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FINANCE BUDGET VOTE (VOTE 13) ON 14 JUNE 1996
Introduction
Madame speaker; Deputy President/s;Honourable Members of Parliament; Ladies and Gentlemen
We have a clear idea of what it is that South Africa needs and deserves, both now and in the future. We also all agree that in order to create the conditions which will address those needs, we will have to go without some things in the short term. Until now, we, in this House, have not agreed on what it is that we should part with for the common good.
The major challenge facing our country is the creation of jobs. I stand here today to place before you a programme of economic reforms which will make a significant difference to the ability of this economy to address this fundamental challenge.
Two years after the elections, too many South Africans feel that change has still not arrived for them. Notwithstanding the fact that the economy has grown at a faster rate over these past two years than it did in the previous decade, too few jobs are still being created.
The Reconstruction and Development Programme is the commitment of this government to the people to rectify the distortions of the past and to ensure the continued and sustained provision of education and training, food and health services, housing, and the creation of jobs, all designed to provide a better life for all South Africans. From Mamelodi to Manenberg and from Malabar to Matjiesfontein we want employment and a decent life for all.
This can only be achieved through sustained higher growth of our economy.
The programme which we announce here today puts in place an integrated set of macroeconomic policies which enable government to deliver on the commitments we have made in the RDP. By shifting gears we can realise the potential of this economy. 6% growth and 400,000 additional jobs per year by the end of the century. This is our vision.
Let me convince you, as I am convinced, that our country can attain these goals...
The continuation of the current trends
But let me start with the present situation.
The past two years have undoubtedly been better than the preceding decades. The economy has grown at around 3%, and the rate of inflation has effectively been halved. But the economy is still performing below its real potential. The recent fall in the value of the Rand highlights the fragility of the progress achieved.
We shouldn=t minimise our achievements. Policies are in place to reduce the budget deficit and to keep inflation in check. Nevertheless, major constraints on growth and job creation remain. The level of domestic savings and reserves are low; the economy suffers from the lack of skilled workers; many sectors are uncompetitive; the labour market is fragmented. More importantly, unemployment sits like an albatross around our neck and, unless it is checked, will continue to threaten the gains made by our young democracy .
What would happen if we continue down the road of the present?
Firstly, economic growth would barely reach 3 percent. Without significant improvements in the absorption of labour, it is doubtful whether annual job creation much in excess of 100 000 would be possible over the next five years. The unemployment rate would then rise by some 5 percent to about 37 percent in 2000.
Secondly, the scope for increased public spending on social services would be severely limited. Medium term fiscal projections indicate the additional funding available would not cover 15 percent of current departmental expansion plans.
Thirdly, the balance of payments remains a structural barrier to accelerated growth. The economy is dependent on imported capital and intermediate goods and, as in the past, the cyclical upswing brings a deterioration in the current account. Whereas this constraint has been eased through capital inflows since the elections in 1994, the lack of sustained long term capital inflows has made the balance of payments and the economy too reliant on short term flows.
The recent exchange rate instability presents a further complication. There is a danger of a further capital outflow and a balance of payments crisis. Leaving aside this risk, growth forecasts have already been revised downwards by most professional analysts. It is recognised that the burden of the adjustment in the short term will fall on monetary policy, leading to higher interest rates and an economic contraction.
This outcome is clearly unacceptable: we will not be able to deliver on the promises of the RDP. It will remain a dream.
A new departure
A change in direction is required...
We in government are fully convinced that we can make a difference. But we can not shy away from hard decisions...
The package which we will announce here today is born of the need to enhance the quality of life of all South Africans. It includes an integration and realignment between fiscal policy, monetary and exchange rate policy, trade and investment policy, social policies, public investment and asset restructuring, policies in employment, wages and training, and policies in respect to improving the interaction between the different social partners in achieving the stated objectives. This package was produced by government of its own volition, it will therefore be implemented by government to ensure the realisation of the desired outcomes.
The integrated strategy provides a broad bridge between the present constrained economic environment and an improved growth and employment performance in the period up to 2000, while strengthening the competitive capacity of the economy in the long term. The main elements of this package are:
an acceleration of the fiscal reform process, including a tighter short term fiscal stance to counter inflation, an appropriate medium-term deficit target to eliminate government dissaving, further revision of the tax structure, and a range of budgetary restructuring initiatives to sharpen the redistributive thrust of expenditure and contain costs;
a further step in the gradual relaxation of exchange controls, the maintenance of monetary policies consistent with continued inflation reduction and exchange rate management to stabilise the real effective exchange rate at a competitive level;
a consolidation of trade and industrial policy reforms, incorporating a further lowering of tariffs to compensate for the real depreciation, the introduction of tax incentives for a fixed period to stimulate investment, a campaign to boost small and medium firm development, a strengthening of competition policy, and the development and implementation of industrial cluster support programmes;
the implementation of the public sector asset restructuring programme, including guidelines for the governance, regulation and financing of public corporations, and leading off with creation of public-private partnerships;
C. an expansionary public infrastructure investment programme to provide for more adequate and efficient economic infrastructure services in support of industrial and regional development and to address major backlogs in the provision of municipal and rural services;
a structured flexibility within the collective bargaining system to support a competitive and more labour-intensive growth path, including greater sensitivity in wage determination to varying capital intensity, skills, regional circumstances and firm size;
and a social agreement to facilitate wage and price moderation, underpin accelerated investment and employment and facilitate public service delivery.
I will deal now in turn, with each area of policy reform of the government=s programme and would like to highlight some of the measures that are contemplated in the package:
Fiscal Policy
Fiscal policy is my immediate responsibility in government. It is important that we eliminate wasteful expenditure, eliminate government dissaving, strengthen our delivery capability and avoid a permanent increase in the overall tax burden.
Over the past two years significant strides have been made in the shaping and honing of a series of sectoral policies to improve on the quality of delivery of social goods and services. Important amongst these are new policies for improvements in education, in the provision of health and welfare services to all South Africans and for housing, land reform and infrastructure. These sectors, amongst others, will lead to qualitative improvements in the lives of all our people.
Deviating from these policy precepts is unthinkable. As government we remain unshakably committed to implementation. Yet we have to do so in circumstances where our stated commitment to fiscal discipline will be proven. We have, over the past year, built the capacity for medium term expenditure planning and expenditure evaluation. The Expenditure Valuation unit will come into operation this year. Reforms to the budgetary process will contribute to significant improvements in service delivery.
From the time this government took office it was apparent that massive expenditure reprioritisation was necessary. The RDP fund was created as a temporary vehicle to assist in this process. It is now time to ensure that the budget must fall in line with the principles of the RDP, and must be evaluated to ensure that resources are placed within reach of those who are most in need.
Over the past few years there has been a steady decrease in the budget deficit from a high point of almost 8% in 1992/93 to the projected 5,1% in the current year. Yet we need a bold stand in order to increase domestic savings and keep inflationary pressure in check. This will stimulate private sector investment. Taking account of all of the objectives, government has decided to take a great stride forward in the next budget, and we are therefore planning to reduce the deficit in the 1997/8 Budget to 4% of GDP.
Monetary Policy
It is evident that in the recent past, the shortcomings of policy coordination has placed an excessive burden on monetary policy as the major instrument to maintain macro balances. This has led to higher real interest rates.
It is, of course, important to contain inflation. Inflation is detrimental to all of all in the country, but the burden of inflation falls most heavily on the poor and needy who are least able to protect themselves. In a society where maldistribution of income and wealth is as stark as it is in South Africa, the burden of inflation on the masses of our people has to be checked. Inflation has a negative impact on investment, job creation and economic growth. Without fiscal prudence and in the absence of declining inflation, higher real interest rates will remain. They have undesirable consequences. For one, they are detrimental to economic growth, and to job creation. They particularly affect small and medium enterprises who rely on leveraging limited equity. They also impact on home ownership, and jeopardise the objectives of providing houses for all. Higher real interest rates also affect government's ability to deliver social services. Debt servicing will constitute the highest portion of the national budget in the coming year.
The strategy proposed will create the conditions for controlling inflation in the country. Accelerated tariff reforms will help to reduce the impact of the recent depreciation of the currency as well as to improve prospects for foreign direct investment, and long-term capital inflows. These measures will create the conditions for reduced inflation and consequently allow the reduction of interest rates. Our strategy, however, acknowledges the need for positive real interest rates to encourage savings.
Exchange rate
The recent decline in the Rand reflected in part fundamental concerns about the future of the economy. The depreciation can be seen as a threat, or it can be viewed as a window of opportunity for expanding exports and growth. To achieve the latter, we would have to ensure that the depreciation is not offset by price and cost increases. Some of the measures I have just described are aimed at preventing this.
An important element of the strategy is the maintenance of real effective exchange rate stability which will provide the necessary conditions for sustained increases in exports. Central to the integrated strategy is to derive full benefit from an outward orientation of the economy. Export orientation, however, calls for a relatively stable real exchange rate. The policy announcements contained in our programme, in this respect, are expected to provide more certainty for planning and investment. This will reinforce our drive toward attracting long-term capital inflows, particularly foreign direct investment.
Exchange control
The government remains committed to the phased lifting of exchange controls in such a way as to avoid excessive disruptions to the foreign exchange market. Although it is generally accepted that controls should not be lifted during times of volatility, we feel that now that sufficient calm has returned to the market, the time is appropriate to announce our next steps in the process. Our aim is to allow for further scope for asset diversification on the part of the financial institutions, as well as to reduce the remaining disincentives to direct foreign investment. The current round of exchange control liberalisation is designed as a balanced package which will enhance economic activity. The new measures include the following:
Policies directed specifically at foreign investors include the relaxation of access to domestic credit. Although a measure of capitalisation from foreign funding is still required, the new regulations will allow for local borrowing capability to be enhanced by doubling the current borrowing limit. In terms of the new regulations, a wholly non-resident owned entity is able to borrow 100 percent of shareholders= equity.
Institutional investors, namely insurance companies, pension funds and unit trusts, may currently obtain foreign assets by way of asset swaps for up to 5 percent of their total assets, subject to the stipulations of the legal framework within which they operate. This limit will now be increased to 10 percent.
Institutional investors will also be allowed foreign currency transfers during 1996 of up to 3 percent of the net inflow of funds during the 1995 calendar year. Approval for such transfers will be subject to the overall limit of 10 percent set out above.
Corporate entities who operate in the export field and also import goods from abroad, will be allowed to offset the cost of imports against the proceeds of exports, provided the set-off takes place within a period of 30 days.
Adjustments to existing exchange control limits and measures designed to effect administrative exchange reform are included in the package.
Trade, Industrial and Small Enterprise policy
The steady integration into the global economy has led to a rising level of competitiveness within the economy. Our new strategy aims at accelerating our competitiveness. However, the government is mindful of the short-term pressures that some industries have had to face to effect modernisation and adjustment. It is nonetheless encouraging that the overall impact of trade liberalisation has been largely neutral with respect to job losses.The recent depreciation of the currency has created further protection for our industries, and has made our exports more competitive. It has therefore created an opportunity to reduce tariffs further in order to at least partially compensate for the new levels of protection that some industries will now enjoy. It is critical to ensure that the current depreciation does not translate in to higher input costs for our industries. Our proposed accelerated tariff reduction will assist to reduce the input cost, maintain competitiveness and preserve job opportunities, at one level, but more importantly, should assist in the broadening of out manufacturing base to ensure that significantly mre job opportunities are created.
Our industrial strategy aims at encouraging investment. To this end we can now announce a package of tax incentives including special allowances for qualifying plant and equipment which will be purchased and brought into use between 1 July 1996 and 30 September 1999; and the replacement of the existing Regional Industrial Development Programme with a tax holiday available to approved projects on the basis of regional location, job creation and for priority industries. The new tax incentives introduced as well as our announcements on the relaxation of the exchange control measures will enhance South Africa=s attractiveness for local and foreign investors. Closely linked is our drive toward increased training and productivity enhancing measures. It is evident that South Africa has to take effective measures to improve its productivity profile and skill base of its labour force. In the spirit of the integrated strategy we need to ensure that various measures will combine to generate rapid gains in productivity so as to sustain our industrialisation within a global context. This is the key to eventual removal of what is called SA=s external constraints. Through a reliable flow of external export earnings we need to eliminate the balance of payments constraints that so consistently limits our growth potential. Our industrial strategy however, extends beyond big export earning industries. It recognises the significance of Small, Medium and Micro Enterprises. In terms of both job creation and economic growth, SMMEs play a critical role. The government therefore proposes to support SMMEs with a mix of capacity-building measures as well as the provisions of loan finance. It is widely acknowledged that SMMEs often lack access to capital. The establishment of the Ntsika Enterprise Promotion Agency, and Khula Enterprise Finance Limited will provide the institutional support for SMMEs.
Public Investment and Asset Restructuring
Investment in social and economic infrastructure will play an important role in laying a foundation for long term growth in the productivity of capital and labour, while providing for the a much needed extension of basic services to households.
There is a calculated backlog of some R170 Billion in infrastructure. A public sector investment programme on a substantial scale is one of the core ingredients of the growth strategy. It will crowd-in private investment and help to boost the growth rate in the direction of the required 6%. Our aim is to address the deficiencies in the country=s major network infrastructure and the backlogs in household infrastructure over the next five to ten years.
In the annual budget, provision will be made for a steady increase in capital expenditure. But we also recognise that private sector resources will have to be geared in to finance these investment plans. The framework for financing municipal infrastructure has been carefully design to mobilise an optimal mix of government grants, development finance and private investment.
As part of this infrastructure thrust, the National Public Works Programme finds a very special place both as a site of training and the creation of short-to-medium-term employment.
In addition, government has prepared a Protocol on Corporate Governance through which it shall exercise its rights as shareholder in respect of the vast number of parastatals which exist. This protocol effects not only matters such as policies on ax and dividends, but more importantly, is directed towards the alignment of these parastatals with the developmental approach of government and the realisation of a series of efficiencies within these enterprises. This step, Madam Speaker , is a necessary, if belated, precursor to any significant advancement in the effective restructuring or alienation of these assets. Significant strides have been made in the Telecommunications sector where negotiations are close to completion for the finding of a strategic equity partner for Telkom. Negotiations in terms of the National Framework Agreement are proceeding apace and announcements will be made by sector as and when these negotiations are concluded.
Employment, Wages & Training
Job creation is the country=s basic challenge. Current trends in job creation offer a bleak prospect for our socio-economic circumstance. Our integrated strategy is designed to meet, first and foremost, this critical objective. In terms of our projections it is possible to generate over 830 000 more jobs than would otherwise have been possible over the next five years. A combination of higher investment, both public and private, together with regulated flexibility will enhance the labour absorption capacity of the economy. A key thrust of our integrated strategy is the promotion of continued productivity improvements aimed at bolstering the development of skills across the full spectrum of the workforce in the country. International indicators show that SA=s investment in human resource development is inadequate. Effective training across all employment sectors is central to our strategy.
Conclusion
Madame Speaker, Honourable Members
Government has now placed a framework for effective change before the people of this country. I want to stress that this framework is integrated, its members are held together in a particular structural fit. Yet, this remains a framework which sets the parameters for change. The parameters are not up for negotiation at this stage. We recognise, however, that the implementation will require close co-operation with our social partners. There is undoubtedly so much of the detail which we will have to work through together, in a manner which ensures the commitment of all South Africans. The success of the implementation of this strategy is premised on a broad national social agreement, on the one hand, and on the other, far more effective co-ordination within government at national level and across all three tiers of government.
This programme will unleash the potential for economic growth, job creation and redistribution that our economy possesses. Our country has the potential to deliver more wealth and more jobs to its citizens than the current trends indicate. We are convinced in government that such improvements require the measures that outlined before you. These measures will bring many gains. And they are also designed to share equitably the effort that is required for their implementation. We believe in government that this is a critical condition for the success of our programme. We are encouraged by the preliminary discussions that we had with our social partners.
Together we are challenged to give meaning and content to our hard-won freedoms. As a nation, we are equal to the task.
We are at the beginning of a new era...
I thank you.