T Manuel: Budget Speech 2007

21 February 2007

Madam Speaker
Mr President
Deputy President
Distinguished Cabinet Colleagues
Honourable Members
The Governor and Deputy Governor of the S A Reserve Bank
MECs
Ambassadors and High Commissioners
Our dear friendsin the gallery and wherever you may be sharing with us
Fellow South Africans
Ladies and gentlemen

In the introduction to his book on China and globalisation, Will Hutton
reminds us that, "The foundation of human association is the idea that human
life has equal worth and human beings are equally entitled to political,
economic and social rights which allow them to choose a life they have reason
to live" (1).

Human life has equal worth…

Motho ke motho - ga ana bosehlana (a human being is a human being, there is
no lesser human being)

The idea, that human life has equal worth, and that this is the core value
that unites us, invites us to ask whether we have done enough to give practical
effect in South Africa today to our shared humanity. Have we acted in a manner
that shows that human life has equal worth? Or do we still live in a society
where the shadow of history dominates over the opportunities of an open
society.

As our young nation enters its thirteenth year, we have much to be proud of.
We are building a society founded on principles of equality, non-racialism and
non-sexism. We have built institutions of democracy, creating an open society
founded on the rule of law. After stabilising the economy and the public
finances, we have created the conditions for rapid economic growth, job
creation and the broadening of opportunities.

Sound management of public finances and the improved tax compliance culture
on which it rests provides us with the resources to invest in our public
services, renew our infrastructure, reshape our residential areas, and provide
water, electricity, housing, sanitation, schooling, health care and access
roads to millions who were previously denied these elementary building blocks
of modern society. The social grant system has expanded, hunger is in retreat
and vulnerable families are being lifted out of poverty.

Yet the idea that human life has equal worth demands more of us. President
Mbeki’s speech at the 4th Nelson Mandela lecture reminds us that…

…to achieve the social cohesion and human solidarity we seek, we must
vigorously confront the legacy of poverty, racism and sexism.

The 2007 Budget strives to accelerate economic growth and work
opportunities, modernise our public services and infrastructure and fight
poverty and inequality, because we have a shared pledge to work together in
action. We do this, consciously, as a choice of this government because without
a powerful countervailing force, the shadow of history will dictate
opportunities, entitlements and outcomes.

Izimpilo zabantu zinesisindo ngoku fanayo (people’s lives hold equal
value)

The economic gains of the last 10 years enable us to begin to fulfil other
key elements of our economic and social modernisation. Chief among these are
the systems we create to plan and prepare for the long-term, to set in place
the policies and institutions that will help us to achieve prosperity for all
and social solidarity for future generations. As our economy adapts to an
ever-changing global environment, and as we recognize over time new policy
challenges and priorities, our public services must support transition and
transformation by providing rising income security and protection to
individuals, families, and communities.

In the State of the Nation address just twelve days ago, President Mbeki
indicated that the time is right to construct a broad-based social security
system embracing all South Africans, and I am pleased to confirm that we are
tabling the main proposals today.

Madam Speaker, we have had the good fortune since 2001 to report on the
healthy and strengthening state of the economy. Once again, economic
performance has exceeded expectations.

The economy continued to expand at a robust pace of 4,9 per cent in 2006,
generating new jobs, broadening the consumer base and providing impetus for
rapid growth in investment. Economic growth is projected to average just over 5
per cent a year over the next three years. For 2007, somewhat weaker growth in
the world economy and the interest rate increases of this past year are
expected to result in a growth rate of 4,8 per cent.

While household spending is projected to slow from the lively growth rate of
over 7 per cent in 2006, it is still expected to grow by close to 5 per cent a
year over the medium term – a robust trend reflecting good growth in household
income.

The expansion has been supported by a benign interest rate climate, with
exceptional growth in the construction, finance, transport and communication
sectors. The manufacturing sector has grown by more than 4 per cent a
year since 2004. Conversely, poor performances by agriculture and mining
weighed on growth in 2006.

Investment across the economy underpins the positive outlook for the period
ahead. Investment increased by 11,7 per cent in the first nine months
of 2006, and as a percentage of GDP rose to 18,4 per cent. Investment
by public corporations, government and the private sector will remain central
to strengthening economic expansion over the medium term, as government
maintains its focus on the extension and improvement of transportation links,
increasing electricity supply and reshaping the built environment.

More rapid growth has meant more rapid job creation. According to the
December 2006 Quarterly Employment Statistics, employment in the
non-agricultural parts of the economy rose by over 3 per cent in the
first nine months of 2006.

The global economy has remained supportive of our growth performance, in
response to exceptional growth in China and India, healthy growth in G7
countries and high commodity prices. The commodity price rally has entered its
sixth year. Between 1999 and the end of 2006, the gold price rose
121 per cent, the oil price rose 144 per cent, and the
prices of both platinum and coal rose by more than 150 per cent.

Our current account deficit has risen to levels close to 6 per cent of
GDP last year, and we expect the deficit to continue running at between five
and six per cent over the medium term. This is a sign of robust economic growth
and South Africa is not alone in this regard. A number of fast growing, oil
importing, and commodity exporting markets such as Australia and New Zealand
are also running sizeable current account deficits.

Capital inflows are expected to cover the current account deficit as
rand-denominated assets remain attractive to foreign investors. Net capital
inflows reached R96,3 billion in the first nine months of 2006.

High commodity prices, moderating household consumption trends and stronger
exports will tend to put downward pressure on the deficit in the next few
years.

At the same time, risks continue to arise from what economists call “global
imbalances” – that is the large surpluses and deficits on the current and
capital accounts of major world economies. The magnitudes involved are
sobering. The American and Chinese current account deficits and surpluses have
reached 6,6 and 7,2 per cent of their respective GDPs. The US deficit is equal
to US$869 billion or nearly R6 trillion – a high amount in any currency. Partly
as a result of these deficits, liquidity in global markets is at very high
levels. The search for higher returns for those funds has led to unprecedented
flows of capital into emerging markets. Further, we are seeing the use of low
interest G7 currencies for leveraged speculation. The potential disorderly
unwinding of these leveraged positions creates risks for emerging market
economies including our own.

So while our higher current account deficit mirrors stronger growth and
investment, we need to re-emphasise the importance of more rapid and
diversified economic growth and improving our export performance, rather than
reliance on uncertain portfolio inflows.

In the first nine months of 2006, the volume of exports rose
2,2 per cent compared to the same period in 2005 and by an average of
3,9 per cent between 2000 and 2005. But a greater expansion in the
volume and value of exports and export-related employment is needed to lift and
sustain the economy’s growth rate beyond 6 per cent a year.

After several years of relative stability, the volatility of global exchange
rates increased in 2006, shifting the levels of many currencies as commodity
prices retreated from all-time highs and investor sentiment towards emerging
markets cooled. The exchange rate of the rand depreciated by an average
15 per cent over the course of 2006. (2)

Some volatility can be mitigated through a combination of increasing foreign
exchange reserves, reducing debt denominated in foreign currency, promoting
lower inflation, prudent fiscal decisions, and improving the economy’s
potential growth rate. In contrast, a more rigid approach to the exchange rate
could stimulate larger capital inflows but make exports less competitive and
overheat the domestic economy. The Reserve Bank has continued its prudent
accumulation of reserves.

Further exchange control relaxation announced in this budget will be
supportive of a greater two-way flow of capital and moderation in the movement
of the exchange rate.

Led by our Deputy President, the Accelerated and Shared Growth Initiative
(AsgiSA) lists clear areas where more work needs to be done to raise our trend
growth.

* We will grow faster when we export more goods and services and accelerate
investment in areas of competitive advantage
* We will grow faster when our levels of productivity are raised and our
ability to generate more low skilled jobs is enhanced
* We will grow faster when bureaucratic red tape that hobbles business is
tackled head on
* We will grow faster when the performance of the public sector is improved so
that the state can become an even more effective tool for reconstruction and
development
* We will grow faster when infrastructure capacity is enhanced, especially in
relation to telecommunications, rail, roads, ports, electricity and water.

Honourable Members, we have more work to do to ensure that economic
expansion can be sustained and participation broadened. Part of the answer lies
in our fiscal and investment decisions and part in ensuring that our economy is
able to adjust to global risks and opportunities.

CPIX inflation has remained within the inflation target band, averaging
4,6 per cent in 2006, compared to 3,9 per cent in 2005.
Inflationary pressures in the short term, including high food prices, should
abate during this year. CPIX is projected to rise in the first half of the
year, thereafter receding to the middle of the target band, remaining within
the 3-6 per cent range over the medium term.

The increase in foreign exchange reserves and the present fiscal position
are considerable strengths. Mr. President, when you took office in June 1999,
gross foreign reserves stood at US$5,5 billion, the public debt to GDP
ratio stood at 49 per cent of GDP, job creation was rising by about
200 000 a year and economic growth was 2½  per cent. There is
now US$25,9 billion in reserves, our debt ratio is reduced to
26 per cent of GDP, the economy is creating about 500 000 jobs a
year and we have economic growth of 5 per cent. Under your
stewardship, Sir, our economic transformation is well and truly underway.

However, Mr President, it’s not all been smooth sailing. Could I point out
that when you came into Office, Bafana Bafana, our national football team, was
ranked 25th in the world, and today we’re ranked 59th.

Madam Speaker, we are planning for a budget surplus in the coming fiscal
year. The fiscal stance creates space for our future social security reforms
and allows for rising funding levels for public sector infrastructure,
improvements to education and other government priorities, while enhancing the
competitiveness of the economy and sustaining the current growth
trajectory.

Tax revenue has grown by an average of 17 per cent a year for the
past three years, much faster than the rate of economic growth. Alongside the
new taxpayers created by a growing economy: legislative, administrative and
technological changes have broadened the tax base significantly. All of these
developments are exceedingly positive and will benefit us long into the
future.

Public spending has risen by over 9,2 per cent a year in real
terms over the past three years. The strong revenue trend and declining debt
service costs have provided us with the room to invest in the modernisation of
our services and infrastructure. This allows us to add further to our spending
plans, raising public spending a further 7,7 per cent a year over the
next three years as government ensures that effective programmes and promising
new initiatives are funded in line with government’s capacity to implement
them. We are able to do this without leaving a legacy of debt for future
generations.

In a country like ours with a low level of savings, the planned fiscal
surplus is government’s contribution to a national savings effort and we would
like our citizens to follow this example.

In summary, our fiscal stance is a careful balance between increasing
spending on services and infrastructure, providing moderate tax relief to raise
household income and savings, lower business costs, while increasing government
savings. Furthermore, the fiscal position helps keep a check on emerging
imbalances in the economy.

Despite generous tax relief and rate reductions, the tax to GDP ratio has
risen considerably in the past three years, reflecting economic buoyancy and
the broader tax base. For the fiscal year ending in March 2007, our revised
estimate for revenue is R29 billion higher than the original budget.
Company tax and Value Added Tax receipts have exceeded expectations due to
higher profits and strong domestic consumption. Personal income tax has also
surpassed our estimates, driven by both rising employment and real income
gains. We are expecting the strong growth in revenue to continue into 2007/08
leading to a revenue estimate of R545 billion or 28 per cent of
GDP. As private sector investment increases and as household consumption
moderates slightly, we expect revenue as a share of GDP to decline to about
27 per cent of GDP by 2009/10.

The revised estimate for spending in 2006/07 is R470,6 billion,
R3,6 billion less than the adjusted budget. As a result, contrary to our
initial expectations, the budget balance for 2006/07 indicates a surplus of
R5 billion or 0,3%.

We are budgeting to spend R534 billion in 2007/08 rising to
R650 billion in 2009/10. Since tax revenues are likely to grow more
strongly than spending for at least another year, we are budgeting for a fiscal
surplus of about 0,6 per cent of GDP in 2007/08, reverting to a
moderate deficit by the end of the forecast period.

Debt interest costs continue to fall as a share of GDP and are set to reach
2,1 per cent by 2010. Madam Speaker, the savings on interest that we have
seen since 2001 provides an additional R33 billion a year to spend on
services and infrastructure, money that we would not have had if we kept on
borrowing at the level it was in 1994.

In 1994, we had a choice, to expand spending by borrowing, or reprioritise
while reducing dependence on debt. The choices that we have made, consciously
made, provide us with the fiscal space to spend more on education, on health,
on public transport. It has also provided us with the policy room to
contemplate long-term reforms to our social security system that will benefit
all South Africans.

Much of our economic and fiscal policies has been aimed at increasing fiscal
space and reducing our vulnerability to financial instability. These questions,
and how governments think about them in a global context, will also be
highlighted in the meetings of the G20, hosted in 2007 by South Africa. The
G20, or Group of Twenty Finance Ministers and Central Bank Governors, includes
seven industrialised countries and 13 of the most systemically significant
emerging market economies, whose main purpose, is the pursuit of global
financial stability. This forum offers a unique platform to identify common
objectives and common solutions to global financial and economic
challenges.

The theme for the G20 in 2007 is “Sharing – Influence, Responsibility,
Knowledge”. South Africa has prepared a detailed work programme for the year
focused on three major areas. In addition to the area of fiscal space, the G20
will look at the issue of increasing the voice of developing countries on the
global economic stage by giving impetus to efforts to strengthen the voting
power of emerging markets and low-income countries in the International
Monetary Fund and World Bank. A final area of focus seeks better to understand
the impact of high commodity prices on macroeconomic management and the
implications for countries’ financial systems.

South Africa will also use the opportunity of its host year to improve and
strengthen knowledge, within the forum, of African economic and financial
policy challenges – and to facilitate a sharing of knowledge with African
countries – through a series of parallel discussions between the G20 and
African finance ministers and governors.

The budget framework allows us to provide an R89,5 billion in
additional spending over the next three years in comparison with our spending
plans from a year earlier. Our spending priorities are informed by overriding
objective of accelerating growth, modernising our public services and
infrastructure and reducing poverty and inequality. Over the next three years,
we are budgeting to spend almost R2 trillion. Madam Speaker, that’s a two,
followed by twelve zeros.

We must use these resources so that human life can indeed have equal
worth.

Iimpilo zabantu zixabisa ngoku linganayo (people’s lives have equal
value)

Motho ke motho - ga ana bosehlana (a human being is a human being, there is
no lesser human being)

If we truly want to create a society where human life has equal worth and
where every child has an equal opportunity to succeed, we must improve the
quality of our schools. This will not happen on its own. We need concerted
action to make things change.

Madam Speaker, our teachers are the frontline of our education system. It is
in their hands that we place our 11 million children each day. In most cases,
our teachers do a sterling job under difficult conditions. We pay tribute to
them and we ask no more than that they continue to serve with dedication and
integrity. We also know that a minority of teachers do not prepare their
lessons adequately, are frequently late and are unfit to be in the position
where they are asked to nurture our children. We cannot let the minority of
teachers denigrate a profession based on love for children and a desire for
learning and a commitment to a collaborative future.

Over the next three years, we are making available an additional
R8,1 billion to hire additional teachers, teaching assistants and support
staff in schools and districts and to improve the remuneration levels of
teachers. The many people who submitted suggestions to the Tips for Trevor
campaign will be pleased to hear this. The Minister of Education will lead the
process of determining how these resources should be used, focusing on the need
to reward good teachers, provide support to poor schools and improve the
quality of schooling in general. We are also setting aside R700 million for
bursaries for teachers to encourage young people to train as teachers and to
pursue careers in our public schooling system. This should benefit about
13 000 teachers over the next three years. Together with resources set
aside in the provincial equitable share for the implementation of no-fee
schools, and a substantial increase in resources for classroom building and
providing water, electricity and sanitation in schools, the investments
announced in this budget constitute a concerted effort to improve the quality
of schooling in our country. It is a step change in resources going to schools,
and we want to see a step change in results too.

The South African Schools Act recognises that the strength of our democracy
is dependent on the depth of involvement in our democratic institutions, such
as school governing bodies. We need committed parents to stand up and make a
contribution to the success of their children’s schools, so that we can build a
society where human life has equal worth.

The national Department of Education receives a further R850 million
for a step up in its adult basic education and training programmes. The 2007
budget also makes available a further R2,2 billion to support our university
sector to meet its objectives of increasing enrolment and producing more
science, engineering and technology graduates. The further education and
training sector receives R600 million for bursaries for deserving
students.

Since the shifting of the social grants function to the Social Security
Agency, provinces have been able to focus on rebuilding their welfare service
capacity. A new bursary scheme for social workers is established, with an
initial allocation of R365 million. Together with steps taken to increase
social worker salaries in 2005, this initiative aims to revive interest in a
profession critical to the well-being of our communities and the development of
a more caring society.

The health sector receives a further R5,3 billion to spend on increased
remuneration for health workers and an increase in staffing levels. We are
budgeting to increase the number of health workers by about 30 000 people
over the next five years. Our previous budget framework made provision for the
treatment and care of about 250 000 people who are ill with Aids. We are
likely to reach that figure in the next few months. Health receives a further
R1,7 billion for this programme, presently being delivered through 272
sites, allowing for a doubling of the uptake over three years. Spending on
dedicated HIV and Aids programmes by health, education and social development
departments will exceed R5 billion by 2009/10. The hospital revitalisation
programme, one of our more successful infrastructure programmes, receives a
further R1 billion taking total spending on this programme to R6,8 billion
over the next three years. In addition, the sector receives R1 billion for the
modernisation of tertiary services, with particular emphasis on diagnostic
equipment.

Madam Speaker, one of the clearest ways in which we are able to act against
poverty is through our system of social grants. We presently have just under 12
million people receiving social grants of which over seven million are
beneficiaries of the child support grant. There is strong evidence that South
Africa’s social grants are well targeted and account for a substantial share of
the income of poor households. Grants are associated with a greater share of
household expenditure on food and hence improved nutrition, and the child
support grant contributes measurably to the health status of young children.
Statistics SA data shows that the proportion of households where children often
or always went hungry decreased from 6,7 per cent in 2002 to
4,7 per cent in 2005. This means that we can say to many more
children, hunger is no longer knocking on the door.

Die lewe van alle mense is gelykwaardig (the lives of all people are
equal)

Three years ago, the Department of Social Development initiated measures to
curb fraud in our social grants system. With the help of the Special
Investigating Unit, over 130 000 people have been removed from the system
and about 2 500 charged with fraud so far. This has contributed
significantly to the stability of the system. Ensuring that we eliminate fraud
and corruption from the social grants system is critically important. The state
old age pension, disability and care dependency grants will rise by R50 to a
maximum of R870 a month, providing a strong signal that money released from the
reduction of corruption will be given back to those who deserve it. Child
support grants increase by R10 to R200 a month and foster care grants rise to
R620 a month.

Let me turn to our criminal justice sector. To quote President Mbeki, “while
we have already surpassed that targeted figure of 152 000 police
officers…and while we have improved the training programme, we recognise the
fact that the impact of this is not yet high enough.”

There has been a significant increase in resources going to the fight
against crime. Since 2003/04, allocations to the Safety and Security ministry
have increased by 43 per cent. Over the next three years, resources
going to the police will rise by a further 34 per cent from
R33 billion in 2006/07 to R44 billion in 2009/10. The budget for the
Department of Justice increased by 41 per cent in the past three
years and will rise by 52 per cent over the next three years.

In this year’s budget, we are allocating an extra R2,4 billion to the police
to further expand police numbers and invest in technology and forensic
equipment. By 2010, we will have close to 190 000 police officers on our
streets. Electronic fingerprints and dockets will become the norm. The
2007 Budget also allows for the implementation of the salary upgrade
programme that commenced in 2005.

The Department of Justice receives a further R1,5 billion over the next
three years to improve court capacity, reduce case backlogs and modernise the
administration of justice.

Our government recognises the seriousness of the crime situation and will
continue to provide leadership in the fight against crime. But, effective crime
fighting depends on partnerships between our law enforcement agencies and
communities. Through community police forums, all citizens have the opportunity
to contribute towards making their communities safer. In this way, each person
can help in the construction of a society where human life has equal worth.

Madam Speaker, even as we step up the fight against crime, we must ask
ourselves what cultural, social and economic conditions give rise to crime. We
have spoken in the past about the destructive effects of the relentless pursuit
of individual self-enrichment at the expense of the broader development and
progress of society. We cannot escape the fact that the culture of greed plays
a role in driving crime. Long-term, sustainable solutions lie in addressing the
causes of crime and the conditions that give rise to the alienation of some in
our communities. Only a stronger sense of society, of community, of family; a
sense of responsibility to each other – Umuntu ngumuntu ngabantu – can heal the
fractures that give rise to crime.

We also need to insist that honesty and integrity are core values of our
economic and financial institutions. We continue to see instances of flagrant
abuse of this principle, often involving hundreds of millions of rands. In
addition, we continue to see extraordinary methods to evade tax and the legal
obligations relating to anti money-laundering legislation.

I want to make it clear that we will not tolerate a situation where
individuals pillage and plunder millions from the companies they run or from
ordinary South Africans who are poor and humble people whose entire life
savings get destroyed in the process.

I have instructed the Financial Intelligence Centre, the Financial Services
Board and the South African Revenue Service to work collaboratively with the
South African Police and prosecutors in dealing with financial crime and its
proceeds. I have also asked that fiduciary and trusteeship responsibilities
need to receive the highest priority in the oversight activities of our
regulators. We must ensure that neither organised crime nor abuse of
stewardship obligations should be allowed to violate our hard-earned democracy
and the integrity of our country.

Since 2001, we have channelled an ever greater share of our resources into
capital spending. Our investment in infrastructure has been focused on two
major areas: the built environment and economic infrastructure. The built
environment refers to a cluster of activities and services that centre on
building viable, secure residential communities – housing, water,
electrification, sanitation, roads, sports facilities, police stations and
schools, clinics and community halls. These programmes seek to change the
landscape across both urban and rural areas, to turn barren, dusty land into
places that people feel proud to live in, those places where people can find
the comfort and security to raise children.

In the past two years, we have added considerably to our public transport
budget. In 2005, we created the Public Transport Infrastructure Systems Grant,
aimed mainly at putting in place passenger transport services that would
facilitate the movement of people for the FIFA World Cup. This, together with
the impetus that the World Cup provided, has resulted in something of a
revolution in municipal planning for public transport and forward thinking
about urban development. The bids that we have seen are impressive in terms of
knitting together communities with places of work, recreation and leisure. In
particular, the development of Bus Rapid Transit schemes offers exciting
opportunities to improve municipal public transport systems. To ensure that the
World Cup leaves us with a legacy of better public transport, we are adding a
further R2,3 billion to this programme.

Our housing budget receives a further R2,7 billion taking the total
allocation over the next three years to R32 billion. To give you a sense
of the scale of increase in our housing budget, Madam Speaker, in 2003/04, we
spent R4,6 billion on housing. By 2009/10, the end of our present budgeting
period, the budget rises to R12,5 billion.

Madam Speaker, I’ve been listening to the debates on the State of the Nation
Address in this house. The Minister of Housing has publicly asked for her
budget to be doubled. I’d like to tell this House, that over the next three
years, we will spend more on housing than in the entire first decade of
democracy.

Allocations for water, sanitation, electrification and municipal roads all
rise in a complementary fashion. Our government is determined to meet the
targets set by the President in 2004 in relation to water, sanitation,
electrification and housing.

Motho ke motho - Ga ana bosehlana (a human being is a human being, there is
no lesser human being)

The Neighbourhood Development Partnership Grant, a new innovative funding
model, encourages private participation in the rejuvenation of townships. Our
urban landscape is often described as dysfunctional with large townships far
from city centres, far from places of work and leisure. This landscape will not
change of its own accord. We will not be able to reshape our cities, integrate
our townships, create residential communities unless we intervene, unless we
act decisively. The Neighbourhood Development Partnership Grant has already
allocated money for technical assistance to upgrade Bara Central in Soweto,
Njoli Square in KwaZakhele, Ngangelizwe eMthatha. Planned interventions include
eThekwini Bridge City and KwaMashu town centre.

Many of the programmes outlined are labour intensive, and form part of the
Expanded Public Works Programme, aimed at drawing in marginalised communities
in the 2nd economy. Since its inception, this programme has created about
300 000 work opportunities, mainly in rural areas and mainly for women.
Taking our cue from the State of the Nation Address, together with the Minister
for Public Works, we will review this programme to see how it can be amended
and further ramped up to increase the number of work opportunities that it
creates. A further R125 million is allocated to the Department of Public Works
to improve coordination and oversight of this programme.

I am happy to announce that the Local Organising Committee for the FIFA
World Cup has reached agreement with municipalities on the budgets for the
construction and upgrading of stadiums and that these agreements are within the
R8,4 billion set aside for stadiums. These agreements set a firm precedent
- that we must go out of our way to ensure a successful tournament and a
lasting legacy beyond 2010, but fiscal prudence and sound budgeting principles
must be adhered to at all times.

The South African National Roads Agency and the Rail Commuter Corporation
receive a further R1,7 billion to upgrade roads, and stations in areas critical
to the World Cup. In total, over R9 billion will be allocated by national
government for municipal transport, roads and precinct upgrading relating to
the 2010 FIFA World Cup.

Agencies and entities falling under the Department of Trade and Industry
receive an additional R1,7 billion to promote industrial development,
black economic empowerment and small business development. To support the
process of broadening participation in the economy, the National Empowerment
Fund receives a further R380 million as a capital injection. The critical
infrastructure programme is allocated a further R300 million to leverage
private sector investment, especially into our industrial development zones and
the film and television production incentive gets another R300 million to
encourage local and international film makers to film in South Africa. Some of
the latest international productions filmed largely in South Africa include
“Ask the Dust”, “Avenger”, “Lord of War”, “The Flood” and “Blood Diamonds”
which was filmed in Port Edward, Cape Town and Mozambique. Two new productions
“Vanilla Gorilla” and “Doomsday” have started filming in January 2007.

Our research and development capacity has been strengthened in the past five
years through targeted investments to our science councils and universities.
This year, we are setting aside a further R1,2 billion for science and
technology of which R500 million is for government’s contribution to the
Square Kilometre Array, contingent on the success of our bid. The South African
Research Network, a joint project of the Departments of Public Enterprises and
Science and Technology aimed at providing low-cost broadband links for the
local academic community receives R95 million and R60 million is
allocated to set up science research chairs at our major universities.

Madam Speaker, the Budget framework includes a contingency reserve of
R3 billion for 2007/08. This allows for unforeseeable and unavoidable
expenditure that may need to be accommodated in the Adjustments Budget this
year, and allocations to several state-owned enterprises that are not yet
finalised. Our commitment to finance 51 per cent of the capital requirements of
the Pebble Bed Modular Reactor project over the next three years amounts to R6
billion. An allocation to settle the land claim and other obligations relating
to Alexkor mine has yet to be finalised and will be provided for in the
Adjustments Budget, which will also include further equity contributions for
the InfraCo telecommunications initiative and Sentech’s investment
requirements, contingent of course on the approval of business plans and
resolution of outstanding regulatory requirements.

South Africa’s foreign policy objectives seek to achieve greater unity and
solidarity between African countries, accelerate political and socio-economic
integration and promote peace, security and stability. Support for key
institutions of the African Union remains a priority. The African Renaissance
Fund, through which most of the initiatives are funded, is given a further
R275 million. Our commitments to host the Pan African Parliament also
requires a further R113 million.

In a short period of time, our defence force has already assisted
significantly in helping reduce a number of conflicts on the continent. We now
have peace-keeping operations in the Democratic Republic of the Congo, Burundi
and Sudan. The SA National Defence Force receives additional allocations to
acquire airlift capacity, for exchange rate adjustments to the strategic
defence package and for the military skills development programme, an
innovative programme aimed at introducing young people into the military.

Improving service delivery in the Department of Home Affairs has positive
benefits for government, the economy and all citizens. The Minister of Home
Affairs is working with colleagues to finalise a plan to turn this department
around and we pledge our full support. A further R900 million is allocated
to the department to support its turnaround, to fill critical posts, purchase a
new passport printer and modernise IT and back-office operations.

Following considerable tax policy changes in the 1990s, the past five years
have been characterised by better services to tax payers, improved compliance
and a broader tax base. The 2007 Budget provides a further R1,3 billion to
upgrade core IT systems in the South African Revenue Service. The modernisation
of the South African Revenue Service will enable it to manage increased
administration volumes. A single customer view, automation, e-business and
improved walk-in services will be supported by enhanced risk management.

Priority is given to moderrnising customs administration to cope with
significant increases in volumes at all our land, sea and air border posts. The
acquisition of cargo and container scanning equipment will enable SARS to
perform non-intrusive inspections on goods going through our ports.
Madam Speaker, our budget allocations must reflect the priorities that
government sets. In recognition of the critical role that provinces and
municipalities play in the delivery of social and household services, these two
spheres receive 64 per cent of the additional R89.5 billion
allocated in this budget.

Transfers to local government grow by 19 per cent a year. In
addition, municipalities receive the bulk of the allocations for stadiums and
related infrastructure for the 2010 FIFA World Cup. The local government
equitable share receives a further R5 billion for the delivery of free
basic services, which now reach an average of about 80 per cent of
households. The Municipal Infrastructure Grant receives a R400 million
more for a final push to eradicate the bucket system. A further
R600 million for the electrification programme, R1,4 billion for bulk
water and sanitation infrastructure and R950 million to deliver water and
electricity to schools and clinics. Total infrastructure transfers to
municipalities now total R52 billion over the next three years.
Ubujamo bethu busho siyalingana empilweni

Transfers to provinces grow by 12,7 per cent a year with the major
additions going to education and health personnel, social welfare services and
for provincial infrastructure. This year, we introduce a new conditional grant
called the Community Library Services grant to develop the infrastructure and
stock of books in local libraries. To spread the joy of books to millions more
children and to provide access to information to teachers and parents, the
grant starts off with an initial allocation of just under R1 billion over
three years. The provincial equitable share formula, through which
86 per cent of provincial transfers flow, is updated to reflect
changes to provincial boundaries.

Preliminary assessments of provincial budgets indicate that allocations are
broadly in line with the priorities outlined in last years’ Medium Term Budget
Policy Statement. Spending on both education and health at a provincial level
are projected to grow by 10.5 per cent a year and welfare services
grow rapidly from R5.3 billion in 2006/07 to R8,8 billion in 2009/10.
Over the next three years, provincial capital spending totals R65 billion.
I wish to commend provinces for the steady progress being made in rolling out
their infrastructure programmes. In 2005/06, only 8 per cent of
infrastructure funds were unspent as opposed to 14 per cent in
2004/05. This year, spending for the first nine months is 35 per cent
higher than in the same period last year.

Madam Speaker, over the past decade, we have created a tax policy regime
which is internationally competitive. We have broadened South Africa’s tax base
while at the same time provided billions of rands in tax cuts to improve the
equity of the tax system.

Mr A S Smit submitted a Tip for Trevor which suggested “Kan u in u
begrotingsrede belastingbetalers bedank vir hul bydrae.” Meneer Smit is
heeltemal korrek so ek vra om verskoning indien ek dit nie genoegsaam in die
verlede gedoen het nie, en spreek ons gesamentlike dankbaarheid uit aan alle
belastingbetalers. Admonished by Mr Smit, I thank all South African taxpayers
for their diligence in contributing to our revenue pool. Ndo livhuwa nga
maanda!

This year, individuals benefit from moderate personal income tax cuts and
the elimination of the retirement fund tax. Business benefits from reforms to
the secondary tax on companies. We extend accelerated depreciation allowances
to certain infrastructure and the cost of corporate reorganisation is
reduced.

The 2007 Budget provides personal income tax relief amounting to
R8,4 billion, increasing the level below which no income tax is levied for
people under the age of 65 to R43 000. Changes to the personal income tax
brackets provide relief to compensate for the negative effects of inflation on
taxpayers, and to partially offset the effects of changes to the taxation of
medical aid contributions and car allowances. I appeal to taxpayers to use this
relief to first settle their debts or save, rather than for consumption.

The monthly monetary caps for tax-free medical aid contributions are
increased from R500 to R530 for each of the first two members and R300 to R320
for each additional beneficiary. This measure is aimed at further incentivising
people to join low-cost medical schemes, and for the market to respond to
demand in this area.

Public benefit organisations play an important part in the social fabric of
our society. During the last few years the tax regime applicable to these
organisations has been reformed to give due recognition to their contributions
to society. I’m pleased to announce that tax deductible contributions by both
individuals and companies to specific public benefit activities will be
increased from 5 per cent to 10 per cent of taxable income. In addition, the
tax free income threshold from trading activities by PBOs will be doubled, from
R50 000 to R100 000. Arising from discussion with Cricket SA recently,
amendments are also proposed to ease the tax liabilities of professional sport
bodies that contribute meaningfully to the development of amateur sports.

In order to promote saving for retirement, we propose to this house the
abolition of the retirement fund tax from 1 March 2007. We call on trustees to
ensure that the benefits of this reform accrue to the contributors and
beneficiaries of retirement funds. The proposal will cost R3 billion a
year and is part of a number of related measures aimed at encouraging household
savings. With the same objective in mind, the interest income exemption is
raised from R16 500 to R18 000 for those under 65 and from
R24 500 to R26 000 for those 65 and over. In addition, the annual
exclusion threshold for capital gains or losses will be increased from
R12 500 to R15 000.

Most countries have a dividend tax at the shareholder level. We have a
secondary tax on companies collected directly from a few thousand companies as
opposed to millions of shareholders. To further improve the transparency and
equity of the tax system, we are proposing that it be phased out and replaced
with a dividend tax at shareholder level. This reform would consist of two
phases. We propose reducing the rate from 12,5 per cent to
10 per cent and that the base be redefined to apply to all
distributions. This will come into effect on 1 October 2007, except
for standard anti-avoidance measures that will commence on conclusion of this
speech.

The conversion to a dividend tax collected at the shareholder level will be
completed by the end of 2008 subject to the renegotiation of a number of
international tax treaties.

The taxation of gains realised from the sale of shares is presently subject
to ambiguous procedural treatment. In order to provide equitable treatment and
certainty for both taxpayers and SARS, all shares disposed of after three years
will trigger a capital gains tax event.

Our tax laws provide for depreciation of buildings used in manufacturing but
not for commercial purposes. We are proposing that tax depreciation allowances
for the economic wear and tear of newly constructed, or upgraded, commercial
buildings be implemented. A 20-year write-off period is envisaged. The income
tax act has not kept pace with changes to the local and international
environmental regulatory regime. It is proposed that environmental capital
structures such as dams and tanks, which are presently not depreciable, qualify
for depreciation allowances.

Consideration is being given to facilitate investments in high risk
investments such as mining exploration by junior mining companies. The
introduction of flow-through shares will be investigated, and a final decision
in this regard will be made next year.

Now for the excise tax increases:
* Tax on a packet of 20 cigarettes goes up by 60 cents
* Tax on a 340 ml can of beer goes up by 5 cents
* Tax on a 750 ml bottle of wine up by 10 cents; and
* Tax on a 750 ml bottle of spirits up by R1,88.

These changes to the excise taxes will raise R1,5 billion.

The general fuel levy is increased by 5 cents a litre and the Road Accident
Fund levy is also increased by 5 cents a litre.

Entrepreneurship remains a vital ingredient in the growth of our economy. In
this regard, we have previously announced measures to assist and encourage
small businesses, including a tax amnesty for small businesses announced last
year. The small business tax amnesty offers those outside the system a fresh
opportunity to become compliant and benefit from the myriad of support measures
offered by government. The amnesty ends in May this year, and over the coming
weeks SARS will be intensifying its efforts to ensure that all businesses with
a turnover of R10 million or less are afforded the opportunity to apply.
So far, about 12 000 have come forward to apply for amnesty.

The task team appointed to investigate the fiscal regime applicable to
windfall profits in the liquid fuels sector submitted its final report to me on
9th February 2007. It has exhaustively inquired into the fiscal and regulatory
aspects of the industry. I want to thank the team led by Dr. Zav Rustomjee for
their efforts in completing their work in such a short space of time.

In responding to the report, I will refer the regulatory matters to the
Minister of Minerals and Energy for further consideration. The task team has
made two substantial fiscal recommendations, involving a possible tax on
windfall profits and an incentive arrangement for new investment in liquid-fuel
production capacity. I believe there is merit in these proposals. However, we
will consult the industry before we finalise this matter.

The task team’s report will be released for public and stakeholder comment
by the end of the week.

The gradual process of exchange control relaxation has focused on enabling
an orderly process of global reintegration, encouraging South African firms to
expand from a domestic base and allowing South African residents to diversify
their portfolios through domestic channels. The continued strength of the South
African economy and financial markets support further steps in this regard,
including:
* Lowering the current shareholding threshold for foreign direct investment
outside of Africa from 50 per cent to 25 per cent to further enable South
African companies to engage in strategic international partnerships;
* Simplifying the Customer Foreign Currency accounts dispensation by allowing a
single CFC account for trade and services related payments, and expanding the
range of permissible transactions; and
* Further developing South Africa’s financial markets and increasing liquidity
in the currency market by permitting the Johannesburg Securities Exchange to
establish a Rand futures market.

As has become tradition, I have received hundreds of Tips for Trevor. Thank
you for taking the time and effort to write to me. The strength of our
democracy is measured by the depth of involvement by ordinary people in the
affairs that affect them. The overwhelming sense I get from reading these tips
is that almost all South Africans recognise that the challenges we face can
only be overcome through a full-on frontal assault on poverty and that the best
way to achieve this is through a combination of faster economic growth and
active intervention by government, on the side of the poor. Because human life
has equal worth.

Magoshu Motau writes to ask that the tax-free lump sum portion of retirement
funds be increased since it has been at R120 000 for some time now. Mr.
Motau is very perceptive, and correct. It could also be added that the formula
required to calculate this tax-free lump sum is incomprehensible to the average
person. We are accordingly proposing an increase in this threshold and will
simplify the whole calculation.

Last year, I received a suggestion that we should make lobola tax
deductible. This year, I’ve been given a suggestion that I should impose VAT or
tax lobola trusts since some people are making money out of them. These issues
seem far too complex for me or my officials to handle. I’m going have to
consult our elders on this one.

In concert with the task of growing the economy and creating new
opportunities for work, we have been hard at work since 1994 to push back the
frontiers of poverty, recognising that no people can be truly free until they
have cast aside the shackles of poverty and underdevelopment.

It is for this reason that the eradication of poverty has been at the centre
of our policies and programmes since the first democratic elections. To help
measure progress in the fight against poverty, Statistics South Africa will
pilot a poverty line for an initial period to allow for public comments and
consultations before its design is finalised. Alongside the Budget, we are
publishing today a discussion document that sets out our proposal for a
national poverty line. I appeal to you to continue to advise us on the
appropriateness and usefulness of this measure.

Ubuntu acknowledges that all people are an integral part of broader society
and humankind, and our individual fortunes are intimately connected to the
fortunes of the whole.

Madam Speaker, in the past decade, we have gradually expanded our system of
social grants providing income support to vulnerable groups, children, the
disabled and the elderly. Our social assistance grants provide an effective
income safety net for the poor, and about 3½ per cent of GDP is spent on this
redistributive budget programme.

But it is also important to encourage saving and self-reliance. The tax
system contains a retirement savings incentive that particularly benefits
higher-income individuals. But for working people who fall below the tax
threshold, there is effectively no incentive, and indeed there is the perverse
effect that if you save enough you might lose the old age pension because of
the way the means test works. So although we have a well-developed retirement
industry, and most employees are covered by pension or provident fund
arrangements, in practice too many people surrender their policies or cash in
their benefits when they change jobs. It is estimated that more than half of
those who contribute to retirement funds, reach retirement age with a pension
that is less than 28 per cent of their final wage or salary and over two thirds
of people are dependent on the state old age pension.

The time has come to put in place a new arrangement in which all South
Africans will share, and that provides a basic saving and social protection
system that meets the needs of low-income employees. We are therefore proposing
a mandatory, earnings-related social security scheme to provide improved
unemployment insurance, disability and death benefits targeted at the income
needs of dependants and a standard retirement savings arrangement. This will be
financed by a social security tax administered by the South African Revenue
Service, and collected in individual accounts in the name of every contributor.
Significant capacity building and institutional reform are needed on both the
tax side and to administer benefits. This work has begun, with a view to
implementation by 2010.

To offset the cost of the social security tax for low-income workers and to
lower the cost of creating employment, we are proposing the introduction of a
wage subsidy for those whose earnings fall below the income tax
threshold.
Madam Speaker, these proposals are bold and ambitious. Much work still needs to
be done. The principles that will underpin these reforms are:
* Equity – there must be fair and uniform rates of contribution and benefits
for all
* Pooling of risk – collective funding arrangements and non-discriminatory
rules and entitlement must apply
* Mandatory participation – there will be compulsory participation of employees
and inclusion of self-employed individuals on reasonable terms
* Administrative efficiency – streamlined use of pay-roll based contributions,
modern information systems and efficient payment arrangements are
essential
* Solidarity – minimum benefits will be assured through continued social
assistance grants programmes financed through the budget.

Alongside the phasing in of social security arrangements, several reforms to
the regulation, governance and tax treatment of occupational and individual
retirement funds will be implemented over the period ahead.

Madam Speaker, these are far-reaching reforms and as the President has
indicated, consultation will be needed before finalisation of legislation,
administrative systems and transition arrangements. We aim to conclude these
discussions with trade unions and employers during the second half of this
year.

We do this, Madam Speaker, to proclaim loudly that human life has equal
worth. Our sense of community, our sense of humanity is dependent both on our
own well-being and the well-being of those around us.

Members of the House should be advised that following steady improvements in
the financial position of the Government Employees Pension Fund over the past
decade, it has been possible to award increases to civil pensions this year
that fully compensate for inflation, and that also correct for the past erosion
in real values. This substantially improves the position of many elderly
pensioners and spouses.

I am pleased to introduce to the House Phineas Tjie, who has been appointed
head of administration of the Government Employees’ Pension Fund. I am grateful
for the wise leadership that Martin Kuscus gives to the Board of Trustees.

We should also pay tribute to the work of the Public Investment Corporation,
ably managed by chief executive officer Brian Molefe. Under their expert
investment management, the GEPF has again recorded excellent financial
results.

The budget is a culmination of a full year of preparation involving
literally thousands of people at national, provincial and local government, and
in many of our public entities. Madam Speaker, the preparation of a Budget
relies on the hard work of many.

Under the stewardship of President Mbeki and the drive and determination of
Deputy President Mlambo-Ngcuka, Cabinet has been instrumental in shaping this
budget. I would like to thank members of the Ministers’ Committee on the budget
for the long hours and thousands of pages of documentation they’ve had to
endure to craft this budget.

Deputy Minister Jabu Moleketi continues to bring his sharp analysis and
intellectual insight to the budget process. I would like to thank provincial
MECs for Finance, who are in the midst of finalising their own budget speeches,
for the work that they have done in strengthening discussions in the Budget
Council and to Salga for their efforts in guiding our understanding of the
issues relevant to local government.

I would also like to express a word of gratitude to:
* Governor Tito Mboweni and the staff of the Reserve Bank for their support and
assistance
* The Financial and Fiscal Commission Chairperson Dr Bethuel Setai and the
other Commissioners and staff for their sound advice and considered
contributions to our intergovernmental framework.
* Herbert Mkhize who has skilfully steered our discussions with business,
labour and community representatives in Nedlac
* Pali Lehohla continues to drive ongoing improvements in the extent and
quality of government statistics, supported by the Statistics Council chair
Howard Gabriels.

Thanks to Nhlanhla Nene, chair of the Portfolio Committee on Finance, Tutu
Ralane who chairs the Select Committee on Finance, and the joint chairs of the
Budget Committee, Louisa Mabe and Buti Mkhaliphi, for diligently working on
holding government to account.

Madam Speaker, could I beg your indulgence and ask that the house joins me
in wishing the South African Revenue Service a happy 10th birthday. It is
remarkable that an organisation, just ten years old, can do so much good for
our country and our people – congratulations Commissioner Gordhan to you and
your dedicated band of 15 000 staff.

Lesetja Kganyago continues to lead an inspired group of professional staff
at the National Treasury, always striving to do better, and in the result,
driving everybody crazy. Thanks too to the officials in the Ministry who give
their all, especially at the time of the budget.

Lastly, thanks to my family who continue to inspire me to build a society
that values our shared humanity.

President Mbeki has also advised

"What this means is that when we talk of a better life for all, within the
context of a shared sense of national unity and national reconciliation, we
must look beyond the undoubtedly correct economic objectives our nation has set
itself." (3)

When our forebears formed the African National Congress in 1912, in response
to being excluded from the formation of the Union of South Africa, they were
driven by the single-minded belief…Human life has equal worth.

On the 21st of February 1917, when 649 South Africans died when the SS Mendi
sunk off the English coast, they died because they too believed that human life
has equal worth.

When Nelson Mandela and Walter Sisulu tabled the 1949 programme of action to
spur more active resistance to discrimination, they believed that Human life
has equal worth.

In 1955, when our parents came together in Kliptown at the Congress of the
People, to proclaim loudly that South Africa belongs to all who live in it,
black and white; they were united by the belief that human life has equal
worth.

In 1983, when we launched the United Democratic Front in Mitchell’s Plain,
hundreds of community organisations said with one voice: Human life has equal
worth.

In 1994, when we stood in line and voted as equals in our first democratic
elections, we could feel the mood, and the mood said, ‘Human life has equal
worth’.

When our constitution was unanimously adopted in this house in 1996, our
declaration to the world was loud and clear, human life has equal worth.

And today, we proclaim loudly…human life has equal worth … and we will be
unwavering in our dedication to the social cohesion and human solidarity that
we seek.

1 Will Hutton, The writing on the wall, 2007. p. 204.
2 On a trade weighted basis.
3 Fourth Nelson Mandela Lecture

Issued by: National Treasury
21 February 2007