2018 Budget Speech: Restoring South Africa’s public finances on a sustainable path
In the current economic climate, spending priorities and the sequencing of programme implementation are subject to a number of trade-offs. The focus of the 2018 Budget has solely been on the reprioritisation of existing baseline funding.
For some time, the South African government has been spending more than it can afford, leading to rising debt. The economy has also been growing at a slow pace as a result of low business confidence and falling private investment. At the time of the October Medium Term Budget Policy Statement government presented an unsustainable debt outlook. The 2018 Budget presents proposals to rebuild confidence and put the public finances on a more sustainable path.
South Africa has an opportunity to build on the positive developments that have emerged in recent months. The economy has performed slightly faster than expected, with economic growth now projected to be 1 percent cent in 2017, 1.5 per cent in 2018 and 2.1 per cent by 2020. This pace of economic growth is welcome, but is still too slow to address unemployment and poverty. This will make it difficult for government to achieve its targets for public finances.
The central budget proposals involve boosting the public finances by raising taxes, reducing spending and reprioritising. Government will raise taxes by R36 billion through a one percentage point increase in the VAT rate to 15 per cent, and adjustments to other taxes. Raising VAT is estimated to have the least harmful effects on growth over the period ahead. Spending will also be reduced in other areas and reallocations will be made to other priorities mostly free higher education and training over the next three years.
Despite these changes, national government will still need to borrow R191 billion in 2018/19. However, the national debt outlook is now on a sustainable path. A sustainable budget is the first step in getting the economy back on track and growing more quickly.
Government will work to deliver on important policy reforms as well as working on improving the governance and performance of state-owned-companies (SOCs) which is also key in supporting the growth of the economy.
Although the economic situation has improved, the risks are still significant. The possibility of government collecting less revenue than it budgeted for, low economic growth and severe financial weakening at several major SOCs, still remain a factor.
Boosting confidence, the economy and creating jobs
Private investment in South Africa has been declining since 2015 as a result of low levels of business and consumer confidence. The 2018 Budget is being introduced during a period that provides an opportunity to restore confidence and boost economic growth.
Government is expected to finalise outstanding policy reforms, act decisively against corruption in the public and private sectors, and move swiftly to resolve governance and operational failures at SOCs.
To spur growth and boost employment, government is working collaboratively with different stakeholders on a number of initiatives.
Delivering policy certainty is vital to restore trust and create a supportive environment for investment growth. Government is addressing barriers to investment in the telecommunications, mining and energy, and transport sectors.
Improving spending efficiency on infrastructure projects
The National Development Plan identifies that in order to overcome unemployment, poverty and inequality, there needs to be significant infrastructure investment.
The Budget Facility for Infrastructure (BFI) is a reform introduced by government aimed at improving the efficiency of spending on infrastructure projects across the public-sector. The first phase of the BFI has begun to address weaknesses in project preparation and the next phase will continue to support quality public investments through better planning, financing, procurement and implementation of infrastructure projects.
The 2018 Budget makes provision for funds that will be used to provide assistance for projects that require further work before they can be considered for funding.
2018 Budget Speech
Delivered by Malusi Gigaba, Minister of Finance, on 21 February 2018
As I begin, let me first table before this august House:
- The Budget Speech,
- The 2018 Budget Review, including
- Fiscal Framework,
- Revenue Proposals, including customs and excise duties,
- Estimates of national revenue and replies to the Budgetary Review and Recommendation Reports,
- The Division of Revenue Bill,
- The Appropriation Bill, and
- The Estimates of National Expenditure
At the very advent of our democracy, as the nation was emerging from more than three centuries of colonial oppression, which President Nelson Mandela described as an “extraordinary human disaster that [had] lasted too long”, he urged that out of that experience had to be born a society of which all humanity would be proud.
To our highly expectant nation, he addressed the following words, that:
“Our daily deeds as ordinary South Africans must produce an actual South African reality that will reinforce humanity’s belief in justice, strengthen its confidence in the nobility of the human soul and sustain all our hopes for a glorious life for all.”
Almost twenty-four years later, President Ramaphosa captured the moment and mood aptly, in delivering his inspirational inaugural State of the Nation Address, when he said that a new dawn was upon us and urged us to renew our nation’s promise.
Declaring this a year of change, renewal and hope, he urged us to honour both Madiba and Mama Albertina Sisulu “not only in word, but, more importantly, in direct action towards the achievement of their shared vision of a better society.”
This was a profound statement, echoing the hopeful and unifying sentiments of the founders of our democracy and the living dreams of the peoples of our country.
The President proceeded to outline an abiding vision for our country that has resonated with all our people, fired all of us with hope and enthusiasm, and ignited a sense of renewal.
Towards the realization of this vision, the Budget we present today is an opportunity to reflect on the state of our nation’s finances, and the economy more broadly, but most importantly, to understand how these support our social and economic objectives.
This is the challenge of our time, to build a South Africa in which all people have a decent standard of living, access to economic opportunities and opportunity to pursue their dreams.
It is these core aspirations which the Budget must speak to, enable and indeed, advance. We stand before you with a profound sense of optimism, purpose and resolve.
All of us should heed the President’s call echoing the late, great Hugh Masekela, to lend a hand in addressing society’s most pressing challenges.
Fellow South Africans, we have the opportunity to achieve faster and more inclusive growth, to create jobs for our people and a better life for all South Africans.
That opportunity comes from a favourable global economic outlook, with many of our trading partners doing well, and from improved prices for our exports.
That opportunity comes from a fiscal framework which has improved markedly since the October medium-term budget policy statement.
That opportunity comes from a stronger rand and favourable inflation outlook.
That opportunity comes from the strong partnership which has been forged between all the social partners to prevent further ratings downgrades, and remove obstacles to investment, growth and job creation.
That opportunity comes from improving confidence, as business and consumers have responded positively to political developments over the last three months, and are anticipating progressive, ethical and decisive leadership from government.
To take advantage of these opportunities, we must act with urgency to make tangible progress on issues of public governance, inclusive growth and economic transformation.
Our resolve to ensure the sustainability of the nation’s finances will become evident today, as we table a budget which carefully balances a variety of important priorities, including social investment and protection, economic investment, and the need to stabilize the growth in public debt.
After several years during which economic growth undershot our projections, we now see the improved growth projections for 2018 and subsequent years as a floor, rather than a ceiling.
We are convinced that as business and consumer confidence return, and as government follows through on its commitments to enable growth with prudent, fast and decisive action, we can exceed our growth projections.
With purpose and resolve, we can take advantage of these opportunities, and achieve the faster growth which is needed dramatically to reduce unemployment, poverty and inequality, and relieve pressure on our fiscal framework.
This is a tough, but hopeful budget.
It required us to make difficult but necessary trade-offs, important to ensure that this budget is a platform for renewal, inclusive growth and job creation.
It directs spending to our most pressing national priorities: educating our youth, protecting the vulnerable and investing in enablers of inclusive growth.
It moderates spending and raises the revenues required to contain the growth in national debt, whilst trying to minimize negative effects on growth.
It presents a budget outlook which is markedly improved since the Medium-Term Budget Policy Statement in October; it now projects debt stabilizing as a share of GDP over the medium term.
Budget 2018 charts a path out of economic stagnation, anticipating a steady increase in economic growth which will create a path to prosperity for our people, and improve our nation’s finances over time.
There are risks and spending pressures we will need to navigate carefully, but this Budget presents a roadmap to maintaining the integrity of our public finances, while protecting social services.
We remain committed to the goals we set ourselves in the Freedom Charter, the Constitution and the National Development Plan (NDP).
These goals are ultimately aimed at addressing the triple challenges of poverty, inequality and unemployment. To achieve these goals, we have to implement radical socio-economic transformation.
It would be remiss of me not to acknowledge that last year was particularly difficult for our economy.
The year was characterised by slow economic growth, recession, ratings downgrades, and heightened concerns regarding the governance and sustainability of key state-owned companies.
Despite this, the country’s economic growth outlook has improved over the past few months because of strong growth in the primary sector of the economy – particularly agriculture – as well as a welcome recovery in investor sentiment and business confidence.
Over the medium term, the growth outlook is higher than projected in last year’s MTBPS.
The cyclical recovery is matched by a renewed sense of optimism that the government can and will do its work effectively.
This presents an opportunity for us to do the things required to reignite growth and chart a course towards meeting the objectives of the NDP and fulfilling our constitutional obligations.
Our responsibilities in translating this renewed energy into tangible and sustainable economic benefits for all our people include:
Creating the right environment for investment,
Partnering with the social partners to create sustainable employment,
Dealing decisively with governance and financial failures at state owned companies; and
Addressing the concentrated and inequitable structure of the economy.
Achieving these objectives will require us to forge a new compact between the social partners. We need to provide investors with the certainty required to increase investment.
Raising the level of investment and improving the ease of doing business in the country will support job creation.
Private sector investment and job creation are critical to reducing unemployment which remains stubbornly high at 26.7 per cent.
Investment opportunities are occasioned by the following global developments in our main trading partners:
Stronger domestic demand in the US and the euro area has supported an improved growth outlook.
The recovery in commodity prices has also supported developing countries growth prospects.
Sub-Saharan Africa is expected to grow at 3.3 per cent in 2018
Seizing the opportunity for inclusive growth and economic transformation
By harnessing these opportunities, we can move our economy towards the targets we have set ourselves in the NDP.
South Africa needs to be bold and coordinated in building sectors where we have comparative advantage and can be truly world class.
These include, but are not limited to: mining, agriculture, tourism, as well as manufacturing and service exports to the rest of Africa and globally.
The 2017 GDP growth projection has been revised upward to 1 per cent, which is higher than the 0.7 per cent expected at the time of MTBPS last year.
We are anticipating growth of 1.5 per cent in 2018, rising to 2.1 per cent in 2020.
While this is a good start, there are immediate policy interventions that we need to make to ensure that we create the right environment for investment, growth and employment.
The first is to finalize the 14 confidence-boosting measures that we committed to in July last year.
I am pleased to announce that good progress has been made in this regard, as detailed in Chapter 1 of the Budget Review.
The gains from progress made by government action are important but insufficient to achieve transformation and inclusive growth.
Together, government, labour, the private sector and civil society have the ability and responsibility to grow the economy inclusively.
The enormous potential of our partnership has been demonstrated by the CEO initiative, which has established a business-led fund committing about R1.4 billion to support high potential SMMEs.
Work is being done to provide crucial funding to innovative small businesses when they need it most.
A fund with an allocation of R2.1 billion over the medium term is being developed between the Departments of Small Businesses, Science and Technology and the National Treasury to benefit small and medium enterprises during the early start-up phase – this is an area that has historically had limited support because of the risks involved.
By enabling new businesses with new ideas to emerge and thrive, we are radically transforming patterns of production in the economy.
Another important constraint for small business is lack of market access and barriers to entry. To resolve this, our competition authorities continue to do the necessary and important work of addressing barriers to entry and rooting out anti-competitive behaviour which slows economic growth and dynamism.
As the President indicated, the Competition Commission’s market inquiry to investigate data prices will be completed by the end of August 2018. This will support the work being done by the government to improve competition in the telecommunications sector.
By deconcentrating our economy, we are radically transforming the structure of our economy.
Furthermore, there is continued collaboration with our social partners at NEDLAC to improve the country’s investment ratings and accelerate economic growth.
While this represents much needed progress, it is inadequate to get the economy growing at the rate we need.
More needs to be done.
We are inspired by the President’s commitment in the SONA to convene investment and jobs summits, to bring all stakeholders together around practical initiatives to catalyse inclusive growth and job creation.
Transformation calls for more than growth alone, it requires a fundamental shift in the way that wealth is created and shared.
The structure of the economy needs to be transformed to allow for new ideas, businesses and economic activities to emerge and thrive.
South Africa cannot be so fixated on our domestic circumstances that we ignore fundamental global economic trends, dynamics and debates that will shape the future.
We must continue to chart a path for ourselves that is responsive to global change but equally tailored to addressing the specific needs of our society that will result in truly better lives for all.
The tax proposals for the 2018 Budget are designed to generate an additional R36 billion in tax revenue for 2018/19.
The main tax proposals for the 2018 Budget are:
An increase in the value-added tax rate from 14 per cent to 15 per cent,
A below inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets,
An increase in the ad-valorem excise duty rate on luxury goods from 7 per cent to 9 per cent,
A higher estate duty tax rate of 25 per cent for estates greater than R30 million,
A 52 cents per litre increase in the levies on fuel, made up of a 22 cents per litre for the general fuel levy and a 30 cents per litre increase in the Road Accident Fund Levy, and
Increases in the alcohol and tobacco excise duties of between 6 and 10 per cent.
In developing these tax proposals, government reviewed the potential contributions from the three major tax instruments which raise over 80 per cent of our revenue; personal and corporate income tax and VAT.
The National Treasury, in close cooperation with the Reserve Bank, the Financial Intelligence Centre and the South African Revenue Service, is taking several steps to detect, disrupt and deter illicit financial flows.
These measures include increasing capacity, coordinating a national risk assessment and improving information sharing between various agencies.
In line with G20 recommendations, policy measures to deal with transfer pricing and base erosion by multinational companies are been implemented and continue to be tightened.
Having a sustainable tax base is important to ensure that government has enough revenue to meet its spending needs.
Companies can structure affairs to reduce their tax base in South Africa and shift their profits to low-tax countries. This threatens the sustainability of our tax base and is a challenge that most governments are struggling with.
The implementation of country-by-country reporting will enable SARS to ensure that companies pay their fair share of tax in SA.
We are also investigating options to further curb the practice of excessive interest deductions by companies in order to reduce their tax liability.
The realisation of taxes from the off-shore wealth of taxpayers, as highlighted in the Panama and more recently the Paradise Papers, was evidenced in the over 2000 applications for disclosure by South African taxpayers under last year’s Special Voluntary Disclosure Programme.
It is anticipated that by the end of March 2018 over R3 billion will have been collected in respect of the SVDP that have been processed, with work on remaining applications continuing into the new fiscal year.
Measures to approve material cross-border transactions involving state-owned entities will be put in place.
The digital economy brings about many technological advances that have led to changes in business models. Today, we update draft VAT regulations to cover foreign businesses selling electronic services to South African consumers.
Working closely with the Department of Trade and Industry, I have approved six special economic zones that will make qualifying companies subject to a reduced corporate tax rate, and enable them to claim an employment tax incentive for workers of all ages.
These measures will promote investment in those manufacturing and tradable services sectors that encourage exports, job creation and economic growth.
Working with the Minister of Science and Technology, Government has streamlined the administration of the research and development tax incentive.
Aside from raising revenue, the tax system is increasingly required to play a role in protecting the natural environment and promoting sustainable use of limited resources.
Parliament is currently considering the draft Carbon Tax Bill, which will assist South Africa to meet its climate change commitments to reduce our carbon emissions.
The tax will be implemented from 1 January 2019.
As with greenhouse emissions, the polluter-must-pay-principle must also apply to other activities which harm the environment, like the dumping of plastics into our oceans and threatening of marine life.
Working with the Department of Environmental Affairs, we will shortly publish a policy brief to broaden the scope of environmental fiscal reform, to explore fiscal and regulatory measures to improve water resource management, mitigate the emission of pollutants and encourage recycling to reduce waste, such as plastic, which is polluting our oceans.
Tax morality is a crucial component of a healthy democracy. It has taken many years and lots of effort to build the foundation of trust that supports our tax morality. We have seen how quickly that citizens’ trust can be eroded by perceptions of poor public governance.
At the SONA, the President has announced his intention to establish a commission of inquiry into tax administration and governance at SARS.
This year, government will respond to the Davis Tax Commission’s report on tax administration and introduce draft legislation to give effect to some of its recommendations, including those on the accountability of SARS to the Minister of Finance, and the establishment of a supervisory board, as well as measures to strengthen the Office of the Ombud.
Government will also take steps to implement the customs modernisation programme currently implemented by SARS, to give effect to the new customs and excise legislation passed in 2014.
Medium term expenditure and the division of revenue
Consolidated spending will increase from R1.67 trillion in 2018/19 to R1.94 trillion, representing a nominal annual average growth of 7.6 per cent, or 2.1 per cent in real terms.
In aggregate, government will be spending R792 billion on basic education, R668 billion on health and R528 billion on social grants, over the medium term.
This coming fiscal year alone, government has allocated over R200 billion for peace and security and another R200 billion for economic development to build a safer country and to grow our economy inclusively.
The largest reallocation of resources towards government’s priorities was on higher education and training, amounting to additional funding of R57 billion over the medium term.
Government continues to support South African companies to grow and to become more competitive through incentives in the form of grants, loans and tax allowances.
R18.8 billion is allocated for industrialisation incentives over the medium term of which an additional allocation of R3.3 billion is allocated for the Economic Competitiveness and Support Package to support growth and job creation in support of the Industrial Policy Action Plan.
Government is spending a significant amount on small business support in the medium term.
Of the incentives budget, R4.9 billion is allocated for industrial infrastructure projects over the medium term for special economic zones, government-owned industrial and critical infrastructure projects to promote industrial development and increase investment and exports of value-added commodities.
To strengthen global market access for South African agricultural products, the Department of Agriculture, Forestry and Fisheries received an additional allocation of R40 million over the MTEF to upgrade infrastructure and equipment for analytical services laboratories.
This will provide assurance to global trading partners that South African agricultural products meet internationally recognized standards for human safety, thereby facilitating our ability to export unhindered.
In line with the outcomes of Operation Phakisa on Agriculture, Rural Development and Land reform, the Department of Agriculture, Forestry and Fisheries aims to create and support 450 sustainable and profitable black commercial producers participating in prioritised value chains over a five-year period.
An estimated R581.7 million is expected to be reprioritised for the black producer commercialisation programme. By creating opportunities for black agricultural producers, we are radically transforming the agricultural sector of our economy.
The Judicial Commission of Inquiry into State Capture is ready to commence with its work. Budget allocation for the Commission will be considered during the 2018 Adjustment Budget once its costing is finalised.
Financial sector regulation
Financial sector transformation
Transformation of the financial services sector is critical, as the allocation of capital greatly influences patterns of ownership and production in the economy.
In financial services, government has gazetted the Financial Sector Codes and a R100 billion Black Business Growth Fund has been created through the code.
The fund will assist black entrepreneurs to finance big deals – an intervention that is crucial to transforming capital allocation in the economy.
The Financial Sector Summit will also take place in April 2018.
All of these efforts serve to extend access to South Africans who were excluded from the financial system.
Strengthening the regulatory system
South Africa has a strong financial regulatory system and deep and liquid capital markets. These are critical ratings strengths.
The two new Twin Peaks authorities will be established on or soon after 1 April 2018, and their powers will be phased in to ensure a smooth transition to the new and tougher regulatory system.
Further steps will be taken to strengthen the system, including introducing deposit insurance and introducing a new way of resolving banks that are in financial distress. Draft legislation will be published shortly.
Work will continue on reforming the legislation for financial markets and the payment system, to ensure that our infrastructure remains globally competitive.
The Treasury is working with the Reserve Bank, Financial Services Board and other government entities towards a regulatory framework for all types of FinTech.
For instance, the emergence of cryptocurrencies is a major development to which our regulatory regime must respond.
Given the difficult circumstances we have been in and the choices we had to make in order to steer the course, maintain the trajectory of our policy objectives and sustain our public finances, we have made the tough calls and decisions that affirm our nationhood.
Let this be the year of renewal, revitalization and a step change in progress in fostering inclusive economic growth which rolls back unemployment, poverty and inequality.
The opportunity is before us. To take advantage we need to be able to see beyond our individual interests to the national interest, as Madiba so often did, and to find common ground.
Let us work together to create a better life for every citizen and inhabitant of our beloved country.
Let each of us lend a hand.
Estimates of National Expenditure 2018
Government sets out its spending plans in a three-year medium-term expenditure framework (MTEF), which is updated annually. This year’s Estimates of National Expenditure (ENE) publications set out spending plans for 2018/19 to 2020/21. They provide explanatory information on government’s expenditure presented in the annual appropriation legislation, through which government seeks authority from Parliament for its spending. The publications include information on how government institutions have spent their budgets in previous years. They explain how these institutions intend to use their allocations over the medium term to achieve their goals, and the outputs and outcomes their spending is expected to lead to.
The publications include tables depicting non-financial performance indicators and targets, departmental receipts, and detailed expenditure trends and estimates by programme, subprogramme and economic classification for each department and for selected entities. Brief explanatory narratives set out the institution’s purpose (and that of its programmes), mandate, programme-level objectives and descriptions of subprogrammes. A more in-depth narrative analyses the institution’s expected expenditure over the MTEF period. A summary table is included at the end of the chapter for votes in which there is significant spending on infrastructure.
In addition, for each vote, a more detailed e-publication is available online. The e-publications contain programme personnel data tables and detailed information for all entities, as well as additional summary data tables on provincial and municipal conditional grants, public-private partnerships, donor funding, and expenditure at the level of site service delivery, where applicable.