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Speaking notes for Minister of Finance: Nhlanhla Nene

07 March 2018

Closing the debate in the National Assembly on the Fiscal Framework and Revenue Proposals as included in the 2018 Budget


Honourable Speaker
Honourable Members

Ladies and gentlemen, thank you for this opportunity to address you on the 2018 Budget specifically on the fiscal framework and the revenue proposals.

Let me begin by saying that the fiscal proposals outlined in the Budget involve hard adjustments that are required to protect the integrity of the public finances. By taking steps now to strengthen the fiscal position, government will widen the path for new investment and inclusive, job-creating growth in the years ahead, while creating space to meet new spending commitments.

The decisions presented in the Budget reflect difficult tradeoffs, but are necessary to put the public finances back onto a sustainable path. Stable finances are a fundamental building block of democracy, development and growth. There is nothing pro-poor or developmental about unsustainable fiscal policy.

With the bold and tough choices outlined in the Budget, we now have an opportunity to put the country on a different and more sustainable trajectory, and begin to reverse the damaging trends of the past few years. The risks and pressures remain significant, but the 2018 Budget is a big step in the right direction. The better-than-expected last quarter GDP data released yesterday by STATS SA are encouraging, and can only get better once the bold measures in the Budget take effect.

Budget 2018 in context

Our present fiscal position is the cumulative result of trends at work since a structural budget deficit emerged following the 2009 global recession. For several years, the Budget Review has noted that, in the absence of a significant upturn in GDP growth, government would face increasingly difficult budget decisions. Since 2012, successive budgets have reduced the rate of expenditure growth and raised taxes. While this measured path of fiscal consolidation achieved some success, debt continued to rise as a share of GDP as economic growth declined and new spending pressures emerged. In combination with concerns over policy uncertainty, this led to credit-rating downgrades in 2017.

At the time of the 2017 MTBPS, gross government debt was approaching R3 trillion over the medium term. If left unchecked, debt would continue to rise above 60 per cent of GDP over the coming decade. Since then, the economy has shown signs of recovery. Our estimates for real GDP growth have been revised upwards for 2018/19 and the coming two years. The stronger growth of 3.1 per cent in the last quarter meant that our economy grew by 1.3 per cent in 2017. We are likely to revise our estimates upward in October if we continue to build on the right steps initiated by the President this year.

The recent under-collections in tax revenue have put immense pressure on the fiscal framework. Relative to the 2017 Budget, we will end with a shortfall of R48.2 billion in 2017/18, on top of a R30.7 billion shortfall in the previous year. The fiscal framework still faces many risks. For example,

  • While decisive action by government to strengthen governance at Eskom has staved off the likelihood of near-term default, the financial positions of the power utility and several other large entities pose risks to the economy and the fiscus.
  • The costs associated with fee-free higher education and training are uncertain.
  • Talks on a new public-service wage agreement are in progress. An agreement locking in salary increases that exceed consumer price index inflation would make expenditure limits difficult to achieve.
  • A sub-investment downgrade for local- and foreign-currency debt by Moody's would result in South Africa's exclusion from the Citi World Government Bond Index, triggering a sell-off of South African debt. This would raise future borrowing and debt-service costs.

Prudent fiscal policy decisions and increases in the contingency reserve will help government to manage these risks. Improved policy certainty, alongside governance and economic reforms, and higher growth, will also support fiscal consolidation.

Specific proposals

The 2018 Budget proposes measures to reduce the budget deficit while providing space for new spending commitments. Together with an improved growth outlook, the proposals will reduce the consolidated budget deficit - the difference between total revenue and expenditure - from 4.3 per cent of GDP in 2017/18 to 3.5 per cent in 2020/21. A narrower deficit, stronger rand and lower borrowing costs result in gross government debt stabilising at 56.2 per cent of GDP by 2022/23, with net debt stabilising at 53.2 per cent of GDP in 2023/24.

The central adjustments to the fiscal framework in 2018/19 are to:

  • Raise an additional R36 billion in tax revenue through an increase in the VAT rate, limited personal income tax bracket adjustments and other measures.
  • Reduce MTBPS baseline expenditure by R26 billion.
  • Allocate R12.4 billion for fee-free higher education and training for the next fiscal year.
  • Set aside an additional R5 billion for the contingency reserve.
  • Provisionally allocate R6 billion for drought management and public infrastructure.

Even with higher tax revenues and large expenditure re-allocations, the overall division of revenue is strongly redistributive and pro-poor. About two-thirds of the 2018 Budget will be allocated to functions that are dedicated to realising constitutionally mandated social rights, including education, healthcare, social protection and housing.

Over the next three years, the fastest-growing areas of expenditure include post-school education and training, followed by debt-service costs, social protection, health, economic development, community development and basic education. All these expenditure items are expected to grow at rates in excess of inflation and, other than debt-service costs, directly impact on the well-being of poor households. These expenditure plans are unequivocally pro-poor.

Tax proposals

I have spent some time outlining the importance of a credible and sustainable fiscal framework, and it is the tax revenue increases of R36 billion that contribute to a large degree in achieving the much improved fiscal position.

The VAT increase of 1 percentage point, which is the main revenue raising proposal with expected additional tax revenues of almost R23 billion, is the toughest proposal in the budget. Parliament, civil society and other participants should be commended on the robust engagements that have already taken place, in such a short time after the announcement.

We welcome further debates and discussions on alternative options, and how to reduce the impact of a VAT increase on the poorest of households. We will consider such proposals very seriously. One must keep in mind, however, that many of these alternatives cannot be implemented quickly or easily, and would not raise sufficient revenue to immediately rectify the fiscal gap that was clearly announced in October last year.

Large expenditure reallocations were also implemented to ensure we arrest the fiscal decline. And the introduction of new tax streams, rather than a change in a tax rate, would take a much longer time to introduce after allowing for sufficient consultation and discussion of legislative amendments, which is a strength in our democracy. Removing corruption and improving the effectiveness of funds spent, both in government and SOEs, would create valuable savings that can then be spent more effectively, but these are not amounts that are available in the Budget, and hence to reduce our debt within the next fiscal year.

Decisive action was needed to fix our finances immediately, in a manner that would not choke off economic growth as it was starting to rebound. Government has been trying to raise the tax revenues needed to avoid this position over the last five or more years, with considerable increases in personal income taxes, through higher rates and a new top bracket, with little relief for inflation. Yet personal income taxes have been the worst performing tax category, with shortfalls of over R16 billion and R21 billion in the last two years. Higher taxes on only the top brackets would not have generated enough revenue. The proposals do include an additional R6.8 billion from personal income taxes again, through lower than inflation relief, but it is clear that continual tax increases are not the solution.

I would be hard pressed to find anyone here who does not agree that the main solution is a higher level of economic growth, which creates employment and generates additional tax revenues; most research suggests that consumption taxes are the least damaging to growth. The VAT increase will provide a far more certain source of additional tax revenue, that has a minimal impact on the economy, giving it greater space to grow and create the jobs that are desperately needed. And if the revenues are realized, and growth improves, the current cycle of tax increases and expenditure cuts could potentially come to an end.

Corporates will also be affected by the coming carbon and sugary beverages tax, as well as the higher dividends withholding tax implemented last year, and we do not want to risk reducing our attractiveness as an investment destination and harm economic growth prospects. The designation of special economic zones to receive additional tax incentives, in co-ordination with the DTI, should also be a boost to the labour intensive manufacturing sector.

But given the VAT increase will raise more revenue, it will have an impact on the cost of living of all households, including poor households. Although the zero-rated basket is relatively well targeted to poor households, and will reduce the impact of the increase, clearly these households consume goods other than those 19 basic food items. Government has listened to the concerns raised on the impact on the poor. Cabinet has already announced that the list of zero-rated items should be reviewed, and I will establish a process, with the help of my colleagues and the advice of an independent panel under the direction of the Davis Tax Committee, to determine how best to reduce the impact of this tax increase on the poorest households. We will also review how to improve the effectiveness of specific expenditure programmes that are targeted at poor communities.

The large increase in the fuel levy has also been cited as negatively impacting the poor. The major change is the 30 cents per litre increase in the Road Accident Fund Levy, to assist the RAF which has a substantial net liability. This Parliament will need to take steps to process new legislation that will put the RAF on a more sustainable footing, to avoid these increases in future.

The strengthening of the currency since December should also soften the negative impact as the costs of imported inputs and the rand price of oil decrease. We hope that our retailers will pass on the benefits of these lower costs, particularly on food and other basic retail goods. It is my hope that our major retail stores will lead this process to pass over the benefits of lower input costs to the consumer, which will reduce the adverse impact of any tax increases.


Ladies and gentlemen, the 2018 Budget outlines a series of measures to rebuild economic confidence and return the public finances to a sustainable path. The proposals build on government's renewed commitment to effective policy implementation, good governance and inclusive development. In partnership with business and labour, government intends to set South Africa on a new path of growth, development and transformation.

We still have a long way to go, and the risks remain significant, but the proposals set out in the 2018 Budget will give the country the stability and certainty it needs to drive economic growth, expand employment opportunities and generate revenues to fund the social expenditure that has the greatest positive impact on the people in the households we need to help the most.

In conclusion I would like to thank the Standing Committee on Finance and Appropriations for their oversight role in processing the 2018 Fiscal Framework and Revenue Proposals.


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