Parliamentary Questions and Answers
Media Room Provincial Caucuses Jobs Links Support Services Tenders ANC Homepage

Speaking notes for by Minister of Finance Nhlanhla Nene, Debate in the National Council of Provinces on the Fiscal Framework and Revenue Proposals as included in the 2018 Budget

07 March 2018

Speaker and Honourable Delegates

The fiscal framework and revenue proposals for the Budget this year has created intense debate, but was clearly crafted in an environment where tough decisions needed to be made. This could not have been a regular Budget after the dire state of the public finances were laid bare in the Medium Term Budget Policy Statement (MTBPS) at the end of last year. The main culprit has been year-after-year of weak economic growth, which has led to an increase in unemployment and vast shortfalls in our tax revenue, making it increasingly difficult to fund existing, and new, social programmes.

Although South Africa's growth outlook has improved, notably with a positive surprise in fourth quarter GDP growth of 3.1 per cent, economic growth remains too slow to have a substantial impact on unemployment and further reduce levels of poverty.

The fiscal framework presents a much improved picture compared to last year, but many risks remain. The finances of major state-owned companies have become precarious, and the extent of corruption and wasteful expenditure in the public sector, together with governance and efficiency challenges in SOEs, have adversely affected tax morality. The medium-term costs of fee-free higher education and training, and public-service compensation, are also uncertain.

Over the past five years, South Africa has enjoyed relatively buoyant revenue growth despite a persistently slowing economy. In other words, tax revenue was growing faster than GDP. However, this trend was reversed towards the end of 2016/17. Tax revenues have continued to be under pressure, with an estimated shortfall of R48.2 billion for the last fiscal year. This comes on top of a R30.7 billion shortfall in the previous year. These under-collections have put immense pressure on the fiscal framework, as government has insufficient revenue to pay for planned expenditures, leading to an increase in borrowing. Further revenue underperformance is one of the key risks to the sustainability of the public finances.

A failure to manage these pressures could reverse the substantial gains that South Africa has made in expanding the social wage since 1994. In the recent Budget, the government outlined a series of measures to rebuild 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, we will set South Africa on a new path of growth, development and transformation.

Together we need to narrow the budget deficit and stabilise debt, laying the foundation for faster growth in the years ahead. As a result of the difficult trade-offs we face, the budget sought to bolster the public finances by raising taxes and adjusting expenditure.

Major steps include a one percentage point increase in the VAT rate in 2018/19 and large-scale spending reallocations over the medium term.

The fiscal proposals will involve hard adjustments that are needed to protect the integrity of the public finances. By taking steps now to strengthen the fiscal position, we will widen the path for new investment and inclusive, job-creating growth in the years ahead. At the same time we will create the space to meet new spending commitments.

In combination with the improved growth outlook, the 2018 Budget proposals will result in a considerably narrower budget deficit than was presented in October 2017, and a clear path to debt stabilisation.

At the time of the last year's MTBPS, gross national debt was projected to breach 60 per cent of GDP in 2021/22, and continue rising thereafter. This projection reflected major revenue shortfalls, slow economic growth and a limited policy response. The outlook also represented a major departure from the 2017 Budget figures, which showed the debt-to-GDP ratio declining from 2018/19 onwards.

In the Budget, the combination of higher GDP growth, a narrower deficit, a stronger currency and lower borrowing rates results in an improved debt-to-GDP outlook, with debt stabilising at 56.2 per cent of GDP in 2022/23.

We have received numerous comments, suggestions and criticisms since the Budget, but almost every input has agreed that this is the path we need to take as a country. Debt needs to be reduced and should stop increasing as a proportion of GDP, to avoid future tax increases or public expenditure cuts and to reduce the ever-increasing portion of budget that goes to servicing that debt. The main contention is on how that debt has been reduced.


The budget saw a significant re-allocation of public expenditure, through implementing an R85 billion reduction in expenditure over the next three years, but allowing for an additional R57 billion in expenditure for fee-free higher education over the same period. Given the risks I mentioned earlier, on top of other risks such as costs related to the current drought, the contingency reserve has been increased. There were also increases in provisional allocations for drought management and public infrastructure.

The expenditure cuts fall mainly on large programmes and transfers to government entities. Civil society organisations are concerned that these cuts may impact on service delivery and infrastructure projects. Although it may cause a delay in completing some infrastructure projects, we believe there will be a minimal impact on front line services. The impact of these changes will be carefully monitored to ensure there are no unintended consequences from these actions.

The tax proposals are expected to raise R36 billion in additional revenue for the state, contributing to a large degree in reducing our debt and funding fee-free higher education. The vast majority of comments and concerns have been focused on these tax proposals, and specifically on the decision to increase the value-added tax rate to 15 per cent.

Tax policy issues

We have been pleased with the active citizenry on display since the Budget. I want to thank each and every one of you who submitted comments and presented your views and concerns to the joint committees on finance on these issues. We have had robust discussions in which I am sure all parties have learnt something from those who have different views to their own. Furthermore I am sure we can all agree that having debates of this nature are what contribute to a healthy and functioning democracy.

Our President spoke about a new dawn and improved accountability in Government. This is certainly happening and we welcome it. We understand that, for most people, paying taxes is not particularly enjoyable. We are also acutely aware that the majority of our people are struggling to feed their families every day. So asking them to pay more for some of their food and other expenses is certainly not a decision that was taken lightly, considering that the VAT rate has not been changed in the past 25 years.

At Shoprite in Alexandra (Johannesburg), you can currently buy a loaf of sliced white bread for R10.79. At the same shop, you can buy a slightly smaller loaf of brown bread for R4.99. While the price of the brown bread will remain unchanged with the VAT increase because it is zero-rated, the price of this white loaf will increase by 9c. We understand that many moms make sandwiches for their children with zero-rated brown bread, but that the fillings, like peanut butter, are not zero-rated, and the price of these items will increase from 1 April.

We have listened to all these concerns that VAT is regressive and, along with fuel levy increases, will hurt the poor the most. This means that the poor spend more on the tax as a percentage of their income than do high-income households. The most recent research suggested that VAT was "mildly progressive" and without the current zero-rated food items, it would have been regressive. We have also heard that the poor consume many other products that are not currently zero-rated and therefore not provided the cushioning from the VAT increase as envisaged. We are therefore seriously considering options for mitigating the impact on the poor. Our Minister will be leading a team, assisted by officials and a panel of experts, who will reconsider the current list of zero-rated items and assess whether we can improve the targeting and better align the list of zero-rated food with the spending priorities of our poorest households. There are also a few food items on the current list that can be removed as they are poorly targeted and predominantly benefiting richer households. Our focus should be on the poor.

Even though we will reconsider the list of zero-rated foods, it must be noted that this is generally an ineffective means of providing relief to the poor, as the benefit of additional zero-rating will predominantly go to richer households. Also, since we do not regulate the pricing of these products, businesses may not reduce their prices if a good becomes zero-rated, pocketing the difference themselves, a point that was made by some of our partners in the labour movement.

Another important issue that has raised concern is the 52 cents per litre increase in the fuel levies. Of this increase, 30 cents goes towards the Road Accident Fund to stabilise short-term liabilities (about R8.5 billion per year) from the road accident claims that are finalised but have not yet been paid. Urgent work needs to take place this year to pass new legislation that will put the RAF on a more sustainable footing to avoid these increases in future. The other 22 cents is the general fuel levy that funds general government expenditure. An ordinary inflationary adjustment to the general fuel levy would have resulted in a 17 cent per litre increase on fuel, however the above inflationary adjust takes government's fiscal situation into consideration.

We cannot forget that the bulk of redistribution in South Africa is achieved through targeted spending programmes. The overall division of revenue is strongly redistributive. Resources are shifted from taxes raised mainly in wealthier areas to services benefiting poor South Africans in every province and municipality. 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.

Even so, the expansion of zero-rating for specific food items will be seriously considered and we look forward to further discussions on this.

It is also important to remember why it was necessary to use an instrument like VAT to raise the revenue required. The combination of large revenue shortfalls in 2016/17 and 2017/18; the need to fund fee-free post-school education and training; and our continued fiscal decline warranted a drastic response. Besides reducing and reallocating expenditure programmes, VAT is the only tax instrument that can raise enough revenue and not simultaneously hamper our already fragile economy.

With years of policy uncertainty and low business confidence, our growth and employment prospects have been dim. We desperately need broad-based growth that creates opportunities for skills development and employment prospects, so that all our people can participate in the economy and provide for their families. With more business activity and employment, we will also generate more tax revenue, enabling us to fund social programmes.

I also want to emphasize how progressive our tax system already is, and we have also announced measures in the 2018 Budget that enhance this important principle. For example, the top four personal income brackets were not adjusted for the effects of inflation, while lower brackets received some relief through a 3.1 per increase. These changes should bring in around R6.8 billion. Ad-valorem excise duties, which are an additional tax on a product as it is imported into the country or as it leaves the factory, are charged on a number of luxury goods. The duty rate on these products was increased from 7 per cent to 9 per cent to ensure wealthier households pay proportionately more. Those who can afford to buy more expensive cars will also be paying more from 1 April. The estate duty tax rate was also increased for large estates, from 20 per cent to 25 per cent.

Further increases in PIT may not have yielded the full amount (as has happened over the past few years), which would lead to yet another Budget next year where large tax increases are required.

To raise the equivalent of VAT (R23 billion), the corporate income tax rate would have had to be increased by three percentage points, moving us further out of line with global rates as the trend internationally continues to move downward. With a greater differential compared to the rest of the world, the opportunities for instances of base erosion and profit shifting (BEPS) will increase, putting pressure on revenue administration and ultimately on corporate income tax revenues. In prior budgets, National Treasury has clearly communicated that increased corporate taxation will have to come from base broadening, rather than rate increases. We are actively monitoring and evaluating existing tax expenditure to identify ineffective or inefficient programmes.

South Africa is also one of the countries that have made prudent policy choices to contain BEPS. As indicated in the budget, and taking into account recommendations from the Davis Tax Committee, we are pushing ahead with further reform. As a share of GDP, corporate income tax collections are higher than the OECD and African average. Raising the corporate income tax is not a guaranteed means of improving the progressivity of the tax system as capital owners do not necessarily bear the additional tax burden. Studies show that the burden from higher corporate taxes is often passed on to consumers (in the form of higher prices) or workers (through lower wages or retrenchment). To directly increase the burden on shareholders, we increased the dividends tax in the 2017 Budget.

Government does firmly believe that the VAT increase will be in the best interests of all South Africans. So far, we are already seeing signs of improvement in our economy. Yields on our government debt have fallen since the Budget, meaning that we will now be spending less of our tax revenue on paying back debt, and more on serving our people. If the growth and tax revenues forecasts from this Budget are realised, there would be no need for further large expenditure cuts or tax increases in the Budget next year to stabilise debt.

If we were to do nothing, our revenue shortfalls pose a risk to the sustainability of our expenditure system, and therefore our main tool to address inequality. Once the tax and transfer system is endangered, the poor will be worst off due to pressure on the social wage. For this reason, we propose that we act decisively now. Delaying any action to curb our increasing debt would have meant that without a large surge in growth, even larger expenditure cuts and tax increases would need to have taken place at some point in the future.

We have been transparent about the likely impacts and incidence of our proposals, and we are open to discuss these matters and find solutions that aim to protect the most vulnerable people in our society. This is our public duty. While the immediate impacts have received much attention, I feel I have a duty to ensure that we do not lose sight of the larger trajectory of our country's fiscal and economic path.

« back