Budget Speech 2007
by Minister of Finance Trevor A Manuel, MP
21 February 2007
Madam Speaker
Mr
President
Deputy President
Distinguished Cabinet Colleagues
Honourable
Members
The Governor and Deputy Governor of the S A Reserve
Bank
MECs
Ambassadors and High Commissioners
Our dear friendsin the
gallery and wherever you may be sharing with us
Fellow South
Africans
Ladies and gentlemen
In the introduction
to his book on China and globalisation, Will Hutton reminds us that, "The
foundation of human association is the idea that human life has equal worth and
human beings are equally entitled to political, economic and social rights which
allow them to choose a life they have reason to live"(1).
Human life has equal
worth…
Motho ke motho - ga
ana bosehlana (a human being is a human being, there is no lesser human being)
The idea, that human
life has equal worth, and that this is the core value that unites us, invites us
to ask whether we have done enough to give practical effect in South Africa
today to our shared humanity. Have we acted in a manner that shows that human
life has equal worth? Or do we still live in a society where the shadow of
history dominates over the opportunities of an open society.
As our young nation
enters its thirteenth year, we have much to be proud of. We are building a
society founded on principles of equality, non-racialism and non-sexism. We have
built institutions of democracy, creating an open society founded on the rule of
law. After stabilising the economy and the public finances, we have created the
conditions for rapid economic growth, job creation and the broadening of
opportunities.
Sound management of
public finances and the improved tax compliance culture on which it rests
provides us with the resources to invest in our public services, renew our
infrastructure, reshape our residential areas, and provide water, electricity,
housing, sanitation, schooling, health care and access roads to millions who
were previously denied these elementary building blocks of modern society. The
social grant system has expanded, hunger is in retreat and vulnerable families
are being lifted out of poverty.
Yet the idea that
human life has equal worth demands more of us. President Mbeki’s speech at the
4th Nelson Mandela lecture reminds us that…
…to achieve the
social cohesion and human solidarity we seek, we must vigorously confront the
legacy of poverty, racism and sexism.
The 2007 Budget
strives to accelerate economic growth and work opportunities, modernise our
public services and infrastructure and fight poverty and inequality, because we
have a shared pledge to work together in action. We do this, consciously, as a
choice of this government because without a powerful countervailing force, the
shadow of history will dictate opportunities, entitlements and outcomes.
Izimpilo zabantu
zinesisindo ngoku fanayo (people’s lives hold equal value)
The economic gains
of the last 10 years enable us to begin to fulfil other key elements of our
economic and social modernisation. Chief among these are the systems we create
to plan and prepare for the long-term, to set in place the policies and
institutions that will help us to achieve prosperity for all and social
solidarity for future generations. As our economy adapts to an ever-changing
global environment, and as we recognize over time new policy challenges and
priorities, our public services must support transition and transformation by
providing rising income security and protection to individuals, families, and
communities.
In the State of the
Nation address just twelve days ago, President Mbeki indicated that the time is
right to construct a broad-based social security system embracing all South
Africans, and I am pleased to confirm that we are tabling the main proposals
today.
Madam Speaker, we
have had the good fortune since 2001 to report on the healthy and strengthening
state of the economy. Once again, economic performance has exceeded
expectations.
The economy
continued to expand at a robust pace of 4,9 per cent in 2006, generating new
jobs, broadening the consumer base and providing impetus for rapid growth in
investment. Economic growth is projected to average just over 5 per cent a year
over the next three years. For 2007, somewhat weaker growth in the world economy
and the interest rate increases of this past year are expected to result in a
growth rate of 4,8 per cent.
While household
spending is projected to slow from the lively growth rate of over 7 per cent in
2006, it is still expected to grow by close to 5 per cent a year over the medium
term – a robust trend reflecting good growth in household income.
The expansion has
been supported by a benign interest rate climate, with exceptional growth in the
construction, finance, transport and communication sectors. The manufacturing
sector has grown by more than 4 per cent a year since 2004.
Conversely, poor performances by agriculture and mining weighed on growth in
2006.
Investment across
the economy underpins the positive outlook for the period ahead. Investment
increased by 11,7 per cent in the first nine months of 2006, and as a
percentage of GDP rose to 18,4 per cent. Investment by public
corporations, government and the private sector will remain central to
strengthening economic expansion over the medium term, as government maintains
its focus on the extension and improvement of transportation links, increasing
electricity supply and reshaping the built environment.
More rapid growth
has meant more rapid job creation. According to the December 2006 Quarterly
Employment Statistics, employment in the non-agricultural parts of the economy
rose by over 3 per cent in the first nine months of 2006.
The global economy
has remained supportive of our growth performance, in response to exceptional
growth in China and India, healthy growth in G7 countries and high commodity
prices. The commodity price rally has entered its sixth year. Between 1999 and
the end of 2006, the gold price rose 121 per cent, the oil price rose
144 per cent, and the prices of both platinum and coal rose by more
than 150 per cent.
Our current account
deficit has risen to levels close to 6 per cent of GDP last year, and we
expect the deficit to continue running at between five and six per cent over the
medium term. This is a sign of robust economic growth and South Africa is not
alone in this regard. A number of fast growing, oil importing, and commodity
exporting markets such as Australia and New Zealand are also running sizeable
current account deficits.
Capital inflows are
expected to cover the current account deficit as rand-denominated assets remain
attractive to foreign investors. Net capital inflows reached R96,3 billion
in the first nine months of 2006.
High commodity
prices, moderating household consumption trends and stronger exports will tend
to put downward pressure on the deficit in the next few years.
At the same time,
risks continue to arise from what economists call “global imbalances” – that is
the large surpluses and deficits on the current and capital accounts of major
world economies. The magnitudes involved are sobering. The American and Chinese
current account deficits and surpluses have reached 6,6 and 7,2 per cent of
their respective GDPs. The US deficit is equal to US$869 billion or nearly R6
trillion – a high amount in any currency. Partly as a result of these deficits,
liquidity in global markets is at very high levels. The search for higher
returns for those funds has led to unprecedented flows of capital into emerging
markets. Further, we are seeing the use of low interest G7 currencies for
leveraged speculation. The potential disorderly unwinding of these leveraged
positions creates risks for emerging market economies including our own.
So while our higher
current account deficit mirrors stronger growth and investment, we need to
re-emphasise the importance of more rapid and diversified economic growth and
improving our export performance, rather than reliance on uncertain portfolio
inflows.
In the first nine
months of 2006, the volume of exports rose 2,2 per cent compared to
the same period in 2005 and by an average of 3,9 per cent between 2000
and 2005. But a greater expansion in the volume and value of exports and
export-related employment is needed to lift and sustain the economy’s growth
rate beyond 6 per cent a year.
After several years
of relative stability, the volatility of global exchange rates increased in
2006, shifting the levels of many currencies as commodity prices retreated from
all-time highs and investor sentiment towards emerging markets cooled. The
exchange rate of the rand depreciated by an average 15 per cent over
the course of 2006. (2)
Some volatility can
be mitigated through a combination of increasing foreign exchange reserves,
reducing debt denominated in foreign currency, promoting lower inflation,
prudent fiscal decisions, and improving the economy’s potential growth rate. In
contrast, a more rigid approach to the exchange rate could stimulate larger
capital inflows but make exports less competitive and overheat the domestic
economy. The Reserve Bank has continued its prudent accumulation of reserves.
Further exchange
control relaxation announced in this budget will be supportive of a greater
two-way flow of capital and moderation in the movement of the exchange rate.
Led by our Deputy
President, the Accelerated and Shared Growth Initiative (AsgiSA) lists clear
areas where more work needs to be done to raise our trend growth.
* We will grow
faster when we export more goods and services and accelerate investment in areas
of competitive advantage
* We will grow faster when our levels of
productivity are raised and our ability to generate more low skilled jobs is
enhanced
* We will grow faster when bureaucratic red tape that hobbles
business is tackled head on
* We will grow faster when the performance of
the public sector is improved so that the state can become an even more
effective tool for reconstruction and development
* We will grow faster when
infrastructure capacity is enhanced, especially in relation to
telecommunications, rail, roads, ports, electricity and water.
Honourable Members,
we have more work to do to ensure that economic expansion can be sustained and
participation broadened. Part of the answer lies in our fiscal and investment
decisions and part in ensuring that our economy is able to adjust to global
risks and opportunities.
CPIX inflation has
remained within the inflation target band, averaging 4,6 per cent in
2006, compared to 3,9 per cent in 2005. Inflationary pressures in the
short term, including high food prices, should abate during this year. CPIX is
projected to rise in the first half of the year, thereafter receding to the
middle of the target band, remaining within the 3-6 per cent range
over the medium term.
The increase in
foreign exchange reserves and the present fiscal position are considerable
strengths. Mr. President, when you took office in June 1999, gross foreign
reserves stood at US$5,5 billion, the public debt to GDP ratio stood at
49 per cent of GDP, job creation was rising by about 200 000 a
year and economic growth was 2½ per cent. There is now
US$25,9 billion in reserves, our debt ratio is reduced to
26 per cent of GDP, the economy is creating about 500 000 jobs a
year and we have economic growth of 5 per cent. Under your
stewardship, Sir, our economic transformation is well and truly underway.
However, Mr
President, it’s not all been smooth sailing. Could I point out that when you
came into Office, Bafana Bafana, our national football team, was ranked 25th in
the world, and today we’re ranked 59th.
Madam Speaker, we
are planning for a budget surplus in the coming fiscal year. The fiscal stance
creates space for our future social security reforms and allows for rising
funding levels for public sector infrastructure, improvements to education and
other government priorities, while enhancing the competitiveness of the economy
and sustaining the current growth trajectory.
Tax revenue has
grown by an average of 17 per cent a year for the past three years,
much faster than the rate of economic growth. Alongside the new taxpayers
created by a growing economy: legislative, administrative and technological
changes have broadened the tax base significantly. All of these developments are
exceedingly positive and will benefit us long into the future.
Public spending has
risen by over 9,2 per cent a year in real terms over the past three
years. The strong revenue trend and declining debt service costs have provided
us with the room to invest in the modernisation of our services and
infrastructure. This allows us to add further to our spending plans, raising
public spending a further 7,7 per cent a year over the next three
years as government ensures that effective programmes and promising new
initiatives are funded in line with government’s capacity to implement them. We
are able to do this without leaving a legacy of debt for future generations.
In a country like
ours with a low level of savings, the planned fiscal surplus is government’s
contribution to a national savings effort and we would like our citizens to
follow this example.
In summary, our
fiscal stance is a careful balance between increasing spending on services and
infrastructure, providing moderate tax relief to raise household income and
savings, lower business costs, while increasing government savings. Furthermore,
the fiscal position helps keep a check on emerging imbalances in the economy.
Despite generous tax
relief and rate reductions, the tax to GDP ratio has risen considerably in the
past three years, reflecting economic buoyancy and the broader tax base. For the
fiscal year ending in March 2007, our revised estimate for revenue is
R29 billion higher than the original budget. Company tax and Value Added
Tax receipts have exceeded expectations due to higher profits and strong
domestic consumption. Personal income tax has also surpassed our estimates,
driven by both rising employment and real income gains. We are expecting the
strong growth in revenue to continue into 2007/08 leading to a revenue estimate
of R545 billion or 28 per cent of GDP. As private sector
investment increases and as household consumption moderates slightly, we expect
revenue as a share of GDP to decline to about 27 per cent of GDP by
2009/10.
The revised estimate
for spending in 2006/07 is R470,6 billion, R3,6 billion less than the
adjusted budget. As a result, contrary to our initial expectations, the budget
balance for 2006/07 indicates a surplus of R5 billion or 0,3%.
We are budgeting to
spend R534 billion in 2007/08 rising to R650 billion in 2009/10. Since
tax revenues are likely to grow more strongly than spending for at least another
year, we are budgeting for a fiscal surplus of about 0,6 per cent of
GDP in 2007/08, reverting to a moderate deficit by the end of the forecast
period.
Debt interest costs
continue to fall as a share of GDP and are set to reach 2,1 per cent by
2010. Madam Speaker, the savings on interest that we have seen since 2001
provides an additional R33 billion a year to spend on services and
infrastructure, money that we would not have had if we kept on borrowing at the
level it was in 1994.
In 1994, we had a
choice, to expand spending by borrowing, or reprioritise while reducing
dependence on debt. The choices that we have made, consciously made, provide us
with the fiscal space to spend more on education, on health, on public
transport. It has also provided us with the policy room to contemplate long-term
reforms to our social security system that will benefit all South Africans.
Much of our economic
and fiscal policies has been aimed at increasing fiscal space and reducing our
vulnerability to financial instability. These questions, and how governments
think about them in a global context, will also be highlighted in the meetings
of the G20, hosted in 2007 by South Africa. The G20, or Group of Twenty Finance
Ministers and Central Bank Governors, includes seven industrialised countries
and 13 of the most systemically significant emerging market economies, whose
main purpose, is the pursuit of global financial stability. This forum offers a
unique platform to identify common objectives and common solutions to global
financial and economic challenges.
The theme for the
G20 in 2007 is “Sharing – Influence, Responsibility, Knowledge”. South Africa
has prepared a detailed work programme for the year focused on three major
areas. In addition to the area of fiscal space, the G20 will look at the issue
of increasing the voice of developing countries on the global economic stage by
giving impetus to efforts to strengthen the voting power of emerging markets and
low-income countries in the International Monetary Fund and World Bank. A final
area of focus seeks better to understand the impact of high commodity prices on
macroeconomic management and the implications for countries’ financial systems.
South Africa will
also use the opportunity of its host year to improve and strengthen knowledge,
within the forum, of African economic and financial policy challenges – and to
facilitate a sharing of knowledge with African countries – through a series of
parallel discussions between the G20 and African finance ministers and
governors.
The budget framework
allows us to provide an R89,5 billion in additional spending over the next
three years in comparison with our spending plans from a year earlier. Our
spending priorities are informed by overriding objective of accelerating growth,
modernising our public services and infrastructure and reducing poverty and
inequality. Over the next three years, we are budgeting to spend almost R2
trillion. Madam Speaker, that’s a two, followed by twelve zeros.
We must use these
resources so that human life can indeed have equal worth.
Iimpilo zabantu
zixabisa ngoku linganayo (people’s lives have equal value)
Motho ke motho - ga
ana bosehlana (a human being is a human being, there is no lesser human being)
If we truly want to
create a society where human life has equal worth and where every child has an
equal opportunity to succeed, we must improve the quality of our schools. This
will not happen on its own. We need concerted action to make things change.
Madam Speaker, our
teachers are the frontline of our education system. It is in their hands that we
place our 11 million children each day. In most cases, our teachers do a
sterling job under difficult conditions. We pay tribute to them and we ask no
more than that they continue to serve with dedication and integrity. We also
know that a minority of teachers do not prepare their lessons adequately, are
frequently late and are unfit to be in the position where they are asked to
nurture our children. We cannot let the minority of teachers denigrate a
profession based on love for children and a desire for learning and a commitment
to a collaborative future.
Over the next three
years, we are making available an additional R8,1 billion to hire
additional teachers, teaching assistants and support staff in schools and
districts and to improve the remuneration levels of teachers. The many people
who submitted suggestions to the Tips for Trevor campaign will be pleased to
hear this. The Minister of Education will lead the process of determining how
these resources should be used, focusing on the need to reward good teachers,
provide support to poor schools and improve the quality of schooling in general.
We are also setting aside R700 million for bursaries for teachers to encourage
young people to train as teachers and to pursue careers in our public schooling
system. This should benefit about 13 000 teachers over the next three
years. Together with resources set aside in the provincial equitable share for
the implementation of no-fee schools, and a substantial increase in resources
for classroom building and providing water, electricity and sanitation in
schools, the investments announced in this budget constitute a concerted effort
to improve the quality of schooling in our country. It is a step change in
resources going to schools, and we want to see a step change in results too.
The South African
Schools Act recognises that the strength of our democracy is dependent on the
depth of involvement in our democratic institutions, such as school governing
bodies. We need committed parents to stand up and make a contribution to the
success of their children’s schools, so that we can build a society where human
life has equal worth.
The national
Department of Education receives a further R850 million for a step up in
its adult basic education and training programmes. The 2007 budget also makes
available a further R2,2 billion to support our university sector to meet its
objectives of increasing enrolment and producing more science, engineering and
technology graduates. The further education and training sector receives
R600 million for bursaries for deserving students.
Since the shifting
of the social grants function to the Social Security Agency, provinces have been
able to focus on rebuilding their welfare service capacity. A new bursary scheme
for social workers is established, with an initial allocation of
R365 million. Together with steps taken to increase social worker salaries
in 2005, this initiative aims to revive interest in a profession critical to the
well-being of our communities and the development of a more caring society.
The health sector
receives a further R5,3 billion to spend on increased remuneration for health
workers and an increase in staffing levels. We are budgeting to increase the
number of health workers by about 30 000 people over the next five years.
Our previous budget framework made provision for the treatment and care of about
250 000 people who are ill with Aids. We are likely to reach that figure in
the next few months. Health receives a further R1,7 billion for this
programme, presently being delivered through 272 sites, allowing for a doubling
of the uptake over three years. Spending on dedicated HIV and Aids programmes by
health, education and social development departments will exceed R5 billion by
2009/10. The hospital revitalisation programme, one of our more successful
infrastructure programmes, receives a further R1 billion taking total spending
on this programme to R6,8 billion over the next three years. In addition,
the sector receives R1 billion for the modernisation of tertiary services, with
particular emphasis on diagnostic equipment.
Madam Speaker, one
of the clearest ways in which we are able to act against poverty is through our
system of social grants. We presently have just under 12 million people
receiving social grants of which over seven million are beneficiaries of the
child support grant. There is strong evidence that South Africa’s social grants
are well targeted and account for a substantial share of the income of poor
households. Grants are associated with a greater share of household expenditure
on food and hence improved nutrition, and the child support grant contributes
measurably to the health status of young children. Statistics SA data shows that
the proportion of households where children often or always went hungry
decreased from 6,7 per cent in 2002 to 4,7 per cent in 2005.
This means that we can say to many more children, hunger is no longer knocking
on the door.
Die lewe van alle
mense is gelykwaardig (the lives of all people are equal)
Three years ago, the
Department of Social Development initiated measures to curb fraud in our social
grants system. With the help of the Special Investigating Unit, over
130 000 people have been removed from the system and about 2 500
charged with fraud so far. This has contributed significantly to the stability
of the system. Ensuring that we eliminate fraud and corruption from the social
grants system is critically important. The state old age pension, disability and
care dependency grants will rise by R50 to a maximum of R870 a month, providing
a strong signal that money released from the reduction of corruption will be
given back to those who deserve it. Child support grants increase by R10 to R200
a month and foster care grants rise to R620 a month.
Let me turn to our
criminal justice sector. To quote President Mbeki, “while we have already
surpassed that targeted figure of 152 000 police officers…and while we have
improved the training programme, we recognise the fact that the impact of this
is not yet high enough.”
There has been a
significant increase in resources going to the fight against crime. Since
2003/04, allocations to the Safety and Security ministry have increased by
43 per cent. Over the next three years, resources going to the police
will rise by a further 34 per cent from R33 billion in 2006/07 to
R44 billion in 2009/10. The budget for the Department of Justice increased
by 41 per cent in the past three years and will rise by
52 per cent over the next three years.
In this year’s
budget, we are allocating an extra R2,4 billion to the police to further expand
police numbers and invest in technology and forensic equipment. By 2010, we will
have close to 190 000 police officers on our streets. Electronic
fingerprints and dockets will become the norm. The 2007 Budget also allows
for the implementation of the salary upgrade programme that commenced in 2005.
The Department of
Justice receives a further R1,5 billion over the next three years to improve
court capacity, reduce case backlogs and modernise the administration of
justice.
Our government
recognises the seriousness of the crime situation and will continue to provide
leadership in the fight against crime. But, effective crime fighting depends on
partnerships between our law enforcement agencies and communities. Through
community police forums, all citizens have the opportunity to contribute towards
making their communities safer. In this way, each person can help in the
construction of a society where human life has equal worth.
Madam Speaker, even
as we step up the fight against crime, we must ask ourselves what cultural,
social and economic conditions give rise to crime. We have spoken in the past
about the destructive effects of the relentless pursuit of individual
self-enrichment at the expense of the broader development and progress of
society. We cannot escape the fact that the culture of greed plays a role in
driving crime. Long-term, sustainable solutions lie in addressing the causes of
crime and the conditions that give rise to the alienation of some in our
communities. Only a stronger sense of society, of community, of family; a sense
of responsibility to each other – Umuntu ngumuntu ngabantu – can heal the
fractures that give rise to crime.
We also need to
insist that honesty and integrity are core values of our economic and financial
institutions. We continue to see instances of flagrant abuse of this principle,
often involving hundreds of millions of rands. In addition, we continue to see
extraordinary methods to evade tax and the legal obligations relating to anti
money-laundering legislation.
I want to make it
clear that we will not tolerate a situation where individuals pillage and
plunder millions from the companies they run or from ordinary South Africans who
are poor and humble people whose entire life savings get destroyed in the
process.
I have instructed
the Financial Intelligence Centre, the Financial Services Board and the South
African Revenue Service to work collaboratively with the South African Police
and prosecutors in dealing with financial crime and its proceeds. I have also
asked that fiduciary and trusteeship responsibilities need to receive the
highest priority in the oversight activities of our regulators. We must ensure
that neither organised crime nor abuse of stewardship obligations should be
allowed to violate our hard-earned democracy and the integrity of our country.
Since 2001, we have
channelled an ever greater share of our resources into capital spending. Our
investment in infrastructure has been focused on two major areas: the built
environment and economic infrastructure. The built environment refers to a
cluster of activities and services that centre on building viable, secure
residential communities – housing, water, electrification, sanitation, roads,
sports facilities, police stations and schools, clinics and community halls.
These programmes seek to change the landscape across both urban and rural areas,
to turn barren, dusty land into places that people feel proud to live in, those
places where people can find the comfort and security to raise children.
In the past two
years, we have added considerably to our public transport budget. In 2005, we
created the Public Transport Infrastructure Systems Grant, aimed mainly at
putting in place passenger transport services that would facilitate the movement
of people for the FIFA World Cup. This, together with the impetus that the World
Cup provided, has resulted in something of a revolution in municipal planning
for public transport and forward thinking about urban development. The bids that
we have seen are impressive in terms of knitting together communities with
places of work, recreation and leisure. In particular, the development of Bus
Rapid Transit schemes offers exciting opportunities to improve municipal public
transport systems. To ensure that the World Cup leaves us with a legacy of
better public transport, we are adding a further R2,3 billion to this
programme.
Our housing budget
receives a further R2,7 billion taking the total allocation over the next
three years to R32 billion. To give you a sense of the scale of increase in
our housing budget, Madam Speaker, in 2003/04, we spent R4,6 billion on housing.
By 2009/10, the end of our present budgeting period, the budget rises to
R12,5 billion.
Madam Speaker, I’ve
been listening to the debates on the State of the Nation Address in this house.
The Minister of Housing has publicly asked for her budget to be doubled. I’d
like to tell this House, that over the next three years, we will spend more on
housing than in the entire first decade of democracy.
Allocations for
water, sanitation, electrification and municipal roads all rise in a
complementary fashion. Our government is determined to meet the targets set by
the President in 2004 in relation to water, sanitation, electrification and
housing.
Motho ke motho - Ga
ana bosehlana (a human being is a human being, there is no lesser human being)
The Neighbourhood
Development Partnership Grant, a new innovative funding model, encourages
private participation in the rejuvenation of townships. Our urban landscape is
often described as dysfunctional with large townships far from city centres, far
from places of work and leisure. This landscape will not change of its own
accord. We will not be able to reshape our cities, integrate our townships,
create residential communities unless we intervene, unless we act decisively.
The Neighbourhood Development Partnership Grant has already allocated money for
technical assistance to upgrade Bara Central in Soweto, Njoli Square in
KwaZakhele, Ngangelizwe eMthatha. Planned interventions include eThekwini Bridge
City and KwaMashu town centre.
Many of the
programmes outlined are labour intensive, and form part of the Expanded Public
Works Programme, aimed at drawing in marginalised communities in the 2nd
economy. Since its inception, this programme has created about 300 000 work
opportunities, mainly in rural areas and mainly for women. Taking our cue from
the State of the Nation Address, together with the Minister for Public Works, we
will review this programme to see how it can be amended and further ramped up to
increase the number of work opportunities that it creates. A further R125
million is allocated to the Department of Public Works to improve coordination
and oversight of this programme.
I am happy to
announce that the Local Organising Committee for the FIFA World Cup has reached
agreement with municipalities on the budgets for the construction and upgrading
of stadiums and that these agreements are within the R8,4 billion set aside
for stadiums. These agreements set a firm precedent - that we must go out of our
way to ensure a successful tournament and a lasting legacy beyond 2010, but
fiscal prudence and sound budgeting principles must be adhered to at all times.
The South African
National Roads Agency and the Rail Commuter Corporation receive a further R1,7
billion to upgrade roads, and stations in areas critical to the World Cup. In
total, over R9 billion will be allocated by national government for
municipal transport, roads and precinct upgrading relating to the 2010 FIFA
World Cup.
Agencies and
entities falling under the Department of Trade and Industry receive an
additional R1,7 billion to promote industrial development, black economic
empowerment and small business development. To support the process of broadening
participation in the economy, the National Empowerment Fund receives a further
R380 million as a capital injection. The critical infrastructure programme
is allocated a further R300 million to leverage private sector investment,
especially into our industrial development zones and the film and television
production incentive gets another R300 million to encourage local and
international film makers to film in South Africa. Some of the latest
international productions filmed largely in South Africa include “Ask the Dust”,
“Avenger”, “Lord of War”, “The Flood” and “Blood Diamonds” which was filmed in
Port Edward, Cape Town and Mozambique. Two new productions “Vanilla Gorilla” and
“Doomsday” have started filming in January 2007.
Our research and
development capacity has been strengthened in the past five years through
targeted investments to our science councils and universities. This year, we are
setting aside a further R1,2 billion for science and technology of which
R500 million is for government’s contribution to the Square Kilometre
Array, contingent on the success of our bid. The South African Research Network,
a joint project of the Departments of Public Enterprises and Science and
Technology aimed at providing low-cost broadband links for the local academic
community receives R95 million and R60 million is allocated to set up
science research chairs at our major universities.
Madam Speaker, the
Budget framework includes a contingency reserve of R3 billion for 2007/08.
This allows for unforeseeable and unavoidable expenditure that may need to be
accommodated in the Adjustments Budget this year, and allocations to several
state-owned enterprises that are not yet finalised. Our commitment to finance 51
per cent of the capital requirements of the Pebble Bed Modular Reactor project
over the next three years amounts to R6 billion. An allocation to settle the
land claim and other obligations relating to Alexkor mine has yet to be
finalised and will be provided for in the Adjustments Budget, which will also
include further equity contributions for the InfraCo telecommunications
initiative and Sentech’s investment requirements, contingent of course on the
approval of business plans and resolution of outstanding regulatory
requirements.
South Africa’s
foreign policy objectives seek to achieve greater unity and solidarity between
African countries, accelerate political and socio-economic integration and
promote peace, security and stability. Support for key institutions of the
African Union remains a priority. The African Renaissance Fund, through which
most of the initiatives are funded, is given a further R275 million. Our
commitments to host the Pan African Parliament also requires a further
R113 million.
In a short period of
time, our defence force has already assisted significantly in helping reduce a
number of conflicts on the continent. We now have peace-keeping operations in
the Democratic Republic of the Congo, Burundi and Sudan. The SA National Defence
Force receives additional allocations to acquire airlift capacity, for exchange
rate adjustments to the strategic defence package and for the military skills
development programme, an innovative programme aimed at introducing young people
into the military.
Improving service
delivery in the Department of Home Affairs has positive benefits for government,
the economy and all citizens. The Minister of Home Affairs is working with
colleagues to finalise a plan to turn this department around and we pledge our
full support. A further R900 million is allocated to the department to
support its turnaround, to fill critical posts, purchase a new passport printer
and modernise IT and back-office operations.
Following
considerable tax policy changes in the 1990s, the past five years have been
characterised by better services to tax payers, improved compliance and a
broader tax base. The 2007 Budget provides a further R1,3 billion to
upgrade core IT systems in the South African Revenue Service. The modernisation
of the South African Revenue Service will enable it to manage increased
administration volumes. A single customer view, automation, e-business and
improved walk-in services will be supported by enhanced risk management.
Priority is given to
moderrnising customs administration to cope with significant increases in
volumes at all our land, sea and air border posts. The acquisition of cargo and
container scanning equipment will enable SARS to perform non-intrusive
inspections on goods going through our ports.
Madam Speaker, our budget
allocations must reflect the priorities that government sets. In recognition of
the critical role that provinces and municipalities play in the delivery of
social and household services, these two spheres receive 64 per cent
of the additional R89.5 billion allocated in this budget.
Transfers to local
government grow by 19 per cent a year. In addition, municipalities
receive the bulk of the allocations for stadiums and related infrastructure for
the 2010 FIFA World Cup. The local government equitable share receives a
further R5 billion for the delivery of free basic services, which now reach
an average of about 80 per cent of households. The Municipal
Infrastructure Grant receives a R400 million more for a final push to
eradicate the bucket system. A further R600 million for the electrification
programme, R1,4 billion for bulk water and sanitation infrastructure and
R950 million to deliver water and electricity to schools and clinics. Total
infrastructure transfers to municipalities now total R52 billion over the
next three years.
Ubujamo bethu busho siyalingana empilweni
Transfers to
provinces grow by 12,7 per cent a year with the major additions going
to education and health personnel, social welfare services and for provincial
infrastructure. This year, we introduce a new conditional grant called the
Community Library Services grant to develop the infrastructure and stock of
books in local libraries. To spread the joy of books to millions more children
and to provide access to information to teachers and parents, the grant starts
off with an initial allocation of just under R1 billion over three years.
The provincial equitable share formula, through which 86 per cent of
provincial transfers flow, is updated to reflect changes to provincial
boundaries.
Preliminary
assessments of provincial budgets indicate that allocations are broadly in line
with the priorities outlined in last years’ Medium Term Budget Policy Statement.
Spending on both education and health at a provincial level are projected to
grow by 10.5 per cent a year and welfare services grow rapidly from
R5.3 billion in 2006/07 to R8,8 billion in 2009/10. Over the next
three years, provincial capital spending totals R65 billion. I wish to
commend provinces for the steady progress being made in rolling out their
infrastructure programmes. In 2005/06, only 8 per cent of
infrastructure funds were unspent as opposed to 14 per cent in
2004/05. This year, spending for the first nine months is 35 per cent
higher than in the same period last year.
Madam Speaker, over
the past decade, we have created a tax policy regime which is internationally
competitive. We have broadened South Africa’s tax base while at the same time
provided billions of rands in tax cuts to improve the equity of the tax system.
Mr. A S Smit
submitted a Tip for Trevor which suggested “Kan u in u begrotingsrede
belastingbetalers bedank vir hul bydrae.” Meneer Smit is heeltemaal korrek so ek
vra om verskoning indien ek dit nie genoegsaam in die verlede gedoen het nie, en
spreek ons gesamentlike dankbaarheid uit aan alle belastingbetalers. Admonished
by Mr Smit, I thank all South African taxpayers for their diligence in
contributing to our revenue pool. Ndo livhuwa nga maanda!
This year,
individuals benefit from moderate personal income tax cuts and the elimination
of the retirement fund tax. Business benefits from reforms to the secondary tax
on companies. We extend accelerated depreciation allowances to certain
infrastructure and the cost of corporate reorganisation is reduced.
The 2007 Budget
provides personal income tax relief amounting to R8,4 billion, increasing
the level below which no income tax is levied for people under the age of 65 to
R43 000. Changes to the personal income tax brackets provide relief to
compensate for the negative effects of inflation on taxpayers, and to partially
offset the effects of changes to the taxation of medical aid contributions and
car allowances. I appeal to taxpayers to use this relief to first settle their
debts or save, rather than for consumption.
The monthly monetary
caps for tax-free medical aid contributions are increased from R500 to R530 for
each of the first two members and R300 to R320 for each additional beneficiary.
This measure is aimed at further incentivising people to join low-cost medical
schemes, and for the market to respond to demand in this area.
Public benefit
organisations play an important part in the social fabric of our society. During
the last few years the tax regime applicable to these organisations has been
reformed to give due recognition to their contributions to society. I’m pleased
to announce that tax deductible contributions by both individuals and companies
to specific public benefit activities will be increased from 5 per cent to 10
per cent of taxable income. In addition, the tax free income threshold from
trading activities by PBOs will be doubled, from R50 000 to R100 000. Arising
from discussion with Cricket SA recently, amendments are also proposed to ease
the tax liabilities of professional sport bodies that contribute meaningfully to
the development of amateur sports.
In order to promote
saving for retirement, we propose to this house the abolition of the retirement
fund tax from 1 March 2007. We call on trustees to ensure that the benefits of
this reform accrue to the contributors and beneficiaries of retirement funds.
The proposal will cost R3 billion a year and is part of a number of related
measures aimed at encouraging household savings. With the same objective in
mind, the interest income exemption is raised from R16 500 to R18 000
for those under 65 and from R24 500 to R26 000 for those 65 and over.
In addition, the annual exclusion threshold for capital gains or losses will be
increased from R12 500 to R15 000.
Most countries have
a dividend tax at the shareholder level. We have a secondary tax on companies
collected directly from a few thousand companies as opposed to millions of
shareholders. To further improve the transparency and equity of the tax system,
we are proposing that it be phased out and replaced with a dividend tax at
shareholder level. This reform would consist of two phases. We propose reducing
the rate from 12,5 per cent to 10 per cent and that the base
be redefined to apply to all distributions. This will come into effect on
1 October 2007, except for standard anti-avoidance measures that will
commence on conclusion of this speech.
The conversion to a
dividend tax collected at the shareholder level will be completed by the end of
2008 subject to the renegotiation of a number of international tax treaties.
The taxation of
gains realised from the sale of shares is presently subject to ambiguous
procedural treatment. In order to provide equitable treatment and certainty for
both taxpayers and SARS, all shares disposed of after three years will trigger a
capital gains tax event.
Our tax laws provide
for depreciation of buildings used in manufacturing but not for commercial
purposes. We are proposing that tax depreciation allowances for the economic
wear and tear of newly constructed, or upgraded, commercial buildings be
implemented. A 20-year write-off period is envisaged. The income tax act has not
kept pace with changes to the local and international environmental regulatory
regime. It is proposed that environmental capital structures such as dams and
tanks, which are presently not depreciable, qualify for depreciation allowances.
Consideration is
being given to facilitate investments in high risk investments such as mining
exploration by junior mining companies. The introduction of flow-through shares
will be investigated, and a final decision in this regard will be made next
year.
Now for the excise
tax increases:
* Tax on a packet of 20 cigarettes goes up by 60 cents
*
Tax on a 340 ml can of beer goes up by 5 cents
* Tax on a 750 ml bottle of
wine up by 10 cents; and
* Tax on a 750 ml bottle of spirits up by R1,88.
These changes to the
excise taxes will raise R1,5 billion.
The general fuel
levy is increased by 5 cents a litre and the Road Accident Fund levy is also
increased by 5 cents a litre.
Entrepreneurship
remains a vital ingredient in the growth of our economy. In this regard, we have
previously announced measures to assist and encourage small businesses,
including a tax amnesty for small businesses announced last year. The small
business tax amnesty offers those outside the system a fresh opportunity to
become compliant and benefit from the myriad of support measures offered by
government. The amnesty ends in May this year, and over the coming weeks SARS
will be intensifying its efforts to ensure that all businesses with a turnover
of R10 million or less are afforded the opportunity to apply. So far, about
12 000 have come forward to apply for amnesty.
The task team
appointed to investigate the fiscal regime applicable to windfall profits in the
liquid fuels sector submitted its final report to me on 9th February 2007. It
has exhaustively inquired into the fiscal and regulatory aspects of the
industry. I want to thank the team led by Dr. Zav Rustomjee for their efforts in
completing their work in such a short space of time.
In responding to the
report, I will refer the regulatory matters to the Minister of Minerals and
Energy for further consideration. The task team has made two substantial fiscal
recommendations, involving a possible tax on windfall profits and an incentive
arrangement for new investment in liquid-fuel production capacity. I believe
there is merit in these proposals. However, we will consult the industry before
we finalise this matter.
The task team’s
report will be released for public and stakeholder comment by the end of the
week.
The gradual process
of exchange control relaxation has focused on enabling an orderly process of
global reintegration, encouraging South African firms to expand from a domestic
base and allowing South African residents to diversify their portfolios through
domestic channels. The continued strength of the South African economy and
financial markets support further steps in this regard, including:
* Lowering
the current shareholding threshold for foreign direct investment outside of
Africa from 50 per cent to 25 per cent to further enable South African companies
to engage in strategic international partnerships;
* Simplifying the
Customer Foreign Currency accounts dispensation by allowing a single CFC account
for trade and services related payments, and expanding the range of permissible
transactions; and
* Further developing South Africa’s financial markets and
increasing liquidity in the currency market by permitting the Johannesburg
Securities Exchange to establish a Rand futures market.
As has become
tradition, I have received hundreds of Tips for Trevor. Thank you for taking the
time and effort to write to me. The strength of our democracy is measured by the
depth of involvement by ordinary people in the affairs that affect them. The
overwhelming sense I get from reading these tips is that almost all South
Africans recognise that the challenges we face can only be overcome through a
full-on frontal assault on poverty and that the best way to achieve this is
through a combination of faster economic growth and active intervention by
government, on the side of the poor. Because human life has equal worth.
Magoshu Motau writes
to ask that the tax-free lump sum portion of retirement funds be increased since
it has been at R120 000 for some time now. Mr. Motau is very perceptive,
and correct. It could also be added that the formula required to calculate this
tax-free lump sum is incomprehensible to the average person. We are accordingly
proposing an increase in this threshold and will simplify the whole calculation.
Last year, I
received a suggestion that we should make lobola tax deductible. This year, I’ve
been given a suggestion that I should impose VAT or tax lobola trusts since some
people are making money out of them. These issues seem far too complex for me or
my officials to handle. I’m going have to consult our elders on this one.
In concert with the
task of growing the economy and creating new opportunities for work, we have
been hard at work since 1994 to push back the frontiers of poverty, recognising
that no people can be truly free until they have cast aside the shackles of
poverty and underdevelopment.
It is for this
reason that the eradication of poverty has been at the centre of our policies
and programmes since the first democratic elections. To help measure progress in
the fight against poverty, Statistics South Africa will pilot a poverty line for
an initial period to allow for public comments and consultations before its
design is finalised. Alongside the Budget, we are publishing today a discussion
document that sets out our proposal for a national poverty line. I appeal to you
to continue to advise us on the appropriateness and usefulness of this measure.
Ubuntu acknowledges
that all people are an integral part of broader society and humankind, and our
individual fortunes are intimately connected to the fortunes of the whole.
Madam Speaker, in
the past decade, we have gradually expanded our system of social grants
providing income support to vulnerable groups, children, the disabled and the
elderly. Our social assistance grants provide an effective income safety net for
the poor, and about 3½ per cent of GDP is spent on this redistributive budget
programme.
But it is also
important to encourage saving and self-reliance. The tax system contains a
retirement savings incentive that particularly benefits higher-income
individuals. But for working people who fall below the tax threshold, there is
effectively no incentive, and indeed there is the perverse effect that if you
save enough you might lose the old age pension because of the way the means test
works. So although we have a well-developed retirement industry, and most
employees are covered by pension or provident fund arrangements, in practice too
many people surrender their policies or cash in their benefits when they change
jobs. It is estimated that more than half of those who contribute to retirement
funds, reach retirement age with a pension that is less than 28 per cent of
their final wage or salary and over two thirds of people are dependent on the
state old age pension.
The time has come to
put in place a new arrangement in which all South Africans will share, and that
provides a basic saving and social protection system that meets the needs of
low-income employees. We are therefore proposing a mandatory, earnings-related
social security scheme to provide improved unemployment insurance, disability
and death benefits targeted at the income needs of dependants and a standard
retirement savings arrangement. This will be financed by a social security tax
administered by the South African Revenue Service, and collected in individual
accounts in the name of every contributor. Significant capacity building and
institutional reform are needed on both the tax side and to administer benefits.
This work has begun, with a view to implementation by 2010.
To offset the cost
of the social security tax for low-income workers and to lower the cost of
creating employment, we are proposing the introduction of a wage subsidy for
those whose earnings fall below the income tax threshold.
Madam Speaker,
these proposals are bold and ambitious. Much work still needs to be done. The
principles that will underpin these reforms are:
* Equity – there must be
fair and uniform rates of contribution and benefits for all
* Pooling of risk
– collective funding arrangements and non-discriminatory rules and entitlement
must apply
* Mandatory participation – there will be compulsory participation
of employees and inclusion of self-employed individuals on reasonable terms
*
Administrative efficiency – streamlined use of pay-roll based contributions,
modern information systems and efficient payment arrangements are essential
*
Solidarity – minimum benefits will be assured through continued social
assistance grants programmes financed through the budget.
Alongside the
phasing in of social security arrangements, several reforms to the regulation,
governance and tax treatment of occupational and individual retirement funds
will be implemented over the period ahead.
Madam Speaker, these
are far-reaching reforms and as the President has indicated, consultation will
be needed before finalisation of legislation, administrative systems and
transition arrangements. We aim to conclude these discussions with trade unions
and employers during the second half of this year.
We do this, Madam
Speaker, to proclaim loudly that human life has equal worth. Our sense of
community, our sense of humanity is dependent both on our own well-being and the
well-being of those around us.
Members of the House
should be advised that following steady improvements in the financial position
of the Government Employees Pension Fund over the past decade, it has been
possible to award increases to civil pensions this year that fully compensate
for inflation, and that also correct for the past erosion in real values. This
substantially improves the position of many elderly pensioners and spouses.
I am pleased to
introduce to the House Phineas Tjie, who has been appointed head of
administration of the Government Employees’ Pension Fund. I am grateful for the
wise leadership that Martin Kuscus gives to the Board of Trustees.
We should also pay
tribute to the work of the Public Investment Corporation, ably managed by chief
executive officer Brian Molefe. Under their expert investment management, the
GEPF has again recorded excellent financial results.
The budget is a
culmination of a full year of preparation involving literally thousands of
people at national, provincial and local government, and in many of our public
entities. Madam Speaker, the preparation of a Budget relies on the hard work of
many.
Under the
stewardship of President Mbeki and the drive and determination of Deputy
President Mlambo-Ngcuka, Cabinet has been instrumental in shaping this budget. I
would like to thank members of the Ministers’ Committee on the budget for the
long hours and thousands of pages of documentation they’ve had to endure to
craft this budget.
Deputy Minister Jabu
Moleketi continues to bring his sharp analysis and intellectual insight to the
budget process. I would like to thank provincial MECs for Finance, who are in
the midst of finalising their own budget speeches, for the work that they have
done in strengthening discussions in the Budget Council and to Salga for their
efforts in guiding our understanding of the issues relevant to local government.
I would also like to
express a word of gratitude to:
* Governor Tito Mboweni and the staff of the
Reserve Bank for their support and assistance
* The Financial and Fiscal
Commission Chairperson Dr. Bethuel Setai and the other Commissioners and staff
for their sound advice and considered contributions to our intergovernmental
framework.
* Herbert Mkhize who has skilfully steered our discussions with
business, labour and community representatives in Nedlac
* Pali Lehohla
continues to drive ongoing improvements in the extent and quality of government
statistics, supported by the Statistics Council chair Howard Gabriels.
Thanks to Nhlanhla
Nene, chair of the Portfolio Committee on Finance, Tutu Ralane who chairs the
Select Committee on Finance, and the joint chairs of the Budget Committee,
Louisa Mabe and Buti Mkhaliphi, for diligently working on holding government to
account.
Madam Speaker, could
I beg your indulgence and ask that the house joins me in wishing the South
African Revenue Service a happy 10th birthday. It is remarkable that an
organisation, just ten years old, can do so much good for our country and our
people – congratulations Commissioner Gordhan to you and your dedicated band of
15 000 staff.
Lesetja Kganyago
continues to lead an inspired group of professional staff at the National
Treasury, always striving to do better, and in the result, driving everybody
crazy. Thanks too to the officials in the Ministry who give their all,
especially at the time of the budget.
Lastly, thanks to my
family who continue to inspire me to build a society that values our shared
humanity.
President Mbeki has
also advised
"What this means is
that when we talk of a better life for all, within the context of a shared sense
of national unity and national reconciliation, we must look beyond the
undoubtedly correct economic objectives our nation has set itself." (3)
When our forebears
formed the African National Congress in 1912, in response to being excluded from
the formation of the Union of South Africa, they were driven by the
single-minded belief…Human life has equal worth.
On the 21st of
February 1917, when 649 South Africans died when the SS Mendi sunk off the
English coast, they died because they too believed that human life has equal
worth.
When Nelson Mandela
and Walter Sisulu tabled the 1949 programme of action to spur more active
resistance to discrimination, they believed that Human life has equal worth.
In 1955, when our
parents came together in Kliptown at the Congress of the People, to proclaim
loudly that South Africa belongs to all who live in it, black and white; they
were united by the belief that human life has equal worth.
In 1983, when we
launched the United Democratic Front in Mitchell’s Plain, hundreds of community
organisations said with one voice: Human life has equal worth.
In 1994, when we
stood in line and voted as equals in our first democratic elections, we could
feel the mood, and the mood said, ‘Human life has equal worth’.
When our
constitution was unanimously adopted in this house in 1996, our declaration to
the world was loud and clear, human life has equal worth.
And today, we
proclaim loudly…human life has equal worth … and we will be unwavering in our
dedication to the social cohesion and human solidarity that we seek.
1 Will Hutton, The
writing on the wall, 2007. p. 204.
2 On a trade weighted basis.
3 Fourth
Nelson Mandela Lecture
Issued by: National
Treasury
21 February 2007