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BUDGET SPEECH BY THE MINISTER OF FINANCE TREVOR MANUEL


20 February 2002

In my utopia, human solidarity would not be seen as a fact to be recognised by clearing away prejudice or burrowing down to previously hidden depths but, rather, as a goal to be achieved. It is to be achieved not by inquiry but by imagination, the imaginative ability to see strange people as fellow sufferers.

Solidarity is not discovered by reflection but created. It is created by increasing our sensitivity to the particular details of the pain and humiliation of other, unfamiliar sorts of people. Richard Rorty (1989), Contingency, Irony and Solidarity.

Introduction – creating solidarity

The Budget we present today seeks to embody a philosophy that lies deep in the struggle that has brought us together in this democratic Assembly.

It is a philosophy of people affirming the things that they share with others above those that set them apart… …relying not on abstract concepts and ideas to build our community, but seeking to anchor it to daily solidarities, expressed in deeds and actions, of which this Budget is only one, but a particularly visible, example.

…Solidarity that does not appear out of thin air, but is nurtured and sustained through “the imaginative ability to see strange people as fellow sufferers,” and it in turn nurtures and sustains us. …Solidarity that saw us through the centuries of oppression, instilled in us that imaginative capacity to identify with the suffering in our midst. That was already part of us when we stepped back from the precipice – oppressor and oppressed – and began the long journey toward a better life for all.

This is the solidarity of which I speak. This is our legacy. We know that the society to which we aspire – compassionate, democratic, egalitarian – will not come about by belief alone. It is a society we seek to create.

We create it in our communities when a person who has never had running water opens a tap in her own back yard, when a family turns on an electric light for the first time.

We create it in our region when we join in a compact with others, seeking to negotiate a new partnership for the sustainable development of the continent.

We seek its global embodiment in an international order committed to the eradication of poverty, not because poverty is the presumed seed-bed of terrorism, but because we are all enriched by affirming the dignity and recognising the potential of others.

As we table the 2002 Budget before this House today it is therefore appropriate that we take some time to reflect on the developments in the global economy.

The past two decades were characterised by unbridled optimism fuelled by the longest period of growth in the United States, the prospects of economic power embodied in the coming of age of the European Union, and the mirage of unimpeded expansion in Asia and Latin America.

A na�ve confidence prevailed that prosperity was the guaranteed outcome of the ‘third wave of globalisation’. This wave of globalisation, which began around 1980 had at its heart three broad characteristics. First, a large group of developing countries accounting for some three billion people became players in global markets. Second, international migration and capital movements increased dramatically reshaping trading patterns and ownership structures. Third, for some developing countries, many of them in Africa, globalisation has meant increased marginalisation.

Unprecedented prosperity and wealth in the developed nations of the world has created opportunities for growth and trade for other countries. However, these benefits have not been distributed equally. The bulk of capital flows remain between the rich countries of the world. Foreign direct investment per capita in the United States is around $3200 while in Africa it is a paltry $124. And a na�ve definition of success has blunted the world’s commitment to address poverty.

It ignored local realities, cultures, and needs. It sought simplistic solutions to complex problems. In the aftermath of September 11, 2001, we again face the risk of easy diagnoses. Of course terrorism is an evil that must be countered. But this must not be allowed to become another burden laid indiscriminately on the shoulders of the poor. And we must not allow the war on poverty to become hostage to another agenda.

We who are born at the cradle of humanity have a responsibility for remaining activists for a more compassionate society. A society that recognises and respects the richness of our different cultures and languages, the humanity of all the world’s people. A society that is intolerant of poverty. A society that recognises the life of a Mozambican child is as precious as that of an American child. A society that accepts that poverty anywhere lessens the humanity of every citizen of the globe. A global society that actively seeks human solidarity.

Solidarity is not discovered by reflection but created. It is created by increasing our sensitivity to the particular details of the pain and humiliation of other, unfamiliar sorts of people.

From the global economic perspective the challenge we face now is to ensure that the gains that have been made through this wave of globalisation can be extended to eliminate poverty and improve equity in the poorest parts of the world. Economist Joe Stiglitz reminds us that ‘each of the most successful globalising countries determined its own pace of change; each made sure that as it grew the benefits were shared equitably.’
And so in this Budget we are able, once again, to harvest the sweet fruits of the progress we have made. The 2002 Budget:

* Gives priority to reducing poverty and vulnerability through sustained economic growth
* Increases spending on social grants, municipal infrastructure and housing,
improved police and justice services and critical administrative services to citizens * Supports an enhanced programme to address the impact of HIV/Aids
* Gives continued emphasis to infrastructure investment and support and urban and rural development
* Strengthens the fight against crime
* Steps up assistance to communities to improve access to affordable basic services
* Gives generous tax relief to all.

Madam Speaker, we recognise the importance of taking charge of our destiny and of finding solutions that are appropriate for our needs and circumstances.

Our response has been to seek a partnership with the global economy and, in particular, the wealthy nations of the world and the multilateral institutions. A partnership built on trust, respect and, above all, a commitment to succeed. A partnership designed to improve the quality of the lives of all the people of our continent, and in particular the poor. But it is also a partnership that will contribute positively to global growth and prosperity. We take pride in the role that our President has played in shaping the New Partnership for Africa’s Development. As South Africans we have a shared responsibility to ensure that this partnership takes root and grows.

Madam Speaker, it is our intention to place firmly on the agenda of the global discourse the values and principles that have guided our young democracy. The World Summit on Sustainable Development to be held in Johannesburg in August this year provides an opportunity to arrive at a global partnership that will embody these values.

The Johannesburg conference is preceded by a conference on Financing for Development in Monterrey, Mexico, where, as one of two special envoys of the Secretary General of the United Nations, I will have the task of challenging my colleagues, the Ministers of Finance of developed countries, to commit to a meaningful compact on the resources required for sustainable development. Another important opportunity arises from the fact that as of November 2001 South Africa occupies the Chair of the Development Committee, which is the policy making committee that governs the World Bank. It is our intention to use this opportunity to focus the attention of the multilateral institutions on a programme of action designed to eliminate poverty.

South Africa’s appointment as the Chair of the Council of the World Customs Organisation in June 2001 reflects the integration of our economy into the world economy and establishes the South African Revenue Service (SARS) as a reliable partner in trade administration. And it also provides another forum within which to advance the interests of developing economies and the goals of NEPAD.

Economic outlook

Economist and philosopher Amartya Sen has for many years articulated a profound and nuanced understanding of the need to address broader social policy concerns alongside growth as an economic goal. Public action in areas such as education, health, social development, security, land reform and housing are critical to a development strategy that places at its core the need to eradicate poverty and create a better life for all citizens.

Our economic policy over the past seven years has been shaped by this commitment. The choices we have made are designed to ensure that our economy grows sustainably and that more and more of our people share in the benefits of that growth.

The Budget we table before this House today makes five key interventions in support of development and the war against poverty. First, this Budget is strongly oriented towards growth, providing for an average increase in real spending of over 4 per cent a year for the next three years. Second, it provides for an intensification of spending on alleviating poverty, including increases in old-age pensions and child support grants and an enhanced response to HIV/Aids. Third, there is increased investment in infrastructure, particularly in support of urban renewal and rural development. Fourth, it strengthens the fight against crime by, amongst other things, making available the resources to employ an additional 16 000 police men and women. Fifth, it provides tax cuts for individuals, further tax incentives for investment and a more generous tax regime for small business.

This Budget has been crafted against the background of considerable uncertainty about the growth prospects for the global economy. The rapid growth that characterised the latter part of the 1990’s stalled in 2001. The US economy descended into a recession last year from which it is expected to make a mild recovery this year. Although initially expected to be relatively immune to the investment collapse in the US, Europe’s economic performance was affected.

Germany in particular has experienced a sharp slowdown. The Japanese economy remains trapped in a recession from which it is unlikely to recover in the year ahead. The outlook for the emerging market economies also remains subdued. The collapse of Argentina and the fragile position of Turkey are likely to remain points of vulnerability for other emerging markets. It is worth noting that this is the first time since the mid-1970’s that there has been such a comprehensive slowdown in the global economy. The advanced economies are expected to grow by 0,6 per cent this year.

Amidst this, South Africa’s economy has shown impressive resilience. It is easily forgotten that the average rate of growth in real Gross Domestic Product (GDP) between 1994 and 2000 was 2,7 per cent. If we exclude 1998, a year of exceptional international turmoil due to the Asian financial crisis, average growth was 3,1 per cent. The economy grew by 3,4 per cent in 2000 and about 2,2 per cent in 2001, underpinned by a moderate recovery of investment and a strong export performance in the first half of last year.

But of course our economy is not immune to international developments which have temporarily unsettled growth and inflation trends. Growth for 2002 is expected to be 2,3 per cent, rising to 3,3 per cent in 2003. Against the background of an unexpected depreciation of the rand in the second half of last year, we now expect inflation to pick up moderately this year.

But growth of our economy has been underpinned by extensive structural reforms designed to ensure a more dynamic and resilient economy.
* Export diversification continues, both in non-traditional manufactured goods, tourism-related trade and growth in services exports.
Manufactured exports grew from 9 to 20 per cent of GDP between 1990 and 2000. * The balance of payments is immeasurably stronger and better able to sustain stronger growth – the current account will register a moderate deficit of 0,5 per cent of GDP in 2002.
* Real wages and productivity have increased by over 20 per cent since 1994, bringing rising living standards to millions of people and strengthening the competitiveness of industry.
* The net open forward position has been reduced from some $24 billion in 1998 to just under $3 billion in January 2002.
* The budget deficit is expected to be 2,1 per cent of GDP in 2002/03 falling to 1,7 per cent in 2004/05.
Madam Speaker, numerous explanations have been advanced for the depreciation of the rand in the fourth quarter of 2001. The underlying health of South Africa economy is not in question. Indeed the international rating agency Moodys provided a strong endorsement of our economic policies by raising our credit rating to Baa2.

It is widely acknowledged that the depreciation of the rand in the last quarter of last year was overdone. In an attempt to better understand what occasioned the sharp decline of the exchange rate in the last quarter of 2001, a commission has been set up headed by Advocate Myburgh. The Commission’s preliminary report is expected by the end of April.

Rising prices impact negatively on the poor and most vulnerable, and so the lowering of CPIX inflation from 7,7 per cent in 2000 to 6,6 per cent last year represents a significant advance. The Governor, Mr Tito Mboweni, must be commended for the way in which the South African Reserve Bank has managed monetary policy during difficult and uncertain times.

This year, we will see a temporary rise in inflation as the economy adjusts to last year’s depreciation, and we now expect CPIX to average 6,9 per cent, just outside the 3 – 6 per cent target range. However, the underlying inflation outlook is firmly downwards, and both the Government and the Reserve Bank remain confident that CPIX will return to the target range in 2003 and beyond.

Although the overall inflation trend remains muted, we are aware that food prices have increased sharply. The rise in the maize price in particular, affects the poor and the most vulnerable. The markets for grains, meat, vegetables and related products are unavoidably affected by seasonal factors and international developments in commodity prices and so we should expect a greater variation in food prices than the overall CPI.

For three of the past four years, food prices have increased by less than other consumer goods. But it is clearly important that we avoid an undue rise in the prices of essential staple foods. Therefore the Departments of Trade and Industry and Agriculture have been asked to do a thorough investigation and a report is expected shortly. We would like once more to appeal to the players in this sector to keep prices appropriately related to costs. It would clearly be in no-one’s interest for the benefits of a more competitive agricultural marketing system to be lost in the pursuit of short term opportunistic gains.

Viewed against the rapid changes in the global economy and the deep structural reforms we have undertaken in the past six years, our economy’s growth performance has been remarkable. But employment creation remains weak and efforts to accelerate investment and training and promote small business development have not yet turned the employment trend around.

We believe that the economy’s potential is infinitely greater. Unleashing this potential requires that we act together as a nation. That we embrace the spirit of Vuk’uzenzele, and allow the needs, aspirations and interests of our country and economy to shape our respective roles, responsibilities and responses. That we act now, together, energetically to realise the potential of our country.

Government alone cannot take responsibility for growth and development. It is a collective responsibility. We need, all of us, to accept that and commit to a compact that recognises that the power to make a difference rests with all of us.

This Budget constitutes the commitment of government to this compact.

Such a compact would need to address a key element in our economic and social landscape. This element, which is hard to define precisely or adequately quantify in economic models, is confidence. It is the need to understand that we all have a part to play in shaping our common destiny. In our generation vests the responsibility to build human solidarity actively, to push back poverty, to build a compassionate, caring society. It is our task to identify the challenges and grasp the opportunities.

Opportunities can arise in surprising ways. We initiated a project called ‘Tips for Trevor’. The idea is that South Africans from all walks of life are invited to write to the Minister with tips of what should be in the Budget. About two weeks ago one of our very tired officials inadvertently gave a telephone number for the Ministry which turned out to be the number of Butler’s Pizza in Gardens. Butler’s phones started ringing, not with pizza orders but with tips for the Minister. It took very little time to convert an annoying situation into a business opportunity. They approached our Communications manager and proposed that, in return for the tips they had received, they wanted a picture with the Minister. They also very generously donated 60 pizzas to an exhausted and hungry Treasury team. We thank them and apologise for the mix-up.

Similarly to when we called Mr Hannes Rabie at his farm Nuwerus yesterday to share some of his hanepoot harvest with you here today, he jumped at the opportunity – mahala! And offered that we should return next year for even sweeter fruit. This captures the spirit of South Africa’s people.
The Budget framework

2001 Budget outcome

This Budget extends the growth-oriented fiscal stance of the 2001 Budget, providing for strong real increases in spending and significant cuts in taxes. Although the economy did slow down last year we have again seen strong revenue performance and sound debt management.

The projected outcome for 2001/02 is dominated by the strong tax performance. Revenue is projected to be R15 billion higher than budgeted. Supplementary allocations raise total expenditure by R4,3 billion.

Of the additional spending this year, R2 billion goes to provinces to pay backlogs in social security payments, R130 million is set aside for operations in Burundi and the remainder funds unavoidable and unforeseeable expenditure approved by Parliament in the Adjustments Budget in November 2001.

The budget deficit in 2001/02 is expected to be 1,4 per cent of GDP.
2002 Budget priorities

The improvement in our fiscal position means that we can substantially increase public spending, thereby increasing the potential of all our people to contribute to social development. Main budget expenditure will be financed through moderate growth in revenue and a deficit of 2,1 per cent of GDP in 2002/03, decreasing to 1,7 per cent in 2004/05.

The 2002 Budget directs more resources towards reducing poverty and vulnerability among our people; educating our children; training and developing skills among our youth; building and enhancing physical infrastructure and basic municipal services and making our communities safer places to live, work and play.

Real non-interest spending across national and provincial government will grow by 4,1 per cent a year over the next three years. In nominal terms, it rises from R256 billion in 2002/03 to R298 billion in 2004/05.

Prudent fiscal management has resulted in lower interest costs thereby releasing some R10 billion of additional resources for spending on services over the next three years. Debt service costs are expected to fall from 4,8 per cent of GDP in 2001/02 to 4,4 per cent next year and 4,1 per cent by 2004/05. What this means is that whereas in 1998/99 we were spending 20,2 per cent of our Budget on interest costs, for 2002/03 this comes down to 15,7 per cent and is expected to fall below 15 per cent by 2004/05. This is clearly a policy choice that has started to pay dividends.

The outstanding revenue performance for this year is largely the outcome of a sharp improvement in company tax receipts. The robust revenue trend makes possible substantial relief to taxpayers again in the 2002 Budget, which will in turn contribute to a recovery in household spending and economic growth over the medium term.

The main budget provides for expenditure of R287,9 billion in 2002/03, rising to R334,6 billion in 2004/05. Revenue increases from R265,2 billion to R313,2 billion over the same period.

After setting aside provision for debt costs and the contingency reserve, the framework provides for total allocations to national departments, provinces and assistance for local government of R237,1 billion in 2002/03, rising to R273,1 billion in 2004/05.

Recognising that the depreciation of the rand will impact on inflation and public service salary adjustments in 2002, the revised framework includes a R3,3 billion contingency reserve in 2002/03, rising to R9 billion in 2004/05. The reserve also provides for possible unforeseeable and unavoidable expenditure in the budget year and macroeconomic uncertainties or new priorities in the years ahead. Supplementary funds are once again set aside for new infrastructure spending.

The 2002 Budget framework creates an enabling environment that allows us to respond creatively to the challenges of social development and work in partnership with communities to build a healthy, vibrant future for all.

Our response is balanced, yet reflects the tough choices that we have made. It ensures that spending is affordable and sustainable, and contributes effectively towards achieving our broad social and economic policy objectives. These include enhancing economic growth and job creation, deepening equity and social development and strengthening the safety and justice sector.
Investing in growth

Recognising the need to reinforce the growth momentum of the economy, the 2002 Budget aims to invigorate several key policy initiatives.

As in last year’s budget, investment in infrastructure is prioritised. In addition to national and provincial capital spending, the investment programmes of public enterprises and public-private partnership agreements – including transport projects, government buildings and several eco-tourism initiatives – will contribute significantly to building productive capacity in the years ahead.

Economic performance is also enhanced by a cluster of measures focused on enhancing the quality of public expenditure. These include the overhaul of the shape and organisation of the public finances and a robust new framework for financial accountability across all three spheres of government. Managerial capacity building programmes have been strengthened, information systems upgraded and financial management training enhanced.

The most important contribution Government makes to long-run growth and development is investing in people. The Human Resource Development Strategy launched in April 2001 sets the framework for developing our country’s skills base. Reshaping our universities and technikons, improving learning and teaching in schools and creating new skills development programmes for workers and work-seekers are amongst the key elements of the strategy for human development. To these we will add in the years ahead the new learnership incentive and the programmes of the Umsobomvu Fund.
Division of revenue

The 2002 framework allows for additional spending of R13,4 billion in 2002/03 rising to R17,9 billion in 2003/04 over the forward estimates set out in the 2001 Budget.

* Over the MTEF period, additional allocations totaling R20,5 billion are proposed for provinces, mainly in response to the rapid take-up of the child support grant and to reinforce both human and physical capacity in the health system to address the imt of communicable diseases such as HIV/Aids, TB and malaria.
* A further R6,8 billion is proposed in support of local government to strengthen basic municipal service provision to poor households, manage the impact of the municipal demarcation processes and the institutional restructuring of service delivery system.
* Supplementary allocations to national departments include some R6,6 billion for the criminal justice sector to employ additional personnel, strengthen the administration of justice, improve court services and build additional prison accommodation. Adional allocations are also directed towards key administrative services, including modernising the information systems of the Department of Home Affairs and enhancing tax administration. The Departments of Foreign Affairs and Defence are compensated for the effects of the depreciation of the rand on their costs.

Given that most of our social spending is at the provincial sphere, the biggest transfers in the Budget are to this sphere, rising from a revised level of R121,2 billion in 2001/02 to R132,4 billion next year and R152,4 billion in 2004/05. This represents an annual average growth rate of 7,9 percent over the next three years.

With stable finances, improved financial management, the strong growth in transfers to provinces will reinforce accelerated delivery of pro-poor programmes. They should enable provinces to build and improve social and economic infrastructure: hospitals, schools and roads. They should allow them to strengthen their capacity to deliver better quality services by employing more doctors and nurses, and to increase the amounts for old age pensions and the child support grant.

The biggest increases in this budget go to local government. These allocations rise by 18,3 per cent a year over the MTEF period. Total allocations rise from R6,6 billion in 2001/02 to R8,6 billion in 2002/03 and R10,9 billion in 2004/05. This reflects government’s strong commitment towards the delivery of basic municipal services and infrastructure to the poorest of our people. Now that our municipalities have completed their transition, residents are dependent on them to roll out essential infrastructure. Poor areas that fall within the nodes identified in the rural development and urban renewal programmes are given an extra boost of funds to accelerate the pace of alleviating poverty in the poorest areas of the country.

The municipal infrastructure programme increases from R2,2 billion this year to over R4 billion by 2004/05. The housing subisidy allocations grow from R3,2 billion to R4,3 billion by 2004/05.

This year, around 30 municipalities will, for the first time, be implementing three-year budgets for their 2002/03 budgets. The Municipal Finance Management Bill, currently before Parliament, will also give legislative effect to financial management reforms in this sphere.
National expenditure proposals

Details of national departments’ spending plans for the next three years are again this year set out in the Estimates of National Expenditure. Members will find a wealth of information here, some 820 pages of departmental aims and objectives, policy developments, programme expenditure estimates, service delivery outputs, indicators and targets. You will be pleased to learn that I do not propose to list the full set of measurable objectives by programme. But I would urge Members to exploit to the full this valuable compendium. Hidden in this volume and departments’ published annual reports there is a remarkable record of our development and progress:

* In fighting cholera in KwaZulu-Natal, the Department of Water Affairs and Forestry provided 100 000 people with safe water and 52 000 people with ventilated pit latrines.
* Some 20 300 land restitution cases have been settled, returning 300 000 hectares to 44 246 households.
* Social Development and Welfare departments pay 1 942 000 old-age pensions and 706 000 disability grants a month. There are 1,7 million children registered for child support grants now.
* Migration officials registered over 6 million visitors passing through our borders last year.
* In 2001, the Department of Agriculture eradicated 40 000 hopper bands and 9 000 swarms of locusts.
* Regional joint task forces have seized 101,6 tons of dagga and recovered 2 595 stolen livestock.
* The National Health Department distributed 310 million condoms last year. There were over 429 000 admissions to our hospitals for complex tertiary care. In our anti-malaria vector control programme, over 1,1 million households were sprayed last year.
* The Government Communication and Information System records that 909 679 pages are now registered on government websites.
* And last year Parliament received 279 696 incoming telephone calls, of which 37 744 were not answered.

There is more to the Budget, of course, than the statistics that track expenditure and services. But by monitoring and reporting on progress, and quantifying plans and targets, we hope to reinforce and empower this House and the public in holding our Departments accountable.

Investing in people

Turning now to the expenditure proposals, we note that investing in people is again the foremost priority in the Budget. Education and skills development

Spending on education is 24 per cent of non-interest expenditure – the lion’s share of the allocations.

Consolidated spending on education (national and provincial government) rises to R59,8 billion in 2002/03. It is estimated to increase to R68,3 billion by 2004/05.

For 2002/03 projected revenue from the Skills Development Levy (which entails a 1 per cent tax on company payroll) is expected to be R2,95 billion. Critical to the success of this initiative is the partnership that is required between government and business so as to ensure that the skills development programmes being implemented are consistent with the requirements of a particular sector.

The Umsobomvu Fund has youth development as its focus. Since its inception, the Fund has initiated a number of projects including the creation of pilot youth advisory centres, the launch of Community Youth Service programmes and the establishment of ‘school-to-work’ pilot projects. This year the Fund will launch new initiatives to provide young entrepreneurs primarily in the small business sector with business advisory support.
Social security grants and welfare services

Spending on welfare services and social security grants forms a significant share of provincial budgets, rising to R34,3 billion in 2004/05. The social grant system is our most effective tool in alleviating poverty. Honourable members will be pleased to note that with effect from this Budget, the date of annual increases to social grants is brought forward from 1 July to 1 April, the start of the financial year.

From April this year, we will place more money in the hands of four million people, raising the value of old age pensions and other social grants to R620 a month, an increase of R50. This is good news for our people and will assist in improving the daily life of poor families.

We will also help more families and care-givers look after young children by raising the value of the child support grant by R20 to R130 a month. The grant will be and extended to a further 1,2 million children by the end of next year.
Health care

This Budget contains significant measures to strengthen the national HIV/Aids programme. In addition to an estimated R4 billion currently spent by provincial health departments on Ai

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