MEDIUM TERM BUDGET POLICY STATEMENT 2007 SPEECH BY MINISTER OF FINANCE TREVOR A. MANUEL, MP

Madam Speaker
In tabling the 2007 Medium Term Budget Policy Statement, we can affirm that
economic growth and investment in public services are steadily bringing a better life
to millions of South Africans. We can look back with pride on the course we chose in
implementing our Reconstruction and Development Programme, because we can
see the fruits of the new Constitutional order we built, of the transformation of policy
and service delivery we undertook, of the tough decisions we made and the
dedicated efforts of South Africans from all walks of life who have contributed to our
social progress and economic renewal.
Today is better than yesterday, and tomorrow will be better than today.
We can assert this confidently because our progress is recorded and measured, and
the facts speak louder than any rhetorical flourishes.
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Yet the message of today's Budget Statement is not that we have reached our
destination or that victory can be claimed. It is that we have advanced to new
challenges and another phase in our transformation journey lies ahead.
Economic growth and development challenges
The 2007 Community Survey released last week tells a story of steady progress in
public service delivery. In 1996, just over half our people did not have water in their
homes. Today, over 88 per cent of people have access to piped water. In 1996, only
64 per cent of our people lived in formal houses. Today, over 70 per cent enjoy this
right. In almost every area of public service delivery, from access to schooling and
health care to refuse removal, from electrification to access to computers, from roads
and street lights to sport facilities, from telecommunication services to access to
public transport - we can point to steady progress in living standards. Development
is also about access to jobs, security of incomes and redressing past inequalities.
We can show measured quantitative progress on these fronts, although we clearly
still have more work to do in these dimensions of reconstruction and transformation.
So in tabling the 2007 Medium Term Budget Policy Statement, we also reaffirm our
commitment to building a stronger economy, faster job creation, broadening
participation and deepening the quality of social and economic opportunities for all.
South Africa is now entering the ninth year of the longest economic upswing since
the national accounts have been recorded. National income has risen by 22 per cent
per person since 1999, with increases across all income groups. Employment is
rising faster than at any point since the 1960s. Fixed investment has increased
sharply since 2002, by over 10 per cent a year. These are substantial steps towards
our medium term economic goals - growth of 6 per cent a year or more, an
unemployment rate of below 14 per cent by 2014, and an aggregate poverty rate half
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that recorded in 2004. Our commitment is not just an aspiration towards these
targets, we intend to measure progress, step by step, in sharing the democratic
dividend among all of our people.
We need to understand, Madam Speaker, that the present buoyancy in our economic
growth is partly a consequence of favourable global economic conditions. High
commodity prices, low interest rates and strong international demand have
contributed to the momentum of our income growth and to financing investment
through capital inflows. We need to welcome and take advantage of the
opportunities of global growth, but we also need to distinguish temporary prosperity
from structural progress; we need to ensure that windfall gains are wisely invested
and surplus resources are set aside for when markets turn against us in times ahead.
On the domestic front, our economy remains strong, buoyed by rising investment in
productive capacity, higher employment and incomes, strong consumer demand and
healthy foreign capital inflows. Last week's announcement of a R37 billion investment
by the Industrial and Commercial Bank of China in one of our leading banks indicates
that international confidence in our economy is high, and perhaps also signals a new
place for Africa in the changing patterns of trade and finance flows of the 21st
century.
So the healthy economic outlook that we are able to table today is of interest not just
to our own people, but also in our region and the wider world. We expect the South
African economy to grow by 4.9 per cent this year and 4.5 per cent in 2008, before
returning to about 5 per cent a year in 2009 and 2010. The outlook is somewhat less
positive than it appeared in February - financial crises in developed markets, global
imbalances, high food and oil prices internationally and slowing growth in the US and
other developed countries cloud the sky. The advent of the sub-prime mortgage crisis
in the US is further evidence of the interconnectedness of our world, and also a
reminder of the fact that we must build up our cushion against global volatility.
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Our approach to international finance and monetary management has meant an
accumulation of over US$30 billion in foreign reserves, which is itself a considerable
strength and also a contribution to greater exchange rate and interest rate stability.
In the fiscal stance outlined today, we indicate how the public finances are also
contributing to the resilience of the economy in the context of both international
uncertainty and the future investment requirements of our own economy.
Inflation and capacity utilisation
Madam Speaker, in this regard we are mindful that more rapid economic progress
has itself brought new dimensions to the struggle. In the context of increasing oil and
food prices globally, rising inflation has re-emerged as a policy concern. And our
expanding investment spending has run well ahead of our ability to save, contributing
to an increased current account deficit on the balance of payments. This highlights
the importance of improved productivity and industrial competitiveness as a condition
for the further acceleration in growth and employment creation over the decade
ahead.
The recent increase in CPIX inflation to 6.7 per cent has necessitated steps to curb
inflation, that have been implemented by the Reserve Bank.
Global price trends present an inflation challenge for all economies at this time. Food
and commodity prices have increased sharply in recent years. More recently, the
depreciation of the US dollar and continued market pressures have increased oil
prices to over US$90 per barrel, an increase of about 23 per cent in the last two
months. The global trends have interacted with our own rapid economic growth,
agricultural supply conditions, broader supply pressures and skills deficits to push
CPIX above the inflation target this year.
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The rate of capacity utilisation in the economy is high, and in some sectors demand
pressures are generating higher prices.
These price pressures will not abate quickly. Yet addressing them and returning to
within the inflation target range is important for our long-term growth. Higher inflation
reduces our competitiveness, undermines the real income of rich and poor
households alike, and creates greater uncertainty for the investment decisions of
firms.
The task of bringing down inflation cannot just be left to the Reserve Bank. Robust
investment in capacity is underway and this will reduce some of the price pressures
over time. All actors in the economy have a role to play. In particular, an
improvement in the fiscal balance will help to moderate inflation and create space for
stronger private sector economic activity.
Investment, trade, skills, competitiveness
Because we are determined to make tomorrow better than today, we must carefully
analyse our present pattern of growth. For the next two years, somewhat slower
growth in household spending will be offset by rising private and public investment.
Our increased investment has not been matched by a commensurate increase in
domestic production or in savings. Rising inflation and a high current account deficit
are signs of both robust domestic growth and that we run a risk of not being able to
finance that growth in future. In order to address these imbalances, we need to
sharpen our microeconomic policy instruments through lowering the costs of doing
business, stepping up our efforts in skills development, increasing trade
competitiveness and investing in infrastructure that will support economic expansion.
To grow rapidly, and to sustain that growth, we must increase exports, for they are
the source, over time, of the revenue that must pay for our imports. The prices of
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gold, platinum and other commodities have risen sharply in recent years and this has
helped us, but we need to take further and more aggressive steps to diversify our
trade capacity. Because of its impact on productivity and innovation, trade policy has
a central place in promoting competitiveness. Our approach needs to ensure that
competition is fostered through tariff simplification and reform, and that incentives for
investment and for research and development are appropriately targeted and
effectively administered. Public accountability is critical to the success of such
initiatives, so we will seek to publish appropriate reviews and assessments of our
progress. In addition, both industrial and labour market policies must focus on raising
the labour intensity of the economy so that we can create jobs at an even faster
pace. Greater progress in channelling young people into jobs has to be a central
policy objective in coming years.
In all of these things, we face intense international competition.
A recent survey of 600 chief executives of multinational companies said a shortage of
qualified staff ranked as their biggest concern. No, this survey was not conducted in
South Africa. The skills shortage complained about is in Asia. Yes, a region with
almost half the world's population is experiencing severe skills constraints. China is
battling with severe shortages of lawyers; major Indian companies are complaining
about a shortage of IT professionals; everywhere there are difficulties in finding
industrial, commercial and managerial expertise. Last week, the European Union
announced its intent to recruit 20 million skilled foreigners over the next twenty years.
I believe that this kind of parasitic conduct of nations is wrong. But the point we need
to debate about South Africa's skills shortages is not whether they exist or not, but
how we confront the challenge and deal with it, recognising that everywhere else in
the world they are focused on the same thing.
We will continue to place education and skills development at the top of the budget
priority list. Building a learning society is partly about improving the quality and
content of what goes on the classroom, but it is also about investment by businesses
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in their employees, about communities taking ownership and responsibility for their
schools and about how families communicate values and capabilities to their
children. I am aware that the negotiations with educator unions on the occupation
specific dispensation have encountered some difficulties. We all know that a better
career progression system is needed to retain good teachers and so efforts to
unblock these difficulties must enjoy our full support.
The area of skills development is clearly one in which we will make more progress if
we address the institutional and financial barriers that stand in the way of aligning
resources with needs.
I share with the Minister of Labour a disappointment that financial management has
been poor in several of our sector education and training authorities. At the end of
last year, our SETAs held over R3.7 billion in cash reserves - effectively levy income
that employers had not yet utilised to reimburse training expenses or skills
development projects that had not yet been implemented. But other parts of our
higher and further education system that are ready to expand enrolment and step up
their contribution to human investment, do not have the financial resources to do so.
This can't be right, and so we surely need to explore options for improving the
integration of our education and training financing arrangements.
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Fiscal policy and the budget balance
For the past five years, public spending has increased by an annual average of
9.4 per cent in real terms. If a comparison is made with expenditure in 1995, it shows
that public spending has doubled in real terms since then. Higher spending has been
financed by falling debt service costs and rising tax revenues. We must take account
that some of the growth in our revenue is cyclical, related to high commodity prices
and the consumption boom. It is incumbent upon us to manage these cyclical
revenues differently.
In this Medium Term Budget Policy Statement, we introduce the concept of a
structural budget balance, sometimes also referred to as the cyclically-adjusted
budget balance. The structural balance attempts to calculate the effect of cyclical
revenues on our budget balance. This addition to our box of tools allows us to ensure
that public spending is protected, even if economic conditions worsen. Revenue that
is cyclical must be treated differently. To do otherwise would be reckless. Some of
the cyclical revenue should be spent on things that raise our ability to grow faster in
the long term, things such as infrastructure, education and institutional capacity. It
also makes sense to use some of that cyclical revenue to pay off debt or to save for
future needs.
With this in mind, government is proposing to budget for a surplus of about
0.6 per cent of GDP for the next three years so that when economic conditions
deteriorate, we have the resources to cushion the economy. When cyclical revenues
are removed from our calculations, the structural budget balance indicates a deficit
that will rise to about 1 per cent GDP in 2010/11.
The tax burden on the economy has risen since 2004 mainly due to the cyclical
windfalls accrued as a result of higher consumption and commodity prices. Rising
employment and higher salary increases have also led to a rise in tax revenue. This
year, we project to collect about R8.5 billion more than budgeted, mainly due to
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higher inflation and related salary increases. We expect that over the medium term,
main budget revenue will be about 27½ per cent of GDP.
We reaffirm the principle that cyclical revenues should not be used to provide
permanent tax relief. However, proceeds from better administration and tax
compliance, and the broadening of the tax base may be used to lower the tax
burden, as we have done in the past.
Adjustments to the 2007/08 estimates
This year, we have tabled two adjustments appropriations. The special adjustments
budget tabled in September dealt with urgent transfers for the following items:
• R1.9 billion brought forward from 2008/09 to fast-track stadium development
• R2.5 billion for the pebble bed modular reactor project
• R700 million for the Land Bank
• R222 million for Denel and R45 million to Alexkor; and
• R500 million to Sentech for wireless broadband infrastructure.
In the adjustments appropriation bill that we table today, we include details of
amounts rolled over from last year's budget as well as unforeseen and unavoidable
expenditure. These include:
• R654 million for expenditure resulting from fires, floods and other adverse
weather conditions
• R400 million for the prevention and treatment of multidrug-resistant
tuberculosis
• R744 million to support the restructuring of South African Airways; and
• R1.9 billion to accommodate the higher-than-budgeted cost of the 2007 salary
agreement.
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Taking into account about R5 billion in under-spending, total spending amounts to
R542 billion, about 15.4 per cent more than expenditure in 2006/07. The revised
estimate for the budget surplus is R10.8 billion, marginally higher than the
R10.7 billion projected in February.
The 2008 Medium Term Expenditure Framework
The proposed budget framework for the next three years makes provision for about
R81 billion of additional allocations, allowing for spending on services to rise by
6.4 per cent a year in real terms over the next three years. Of this amount, about
R15 billion goes towards funding the higher cost of the 2007 public service salary
agreement. A further R2 billion goes towards the occupation-specific dispensations
proposed for educators and the envisaged dispensation for social workers. Last year,
the budget provided R4.6 billion for occupation-specific adjustments in the health
sector.
About R4.3 billion over the MTEF period will go towards compensating pensioners
and social grant beneficiaries for rising food prices and other cost-of-living increases.
Of the remaining amounts, municipalities receive about R12.6 billion to accelerate the
pace of delivery of water, sanitation and electricity connections. These resources also
cover the additional costs of providing poor households with free basic services. Over
the next three years, infrastructure transfers to municipalities total R57 billion,
reflecting a firm commitment to sharing the fruits of economic development. This
includes a further R2 billion for public transport infrastructure and systems.
Provinces receive about R36 billion mainly for targeted interventions to improve the
quality of schooling, health care and welfare services. The proposed budget
framework provides for growth in the provincial equitable share of 11.9 per cent a
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year over the next three years. The new estimates of provincial population numbers
are taken into account in the allocation of these funds.
Several conditional grant allocations are revised upwards. A further R2.1 billion goes
towards funding the comprehensive HIV and Aids programme. Early learning
opportunities and the expansion of grade R are also prioritised because these are
programmes that improve outcomes in later years. Provision will be made for more
places for learners with disabilities and who therefore have particular needs in our
schooling system. The school nutrition programme receives a further addition to take
account of higher food prices and to feed more children for the full school year.
Earlier this year, the Minister of Education released a report detailing the state of
school facilities. It illustrates considerable progress over the past decade, but also
signals that more needs to be done. Whereas in 1996, 51 per cent of schools were
overcrowded, this figure now stands at 24 per cent. The number of schools without
electricity has decreased from nearly 14 000 to 4 300. Schools without adequate
water have declined from 8 800 to 3 150. The number of schools with access to
computers has increased significantly, but there are still 17 000 without them. With
these challenges in mind, a further R2.7 billion is proposed for school building and
maintenance over the MTEF period.
National departments receive about R33 billion of the proposed additional
expenditure. Much of this will go to economic infrastructure and services, including a
substantial rise in funding for industrial development incentives. We will also increase
spending on fighting crime, improving service delivery in the Department of Home
Affairs and expanding labour-based employment programmes. Higher education will
benefit from additional allocations in recognition of rising student numbers and the
need to boost financial assistance to students.
Efficiency savings and measuring performance
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The 2008 Budget framework favours programmes that induce efficiency savings in
other areas of spending. For example, removing unroadworthy vehicles reduces road
accidents, taking pressure off our emergency services and trauma health care
services. Increasing the number of agricultural extension workers enhances the
prospects of successful land reform projects.
Allocating resources to the right areas is only half the battle. The 2008 Budget
framework raises the bar in the quest to improve value for money. In line with the
Presidency's monitoring and evaluation framework, the Treasury has issued
guidelines for the development of performance measures related to each
programme. The intention is to assist Parliament and the public to hold departments
to account for the delivery of key outputs.
As part of finalising the 2008 MTEF, national departments are asked to make
R2.3 billion worth of savings as part of an efficiency programme. National
departments are asked to improve their management of expenditure on travel,
entertainment, marketing, catering, events and consultants. It is anticipated that
provincial treasuries will adopt a similar approach in the finalisation of their budgets.
These savings will be reprioritised towards frontline services.
Towards accelerated and shared growth
Madam Speaker, this budget framework and the related economic policy proposals
provide a clear platform for investment in the infrastructure and services that are
likely to raise our growth path towards 6 per cent. About R20 billion of the additional
amounts go towards capital formation, signalling a continuation of the drive towards
broadening access to basic services and increasing economic efficiency. Allocations
for targeted salary increases are related to performance systems presently being
implemented in the public service.
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On the basis of sound fiscal and economic policies, we have made significant
progress in improving the quality of life of all South Africans, but particularly for those
in poverty. With the right policies in place, and through steady improvements in
building implementation capacity and monitoring service delivery, we can accelerate
progress in transforming the lives of all South Africans.
Ten years of SARS
Madam Speaker, ten years ago this month, the South African Revenue Service Act
was promulgated to give effect to a key element of our public finance reforms - the
creation of an administratively independent, efficient and effective revenue and
customs authority that would be able to fund our spending objectives in a sustainable
way.
Since those chaotic days, the Revenue Service has evolved into an organisation
respected and admired across the world. SARS has been at the centre of a series of
tax, administrative and organisational reforms that have completely changed our
relationship with taxpayers. A key element of the social contract between government
and citizens is that paying one's fair share of taxes is essential to all of our futures
and that revenue collection is as much about a better service to the public as it is
about enforcement. It is this virtuous circle which lies at the heart of our fiscal policy
and at the centre of SARS's unyielding drive to promote compliance by providing
ever higher service levels, greater simplicity and ease of access to honest taxpayers.
Madam Speaker, none of us needs reminding of the unrelenting vigour, dedication
and passion of Commissioner Gordhan and the 15 000 men and women who work
for the revenue service.
Today, as we congratulate the management and staff of SARS for ten years of
dedicated service, we must also thank South African taxpayers - individuals and
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companies - for their contributions to our nation's development. And the
Commissioner has asked me to mention that tomorrow is the deadline for tax returns.
Hosting G20 Finance Ministers
Madam Speaker, we are close to the highpoint of our year as host of the G20. In just
three weeks, we host the finance ministers from the 19 most systemically significant
economies and the EU here in the Cape. This meeting follows a series of
consultations dealing with fiscal space, the impact of commodity prices and reform to
the World Bank and the International Monetary Fund. We have also used our
chairmanship of the G20 to bring African finance ministries into a dialogue with more
developed countries on issues of development.
I would like to thank colleagues in Cabinet, and in particular members of the
Ministers' Committee on the Budget, for their role in crafting this policy statement.
Thanks too to the staff of Statistics South Africa, the Ministry of Finance and the
National Treasury.
Madam Speaker, I hereby table the 2007/08 Adjustments Appropriation Bill, the
Adjusted Estimates of National Revenue and the Medium Term Budget Policy
Statement.
Thank you