T Manuel: Medium Term Budget Policy Statement 2007

30 October 2007

Madam Speaker

In tabling the 2007 Medium Term Budget Policy Statement, we can affirm that
economic growth and investment in public services are steadily bringing a
better life to millions of South Africans. We can look back with pride on the
course we chose in implementing our Reconstruction and Development Programme,
because we can see the fruits of the new Constitutional order we built, of the
transformation of policy and service delivery we undertook, of the tough
decisions we made and the dedicated efforts of South Africans from all walks of
life who have contributed to our social progress and economic renewal.

Today is better than yesterday, and tomorrow will be better than today.

We can assert this confidently because our progress is recorded and
measured, and the facts speak louder than any rhetorical flourishes. 

Yet the message of today's Budget Statement is not that we have reached our
destination or that victory can be claimed. It is that we have advanced to new
challenges and another phase in our transformation journey lies ahead.

Economic growth and development challenges

The 2007 Community Survey released last week tells a story of steady
progress in public service delivery. In 1996, just over half our people did not
have water in their homes. Today, over 88 percent of people have access to
piped water. In 1996, only 64 percent of our people lived in formal
houses. Today, over 70 percent enjoy this right. In almost every area of
public service delivery, from access to schooling and health care to refuse
removal, from electrification to access to computers, from roads and
streetlights to sport facilities, from telecommunication services to access to
public transport – we can point to steady progress in living standards.
Development is also about access to jobs, security of incomes and redressing
past inequalities.  We can show measured quantitative progress on these
fronts, although we clearly still have more work to do in these dimensions of
reconstruction and transformation.

So in tabling the 2007 Medium Term Budget Policy Statement, we also reaffirm
our commitment to building a stronger economy, faster job creation, broadening
participation and deepening the quality of social and economic opportunities
for all.

South Africa is now entering the ninth year of the longest economic upswing
since the national accounts have been recorded. National income has risen by 22
percent per person since 1999, with increases across all income groups.
Employment is rising faster than at any point since the 1960s. Fixed investment
has increased sharply since 2002, by over 10 percent a year. These are
substantial steps towards our medium term economic goals – growth of
six percent a year or more, an unemployment rate of below 14 percent by
2014, and an aggregate poverty rate half that recorded in 2004. Our commitment
is not just an aspiration towards these targets, we intend to measure progress,
step by step, in sharing the democratic dividend among all of our people.

We need to understand, Madam Speaker, that the present buoyancy in our
economic growth is partly a consequence of favourable global economic
conditions. High commodity prices, low interest rates and strong international
demand have contributed to the momentum of our income growth and to financing
investment through capital inflows. We need to welcome and take advantage of
the opportunities of global growth, but we also need to distinguish temporary
prosperity from structural progress; we need to ensure that windfall gains are
wisely invested and surplus resources are set aside for when markets turn
against us in times ahead.

On the domestic front, our economy remains strong, buoyed by rising
investment in productive capacity, higher employment and incomes, strong
consumer demand and healthy foreign capital inflows. Last week's announcement
of a R37 billion investment by the Industrial and Commercial Bank of China
in one of our leading banks indicates that international confidence in our
economy is high, and perhaps also signals a new place for Africa in the
changing patterns of trade and finance flows of the 21st century.

So the healthy economic outlook that we are able to table today is of
interest not just to our own people, but also in our region and the wider
world. We expect the South African economy to grow by 4.9 percent this year and
4.5 percent in 2008, before returning to about five percent a year in 2009 and
2010. The outlook is somewhat less positive than it appeared in February –
financial crises in developed markets, global imbalances, high food and oil
prices internationally and slowing growth in the US and other developed
countries cloud the sky. The advent of the sub-prime mortgage crisis in the
United States (US) is further evidence of the interconnectedness of our world,
and also a reminder of the fact that we must build up our cushion against
global volatility.

Our approach to international finance and monetary management has meant an
accumulation of over US$30 billion in foreign reserves, which is itself a
considerable strength and also a contribution to greater exchange rate and
interest rate stability. In the fiscal stance outlined today, we indicate how
the public finances are also contributing to the resilience of the economy in
the context of both international uncertainty and the future investment
requirements of our own economy.

Inflation and capacity utilisation

Madam Speaker, in this regard we are mindful that more rapid economic
progress has itself brought new dimensions to the struggle. In the context of
increasing oil and food prices globally, rising inflation has re-emerged as a
policy concern. And our expanding investment spending has run well ahead of our
ability to save, contributing to an increased current account deficit on the
balance of payments. This highlights the importance of improved productivity
and industrial competitiveness as a condition for the further acceleration in
growth and employment creation over the decade ahead.

The recent increase in the Consumer Price Index (CPIX) inflation to
6.7 percent has necessitated steps to curb inflation, that have been
implemented by the Reserve Bank. 

Global price trends present an inflation challenge for all economies at this
time. Food and commodity prices have increased sharply in recent years. More
recently, the depreciation of the US dollar and continued market pressures have
increased oil prices to over US$90 per barrel, an increase of about 23 percent
in the last two months. The global trends have interacted with our own rapid
economic growth, agricultural supply conditions, broader supply pressures and
skills deficits to push CPIX above the inflation target this year. 

The rate of capacity utilisation in the economy is high, and in some sectors
demand pressures are generating higher prices. 

These price pressures will not abate quickly. Yet addressing them and
returning to within the inflation target range is important for our long-term
growth. Higher inflation reduces our competitiveness, undermines the real
income of rich and poor households alike, and creates greater uncertainty for
the investment decisions of firms.

The task of bringing down inflation cannot just be left to the Reserve Bank.
Robust investment in capacity is underway and this will reduce some of the
price pressures over time. All actors in the economy have a role to play. In
particular, an improvement in the fiscal balance will help to moderate
inflation and create space for stronger private sector economic
activity. 

Investment, trade, skills, competitiveness

Because we are determined to make tomorrow better than today, we must
carefully analyse our present pattern of growth. For the next two years,
somewhat slower growth in household spending will be offset by rising private
and public investment. Our increased investment has not been matched by a
commensurate increase in domestic production or in savings. Rising inflation
and a high current account deficit are signs of both robust domestic growth and
that we run a risk of not being able to finance that growth in future.  In
order to address these imbalances, we need to sharpen our microeconomic policy
instruments through lowering the costs of doing business, stepping up our
efforts in skills development, increasing trade competitiveness and investing
in infrastructure that will support economic expansion.  

To grow rapidly, and to sustain that growth, we must increase exports, for
they are the source, over time, of the revenue that must pay for our
imports.  The prices of gold, platinum and other commodities have risen
sharply in recent years and this has helped us, but we need to take further and
more aggressive steps to diversify our trade capacity. Because of its impact on
productivity and innovation, trade policy has a central place in promoting
competitiveness. Our approach needs to ensure that competition is fostered
through tariff simplification and reform, and that incentives for investment
and for research and development are appropriately targeted and effectively
administered.  Public accountability is critical to the success of such
initiatives, so we will seek to publish appropriate reviews and assessments of
our progress.  In addition, both industrial and labour market policies
must focus on raising the labour intensity of the economy so that we can create
jobs at an even faster pace. Greater progress in channelling young people into
jobs has to be a central policy objective in coming years.

In all of these things, we face intense international competition.

A recent survey of 600 chief executives of multinational companies said a
shortage of qualified staff ranked as their biggest concern. No, this survey
was not conducted in South Africa. The skills shortage complained about is in
Asia. Yes, a region with almost half the world's population is experiencing
severe skills constraints. China is battling with severe shortages of lawyers;
major Indian companies are complaining about a shortage of IT professionals;
everywhere there are difficulties in finding industrial, commercial and
managerial expertise. Last week, the European Union announced its intent to
recruit 20 million skilled foreigners over the next twenty years. I
believe that this kind of parasitic conduct of nations is wrong. But the point
we need to debate about South Africa's skills shortages is not whether they
exist or not, but how we confront the challenge and deal with it, recognising
that everywhere else in the world they are focused on the same thing. 

We will continue to place education and skills development at the top of the
budget priority list. Building a learning society is partly about improving the
quality and content of what goes on the classroom, but it is also about
investment by businesses in their employees, about communities taking ownership
and responsibility for their schools and about how families communicate values
and capabilities to their children. I am aware that the negotiations with
educator unions on the occupation specific dispensation have encountered some
difficulties. We all know that a better career progression system is needed to
retain good teachers and so efforts to unblock these difficulties must enjoy
our full support.

The area of skills development is clearly one in which we will make more
progress if we address the institutional and financial barriers that stand in
the way of aligning resources with needs.

I share with the Minister of Labour a disappointment that financial
management has been poor in several of our sector education and training
authorities. At the end of last year, our sector education and training
authorities (SETAs) held over R3.7 billion in cash reserves – effectively
levy income that employers had not yet utilised to reimburse training expenses
or skills development projects that had not yet been implemented. But other
parts of our higher and further education system that are ready to expand
enrolment and step up their contribution to human investment, do not have the
financial resources to do so. This can't be right, and so we surely need to
explore options for improving the integration of our education and training
financing arrangements.

Fiscal policy and the budget balance

For the past five years, public spending has increased by an annual average
of 9.4 percent in real terms. If a comparison is made with expenditure in
1995, it shows that public spending has doubled in real terms since then.
Higher spending has been financed by falling debt service costs and rising tax
revenues. We must take account that some of the growth in our revenue is
cyclical, related to high commodity prices and the consumption boom. It is
incumbent upon us to manage these cyclical revenues differently.

In this Medium Term Budget Policy Statement, we introduce the concept of a
structural budget balance, sometimes also referred to as the
cyclically-adjusted budget balance. The structural balance attempts to
calculate the effect of cyclical revenues on our budget balance. This addition
to our box of tools allows us to ensure that public spending is protected, even
if economic conditions worsen. Revenue that is cyclical must be treated
differently. To do otherwise would be reckless. Some of the cyclical revenue
should be spent on things that raise our ability to grow faster in the long
term, things such as infrastructure, education and institutional capacity. It
also makes sense to use some of that cyclical revenue to pay off debt or to
save for future needs.

With this in mind, government is proposing to budget for a surplus of about
0.6 percent of Gross Domestic Product (GDP) for the next three years so
that when economic conditions deteriorate, we have the resources to cushion the
economy. When cyclical revenues are removed from our calculations, the
structural budget balance indicates a deficit that will rise to about 1 percent
GDP in 2010/11.

The tax burden on the economy has risen since 2004 mainly due to the
cyclical windfalls accrued as a result of higher consumption and commodity
prices. Rising employment and higher salary increases have also led to a rise
in tax revenue. This year, we project to collect about R8.5 billion more
than budgeted, mainly due to higher inflation and related salary increases. We
expect that over the medium term, main budget revenue will be about 27½ percent
of GDP.

We reaffirm the principle that cyclical revenues should not be used to
provide permanent tax relief. However, proceeds from better administration and
tax compliance, and the broadening of the tax base may be used to lower the tax
burden, as we have done in the past.  

Adjustments to the 2007/08 estimates

This year, we have tabled two adjustments appropriations. The special
adjustments budget tabled in September dealt with urgent transfers for the
following items:
* R1.9 billion brought forward from 2008/09 to fast-track stadium
development
* R2.5 billion for the pebble bed modular reactor project
* R700 million for the Land Bank
* R222 million for Denel and R45 million to Alexkor; and
* R500 million to Sentech for wireless broadband infrastructure.

In the adjustments appropriation bill that we table today, we include
details of amounts rolled over from last year's budget as well as unforeseen
and unavoidable expenditure. These include:
* R654 million for expenditure resulting from fires, floods and other
adverse weather conditions
* R400 million for the prevention and treatment of multidrug-resistant
tuberculosis
* R744 million to support the restructuring of South African Airways; and
* R1.9 billion to accommodate the higher-than-budgeted cost of the 2007 salary
agreement.

Taking into account about R5 billion in under-spending, total spending
amounts to R542 billion, about 15.4 percent more than expenditure in
2006/07. The revised estimate for the budget surplus is R10.8 billion,
marginally higher than the R10.7 billion projected in February.

The 2008 Medium Term Expenditure Framework (MTEF)

The proposed budget framework for the next three years makes provision for
about R81 billion of additional allocations, allowing for spending on
services to rise by 6.4 percent a year in real terms over the next three
years. Of this amount, about R15 billion goes towards funding the higher
cost of the 2007 public service salary agreement. A further R2 billion
goes towards the occupation-specific dispensations proposed for educators and
the envisaged dispensation for social workers. Last year, the budget provided
R4.6 billion for occupation-specific adjustments in the health sector.

About R4.3 billion over the MTEF period will go towards compensating
pensioners and social grant beneficiaries for rising food prices and other
cost-of-living increases.

Of the remaining amounts, municipalities receive about R12.6 billion to
accelerate the pace of delivery of water, sanitation and electricity
connections. These resources also cover the additional costs of providing poor
households with free basic services. Over the next three years, infrastructure
transfers to municipalities total R57 billion, reflecting a firm
commitment to sharing the fruits of economic development.  This includes a
further R2 billion for public transport infrastructure and systems.

Provinces receive about R36 billion mainly for targeted interventions to
improve the quality of schooling, health care and welfare services.  The
proposed budget framework provides for growth in the provincial equitable share
of 11.9 percent a year over the next three years.  The new estimates
of provincial population numbers are taken into account in the allocation of
these funds.

Several conditional grant allocations are revised upwards.  A further
R2.1 billion goes towards funding the comprehensive HIV and Aids
programme. Early learning opportunities and the expansion of grade R are also
prioritised because these are programmes that improve outcomes in later years.
Provision will be made for more places for learners with disabilities and who
therefore have particular needs in our schooling system. The school nutrition
programme receives a further addition to take account of higher food prices and
to feed more children for the full school year.

Earlier this year, the Minister of Education released a report detailing the
state of school facilities. It illustrates considerable progress over the past
decade, but also signals that more needs to be done. Whereas in 1996,
51 percent of schools were overcrowded, this figure now stands at
24 percent. The number of schools without electricity has decreased from
nearly 14 000 to 4 300. Schools without adequate water have declined
from 8 800 to 3 150. The number of schools with access to computers
has increased significantly, but there are still 17 000 without
them.  With these challenges in mind, a further R2.7 billion is
proposed for school building and maintenance over the MTEF period.

National departments receive about R33 billion of the proposed
additional expenditure. Much of this will go to economic infrastructure and
services, including a substantial rise in funding for industrial development
incentives. We will also increase spending on fighting crime, improving service
delivery in the Department of Home Affairs and expanding labour-based
employment programmes. Higher education will benefit from additional
allocations in recognition of rising student numbers and the need to boost
financial assistance to students.

Efficiency savings and measuring performance

The 2008 Budget framework favours programmes that induce efficiency savings
in other areas of spending. For example, removing unroadworthy vehicles reduces
road accidents, taking pressure off our emergency services and trauma health
care services. Increasing the number of agricultural extension workers enhances
the prospects of successful land reform projects.

Allocating resources to the right areas is only half the battle. The 2008
Budget framework raises the bar in the quest to improve value for money. In
line with the Presidency's monitoring and evaluation framework, the Treasury
has issued guidelines for the development of performance measures related to
each programme. The intention is to assist Parliament and the public to hold
departments to account for the delivery of key outputs.

As part of finalising the 2008 MTEF, national departments are asked to
make R2.3 billion worth of savings as part of an efficiency programme.
National departments are asked to improve their management of expenditure on
travel, entertainment, marketing, catering, events and consultants. It is
anticipated that provincial treasuries will adopt a similar approach in the
finalisation of their budgets. These savings will be reprioritised towards
frontline services.

Towards accelerated and shared growth

Madam Speaker, this budget framework and the related economic policy
proposals provide a clear platform for investment in the infrastructure and
services that are likely to raise our growth path towards 6 percent. About
R20 billion of the additional amounts go towards capital formation,
signalling a continuation of the drive towards broadening access to basic
services and increasing economic efficiency. Allocations for targeted salary
increases are related to performance systems presently being implemented in the
public service.

On the basis of sound fiscal and economic policies, we have made significant
progress in improving the quality of life of all South Africans, but
particularly for those in poverty. With the right policies in place, and
through steady improvements in building implementation capacity and monitoring
service delivery, we can accelerate progress in transforming the lives of all
South Africans.

Ten years of the South African Revenue Service (SARS)

Madam Speaker, ten years ago this month, the South African Revenue Service
Act was promulgated to give effect to a key element of our public finance
reforms â€“ the creation of an administratively independent, efficient and
effective revenue and customs authority that would be able to fund our spending
objectives in a sustainable way.

Since those chaotic days, the Revenue Service has evolved into an
organisation respected and admired across the world. SARS has been at the
centre of a series of tax, administrative and organisational reforms that have
completely changed our relationship with taxpayers. A key element of the social
contract between government and citizens is that paying one's fair share of
taxes is essential to all of our futures and that revenue collection is as much
about a better service to the public as it is about enforcement. It is this
virtuous circle which lies at the heart of our fiscal policy and at the centre
of SARS's unyielding drive to promote compliance by providing ever higher
service levels, greater simplicity and ease of access to honest taxpayers.
Madam Speaker, none of us needs reminding of the unrelenting vigour, dedication
and passion of Commissioner Gordhan and the 15 000 men and women who work
for the revenue service.

Today, as we congratulate the management and staff of SARS for ten years of
dedicated service, we must also thank South African taxpayers – individuals and
companies – for their contributions to our nation's development. And the
Commissioner has asked me to mention that tomorrow is the deadline for tax
returns.

Hosting G20 Finance Ministers

Madam Speaker, we are close to the highpoint of our year as host of the G20.
In just three weeks, we host the finance ministers from the 19 most
systemically significant economies and the EU here in the Cape. This meeting
follows a series of consultations dealing with fiscal space, the impact of
commodity prices and reform to the World Bank and the International Monetary
Fund. We have also used our chairmanship of the G20 to bring African finance
ministries into a dialogue with more developed countries on issues of
development.

I would like to thank colleagues in Cabinet, and in particular members of
the Ministers' Committee on the Budget, for their role in crafting this policy
statement. Thanks too to the staff of Statistics South Africa, the Ministry of
Finance and the National Treasury.

Madam Speaker, I hereby table the 2007/08 Adjustments Appropriation Bill,
the Adjusted Estimates of National Revenue and the Medium Term Budget Policy
Statement.

Thank you

Issued by: National Treasury
30 October 2007