In brief, we propose the following:
- Against the background of slow growth, rising debt and higher interest rates, the pace of fiscal consolidation will be accelerated. The budget deficit will be reduced to 2.4 per cent by 2018/19.
- The expenditure ceiling is cut over the next three years by R25 billion, mainly by curtailing personnel spending.
- Tax increases amounting to R18 billion in 2016/17 are proposed, and a further R15 billion a year in 2017/18 and 2018/19.
- An additional R16 billion is allocated to higher education over the next three years, funded through reprioritisation of expenditure plans.
- Taking into account projected increases in the cost of living, R11.5 billion is added to social grant allocations over the next three years.
- Funds have been reprioritised to respond to the impact of the drought on the farming sector and water-stressed communities.
In support of growth and development, Honourable Speaker, our initiatives are also aimed at enabling and mobilising private sector and civil society capacity.
- Building on the success of our Renewable Energy initiatives, the Independent Power Producers Programme will be extended to include coal and gas power projects over the period ahead.
- Measures to strengthen tourism, agriculture and agro-processing are in progress.
- Collaboration with regional partner countries is being stepped up to improve border management, streamline trade flows and invest in transport and communications corridors.
- Investment in our cities is being accelerated, creating opportunities for participation of developers and other partners in housing, infrastructure and commercial development.
- Regulatory challenges that affect mining investment and employment are being addressed.
- A pathbreaking study of the cost of doing business has been completed, and municipalities are working on identified reforms.
- Progress has been made towards a minimum wage framework, and to reduce workplace conflict.
- The National Health Insurance White Paper has been published, and proposals for comprehensive social security will be released by mid-year.
Global outlook
Honourable Members, South Africa’s economic prospects are intertwined with global economic developments. A period of unprecedented monetary stimulus in response to the 2008 recession is not yet over, and global volatility and structural imbalances are far from resolved.
The pace of economic growth has slowed in many countries. The price of oil has fallen by 50 per cent since December 2014.
Our major exports – platinum, gold, iron ore and coal – have seen substantial declines in global demand and in prices. The effects on our economy are widespread:
- lower export earnings,
- lower revenue,
- declining investment,
- job losses, and in some cases business failures.
For the world as a whole, growth declined from 3.4 per cent in 2014 to an estimated 3.1 per cent last year. In sub-Saharan Africa, the decline was from 5 per cent to 3½ per cent. A moderate recovery is expected over the next two years.
It is notable that faster growth is being achieved in countries which have undertaken bold structural reforms, such as India’s scaling back of subsidies for industry and opening up of trade opportunities, and the promotion of skilled immigration, urban investment and labour-intensive manufacturing and agro-processing in South-east Asian and several African economies. These efforts have helped boost investor sentiment and reduce economic vulnerabilities.
South African economic outlook
Fellow South Africans, growth rates of below 1 per cent fall short of what we need to create employment and reduce poverty and inequality. The Treasury currently expects growth in the South African economy to be just 0.9 per cent this year, after per cent in 2015. This reflects both depressed global conditions and the impact of the drought.
It also reflects policy uncertainty, the effect of protracted labour disputes on business confidence, electricity supply constraints and regulatory barriers to investment.
However, the institutional foundations of our economy remain resilient:
- Macroeconomic policy is effective,
- The inflation targeting framework provides an anchor for price and wage setting,
- Our banks and financial institutions are well-capitalised, and we have liquid rand-denominated debt markets,
- The architecture of our Constitution, justice system, public and private law and dispute resolution mechanisms is robust,
- We have excellent universities and research centres,
- We have a strong private sector,
- We are a resourceful people, committed to contributing to a better South Africa.
- Overall export growth by volume was over 9 per cent last year, and will continue to benefit from the competitiveness of the rand. South African exports to the rest of Africa now exceed R300 billion a year, up from about R230 billion just three years ago.
- Retail trade data for the last quarter of 2015 indicate growth of over 4 per cent in real terms, signalling that consumer spending remains buoyant despite declining confidence.
- Investments amounting to over R20 billion have recently been announced in the automotive sector.
Yet our economy is not growing fast enough to raise employment or improve average incomes, Honourable Speaker. Investment growth must be substantially scaled up.
Growth and development
As Minister Nene put it in his October Medium Term Budget Policy Statement address: “If we do not achieve growth, revenue will not increase. If revenue does not increase, expenditure cannot be expanded.”
Today’s Budget sets out government’s plans for the next three years, building on what we have achieved since 1994. It also signals the actions underway to improve policy coordination and collaboration between social partners and stakeholders.
- Visa regulations have been revised following consultation between Ministers Gigaba and Hanekom and concerns raised by the tourism industry.
- Special economic zones and employment-intensive sectors with export potential have been prioritised for support by the Industrial Development Corporation.
- Minister Joemat-Pettersson is overseeing our renewable energy, coal and gas IPP programme, and preparatory work for investment in nuclear power.
Investment and sustainable growth
The Presidential Infrastructure Coordinating Commission, under Ministers Nkwinti and Patel, has brought greater coherence to our strategic investment plans. They have drawn attention to the need for multi-year appropriations for major capital projects. Reform in this regard is under consideration.
- Energy investment amounts to R70 billion this year and will be over R180 billion over the next three years, as construction of the Medupi, Kusile and Ingula power plants is completed.
- Transport and logistics infrastructure accounts for nearly R292 billion over the next three years under Minister Peters’ oversight. Transnet is acquiring 232 diesel locomotives for its general freight business and 100 locomotives for its coal lines. There is R3.7 billion to upgrade the Moloto Road, R30 billion for provincial roads maintenance, R18 billion for bus rapid transit projects in cities and refurbishment of over 1700 Metrorail and Shosholoza Meyl coaches.
- R62 billion is allocated for the housing subsidy programmes of Minister Sisulu’s department, and R34 billion for bulk infrastructure and residential services in metropolitan municipalities.
- R28 billion will be spent over the MTEF on improving health facilities and R54 billion on education infrastructure.
- Under Minister Mokonyane’s leadership, the next phase of the Olifants River water scheme is in progress, completion of the supply to Lukhanji Municipality in the Eastern Cape, completion of the Wolmaransstad wastewater treatment works and construction of the Polihali Dam as part of the Lesotho Highlands project.
- These are some components of the R870 billion public sector infrastructure programme over the next three years.
- But our growth and development depends also on an expanding envelope of enterprise investment in industry, mining and mineral beneficiation, agriculture and agro-processing, housing, commercial development and tourism facilities.
There are also initiatives in progress to reinforce financing of these projects.
- The Industrial Development Corporation continues to play a leading role in financing manufacturing and beneficiation. It plans to invest R100 billion over the next five years, including R23 billion set aside to support black industrialists.
- We have completed a R7.9 billion capital transfer to the Development Bank of Southern Africa, approved in 2013, which enables it to expand lending and implementation support to municipalities, and to complement private sector funding of strategic infrastructure projects. The Bank aims to increase lending by R48 billion over the next three years. Initiatives to reinforce municipal implementation capacity have been prioritised.
- The Land Bank has set aside a concessionary loan facility to assist farmers in recovering from the impact of the current drought conditions. Over the next three years R15 billion is allocated for land acquisition, farm improvements and expanding agro-processing opportunities.
- I am also pleased to confirm that the New Development Bank will open its Africa Regional Centre in Johannesburg next month. Our first instalment of R2 billion was paid in December last year, and the Budget makes provision for our further commitments over the medium term. This initiative gives impetus to our role as a financial centre for Africa, and will facilitate access to global finance by African investors and institutions.
So the capacity to mobilise finance is in place. Amendments to bank regulations are proposed, furthermore, which will facilitate lending for long-term infrastructure investment.
In energy, transport, telecommunication and urban development, there are many opportunities for joint public and private investment and facilities management.
Corporate investment and participation by trade union funds in infrastructure development needs appropriate policies and market structure frameworks, clarifying the roles and linkages between public and private sector service providers. Progress in these regulatory arrangements is the key to more rapid investment and more inclusive growth in these sectors.
Fiscal consolidation
This year’s Budget, Honourable Speaker, is focused on fiscal consolidation. We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we can ignite growth and generate more revenue, we have to be tough on ourselves.
A central objective is to stabilise debt as a percentage of GDP. To achieve this, the new budget framework sets deficit targets for the next three years which are lower than the October Medium Term Budget Policy Statement projections. Spending plans are reduced, a higher revenue target is set and net national debt is projected to stabilise at 46.2 per cent of GDP in 2017/18, and to decline after that.
Honourable Members, we have had to take into account the slowdown in revenue associated with slower economic growth over the past year. In last year’s Budget we projected total tax revenue of R1 081 billion. The revised estimate is R11.6 billion short of this total, but nonetheless about 8.5 per cent more than the 2014/15 outcome. This is a most commendable effort in the circumstances: all South Africans have contributed, and the 14 000 staff of the Revenue Service have done a sterling job.
A consolidated revenue target of R1 324 billion is set for 2016/17, or 30.2 per cent of GDP. Expenditure will be R1 463 billion, leaving a budget deficit of R139 billion, or per cent of GDP. The deficit will decline to 2.4 per cent in 2018/19.
Our tax proposals include the following:
- Personal income tax relief of R5.5 billion, which partially compensates for inflation, focused mainly on lower- and middle-income earners;
- An increase in the monthly medical tax credit allowances;
- An increase of 30 cents a litre in the general fuel levy;
- Introduction of a tyre levy to finance recycling programmes, increases in the incandescent globe tax, the plastic bag levy and the motor vehicle emissions tax;
- Introduction of a tax on sugar-sweetened beverages; and
- Increases of between 6 and 8.5 per cent in the duties on alcoholic beverages and tobacco products.
Our current taxes on wealth are under review by the Davis Committee. Higher capital gains inclusion rates are proposed, together with an increase in the annual amount above which capital gains become taxable. The transfer duty rate on properties above R10 million will increase from 11 per cent to 13 per cent, and measures are proposed to strengthen the estate duty and donations tax.
To support a greater national savings effort, we introduced Tax Free Savings Accounts last year. The response has been most gratifying – about 150 000 accounts have been opened, with savings totalling R1 billion. For those who have not yet taken this opportunity, you have until the end of this month to take advantage of this year’s R30 000 limit for special tax treatment in these accounts.
Let me assure public servants, again, that reform of the retirement system will not affect their accrued pension rights. Indeed, I am pleased to report that the investment portfolio of the Government Employees’ Pension Fund grew by 12.2 per cent to R1.6 trillion in the year to March 2015. GEPF pensioners will receive a 5.3 per cent increase in April this year.
Before concluding, Honourable Speaker, allow me to return to the main elements of the 2016 Budget, our spending plans and their contribution to growth and broadening development.
- The budget framework brings forward our fiscal consolidation, reducing the budget deficit to 2.4 per cent by 2018/19.
- Taxes are raised moderately, across a broad base, while limiting the impact on lower-income families.
- Personnel spending has been curtailed and cost containment measures are reinforced.
- Expenditure growth is focused on post-school education and training, economic infrastructure, social protection and health services.
The Regional Bulk Infrastructure Grant programme has been allocated R15 billion over the medium-term for the construction of the bulk water and sanitation infrastructure.
Over the MTEF period R1.6 billion is allocated to the SA Connect broadband programme to support access in remote areas and of schools, health care facilities and government institutions.
R475 million has been reprioritised to the Department of Small Business Development for assistance to small and medium enterprises and cooperatives.
An amount of R2.8 billion is allocated over the medium term to Fetsa Tlala, a food security initiative. The Department of Agriculture, Forestry and Fisheries aims to bring 120 000 hectares of land into productive use in the period ahead, benefitting 145 000 subsistence and smallholder producers each year.
An additional R16.3 billion has been allocated for higher education over the next three years. R5.7 billion of this addresses the shortfall caused by keeping fees for 2016 academic year at 2015 levels, and the carry-through costs over the MTEF period. R2.5 billion goes to the National Student Financial Aid Scheme to clear outstanding student debt, along with a further R8 billion over the medium term to enable current students to complete their studies.
Our expenditure on basic education will increase from R204 billion this year, to R254 billion in 2018/19. By 2018, 510 inappropriate and unsafe schools will be rebuilt, 1 120 schools will be supplied with water and 916 schools with electricity.
An additional allocation of R813 million for early childhood development is proposed to increase the number of children in ECD centres by 104 000 over the MTEF period.
R4.5 billion is budgeted over the medium term for revitalizing health facilities in the eleven NHI pilot districts, and related health system reforms. An additional R740 million has been allocated to strengthen TB programmes to encourage early detection and treatment, and R1 billion for expansion of the antiretroviral treatment programme.
Our overall expenditure on social assistance will increase from R129 billion this year to R165 billion in 2018/19.
- The old age, disability and care dependency grants will rise by R80 to R1 500 in April 2016, and by a further R10 to R1 510 in October.
- The child support grant will rise by R20 to R350 in April and the foster care grant by R30 to R890.
Defence, public order and safety
Spending on defence, public order and safety services will rise from R172 billion this year to R204 billion in 2018/19.
Taking into account recommendations of the Farlam Commission of Inquiry, an amount of R598 million is allocated to enhancing capacity of Public Order Policing units over the MTEF period ahead. Allocations are also made to strengthen institutions supporting Constitutional democracy and to combat corruption, and to enhance the independence of the judiciary. Funds are allocated for the Information Regulator established in terms of the Protection of Personal Information Act of 2013.
Cities are already taking steps to encourage higher land use density and inner city redevelopment, under the authority of the new Spatial Planning and Land Use Management Act. This will unlock significant further private sector development potential across our cities, focussed on strategic corridors.
Bus rapid transit systems are operational and expanding in Johannesburg, Tshwane, Cape Town and George, and will be extended to Ekurhuleni and eThekwini this year. About R6 billion is allocated to this programme in 2016/17. Improvements to rail rolling stock and infrastructure will begin to improve the daily travel experience for commuters.
Associated with these transport investments, over 90 integrated land development projects valued at more than R130 billion are in progress to reshape our cities in partnership with the private sector.
- In eThekwini, the Cornubia node comprises 25 000 housing units. An inner city regeneration programme is also underway, including projects at Bridge City, Centrum, the Point and the interconnecting corridor.
- In the Tembisa Corridor in Ekurhuleni, R6.5 billion in public investment will leverage R8 billion in private sector investment to deliver housing, commercial and office facilities.
- In Cape Town, the N2 Gateway housing programme is continuing, together with redevelopment of the Voortrekker Road Corridor, Conradie Hospital, the Athlone Power Station and other sites.
- In Tshwane, investments are focused on the Mabopane Station Hub which is the gateway to the north for more than 150 000 passengers a day and has an informal market accommodating approximately 2500 traders.
- In Manguang, the R2.6 billion mixed use Airport Development Node is in construction. An inner city residential development is planned and the Vista Park and Brandkop projects will yield over 8 500 housing units at a total development cost of over R1.9 billion.
- In Johannesburg, the “Corridors of Freedom” connecting Soweto, Alexandra, Sandton and the Johannesburg CDB bring together public transport improvements, social amenities and partnerships with property developers to increase settlement densities and improve social mobility.
Honourable Speaker, our economic imperative is to ignite inclusive growth.
This is central for jobs, for lowering debt, for delivering services and building infrastructure for a 21st century economy. Let us chart a new course for the economy and well-being of all South Africans, particularly for those hardest hit by unemployment – the low-skilled and the youth. This is not only crucial to address social imbalances and inequality, it is also fundamental to encouraging investment.
The asset base of state owned entities is over R1 trillion, equivalent to about 27 per cent of GDP. They maintain networks and provide services – power, roads, transport, water, communications – on which the rest of the economy depends.
Firstly, as President Zuma has indicated, entities that are no longer necessary should be phased out. The resources raised or saved will be redirected to the balance sheets of SOCs that should grow.
Secondly, where entities have overlapping mandates, rationalisation options will be pursued. The merger of our housing DFIs is already in progress. There are entities with regulatory responsibilities where capacity should be combined. We have national and provincial entities with diverse property holdings, interests in farming or trading or manufacturing enterprises – often inherited from the pre-1994 dispensation, typically buried in subsidiary companies that are not publicly accountable. These are unnecessary state investments, and often a drain on government resources. They are also assets with potential for growth in independent hands.
It seems clear, furthermore, that we do not need to be invested in four airline businesses. Minister Brown and I have agreed to explore the possible merger of SAA and SA Express, under a strengthened board, with a view to engaging with a potential minority equity partner, and to create a bigger and more operationally efficient airline.
Thirdly, the balance sheets of several entities with extensive infrastructure investment responsibilities are now stretched to their limits. Government has provided support in the form of guarantees, which now total R467 billion or 11.5 per cent of GDP. This is a source of pressure on the sovereign rating. Yet we need to accelerate infrastructure investment in the period ahead. So we must broaden the range and scope of our co-funding partnerships with private sector investors. This requires an appropriate framework to govern concession agreements and associated debt and equity instruments, and appropriate regulation of the market structure.
In taking this forward, we are able to draw on our experience in road funding concessions, in building the renewable energy market, and in promoting broadband telecommunications. Across these and other sectors we have much to learn from each other, both nationally and through provincial and local initiatives.
The strength of our major state-owned companies does not lie in protecting their dominant monopoly positions, but in their capacity to partner with business investors, industry, mining companies, property and logistics developers, both domestically and across global supply chains.
We are resilient. We are committed. We are resourceful.
Looking back on his extraordinary life of resilience, and of commitment, former President Mandela said this: “I am fundamentally an optimist. Whether that comes from nature or nurture I cannot say. Part of being optimistic is keeping one’s head pointed toward the sun, one’s feet moving forward. There were many dark moments when my faith in humanity was sorely tested, but I would not and could not give myself up to despair. That way lays defeat and death.”
