The economic driving force of the Government of National Unity is the goal of a thriving economy which will provide for the material well-being of all South Africans on a sustainable basis. This is the aspiration of all our people. We want to embark on a process whereby we can communicate the Budget to all our people. In addition to the official documents tabled today, we have compiled a "Citizen's Guide to the Budget" which will be available in all eleven official languages.
Nations are not often afforded the privilege of a new beginning. South Africa is one of the fortunate few. South Africa has become a nation united through common political and social purposes and goals. Furthermore, the intense focus, enormous goodwill and material assistance available from the international community are almost unprecedented. Prevailing circumstances, both domestic and international, present opportunities which are unlikely to last indefinitely or repeat themselves.
This country's copybook political transformation must be matched by an equally impressive economic restructuring. It is therefore essential that the most be made of these circumstances and that domestic and international confidence and credibility should be established in the management of our economy. People out there, both domestic and international, are rooting for us to succeed. Internationally they look to us as an example - we owe it to Africa and specifically our Region. We cannot afford to fail them.
The Government must accept the challenge to lead the country in expanding its resource base - be it through improved competitiveness or savings or some other means - and lift the constraint on economic growth and job creation. As all other governments - past, present and future - functioning under whatever political system and pursuing whatever set of priorities, we must nonetheless recognise that, at any specific point in time, resources, be they financial or physical, are limited and that a country and its people must manage this constraint wisely. Whatever choice is made, the inescapable consequence is that some other, often critical, need has to be sacrificed or postponed. The more resources we direct to health or education, the less are available for welfare, housing, job creation or other activities. It will serve us well to remind ourselves continually of this inescapable reality and to reflect on our national interest as we ask, plead or, as is often the case, demand of government to meet our particular needs.
The challenge the Government therefore faces, is to manage its Budget in a way that promotes real economic growth. This will increase the resources available to attain the objectives of the Reconstruction and Development Programme (RDP).
Last year's Budget began to give effect to the institutional changes in the country and the RDP. It did this by creating room for sustainable economic growth in a framework of macroeconomic stability. The success of the past year will form the basis from which added impetus will be given to further the economic and social transformation of our country.
The fundamental view of the Government is that a disciplined approach to fiscal and monetary policy is not a curb on the attainment of RDP objectives, but rather a basic prerequisite for the attainment of those objectives on a sustainable basis.
Today's Budget is the first that was fully designed under the new Government of National Unity. Realising that it takes time to change course, the Budget to be presented today reflects the policies of this Government to a more significant extent than last year's Budget. Faced with limited resources and the institutional legacy we inherited, we have nonetheless achieved important changes within a Budget that must be politically feasible, economically affordable and managerially sound.
THE 1994/95 BUDGET
The Adjustments Estimate tabled in Parliament last month provided for expenditure in 1994/95 of R1,6 billion higher than budgeted. The additional expenditure can partly be ascribed to the fact that spending agencies had to operate in an environment of slightly higher inflation than was provided for in the Budget. While expenditure adjustments during the course of the financial year are to be expected in the dynamic environment of governance, the Treasury Committee, consisting of the two Executive Deputy Presidents, the Minister without Portfolio and the Minister of Finance, played an invaluable role in disciplining expenditure. Additional expenditure allocations were recommended to Cabinet only after thorough and careful analysis and consideration.
Revenue collections in 1994/95 are now expected to exceed the budgeted amount by R2,5 billion, mainly as a result of higher than expected collections from income taxes, especially from gold mines and the corporate sector, where profits were higher than expected. Improved activity on the property market which resulted in higher collections from transfer duties, and increased imports which yielded more revenue from customs and excises were further contributing factors.
At the time of the 1994/95 Budget, the national budget deficit was expected to amount to R29,3 billion or 6,6 per cent of GDP. It is now expected to be R28,5 billion or 6,4 per cent of the latest estimate of GDP. To the extent that the carry-over of funds by departments turns out to be higher than estimated, the deficit may even be lower when the accounts are audited.
Market reaction to this outcome has been positive and indicates growing confidence in the ability of the fiscal authorities to maintain discipline, as well as the acceptability of the government's financial policies. It takes time to establish credibility, however, and today's Budget must be another building block in this regard.
ECONOMIC CONDITIONS AND PROSPECTS
Economic conditions
The Budget for 1995/96 is presented against the background of growing evidence of an economy that is in a relatively strong recovery phase. Welcome developments over the past year provide an opportunity for the implementation of fiscal policy in an environment of overall economic expansion and a growing basis for government revenue. The leeway created by these developments must now be put to the best advantage of all South Africans. Care must be taken, however, not to drain the economy of vital ingredients needed for a continuation of the expansion and for further acceleration of the growth rate in the years to come.
Although the annual rate of growth in real gross domestic product increased from only 1 per cent in 1993 to 2-1/2 per cent in 1994, developments during the course of last year were even more encouraging. After declining by 3-1/2 per cent in the first quarter of 1994, real gross domestic product increased by a seasonally adjusted annual rate of 2 per cent in the second, by 4 per cent in the third, and by an impressive 6-1/2 per cent in the fourth quarter of 1994. This is also the first time since 1989, and only one of three years during the past decade, that the annual growth rate came close to or exceeded the population growth rate.
Total gross domestic expenditure likewise increased at a faster rate. After a rise of only 1 per cent in 1993, real gross domestic expenditure rose by 6 per cent in 1994. All major components of demand, i.e. private consumption, general government consumption and investment, both in fixed assets and in inventories, contributed to this relatively sharp rise in total domestic expenditure. Investment growth is particularly good news.
With the rate of growth in gross domestic expenditure outpacing the expansion in domestic production, the current account of the balance of payments naturally had to carry the burden. In the process, the balance on the current account switched from a surplus of R5,8 billion in 1993 to a deficit of R2,1 billion on 1994. A small deficit emerged for the first time in the third quarter of last year, but then increased to a seasonally adjusted annual figure of R7 billion in the fourth quarter.
Unlike in the period of South Africa's economic isolation from the global money and capital markets, the deficit on the current account last year did not give reason for any concern. After the Government of National Unity was established in May 1994, the capital account of the balance of payments showed a remarkable improvement. Following upon a net outflow of capital of R3,6 billion in the first half of the year, a net inflow of R8,8 billion was registered in the last six months of 1994. A total net inflow of R5,2 billion for the calendar year therefore exceeded the current account deficit of R2,1 billion, and resulted in a net increase of R3,1 billion in the gold and other foreign reserves over the year as a whole.
The improvement in the overall balance of payments in the second half of the year led to a more stable exchange rate for the rand. After having depreciated by 12,1 per cent from 31 December 1993 to 13 July 1994, the average weighted nominal value of the rand against a basket of currencies appreciated by 2,6 per cent over the rest of the year. Over the year 1994 as a whole, the rand depreciated by 8,5 per cent against the basket.
Developments in the domestic economy and in the balance of payments affected the financial situation. On the one hand, an increasing demand for funds, emanating mainly from the private sector, put upward pressure on interest rates and led to a substantial increase in the amount of bank credit extended to the private sector. On the other hand, the net inflow of capital and the overall surplus on the balance of payments added to domestic liquidity and increased the ability of the banking sector to meet the rising demand for more credit. Both these developments contributed to an acceleration in the rate of increase of the money supply. Over the twelve months up to 31 December 1994, the M3 money supply increased by 15,7 per cent, a level well above the guideline range of 6 to 9 per cent announced by the Reserve Bank at the beginning of last year as an acceptable rate of increase in M3 during 1994. In January 1995, however, the money supply was only 13 per cent above the level of a year before.
Inflation also turned around in 1994. The rate of increase in consumer prices measured over a twelve month period declined to 7,1 per cent in April 1994, but then increased to 10,1 per cent in September 1994, before declining again to 9,6 per cent in January 1995.
Interest rates moved up quite strongly during the course of the year. The yield on long-term government stock, for example, rose from 12,2 per cent in January 1994 to 17 per cent in January 1995. The Reserve Bank also increased its Bank rate from 12 to 13 per cent in September 1994, and further to 14 per cent in February 1995.
The tensions that recently developed in the financial markets reflect the buoyancy of underlying economic conditions, and are natural reactions of the financial markets to the acceleration in real economic activity. They indeed provide some further confirmation of the strength of the economic recovery that is now well under way.
An important milestone in our financial strategy was reached two days ago with the abolition of the financial rand. This step was made possible by the improvement in the underlying financial situation, including the increase in our foreign exchange reserve holdings, the continued convergence between the commercial and financial rand exchange rates, the reacceptance of South Africa as a full member of the international community and good progress with political and economic reform in the country.
Prospects for 1995
At this stage, with continued good international economic growth prospects, the economic upswing in South Africa is fairly well established and broadly based. With the exception of the agricultural sector, influenced by adverse climatic conditions, and the gold mining industry, affected by a decline in the average grade of ore mined and other technical difficulties, all other sectors of the economy are on an expansionary route.
Projections also indicate a further acceleration in the growth rates of all the major components of gross domestic expenditure in 1995. With relatively strong demand emanating from the private sector, both for investment and consumer purposes, it is important to constrain current government expenditure, particularly because of the impact of sharp rises in total domestic expenditure on imports.
It can be expected that the deficit on the current account of the balance of payments will increase further in 1995. It is therefore imperative that South Africa should remain attractive to foreign investors, and should continue to draw in a net inflow of capital at least sufficient to cover the expected current account deficit.
As indicated by the 1995 guideline range of 6 to 10 per cent in M3 money supply growth, monetary policy will have to remain relatively restrictive in 1995, not only to protect the balance of payments, but also to avoid any escalation in the current rate of inflation which is, in terms of the standards of most industrial countries, still relatively high.
Overall economic developments are therefore encouraging, but do not leave scope for an expansionary fiscal policy. Indeed, it is required of Government to maintain conventional disciplines also in the management of its own finances. This remains essential to maintain the overall financial stability needed to support sustainable economic growth in the medium and longer term.
THE BUDGET AS AN INSTRUMENT OF RECONSTRUCTION AND DEVELOPMENT
The RDP reflects the Government's mission for achieving economic growth and social development to underpin sustained improvements in living standards of all South Africans. During its first year we focused on, among others, three areas: - the funding and activation of the Presidential Lead Projects; - the establishment of the RDP Fund and its disbursement; and - the formulation of an infrastructure investment programme and policy framework in the key programme areas of urban development, rural development and human resource development.
The leveraging of government spending and the adaptation of the budgetary process so as to facilitate shifts in spending priorities are key features of the RDP Fund mechanism. In addition, the criteria and procedures through which the Presidential Lead Projects have been financed from the RDP Fund have introduced strategic planning in project financing, budgeting and evaluation processes in order to promote effective management of government expenditure. At all levels of government, the RDP planning process is contributing to the identification of strengths and weaknesses in the institutional and human resource capacity of the public sector, and, where necessary, corrective or capacity building measures have been initiated.
It is also important to convey how important the quality of public sector financial management is for all our people who must be the real beneficiaries of the RDP. Of course, fiscal and monetary measures are components of a much broader set of economic policies. In combination with other aspects of good governance they stabilise interest rates and prices, create confidence in government's management of the economy and reduce the burden of debt servicing on the budget. These factors not only promote economic growth and employment, but they eventually have a positive effect on real wages and make basic services more affordable. Mismanagement leading to rising interest rates and inflation would reverse all of these positive factors very much to the detriment of all our people. There remains only one road we can choose to walk.
Minister Jay Naidoo, ably supported by his staff, is to be congratulated on the general acceptance and success of the RDP. This would also not have been possible without the cooperation and commitment of all our colleagues in Cabinet. I look forward to further close cooperation between the Departments of Finance and of State Expenditure, the RDP office and other departments..
FISCAL STRATEGY
The importance of an appropriate and facilitating fiscal strategy, which lays a sound fiscal base necessary to obtain the higher rate of economic growth required for the attainment of the RDP objectives, cannot be underestimated.
Fiscal discipline has been a recurring theme of many previous budgets. The results have been mixed. There have been many examples of policy and implementation slippages as well as external developments beyond the control of the authorities, impeding attempts at achieving this goal. A very firm policy resolve and a respite from overly unfavourable external developments have, however, enabled the Government to make appreciable progress toward restoring and maintaining discipline during the past few years. It is gratifying that respected international financiers, economists and politicians comment favourably on this achievement.
This is but the beginning of a long and arduous road, however, and we cannot afford the luxury of complacency. Government must at all times avoid the twin evils of maladministration and wastefulness.
The challenge facing government is to maintain realism as the key to successful fiscal discipline and reprioritisation. Various initiatives have been undertaken to facilitate this process. To provide an effective long-term framework alongside the annual Budget, and to make sure we reach RDP objectives, Government has begun work on a multi- year fiscal plan. To make this process as transparent as possible, a wide range of role-players have been identified and invited to provide inputs.
An important and far-reaching initiative, with major consequences for fiscal policy, is the public sector restructuring programme announced by Deputy President Mbeki on 29 October 1994. The belt-tightening part of the programme requires the Government to adopt restraint on salary and wage adjustments. To this end, the President and other senior political leaders resolved to accept salary reductions in 1994. At the same time remuneration levels should permit the Government to obtain the technical and managerial skills necessary for effective and efficient policy- making and delivery of public goods and services. We also have to improve the wage levels of low income earners within the public service and reduce the large differential between the lowest and highest wages. Negotiations with employee representatives on salary and wage issues have been conducted and several task teams have been established to investigate issues relating to conditions of service, to be addressed in a three-year plan.
The reprioritisation of programmes and activities of Government, including the revision of inherited policies and spending programmes which are inconsistent with the priorities of the Government, are important further goals of the initiative.
To facilitate this process Cabinet has appointed Mr Charles Stride, a prominent financial adviser, as Special Adviser to the Minister of Finance. He will assist government departments in designing and implementing their restructuring programmes and has commenced his work in the Department of Finance, paying particular attention to revenue collection. He will be supported by a number of private sector financial experts who will be released by their current employers for this specific purpose. The Government wishes to express its appreciation to the legal and accounting professions for the positive manner in which they responded to our requests in this regard and for the high level of expertise that they are making available to us.
Another important initiative is the design of a new system of intergovernmental relations. Some progress has been made in the allocation of powers to provincial governments, and the bulk of the legislation which devolves to provinces has already been assigned to them. The functions and administrative structure of the former regional public services have also been comprehensively reviewed and redeployed in new national departments and provincial administra- tions. The election of new local government authorities later this year will allow the rationalisation process to proceed at this level of government as well. Because economic soundness is an imperative for South Africa as a whole, provinces and local authorities share responsibility with the national government for public sector financial management and accountability, including prudent recourse to borrowing powers. In this regard the Borrowing Powers of Provincial Governments Bill is to be tabled during this session of Parliament.
The Financial and Fiscal Commission will play an important role in facilitating sound fiscal policy at all levels of government in the future, as its responsibilities include making recommendations on the sharing of certain revenue collected nationally, on the role of grants to subnational governments, and on their taxing powers and parameters for borrowing.
The restructuring of public assets can unlock resources currently underutilised and should contribute to the empowerment of communities. Government has already initiated reviews of several institutions with national developmental responsibilities with a view to consolidation and rationalisation. The sale of particular state assets would allow certain parastatals to be restructured for growth, facilitate the implementation of the RDP and allow the public debt and associated interest costs to be reduced. Various task groups have been appointed to coordinate aspects of this process.
In all these initiatives, the Government looks forward to participating in the National Economic Development and Labour Council (NEDLAC) in order to achieve a sufficient consensus on policy issues to secure efficient implementation.
While all our objectives can obviously not be achieved in one year, major inroads have already been made in the planning phase of our journey forward. Most departments have issued, or are about to issue, white papers on the restructuring and redirection of their activities, after taking thorough stock of the present position and where our goals would take us. The white papers are important guides for future resource allocation. Our economic objectives serve as a strategic compass rather than a specific road map, which means that at times we have to divert from true north to circumvent a swamp or two, but with the full intention and commitment to get back to our chosen route.
Within this broad restructuring strategy, the Government has set itself the following fiscal benchmarks: - the avoidance of permanent increases in the overall tax burden, from which follows the need to: - (a) contain non-interest recurrent expenditure in real terms; and (b) keep overall wage and salary adjustments within inflationary limits; and - the reduction of the overall budget deficit and the level of general government dissaving.
In broad terms, the overall growth performance of the economy determines the increase in revenue which will accrue to the fiscus each year given the existing tax structure, while the economic growth objective limits the extent to which either an increased tax burden or borrowing can be used to finance additional outlays. Revenue and deficit targets thus dictate the overall government expenditure levels which the economy and the fiscus can sustain. Against this background, I turn to the 1995/96 Budget.
THE 1995/96 BUDGET
Overview
Taking into account the present growth performance of the economy, the domestic and international economic outlook, existing tax and administrative structures as well as our fiscal benchmarks, the potential ordinary government revenue for the 1995/96 financial year is about R124 billion. If the use of proceeds from oil sales of just over R1 billion is added, the revenue figure becomes R125 billion, or 25 per cent of GDP. This figure, which includes tax revenue that falls within the benchmark of not permanently increasing the total tax burden, represents an increase of 11 per cent on the comparable figure for 1994/95.
In view of our commitment to reducing the budget deficit and in the context of the economic recovery in progress, the Government has decided to budget for a deficit of about R29 billion, or 5,8 per cent of the estimated GDP, which represents a decrease of 0,6 of a percentage point on the estimated deficit of the previous year.
The revenue and borrowing potential, as well as the effect of the tax proposals discussed later on, translate into an expenditure figure of R153,3 billion, or 9-1/2 per cent higher than 1994/95. This includes a real decline in budgeted recurrent expenditure, thereby reaching another milestone in our fiscal strategy. However, lest we cause alarm by suggesting that the Government, faced by very legitimate needs, is ignoring them and spending less, I wish to remind you that with reprioritisation and rationalisation, what is spent is both better directed and more effective.
Before I deal with other expenditure issues, a remark concerning the budget format is called for.
The budget format
The budget format for 1995/96 differs in one main respect from the previous year. Various taxes previously collected in the accounts of former regional authorities will be collected nationally in terms of the various South African tax laws. These include income taxes, value-added taxes and a few other smaller taxes. In order to compensate for the loss of this "own revenue", corresponding transfer payments from the national budget to the relevant provincial governments are increased in the Printed Estimate of Expenditure. A detailed discussion of the changed budget format is contained in the Budget Review released by the Department of Finance today and tabled with other budgetary documents. The review also provides additional information on all the aspects dealt with in the Budget.
Although all the figures in the Budget documents have been presented on a comparable basis, care should nonetheless be taken in analysing budget figures in terms of comparability.
Expenditure
As mentioned earlier, estimated national budget expenditure for 1995/96 amounts to R153,3 billion or an increase of 9-1/2 per cent on the comparable 1994/95 revised estimate. It is presumed that carry-overs of unspent funds by departments at the end of 1995/96 will compensate for carry-overs from 1994/95 to 1995/96, thus not affecting the overall expenditure level.
Before we focus on a number of specific expenditure allocations, a perspective on the broader pattern of resource allocation is warranted. The best perspective is obtained by using the consolidated budgetary figures for national and provincial governments, inclusive of expenditure from the latter's own revenue sources. An annexure in the Budget Review provides details of these projections.
Consolidated national and provincial expenditure
Social services such as housing, education and health continue to receive higher increases in allocations of funds than services such as defence. In the consolidated budgets, social services account for 57,4 per cent of projected expenditure (net of interest and expenditure not yet classified). This is a substantial increase on the comparable 1994/95 figure of 52,8 per cent. Education, as a percentage of total non-interest expenditure, amounts to 26 per cent, up from 25,5 per cent in 1994/95. This is by far the largest single function on the Budget. Within the education budget, the increased spending mostly goes to redressing inequalities in primary and secondary schooling. This is in line with the Government's commitment to reprioritise expenditure within departments. Similarly, health services increase to 13,4 per cent, compared to 12,5 per cent in 1994/95 and the increased spending goes to primary health services, especially in rural areas. The most dramatic increase is in housing and urban upgrading which more than doubles rom 1,3 per cent in 1994/95 to 3,4 per cent in 1995/96.
These increases in social expenditure are mainly financed by reductions in allocations to other government services. Estimated spending on protection services, for example, falls from 22,1 per cent to 21,7 per cent, including a reduction in the projected defence spending from 10,5 per cent to 8,8 per cent, balanced somewhat by an increase in the allocation to policing from 8,2 per cent to 9,2 per cent. Expenditure on economic services also declines from 14,4 per cent in 1994/95 to 12,5 per cent in 1995/96.
Let us now address a number of individual votes on the national budget that warrant special attention.
Education
An amount of R4,3 billion is to be voted for the national department of education, which includes increases of 10,7 per cent and 25,4 per cent in the allocations to universities and technikons, respectively. Total education spending to be financed from the national budget amounts to R32,2 billion. The provincial departments receive 85 per cent of this for college and school education.
Health Services
The total amount provided for health services in 1995/96 amounts to some R15,4 billion, including RDP carry-through costs of R680 million for the provision of free health care, R65 million for the clinic building programme and R500 million for the primary school nutrition programme. Including transfers to be made from the national health budget, expenditure at provincial level will take up 96 per cent of the total amount.
Constitutional development
An amount of R59 million has been provided to the Constitutional Assembly to undertake the task of drafting a new Constitution. This includes funds for a comprehensive public campaign involving public meetings and hearings throughout the country, aimed at encouraging the nation to provide inputs to the process.
Local government elections
An amount of R49 million has been budgeted for national and provincial governments' expenditure in respect of communication and voter education programmes. Moreover, approximately R348 million will be provided via the provincial budgets for predetermined conditional grants to fund local government elections in rural areas and areas under the jurisdiction of transitional structures. Cost-effective management of the local government elections is emphasised throughout.
Improvement of conditions of service
Remuneration of employees represents a major share of the total annual spending by the public service institutions. An amount of R2,5 billion has nevertheless been earmarked for the improvement of conditions of service during 1995/96. The actual amount and its utilisation are still being negotiated between the State and the employee organisations.
Police
The 1995/96 allocation to the South African Police Service is R8,9 billion. Provision is made for a shift of resources from public order policing to community based policing.
Civil and military pensions
Even with the lower inflationary environment ruling at present, it is desirable to adjust pensions on an annual basis to compensate to a certain extent for the loss in buying power of pensions. Civil and military pensions will therefore be increased as follows:
- Civil pensions will rise by 6,5 per cent with effect from 1 April 1995 for pensioners who retired on or before 1 April 1994. Those who retired later, but before 1 April 1995, will have their pensions raised by 0,54 per cent for each completed month since retirement, calculated up to 31 March 1995. - The increase in military pensions will be considered at a later stage, once negotiations on the conditions of service of public servants, to which military pension adjustments are linked, have been conducted.
Welfare services
A total amount of R13,4 billion is provided through the national budget for welfare services, which represents a 9,8 per cent increase on the 1994/95 amount. Details of increases in social grants during the financial year will be announced by the Minister of Welfare and Population Development.
Two supplementary proposals warrant attention.
Supplementary expenditure proposals
Government proposes that R600 million of the intended use of R1,2 billion from the sale of strategic oil reserves be allocated to the RDP Fund. In line with the policy decision regarding the use of proceeds from the sale of assets, these funds will specifically be used for the financing of capital projects. It is also proposed that the remainder of this amount be used to reduce debt and state debt costs.
Amounts of R700 million and R200 million for Defence and the Intelligence Service, respectively, are also proposed as supplementary expenditure. The allocations to these departments were reduced by these amounts pending the outcome of an evaluation by a Cabinet Committee. This Committee has since recommended the reinstatement of the allocations.
Expenditure to be voted in the Adjustments Estimate
Expenditure of an estimated R1,2 billion is identified for inclusion in the 1995/96 Adjustments Estimate. This includes an amount of R450 million as a provision for possible drought relief in 1995/96. Details are still to be finalised.
Revenue
Based on existing tax rates, excluding the transition levy, total estimated ordinary revenue amounts to R123,8 billion. Circumstances change, as do the revenue needs of the Government, and certain tax proposals are deemed necessary. To put these proposals in perspective I must first deal with the Report of the Katz Tax Commission.
The Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa
The Commission of Inquiry into certain aspects of the Tax Structure of South Africa, chaired by Professor Michael Katz and appointed on 22 June 1994, submitted its Interim Report on 18 November 1994. The report was referred to the Joint Standing Committee on Finance which has since issued a report after wide public consultation. The Commission carried out a broad review of the tax system in accordance with its terms of reference and approached its task within the framework of an initial set of guiding principles. These included the government's broad policy framework as articulated in the RDP, the importance of the tax system's contribution to facilitating growth in the economy, and the imperative of an integrated tax system subject to the Constitution and to society's commitment to the Rule of Law. Recommendations were then formulated after wide and transparent consultation and research.
This Commission's recommendations have drawn reaction from various quarters and have led to a lively and sometimes heated debate. It is perhaps unfortunate that public reaction in the main focused on only a few aspects of the Report while ignoring many important, albeit less dramatic, recommendations that may also impact on the equity and efficiency of the tax system. The Commission is to be highly commended for a tremendous effort over a very short span of time, and at negligible cost to the Government. In hindsight they were given an impossible task, yet they succeeded in achieving the impossible. The Joint Standing Committee on Finance is also to be congratulated for their prompt action and immense and thoughtful response to the request by the Minister of Finance for a public enquiry and review of the Report.
The Government does not intend to issue a white paper on the Commission's recommendations. It is, however, reacting to the Report through several measures announced in this Budget. What this amounts to, in a nutshell, is that Government accepts the constitutional imperative of a unitary tax rate structure for individuals, the need for improved tax administration, the feasibility of a general tax amnesty and the need to maintain, for the time being at least, the status quo in respect of value-added tax and of corporate income tax. Further research and consultation are also needed in respect of these taxes as well as on the Commission's proposals regarding the presumptive tax and the taxation of small and micro enterprises. In respect of the latter, however, the cash flow basis of taxation has been accepted. Government also accepts certain of the recommendations in respect of foreign investment to promote an investor-friendly environment.
A host of other recommendations, aimed at improving various components of the tax structure, should contribute to an overall improvement of our tax system. These recommendations are also accepted in principle and their implementation will be part of the process of enhancing tax administration. More detail is contained in the Budget Review.
I should stress that though several of the Tax Commission's recommendations are not immediately implemented in this Budget, this does not mean that they have been discarded, but reflects the circumstance that improved tax administration needs to be secured before some reforms can be tackled. The Katz Commission is to continue its investigations and focus on those issues which it has singled out for further analysis as well as further issues that have been, or will be, referred to it.
The Government regards it as necessary for NEDLAC to debate tax issues as well as the implementation of tax reform. In this regard the issue of income tax rebates and of poverty relief and the link, real or perceived, to value- added tax are two issues to be referred to this body.
On a wider canvas the relative merits of the tax system vis a vis welfare payments in addressing poverty relief is another possible issue for debate.
Tax Proposals
I now turn to the tax proposals.
Integrity of the tax base
Tax avoidance
In acceptance of the need for a more efficient tax administra- tion, the Government is taking a hard line against the erosion and misuse of the tax system by various tax avoidance schemes. Although many are legal, some of these schemes militate against the general intention of the law and the national interest. In effect, they sometimes border on being fraudulent. This Budget heralds the beginning of a restoration of tax integrity through a combination of measures aimed at better tax compliance.
In the Budget Speech of March 1993 mention was made of the some- times strained relationship that had developed between the tax admi- nistration and taxpayers, largely as a result of disputes about tax avoidance schemes. The Government offered to turn its back on the past and, to this end, introduced legislation to permit the Commis- sioner for Inland Revenue to settle disputes concerning schemes for films, music recording, aircraft and plantations. The intention was to bring to a speedy close an era in which tax avoidance schemes had disrupted tax administration and compliance in the country. This offer was made in a spirit of partnership with taxpayers and a similar response was sought from the private sector parties and their advisers.
It is, therefore, with some disappointment that the Government has since learnt that some tax advisers and their clients have not reciprocated and continue to introduce schemes which bear many of the hallmarks of the previous schemes.
Funding mechanisms have also come to the fore which are struc- tured in such a way that they result in substantially reduced and even negative borrowing costs through excessive deductions or the conversion of what is in essence capital, into deductible expendi- ture. The schemes involve among others fixed property acquisitions, convertible debenture issues, intellectual property and leasebacks.
These schemes can be challenged in terms of the anti-avoidance provisions of the Income Tax Act, but they are deliberately engineered in such a complex manner that detection is very difficult. The success of these schemes as avoidance measures would seem to rely to a large extent on non-disclosure to the tax authorities.
The Commissioner for Inland Revenue has been instructed to make resources available to detect and challenge these schemes and to apply all the sanctions in the law against the taxpayers involved and, where possible, the advisers. The Katz Commission has also been asked to investigate the possibility of introducing further anti- avoidance provisions and to make this a priority of the Commission.
In circumstances where taxpayers in general are being asked to pay more tax, it is unacceptable that a few taxpayers should artificially manipulate their affairs and escape their liability to tax.
Measures are also being proposed in respect of more than one company car, the accrual and incurral of interest on financial instruments, interest earned by emigrants, the taxation of lump sum payments and the writing-off of the cost of ships and aircraft. While it is Government's policy that proper research and consulta- tion should precede any tax proposals in order to give the taxpayer certainty ab initio, it may sometimes be necessary to impose changes in respect of the future income of existing contracts. The measure in respect of the accrual and incurral of interest announced today is a case in point. In the implementation of these proposals, further consultation with the financial services industry will be necessary.
Further details on these proposals are contained in the Budget Review and in documentation to be released by the Commissioner for Inland Revenue. Although the measures in respect of these schemes are instituted primarily to prevent abuse of the existing tax provisions and the accompanying erosion of the tax base in the longer term, an estimated additional R100 million is expected in 1995/96 from the introduction of these measures.
Tax Administration
The Government welcomes the Katz Commission's proposals on increasing the efficiency of tax administration. The Commissioners for Inland Revenue and for Customs and Excise are to prepare strategic business plans to achieve this aim. Once progress has been made, further announcements will be made. These measures should in due course add to enhanced tax collections and, therefore, to lower tax rates.
Tax amnesty
The Government accepts that there are good grounds for introducing a once-off tax amnesty. The amnesty will apply to all persons (individuals and business organisations) who were not on register on 26 April 1994, or persons who registered on or after 27 April 1994, or persons registered before 27 April 1994 but whose whereabouts were unknown to the Commissioner for Inland Revenue.
The amnesty will cover taxes such as income tax, employees tax, value added tax, stamp duty, donations tax and secondary tax on com- panies or any similar tax or duty imposed by a law of a former state or territory. The implication of this proposal is that no liability for these taxes will effectively arise in respect of a qualifying person for a tax liability that might have arisen prior to 1 March 1994. The amnesty will, however, not apply in respect of persons registered before 27 April 1994 or who were under investigation by the tax authorities prior to that date.
The exact terms and conditions with regard to the amnesty will be embodied in a General Tax Amnesty Bill to be tabled later during this Session of Parliament. Persons wishing to make use of the amnesty will have to do so within a three month period commencing on a date to be announced by the Minister of Finance.
To have extended this amnesty any wider would have cut too deeply both into the equity of the tax system and the ongoing recovery of overdue revenue.
The amnesty closes the book on tax disobedience for whatever reason. Once the amnesty ends, any further tax evasion will not be tolerated.
Provisional Tax
The Income Tax Act provisions in respect of provisional tax payments have the effect that a bunching of payments occurs in August, increasing the workload of the individuals and companies concerned, as well as the tax authorities.
To alleviate a peak in the workload, it is proposed that the effective date by which the third provisional tax payment is to be made, be extended for one month in the case of individuals as well as for companies that have a February year end. This will prevent two payments having to be made at the same time.
Customs and Excise
Excise duties
Continuing with the now established practice of an annual revision of excise duties and also after consultations with the respective industries, the following increases are proposed:
Beer: 6-1/2 cent per litre or about 2 cents per 340 ml can or so-called "dumpy"; Spirits, e.g. whisky, brandy, gin: about 58 cents per 750 ml bottle; Cigarettes: about 8-1/2 cents per 10 cigarettes; Cigarette tobacco: about 10-1/2 cents per 50 gram; Pipe tobacco and cigars: 80 cents per kilogram; Unfortified wine: about 5 cents per 750 ml bottle; Fortified wine: about 12 cents per 750 ml bottle; Sparkling wine: about 16 cents per 750 ml bottle; Other fermented drinks, e.g. cider: about 3 cents per 340 ml can; Sorghum beer: 1 cent per litre; and Sorghum flour: 5 cents per kilogram.
These increases are based on the rate of inflation, but also take into consideration historical differences between, and circumstances pertaining to, the individual industries. This also builds on the practice followed in last year's Budget. The increased excises on tobacco products is a continuation of the phasing-in of a higher duty on the retail price requested by the health community. In the case of wine products, Government is of the opinion that the adjustments in excise duties did not keep pace over the years with the rates that were applicable on other alcohol- based beverages and these excise duties are therefore adjusted accordingly.
The announced increases which take effect immediately should yield some R410 million per year. In accordance with Section 58(1) of the Customs and Excise Act, 1964, I now lay the formal tax proposal for excise on the Table for consideration by Parliament.
Fuel levy
The fuel levy was last increased some two years ago and, in line with the principle of regular adjustments, an increase of 2 cents per litre is proposed. One cent will be added to the monthly fuel price adjustment on 5 April and another cent on 3 May. Some R255 million in additional revenue is expected from this increase.
Import surcharge
Last year's Budget saw the removal of the import surcharge on all capital and intermediate goods. It has now become possible to propose that the remaining surcharge be abolished on 1 October 1995. This step represents the final repeal of a measure which was introduced in 1985 following the temporary foreign debt standstill and also on two previous occasions during the preceding eight years. As with the abolition of the financial rand, it also reflects the Government's commitment to creating an investor and trade-friendly environment.
The loss of revenue from the removal of the surcharge is estimated at some R455 million for 1995/96 or R1,1 billion for a full year.
Inland Revenue
Small enterprises
Great importance is being attached to the development of the small business sector by the Government. In spite of the comprehensive analysis by the Katz Commission of the tax issues related to these businesses, there are still unreconciled differences of opinion in this regard that prevent major progress.
While accepting the need for more research and consultation, it is nevertheless proposed that small enterprises be allowed to choose to be taxed on a cashflow basis which would allow revenue and expenditure to be recognised only when cash is received or payment is made. This proposal will ease the magnitude of their working capital requirements.
The Commissioner for Inland Revenue will consult with interested parties and organisations in order to establish acceptable criteria to identify small businesses and to provide the most effective relief that can be granted. The amendments to the Income Tax Act necessary to provide for the relief, will be introduced with this year's legislation.
Non-Resident Shareholders' Tax
Unlike many other developing economies with which we compete for investments, South Africa taxes non-residents at a comparatively higher rate than local investors as a result of the non-resident shareholders' tax. This situation also creates an imbalance between foreign debt and equity investments as interest paid to non- residents is exempt from taxes.
As part of the Government's initiative to create an investor-friendly environment, it is proposed that the non-resident shareholders' tax be abolished on 1 October 1995. The loss of revenue is estimated at some R235 million for 1995/96, or R572 million for a full year.
A related issue also impacting on investors is the marketable securities tax. Aspects of this form of taxation will have to be revisited in the context of the development and growth of the market for financial derivatives. Amendments, if any, will therefore have to stand over.
Tax harmonisation
Substantial discrepancies in respect of the bases and tax rates in the former Bophuthatswana, Ciskei and Transkei precluded tax harmonisation with the rest of the country in last year's Budget.
Considerable thought has been given to the most appropriate way of harmonising these tax systems and alleviating possible resulting hardship. Although there is much sympathy for those who will be adversely affected by a sudden increase in their tax liability, it is administratively not feasible to continue to apply separate systems for years to come. It is also not fair towards the great majority of taxpayers who would pay more tax on the same income.
It is accordingly proposed that, as far as personal income tax is concerned, the taxation laws of these former states be repealed with effect from 1 March 1995, and that the new PAYE tables which will be issued shortly to give effect to the rates of tax proposed herein will be applicable throughout the Republic. We are aware of the fact that this could have a significant impact on higher income earners in the former Ciskei and, to a lesser extent, in the former Transkei. However, in both cases lower income earners benefit. I have been consulting with my colleague the MEC of Finance in the Eastern Cape to manage the process effectively.
As far as corporate taxes are concerned, it is proposed that companies deriving taxable income within a former state and whose liability for tax under the law of that state is less than it is under the national law, will in respect of their year of assessment ending during the period 1 April 1995 to 31 March 1996 pay the average of their tax determined under both laws. It is further proposed that dividends declared by those companies out of profits derived during that year will not be subject to secondary tax on companies. In subsequent tax years, the full national tax law will be applicable.
An exception to this rule is proposed, however, in the case of companies operating in the former Ciskei which were granted tax-free status under the Company Tax Amendment Decree No. 2 of 1994. The granting of that status was akin to a contractual undertaking between the company concerned and the former Government of Ciskei, and the undertaking will be honoured until it expires.
Personal income tax
The Constitution prohibits discrimination on grounds of, amongst others, gender and marital status. It is therefore proposed that a single rate of income tax be applied to all individuals and also that child rebates be abolished. For taxable incomes up to R30 000 the rate of tax proposed is the same as that which applied last year to a married person, after which the rate increases to reach a maxi- mum marginal rate of 45 per cent at a taxable income of R80 000. However, to lessen the burden on low income earners who are most affected by the removal of child rebates, it is proposed that the primary rebate be increased by R400 which is the same as granting a rebate for four children to all persons. The additional rebate of R2 500 for persons aged 65 and older will still be granted as in the past. The transition to a single rate will benefit married working women and unmarried persons.
Changes to the rate structure are such that persons earning less than R30 000 will benefit or not be worse off than before except for single earners with 5 or more children. Households with two earners will benefit substantially irrespective of income or number of children. The effect of these changes is an estimated revenue loss of R2 billion. Meeting this Constitutional requirement will make a considerable impact on revenue but was necessary. We are also conscious that removal of the child rebates may be seen by some as a loss. The approach adopted is deemed the most effective way of recovering a part of the lost revenue and yet avoiding an additional burden on lower income persons.
The tax collection tables which the Commissioner for Inland Revenue announced in a press statement on 7 March partially reflect these tax proposals. His insistence that they be applied immediately obviates the cash flow problems experienced by certain categories of employees on account of the earlier preliminary tax collection tables.
In addition to the rates of tax above, the balance of the transition levy announced in last year's Budget will be payable by all individuals on taxable income above R50 000. It will be collected only during the first three months of the year. It is expected to yield about R1,1 billion in revenue.
We also propose that the present rate structure for unmarried persons, but with two additional bands reaching 45 per cent at R80 000, be retained for legal persona other than companies, such as trusts.
As enhanced tax administration translates into improved tax collections, the lowering of personal income tax rates will have the highest priority in terms of any granting of future tax relief.
The net result of all the tax proposals is an estimated revenue loss of R850 million, bringing the revenue estimate for 1995/96 to R123 billion and R124,2 billion if the proceeds from the sale of strategic oil reserves are included. Before turning to the financing of the Budget, a few other issues deserve attention.
Report of the Gambling and Lotteries Board
This Report which was submitted during the past week, contains certain tax proposals. The implications will be evaluated once the Report has been studied. Interested parties are cautioned not to pre-empt the eventual tax dispensation.
Assets and liabilities of the national Government
A Statement of Liabilities of the national government was compiled and published for the first time in the Auditor-General's report for the 1992/93 fiscal year. Financially-related assets have now been added to the Statement as at 31 March 1994. This Statement will be expanded and updated annually with a view to developing a complete and accurate balance sheet for the national government.
Off-balance sheet items, incorporating the total contingent liabilities (or potential losses) of the State are also included in the Statement. These liabilities amounted to R121,7 billion on 31 March 1994 and include inter alia the under- funding of the Multilateral Motor Vehicle Accident Fund (R3,1 billion), guarantees to various institutions (R70 billion) and the under-funding of the Government Service Pension Fund and other related funds (R39 billion).
The latter has attracted much public interest and a few supplementary remarks will be in order.
Pension funds
Significant progress has been made in preparing for the establishment of a single new fund to which all public servants will belong, and which will replace the current Government Service Pension Fund as well as those currently in place in the former TBVC states and self-governing territories. Negotiations are presently being conducted and the distribution of a draft Bill is envisaged once they are concluded.
Government has committed itself to reducing the actuarial shortfalls of the national government pension funds in a phased manner. The goal is to enhance the level of actuarial funding by 2,5 percentage points every three years. To the extent that the annual employer and employee contributions do not meet with this requirement when the progress is assessed every three years, Government will be required to top up any arrears.
The Katz Commission's recommendation on the so-called capping of pension fund contributions has proved to be controversial. The ensuing debate has highlighted various other issues regarding pension provision. The Government is of the opinion that the matter should be pursued further in a holistic manner, with due recognition to the implications for the pension industry and retirement provision. Apart from the proposed change in the rate of taxation of lump sum payments, which does not affect the dispensation presently enjoyed by public sector employees, no other changes can therefore be implemented until further work has been done. This will be undertaken in close cooperation with the Katz Commission.
THE BUDGET DEFICIT AND DEBT MANAGEMENT
Total expenditure, estimated at R153,3 billion, and revenue, after tax proposals, estimated at R124,2 billion, result in a budget deficit of R29,1 billion, some 5,8 per cent of estimated GDP. This figure further manifests the progress we have made during the past year in reducing the deficit and meeting our longer term milestones.
Taking into account loan redemptions of about R9 billion, the gross borrowing requirement of R38 billion is slightly higher than the figure for 1994/95. Once again the domestic market will provide the bulk of the funds. Provision is nonetheless made for foreign financing of about R1,5 billion.
It is the intention of the Government to capitalise on the successful re-entry of South Africa into the international financial markets during the past year and to establish a presence and benchmarks in other markets. Our strategy in this regard will depend on prevailing market conditions and our own financing needs. I should reiterate that foreign borrowing will not lead to larger deficits, but will be a substitute for domestic finance depending on cost considerations and pressures on the domestic financial market.
The same policy applies to concessionary loans. In order to address the various dimensions of, and ensure the effective management and coordination of overseas development assistance, the Government has created an International Development Cooperation Committee (IDCC), which is to act as the principal channel of contact between the Government and the international development assistance community. The IDCC will assist government departments in matching the most appropriate source of foreign assistance with suitable projects and programmes.
Government debt is projected to reach some R246 billion at the end of the 1994/95 financial year, about 55 per cent of GDP. This includes the discount on previous years' stock which became part of debt on maturity.
Taking into account the further growth in the debt by at least the net borrowing requirement of the national budget, the interest burden of the debt in 1995/96 is projected to be about 18-1/2 per cent of total expenditure. This makes it the second largest expenditure item after education. It means that nearly R1 out of every R5 of taxpayer's money is spent on servicing the debt. Can there be a more compelling justification of the need for fiscal prudence? WORD OF THANKS Fiscal prudence was also the philosophy of my predecessor, Mr. Derek Keys, to whom I would like to pay tribute. His pivotal role in securing sound financial management during the political transition has created the financial space for us to start addressing the development needs of South Africa. It could so easily have turned out differently. Thanks also to Dr Japie Jacobs for his assistance to the Department of Finance and particularly to my predecessor.
I am informed by my advisers in the Departments of Finance and of State Expenditure that the past year has been the most demanding in many a year. I can also attest to the extraordinary demands being made on officials at this time. They have responded with hard work, dedication and loyalty to their country. Under the very capable guidance of my two Directors-General, Estian Calitz and Hannes Smit, they have successfully charted the financial course of the ship of state.
In Alec Erwin the country has a man for all seasons. His conduct in many delicate situations has earned him respect throughout all levels of government as well as outside of government. I am indeed fortunate to have him on the team and wish to thank him for his unselfish service to the country.
To Dr Chris Stals, thank you for your support and the wonderful working relationship which we have established.
I should also like to thank the members of the Parliamentary Joint Standing Committee on Finance who, through their chairperson, have given a new content to transparency in debate and advice on financial matters before Parliament. We note, with appreciation, their role in devising today's Budget. We also reiterate our commitment to make the budget process more open and inclusive. Our recent consultation with NEDLAC on this year's Budget is a case in point.
Any success would have been very hard to achieve without our President's example and leadership, also in matters economic. A special word of thanks for your support. To both the Deputy Presidents, thank you for your assistance and guidance to the Cabinet and in the Treasury Committee. Also to my colleagues in Cabinet for your confidence in me, your cooperation and political guidance as well as the manner in which you accepted me.
It is indeed a pleasure for me to be associated with people of such calibre, talent and ability.
THE BUDGET IN PERSPECTIVE
Let me summarise the Budget.
The post-election economic and political environment of relative stability has created some room for fiscal manoeuvrability. This Budget attempts to capitalise on this potential and to address the urgent needs of stakeholders in the economy in a sensible and realistic manner.
Government expenditure sees a continuation and acceleration of the reallocation of resources toward social spending and basic needs within the discipline imposed by the RDP and the RDP Fund. Processes to improve the efficiency of expenditure are also being implemented. The first concrete results in respect of housing, but also education, health and welfare are beginning to be realised. The Government remains committed to keeping the overall rate of expenditure growth within the boundaries imposed by revenue and borrowing considerations, in order to prevent overstretching the potential of the economy.
The constitutional imperative of no discrimination in respect of gender or marital status and its associated revenue loss of some R2 billion, as well as administrative limitations, have limited the restructuring of the financing of the Budget. As far as individuals are concerned, tax changes will benefit working married women and single taxpayers while the Government has been particularly careful to minimise the tax burden of persons earning modest incomes. Where increases were unavoidable, they have been kept as small as possible. Many taxpayers will experience cash flow benefits when the transition levy is removed.
The inflationary impact of the higher fuel levy, when evaluated in the broad context of all the tax changes taken together, should be negligible. The same applies to the excise duty increases. The removal of the import surcharge will tend to lower prices and costs. This and the abolition of the non-resident shareholders' tax also constitute further steps towards an investor and trade-friendly South Africa that can also compete internationally.
Better tax administration as a result of the restructuring of the revenue collecting agencies, improved collections through the continued closing of tax loopholes and an expected increase in the number of taxpayers due to the tax amnesty, should in future create sufficient room for tax restructuring and lower tax rates. In this regard, reductions in the individual income tax rate will receive priority.
The challenge to the South African corporate world is to respond positively to the new opportunities, to participate in the opening up of the South African market to new competitors who will invest in our country, to gear themselves to become world players and to engage the government as a partner for growth, development and equity.
The demands of Government for financing in the local markets are not excessive and the track record of responsible financing practices should contribute to stability in these markets. Strict foreign debt management strategies should also prevent balance of payments instabilities as currently experienced by other developing countries.
Tax and expenditure decisions affect people differently, especially when we have to move to greater consistency, based on criteria of efficiency, effectiveness and equity. Each individual, when assessing his or her position, must therefore not only look at one tax measure or change in benefits from public spending. The full picture has to be assessed and even a multi-year perspective is required. We believe that this Budget - one step in the march of time - will prove its worth in contributing to a better future for everyone this year, but more particularly as economic growth takes root in the longer term.
Our approach in this Budget has been that all economic stakeholders will respect honesty and integrity and respond accordingly. Credibility and consistency is expected from us. We are determined to do our part.