T Manuel: Medium Term Budget Policy Statement

25 October 2006

Chairperson,

John Kani and Winston Ntshona have recently reunited to put on another run
of 'Sizwe Banzi is dead.' Written by Athol Fugard in collaboration with the two
actors, the play tells of a young migrant worker who composes a letter to be
sent to his wife. The story contrasts the cruelty of the pass laws and
desperation of migrant workers, with the dreams and aspirations of people
dressed up in their Sunday best, for a family photograph.

In the play, Styles describes his photo studio. I quote:

"This is a strongroom of dreams. The dreamers? (he asks) My people. The
simple people, who you never find mentioned in the history books, who never get
statues erected to them, or monuments commemorating their great deeds. People
who would be forgotten, and their dreams with them, if it wasn't for Styles.
That's what I do, friends. Put down, in my way, on paper the dreams and hopes
of my people so that even their children's children will remember."

'Sizwe Banzi' is dead is set in 1971, at a time when Apartheid was most
rigid, and the gulfs between rich and poor, between black and white were
unrelenting. Today, twelve years into our democracy, we still have dreams
beyond the world we know, and we still have mountains to climb in pursuit of
fairness, justice and opportunity. But we have broken open that desperate
strongroom of dreams; we are now living out our hopes and aspirations, writing
laws that put people first, building institutions that respect people's rights,
constructing houses, creating jobs, providing services.

Economic overview

South Africa is in the midst of its longest sustained economic expansion.
Robust economic growth, supported by strong consumer spending and rising
investor confidence, has created over one million jobs in the past three years.
While unemployment remains our most pressing social and economic challenge, for
the first time in a generation, the economy is creating jobs faster than new
entrants are joining the labour force. Though it is too early to claim victory
in the battle against unemployment, we can already see how growth and
development work together to reduce poverty and improve livelihoods, how the
policy choices we made a decade ago are bearing fruit.

The key challenges we face as a country are to sustain this growth, broaden
participation and extend opportunities to all. We must strengthen our
industrial capacity and deepen the quality of social development. We must
accelerate growth and share its benefits.

In celebrating the solid performance of our economy, we must continue to be
mindful that there are still too many South Africans who go to bed hungry, too
many who stare at the fragile walls of their shacks and far too many for whom
disease makes life a daily struggle.

In the past four years, our economy has expanded by an average of 4,2
percent a year, with growth reaching almost 5 percent last year. Some
indicators of economic activity suggest that the economy may in fact be growing
faster than the preliminary data suggests. But we know that more needs to be
done. Sustained and broad-based growth depends on more rapid progress in our
industrial sector, on export growth and trade performance and on improving
education, skills and productivity.

Allow me to reflect briefly, Chairperson, on developments in the economy
over the past five years. Co-ordinated fiscal and monetary policies have helped
bring down inflation and interest rates to historic lows. Rising global
commodity prices, solid growth in the domestic market, low interest rates in
developed countries and continued inflows of foreign capital have created
buoyant financial conditions and a favourable environment for investment.

The expansion of the social security system has contributed to poverty
reduction and reduced the vulnerability of many households. At the same time,
real income tax relief for low and middle-income earners has raised disposable
income. People have purchased more durable goods such as televisions, fridges,
furniture and cars. We have seen an acceleration of consumer spending, an
unprecedented rise in house prices - and steadily rising household debt.

At the same time, many companies have taken advantage of the low interest
rate environment and relatively strong currency to retool - to invest in new
machinery and technology to expand their businesses. Boosted also by rising
public sector infrastructure spending, the construction sector has boomed,
growing by 10,7 percent a year in the past three years. The pace of fixed
investment has surprised many of the upstream input sectors. As a result, we
are now experiencing periodic shortages of cement, steel and refined fuel.

In some instances, these shortages have led to price increases. In others,
we have seen imports to meet excess demand. But over time, these are the
signals that lead to investment decisions and business expansions. And
investment leads in due course to jobs, training, exports, earnings, and
further investment.

The supply side of the economy takes time to respond to rising demand. But
the response is clearly underway - companies are increasingly confident that
the present boom is not just a temporary surge, but represents a structural
shift in our economic trends and prospects. So, for example, gross fixed
capital formation has risen from 15 percent of Gross Domestic Product (GDP) in
2002 to 18,4 percent in the first half of 2006.

Just as production takes time to respond to demand, so also domestic savings
lags investment growth. As incomes have risen, and taking advantage of more
favourable credit conditions, South Africans have chosen to spend rather than
save. This has left much of the investment to be financed from foreign capital.
While this is appropriate for a country at the level of development as our own,
it does increase the potential risks to the economy. We are integrally linked
to global financial markets and are therefore able to attract and retain
foreign capital inflows, but we must also raise our export performance and
savings rate over time.

Investment growth is projected to grow by about 10 percent a year to 2010.
Though household consumption is expected to moderate, the economy is expected
to record growth of about four and a half percent next year, rising to about
five and half percent by 2009. Inflation, as measured by the Consumer Price
Index (CPIX) is likely to rise further over the next six months, but should
moderate thereafter, averaging 4,8 percent over the next three years.

Adjustment Budget

Chairperson, I table before the House the 2006 Adjusted Estimates of
National Expenditure and the Adjustments Appropriation Bill. Allowed
adjustments to the expenditure level include underspending from the previous
financial year that is approved for spending in 2006/07, unforeseen and
unavoidable expenditure, changes to state debt cost, and the allocation of
amounts that were announced in the 2006 Budget but not appropriated to a
specific vote.

Key changes to the adjustments estimate include the following:

* R764 million is allocated for emergency funding in response to flood
damage in Taung and the recent flood disasters in the three Cape provinces, to
cover repairs to roads, bulk infrastructure and housing.
* R847 million and R80 million are allocated to Denel and Alexkor
respectively.
* Government's initial equity in the proposed broadband telecommunications
company, InfraCo, and a further investment in the Pebble Bed Modular Reactor
(PBMR) demonstration plant, amount to R1,4 billion.
* R372 million rolled over to the 2006/07 Housing vote will contribute to
financing the N2 Gateway housing project.

The adjustments budget also makes provision for the consolidation of
Metrorail into the South African Rail Commuter Corporation, including
operational losses of R180 million and R439 million to maintain the employee
benefits of former Metrorail staff.

While total adjustments increase the expenditure level by R8,8 billion, the
net increase in the budget is R1,5 billion after taking into account declared
savings and the contingency reserve.

Honourable members, in February this year, we tabled a budget proposing R472
billion in spending. Taking account of changes in the adjustments budgets,
total spending in 2006/07 is projected to be R474 billion, up nearly R60
billion, or 14 percent, in comparison with last year.

Fiscal policy

Next year, expenditure will again increase by about R60 billion, continuing
the strong expansion in spending on public services that has been achieved
since 2000/01. Over the Medium Term Expenditure Framework (MTEF) period,
non-interest expenditure will grow by 7 percent a year in real terms, with
capital spending increasing by 13 percent a year. Chairperson, this expansion
in spending can be afforded, and in addition we anticipate that the budget
balance will be in surplus next year.

The reason why we can afford to increase spending so rapidly is that we have
created the fiscal space to do so.

* By reducing borrowing, we have lowered our interest costs from 21 percent
of spending in 1998/99 to 11 percent in 2006/07, releasing resources for
spending on service delivery.
* Through reform of our tax policy and administration, we've been able to
broaden the tax base, bringing in more people into the tax net. As a result,
tax revenue has continued to grow despite generous income tax relief.

Fiscal space provides government with an array of options: to spend more, to
provide tax relief, to invest in infrastructure or to improve savings. More
importantly, it provides a firm platform upon which we can reform our economy
to ensure that we broaden opportunities to those still marginalised.

In the first six months of this year, tax revenue grew by 19,1 percent over
the same period last year. Strong revenue growth reflects rising consumption,
robust company profits and healthy employment growth, features that have been
with us for almost four years. For the present fiscal year, main budget revenue
is projected to be about R20 billion higher than budgeted. The deficit for the
present fiscal year is projected to be 0,4 percent of GDP, down from the one
and a half per cent budgeted for in February 2006.

Revenue growth is again expected to outpace spending growth next year. We
anticipate a budget surplus of about half a percent of GDP in 2007/08, putting
the public finances on the strongest footing, Chairperson, that this House has
ever contemplated.

Our fiscal stance contributes to overall savings at a point where a
considerable gap has opened up between domestic savings and investment. It
assists in containing consumption expenditure at a time when both the balance
of payments and the inflation trend indicate the need for moderation.
Furthermore, it adds to the fiscal space, providing a solid platform for
increased spending on public infrastructure and the development of skills. And
most importantly, Chairperson, it provides us with the room to respond when
economic conditions become less favourable.

As the capacity of the public sector to spend on infrastructure improves and
as development programmes gather momentum, the budget balance is projected to
revert to a moderate deficit by the end of the forecast period.
Tax policy

Chairperson, the revenue performance introduces a series of difficult policy
choices. Government has to ascertain what part of the revenue overrun is merely
cyclical, given high commodity prices and consumption, and what part is likely
to recur as part of the base broadening efforts of the South African Revenue
Service. It does not make sense to spend once-off revenue on items that are
likely to recur. Similarly, it does not make sense to provide tax relief in
anticipation of revenue that may not be sustainable.

Our policy must be guided by the need to sustain growth in both the medium
and long term, to contribute to an environment for robust investment, improved
trade performance and rising domestic saving.

In May this year, a task team was appointed to investigate a possible
additional tax on extraordinary profits generated by the liquid fuel industry,
in particular the synthetic fuel industry. The task team has presented a
comprehensive report within a very short period. It will be published for
public comment next month and an announcement on the most appropriate
intervention will be made in the budget next February.

The recent publication of the revised Mineral and Petroleum Resources
Royalty Bill provides greater certainty and contributes towards an improved
investment climate in the resources sector.

Tax reforms over the medium term will build upon past base-broadening
initiatives, maintain and enhance the fairness of the tax system and support
the growth and employment creation efforts of government.

Public spending

Let me turn, Chairperson, to the medium term expenditure framework. Over the
next three years, we are in a position to add R8O billion to the spending plans
tabled in February. The major priorities for additional spending are the
following:

* investment in stadiums and public transport to ensure a successful 2010
FIFA World Cup
* stepped up investment in the built environment in the form of housing,
electricity, water, sanitation and community facilities
* contributing to improved economic efficiency through investment in roads,
rail, research and development, energy and skills development
* strengthening the criminal justice sector, with particular emphasis on
visible policing and improving court case flow
* improving the quality of education, health and welfare services through
additional resources and targeted interventions to improve public
administration.

2010 FIFA World Cup

Chairperson, the hosting of the 2010 FIFA World Cup provides South Africa
and the region with a once-in-a-generation opportunity to showcase our land and
our hospitality in a sporting festival that knows no bounds. Hosting this event
will require the effort of all South Africans, strong partnerships between
communities, government and the footballing fraternity and joint action by the
public and private sectors.

The 2007 MTEF period, which ends on 31 March 201O, has to carry the full
costs of this investment. National government will provide a total of R15
billion for infrastructure related to the World Cup. Of this amount, R8,4
billion is for the stadiums and R6,7 billion for public transport initiatives
and supporting infrastructure. These amounts will be complemented by
contributions from local government and other partners. The Local Organising
Committee is putting in place a framework to fast-track the construction of
these stadiums to ensure that key facilities will be in place by mid-2009, when
we host the FIFA Confederations Cup.

In addition to these amounts, the budget will also provide for costs
associated with policing, arts and culture, emergency medical services and
border control.

Investing in the built environment

In 2001, we began increasing spending on social and economic infrastructure.
Sustainable, vibrant communities require houses but also much, much more. They
require safe neighbourhoods, parks, street lighting, quality schools, roads,
clinics and access to public transport. The main conduits of spending on the
built environment are the provincial and municipal infrastructure grants, the
integrated housing and human settlement development grant and the integrated
national electrification programme. Funds channelled through the Department of
Water Affairs and Forestry complement these programmes.

This year, we launched a new programme called the Neighbourhood Development
Partnership Grant 'with an initial three-year allocation of R2,5 billion. To
date, we have received 243 applications from 60 municipalities. Thirty five
qualifying projects have been identified, involving total public and private
sector investment of about R3,6 billion over the three year period.

Including changes proposed in the budget framework, over R83 billion is set
aside for investments in the built environment with many of these programmes
doubling over the next three years. Honourable members, we do these things so
that the benefits of property and community investment should extend beyond
Sandton, Constantia or Waterkloof. Recent research indicates that house prices
in townships have shown rapid increases in the past three years. We are now
seeing rising interest by property developers in the low-income housing market,
supported by both lower interest rates and rising household incomes. Shared
growth is about accelerating and reinforcing these trends.

As the economy grows, one of the constraints to broader economic
participation is poor public transport networks across our major cities. The
challenges facing the commuter rail system are particularly acute. Trains are
often late, security is poor and there are safety concerns. Ageing signalling
systems and deteriorating rolling stock contribute to unreliable and inadequate
service. Additional resources are therefore recommended for both municipal
transport systems and public transport relating to the 2010 FIFA World Cup. A
further R1, 1 billion is proposed for the South African Rail Commuter
Corporation, bringing the total transfer to the corporation to R 15 billion
over the next three years.

In the 2006 Budget, we announced that we expect government and public
enterprises to spend about R370 billion on infrastructure over a three-year
period. We now expect spending on public infrastructure to grow by about 15
percent a year, to reach about R150 billion a year by 2010. These investments
are focused on social and household services and infrastructure that expands
economic capacity. The proposed budget framework provides R28 billion of
additional funds for spending on electrification, roads, commuter rail,
housing, bulk infrastructure and research and development.

Fighting crime

Chairperson, we have always emphasised that bringing down crime requires a
combination of social and economic programmes designed to improve community
livelihoods, and that reducing crime requires a strong partnership between
communities and government. However, the direct efforts of our criminal justice
sector are critical to making our country safer.

As a government, we are committed to the reduction of crime, and
particularly violent crime. We are acutely aware of the damage that crime does
to our social fabric and psyche, and its impact on all South Africans,
including the livelihoods of small businesses and the poor.

The 2007 Medium Term Expenditure Framework proposes to add further resources
to support the fight against crime. We make provision for a further 10 000
people to be employed by the South African Police Service, raising overall
policing levels to 193 000 by 2010. We also make provision for more people to
be employed in the legal system, mainly to improve court case flow management.
Spending on justice, policing and prisons will grow by 9,4 percent a year over
the medium term.

Enhancing economic capacity

Major infrastructure projects over the next three years include the Gautrain
rapid rail link, King Shaka Airport, the de Hoop Dam on the Olifants River and
the Vaal River augmentation project. Most of these projects use a combination
of public and private sector funding and all are designed to complement and
encourage private business investment or, in the case of the De Hoop Dam, open
an entire area to new mining ventures. Much of the investment by state owned
enterprises is also designed to facilitate greater export performance.

Improving economic performance and broadening economic opportunities cannot
happen without further improvements in our investment in human capital. The
2007 MTEF proposes significant additions for enhancing the development of
skills. A major step up in spending on adult literacy is proposed. Further
additions are proposed for higher education, including resources for
infrastructure investment at universities. Three new bursary programmes are
envisaged. The first is to attract 1 400 young people into the teaching
professions and for 900 teachers to improve their skills through post-graduate
education in maths, science and life skills. The second is aimed at raising the
number of qualified social workers to work in both the public and
non-governmental sectors. Thirdly, money is set aside for deserving entrants
into out Further Education and Training (FET) colleges.

Besides the adjustment for the current year for Alexkor and allocations for
Broadband InfraCo, a total of R6 billion is set aside for the PBMR project over
the period ahead. Subject to the necessary environmental, regulatory and safety
considerations, this initiative places South Africa at the forefront of new
generation energy technology development worldwide.

Improving the performance of the public sector

The last spending priority that I wish to deal with relates to the need to
improve the capacity of government. There are many components of the civil
service that work well, where departments deliver services of a high quality
and citizens are treated with respect and dignity, many schools where effective
learning takes place and many millions of people served by our clinics.
However, there are also clear inadequacies. As public spending has accelerated
in the past five years, we, as government, are becoming increasingly concerned
that in many cases, increased resources have not translated into increased
outputs. And so the public has not always seen the benefit of the significant
rise in public spending.

This budget framework makes provision for increased salaries for certain
categories of professions, especially in the health and social welfare sectors.
It also makes provision for higher staffing levels in health, police, justice
and social welfare. These are much needed improvements. Members of the House
know that we share a responsibility to ensure that improved management and
better accountability accompany the rising public sector wage bill.

Municipalities are confronted with several capacity challenges that hamper
critical areas of service delivery, which impact negatively on the delivery of
basic services and the achievement of water and sanitation targets.

The 2007 budget proposes to allocate more than R700 million over the next
three years to Siyenza Manje - an initiative of government that is primarily
driven by the Development Bank of Southern Africa. It aims to provide the
necessary expertise in the fields of project and financial management, planning
and other critical skills needed for the effective delivery of the local
government mandate.

Division of revenue

Our intergovernmental fiscal framework is now an established part of our
public finances. Last week, we published two documents covering provincial and
local government. They set out spending trends and budgets, sectoral policy
developments and non-financial performance information. I urge all members of
this house to peruse these documents. They provide a compelling perspective on
the state of service delivery in these two most critical spheres of
government.

The division of revenue between the three spheres is made on the basis of
the policy priorities determined by Government, articulated in the State of the
Nation Address and given effect in legislation passed by Parliament. Of the
additional R80 billion in spending, it is proposed that provinces receive R28
billion and local government R19 billion.

The provincial transfers fund higher spending in education, health and
welfare services as well as further additions for infrastructure. The hospital
revitalisation grant, programmes aimed at preventing and treating HIV and AIDS
and the provincial infrastructure grant receive more resources.

Transfers to local government remain one of the fastest growing categories
of public spending. The additional resources proposed for the next three years
go mainly for the 2010 FIFA World Cup. The local government equitable share is
increased by R5 billion to help accelerate the delivery of free basic services.
A further R 1,4 billion will be allocated for bulk water and sanitation
infrastructure, and R400 million for the eradication of the bucket system.

Public finance reform

Chairperson, this is the tenth medium term budget policy statement presented
in this house. When we launched this statement in 1997, we said, "this is a
significant step in increasing transparency, openness and co-operative
government. For too long, budgets have been made behind closed doors. These are
important decisions which affect all our futures."

A coalition of international non-governmental organisations, under the
umbrella of the International Budget Project, recently ranked South Africa
fourth out of 59 countries for the transparency of our budget documents. The
MTBPS, the Budget Review, Estimates of National Expenditure and our provincial
and local expenditure reviews, all contribute to this achievement. But we are
not yet where we want to be. We still have too little debate in this House and
in the country on budget priorities. Over the course of the next few weeks, we
will engage with Parliament on the budget framework and spending priorities
mentioned here. We will also meet a number of external organisations, including
our social partners at the National Economic Development and Labour Council
(Nedlac) and the People's Budget Coalition to solicit their views on the budget
framework.

A raised level of consultation and debate on priorities and greater scrutiny
of the public finances not only strengthens our democracy but also places
pressure on government departments to deliver. It is a valuable accountability
mechanism.

Conclusion

Chairperson, the solid performance of our economy, in particular the
creation of job opportunities and rising household incomes, allows us to turn
the dreams of ordinary people into new realities. The expansion of
infrastructure investment and the sound management of our public finances
provide us with the capacity and resources to improve the services we provide
to our people, to build hope and expand opportunities. The Medium Term Budget
Policy Framework invites this House, and all South Africans, to embrace the
challenges ahead as we prepare for 2010 and as we progressively broaden
participation in a growing economy, with confidence in these shared
commitments.

Issued by: National Treasury
25 October 2006