I am mindful, in the context of our own transformation challenges and the stresses in the global environment, of Oliver Tambo’s unwavering vision: “We seek to create a united, democratic and non-racial society. We have a vision of South Africa in which black and white shall live and work together as equals in conditions of peace and prosperity… (We seek to) remake our part of the world into a corner of the globe of which all of humanity can be proud.”
In the words of the Freedom Charter, “South Africa belongs to all who live in it”.
Wealth and economic opportunities must be equitably shared. This imposes obligations on the government – and has implications for the business sector and all stakeholders. We have a shared responsibility to address the social and economic challenges before us.
These South African realities are known to all of us.
Income growth has been uneven. The bottom 20 percent have benefited from social grants and better access to services, the top 20 percent have benefited from the rising demand for skills and pay increases. Those in the middle have been left behind.
Wealth is highly concentrated – 95 percent of wealth is in the hands of 10 percent of the population.
Thirty-five percent of the labour force is unemployed or has given up hope of finding work.
Despite our progress in education, more than half of all children in Grade 5 cannot read adequately in any language
More than half of all school-leavers each year enter the labour market without a senior certificate pass, and 75 percent of these will still be unemployed five years later.
Our towns and cities remain divided, and poverty is concentrated in townships and rural areas.
Our growth has been too slow – just 1 percent a year in real per capita terms over the past 25 years, well below that of Brazil, Turkey, Indonesia, India or China.
These are our realities. They mirror the stresses of poverty and vulnerability in many developing countries, and the inequality between rich and poor throughout the world.
President Jacob Zuma has rightly emphasised that the requirements for transformation and change in South Africa are wide ranging.
Our transformation will be built through economic participation, partnerships and mobilisation of all our capacities. It is a transformation that must unite, not divide, South Africans.
We find ourselves at a conjuncture that requires the wisdom of our elders to help us make the right choices and keep the trust of our citizens.
Today’s message is that we are once again at a crossroads. Tough choices have to be made to achieve the development outcomes we seek:
Economic growth is slow, unemployment is far too high, and many businesses and families are under stress.
We face an uncertain and complex global environment.
At the same time, we face immense transformation challenges – we must overcome the inequalities and divisions of our society. All South Africans must share in a more prosperous future.
We have a plan for a more inclusive, shared economy. Its implementation requires greater urgency and effective collaboration among all social stakeholders.
Change is difficult and often contested. In these tough times, we draw strength from the resilience and the diverse capabilities of our people, our business sector, our unions and our social formations.
The key features of the framework for the 2017 Budget include the following:
Expenditure is within the envelope projected in last year’s Budget.
An additional R28 billion will be raised in taxes.
The budget deficit for 2017/18 will be 3.1 percent of gross domestic product (GDP), in line with our fiscal consolidation commitment.
Government debt will stabilise at about 48 percent of GDP over the next three years.
Redistribution in support of education, health services and municipal functions in rural areas remains the central thrust of our spending programmes.
The government’s wage bill has stabilised. Procurement reforms continue to improve the effectiveness of public spending and open opportunities for small-business participation.
Our state-owned companies and finance institutions play a substantial role in infrastructure investment and financing development. Their borrowing requirements are taken into account in the overall fiscal framework.
As in past years, the Budget Review and the Estimates of National Expenditure provide extensive details of developments in the economy, our fiscal and budget plans and the programmes and activities of government departments and public entities.
But there is a larger purpose, a moral vision and intent behind these plans and programmes. We need to build a new national consensus and a new commitment to deliver, focused on the triple challenges of poverty, unemployment and inequality. President Zuma articulated this intent in the State of the Nation address, rightly emphasising the radical nature of the socio-economic transformation that we need.
Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage.
Global economic outlook After several years of tentative economic growth, there are signs that a more sustainable recovery might be under way.
Growth in the US and Europe is steady, although at low levels.
India and China remain comparatively buoyant, and economies such as Russia and Brazil are set to recover from recessions.
The International Monetary Fund projects that the world economy will grow by 3.4 percent this year and 3.6 percent in 2018.
Moderate recovery in GDP growth Our expectation at this stage is that GDP growth will increase from 0.5 percent last year to 1.3 percent in 2017, and will continue to improve moderately over the medium term.
The services sector was the main contributor to growth last year, bringing nearly 120 000 new work opportunities.
Mining continued to underperform, while manufacturing output was supported by buoyant sales in petrochemicals, food and beverages and motor vehicles. Mining and manufacturing employment declined by 80 000 jobs in 2016.
Weak business confidence and low levels of profitability weighed on investment across all sectors.
Although the policy interest rate has increased by 2 percentage points since 2014, inflation ended the year above the target, with food prices continuing to reflect the impact on agriculture of poor rainfall.
Lower growth in our trading partners in Africa and elsewhere has contributed to sluggish export earnings.
We expect somewhat higher growth in the coming year on the strength of a number of favourable trends:
The prices of commodities have rebounded.
The exchange rate has recovered from its rapid depreciation last year, which bodes well for capital flows, inflation and business and consumer confidence.
Drought conditions have abated in most of the country.
Production stoppages associated with industrial disputes have been comparatively low.
Electricity supply has improved, allowing for new connections and industrial demand to be better accommodated.
But the projected rate of growth is not sufficient to reduce unemployment or impact significantly on poverty and inequality. It falls well short of our National Development Programme goals. Madam Speaker, we know what to do to get ourselves out of the present low growth trap.
In order to boost investment in the short term, there are several specific imperatives:
Finalising legislation relating to mining development and land redistribution.
Implementing the transition from analogue to digital television, which will release the spectrum for broadband services.
Continuing our independent power-producer programme, both in renewables and to take advantage of gas investment opportunities.
Further strengthening of economic regulatory functions and streamlining investment-approval processes.
Production-friendly industrial relations and the prompt resolution of disputes.
An enabling environment for small enterprises and support by leveraging public- and private-sector procurement budgets.
Focused support on labour-intensive sectors, including agriculture, agro-processing and tourism-related services.
Strengthening regional ties and trade links. Safeguarding South Africa’s investment-grade credit rating.
The 2017 budget allocates funds over the medium-term expenditure framework period to support economic growth in various programmes:
R3.9bn for small, medium and micro enterprises and co-operatives. R4.2bn for industrial infrastructure in special economic zones and industrial parks.
R1.9bn for broadband implementation.
R3.9bn for the Council for Scientific and Industrial Research.
An additional R494 million for tourism promotion.
An additional R266m to support the aquaculture sector and realise the goals of the Oceans Economy Phakisa Operation.
Spending on agriculture, rural development and land reform amounting to nearly R30bn by 2019/20.
Effective implementation of these and other programmes and initiatives will set us on a higher growth trajectory than currently projected.
Progress in engagements between the government, the business sector and social stakeholders is imperative.
Transformation for faster growth To achieve sustained higher growth, there are also more fundamental, more radical, transformation measures that are needed.
The ownership of assets and the distribution of income is captured by a minority of the population – a situation that is morally wrong and economically unsustainable. We agree with President Zuma that a new perspective on economic transformation is required.
Fiscal policy and the Budget framework The 2017 Budget reflects a balance between maintaining our spending commitments, and ensuring the long-term health of the public finances.
Slow economic growth has held us back, and so decisive steps are needed to strengthen confidence, investment and growth. Acting too quickly to reduce the deficit would harm service delivery, delay economic recovery and compromise tax-revenue collection. But to ignore our fiscal targets would result in interest rate hikes, unsustainable commitments and credit rating downgrades.
This is a scenario in which shortterm gains would quickly give way to financial stress, capital flight and cutbacks in service delivery. To ensure a balanced and sustainable recovery, we indicated in the Mediumterm Budget Policy Statement that we would raise an additional R28bn in tax revenues. We also need to reduce spending by a total of R26bn over the next two years.
The proposed expenditure 2017/18 totals R1.56 trillion.
Interest on debt amounts R169bn.
Projected revenues amount to R1.41 trillion.
The balance of R149bn, or 3.1 percent of GDP, will be borrowed. Government debt now stands at R2.2 trillion, or 50.7 percent of GDP. Interest payments are a rising share of expenditure. By acting now to stabilise debt, we will ensure that for to future generations will not pay for today’s expenses, 20 or 30 years from now.
Over the medium term, expenditure on public services will continue to grow moderately above inflation. Though the fiscal envelope is constrained, billions of rands have been shifted to meet new needs. A substantial additional allocation to higher education is again proposed, adding R5bn to the R32bn previously announced.
After debt service and postschool education and training, the fastest-growing spending categories are health, social development, and community and economic infrastructure. We will continue to safeguard expenditure that protects poor households.
But the medium-term expenditure limits are tight. Across all three spheres of government, and in stateowned companies and public entities, those responsible for deciding how money is spent have to do so with scrupulous rigour and care. It is only right that if households and firms face tough choices in balancing their income and expenses, the same disciplines must be applied in public expenditure.
Citizens demand accountability to ensure that public funds are used for their intended purposes. In Mahatma Gandhi’s phrase: “Democracy is not a state in which people act like sheep.”
Tax proposals For many years, we have enjoyed the benefit of tax revenue collections outstripping economic growth. This contributed to our capacity to expand public service delivery. This year, revenue has lagged behind the economy, leading to a R30bn shortfall in comparison with the Budget estimate a year ago.
The revenue shortfall is mainly in personal income tax, value-added tax and customs duties. This reflects slower growth in wages, employment and bonus pay-outs last year, among other factors.
Our current expectation is that total tax revenue for 2016/17 will be R1.144 trillion, which is an increase of 7 percent on the previous year. The tax proposals this year will raise an additional R28bn, by comparison with revenue estimates based on full adjustment of personal income tax and excise duties for inflation. The main tax proposals are:
A new top personal income tax rate of 45 percent for those with taxable incomes above R1.5m.
An increase in the dividend withholding tax rate from 15 percent to 20 percent.
Limited bracket creep relief, increasing the tax-free threshold from R75 000 to R75 750.
An increase of 30 cents a litre in the general fuel levy and 9c a litre in the Road Accident Fund levy.
Increases in the excise duties for alcohol and tobacco between 6 percent and 10 percent.
Relief will be provided in the affordable housing market through an increase in the threshold above which transfer duty is paid, from R750 000 to R900 000.
The annual allowance for taxfree savings accounts will be increased to R33 000.
The medical tax credit will be increased in line with inflation this year. It should be noted that consideration is being given to possible reductions in this subsidy in future, as part of the financing framework for National Health Insurance.
Further consultations are taking place on the tax on sugary beverages. Arising from these discussions, and working closely with the Department of Health, the proposed design has been revised to include both intrinsic and added sugars. The tax will be implemented later this year once details are finalised and the legislation is passed.
The proposed carbon tax and its date of implementation will be considered in Parliament this year.
Combating tax avoidance Multinational corporations continue to use inconsistencies in global tax rules to their advantage and to avoid tax liabilities. South Africa intends to sign a multilateral instrument this year that will assist in the updating of treaties and reduce the scope for aggressive tax-avoidance activities. Applications to the Special Voluntary Disclosure Programme have begun.
The South African Revenue Service (Sars) has already received disclosures of R3.8bn in foreign assets, which will yield revenue of about R600m. The programme will be open until the end of August this year.
The automatic exchange of information between tax authorities will come into operation in September this year.
Multinational companies will be required to file further information with Sars on cross-border activities from the end of the year. We will continue to work actively with the international tax community and within government to modernise customs administration and combat cross-border revenue leakages, money laundering and harmful tax practices. An efficient and trusted tax administration is one of South Africa’s institutional strengths.
Sars has played an integral role in building the democratic state by ensuring that expected levels of revenue are available to fund spending programmes. Sars must continue to develop the skills and capacity needed to enforce legislation and strengthen its efforts to curb tax avoidance and evasion, and address transfer pricing – a component of illicit financial flows.
I requested the Davis Tax Committee last year to advise on an appropriate governance and accountability model for Sars.
In the context of the envisaged Border Management Agency, customs and excise administration has come under review. These are integral functions of our revenue system and the Davis Committee has advised that it would be imprudent to fragment customs administration and customs collection.
I agree with this, particularly in the light of Sars’s ongoing customs modernisation programme that is critical to both our revenue and trade policy imperatives.
Continued strengthening of the capacity of Sars and enhancing its relationships with taxpayers is vital for our fiscal health.
Division of revenue The funds available after providing for debt-service costs and a contingency reserve increase by 6.9 percent to R1.24 trillion next year, and are projected to rise to R1.43 trillion in 2019/20. Over the next three years:
47.5 percent of available funds are allocated to national government; 43.4 percent to provinces; and 9.1 percent to local government. The division of revenue involves a substantial redistribution of resources from the wealthiest areas in our country – where most of our taxes are raised – to lower-income communities and households. The allocations to predominantly rural municipalities are twice as large, per household, than those to metropolitan councils.
This redistribution of resources is an enabling foundation for a broader transformation of services and opportunities in our cities, towns and rural areas. Development also requires effective management of public services and promotion of enterprises and income-generating activities.
Provincial finances In the context of our constrained fiscal environment, provinces have already made progress in reducing spending on non-core goods and services and in controlling personnel costs.
Spending on non-essential goods and services fell in real terms by 7.1 percent in 2014/15, 6.1 percent in 2015/16 and is expected to decline by 4.5 percent annually over the medium term.
The proportion of provincial spending on personnel has declined to just under 60 percent in 2016/17, freeing up more resources.
Provinces have also put their public entities under review, to eliminate duplication of activities and ensure effective governance and clear development mandates.
Three new conditional grants will take effect in 2017/18. They will expand access to early childhood development and improve facilities, provide for increased employment of social workers and improve opportunities for learners with profound disabilities.
The auditor-general has called for stronger leadership within provinces to remedy financial management challenges.
Better cash management is needed to ensure suppliers are paid on time. Improved oversight is needed to curb unauthorised expenditure. There must be adherence to procurement rules to limit irregular expenditure. and urban enterprise and industrial development.
South Africa’s integration with its regional neighbours offers significant opportunities for enterprise growth, agricultural development and new industrialists.
Reform of domestic market structures, promotion of competition, deconcentration of monopolised industries and greater private-sector participation in sectors dominated by public enterprises. In regard to market concentration, I need to commend the work of our competition authorities under Minister Ebrahim Patel’s leadership.
In the year ahead, the Department of Economic Development will finalise the establishment of the Tirisano Fund, to be financed from the construction sector settlement. It will boost much needed skills among black South Africans and support emerging enterprises.
An initial amount of R117m is earmarked for the Adjustments Appropriation this year. If we transform competitive markets effectively, we will see more rapid growth. If we achieve faster growth, we will see greater transformation, enterprise development and participation.
Infrastructure The reform of state-owned companies is an especially important part of the restructuring and strengthening of our economy.
State-owned companies (SOCs) are governed by a strong legal framework, and the cabinet has endorsed a series of measures to reinforce governance and accountability and clarify their development mandates. This imposes substantial obligations and responsibilities on boards and senior managers.
We expect the highest standards of ethical leadership and understanding. With a combined asset base of R1.2 trillion, the SOCs are well placed to partner with private-sector investors in growing the productive capacity and infrastructure of our economy.
But they must be financially strong, governance must be sound, and boards and executives must have the necessary competencies to run complex business enterprises.
Eskom and Transnet have especially large responsibilities as dominant suppliers in major network industries. Their investment programmes are important foundations for more rapid economic growth.
The South African Post Office is consolidating its mail services and expanding the role of the Postbank.
Prasa is in the third year of its rolling-stock fleet-renewal programme.
The Industrial Development Corporation, the Land Bank and the Development Bank of Southern Africa are financially sound and are steadily expanding their financing of industry, agriculture and municipal infrastructure.
Last week, I met members of the board of SAA to discuss its turnaround plans. I am pleased to report that the challenges are well understood, and the advisory work that is in progress has clarified the way forward.
We have also held constructive discussions with the new leadership of the Post Office.
During the next few months, proposals for putting the capital structure of SAA and the Post Office on a sound footing will need to be agreed. I hope that this can be dealt with in the Adjustments Budget later this year.