The 2015/16 Budget and Development

Investment

The 2015 budget intends to rebalance fiscal policy to give greater thrust towards investment aimed at supporting enterprise development, promoting agriculture and industry and to make our cities engines of growth. South Africa will benefit from the lower oil price, but our major mining exports have been negatively affected by the global slowdown. Our deepening trade and investment links with sub-Saharan Africa continue to offer favourable growth prospects. Exports to Africa grew by 19 per cent in 2013 and 11 per cent in 2014.

The primary challenge mentioned is to deal with the structural and competitiveness challenges that hold back production and investment in our economy. The most important of these is the security and reliability of our energy supply. Electricity shortages hold back growth in manufacturing and mining, and also inhibit investment in housing while raising costs for businesses and households. The shortages account for the downward revision of 0.5% of projected economic growth for 2015 between the Medium Term Budget Policy Statement in October 2014 and the Budget Speech.  

Although our fiscal position is constrained, there are considerable financial strengths on which South Africa’s growth strategy can build:

• Interest rates have remained moderate, which reflects the credibility of fiscal and monetary policy and the favourable inflation outlook. The capital market rates at which government and the corporate sector borrow have declined over the past year, signalling continued investor confidence in the South African economy.

• The exchange rate depreciated by 11 per cent against the US dollar in 2014, after declining by 15 per cent in 2013. This coupled with low inflation contributes to our trade competitiveness, and partially offsets the deterioration in commodity prices.

• South Africa has a buoyant capital market, is open to foreign investors and is a major contributor to direct investment elsewhere in Africa. Our banks and other financial institutions are well-capitalised. Our company law and tax frameworks are robust, and we have excellent property market institutions.

Development of human capital

Unemployment remains the single greatest economic and social challenge according to the minister. Government continues to prioritise measures aimed at generating employment which include: tax incentives for employment and investment; support for enterprise development; skills development and employment programmes.

Small business owners will receive mentoring and training support over the Medium Term Expenditure Framework period from Minister Zulu’s new Department of Small Business Development, which is granted R 3.5 billion. The Jobs Fund will spend R4 billion in partnership with the private sector on projects that create new employment, support work-seekers and address structural constraints to more inclusive growth. The Community Works programme will be extended to all municipalities and its allocations will increase by 21 per cent a year from just a selected group. The Department of Environmental Affairs has an allocation of R11.8 billion to fund more than 107 000 full time equivalent jobs and 224 000 work opportunities through environmental public works programmes.

Health spending will reach R178 billion in 2017/18. There has been a noticeable reduction in child mortality over the past five years, supported by improved access to antenatal services as well as the antiretroviral treatment programme reaching 3 million patients.

Over R640 billion will be allocated to basic education during the next three years. The budget also includes R4.1 billion over the MTEF period to build and support public libraries. School and community sport programmes and sports academies will receive R1.7 billion in conditional allocations to provinces.

University operating subsidies will amount to R72.4 billion this year. Transfers to universities for infrastructure of R10.5 billion are proposed, including R3.2 billion for the new universities of Mpumalanga and Sol Plaatje. The National Student Financial Aid Scheme is projected to spend R11.9 billion in 2017/18, up from R9.2 billion in 2014/15. This will support a further increase in university enrolments and in technical and vocational colleges.

Infrastructure development

Apart from electricity supply interruption, other infrastructure failures mentioned were unreliable water supplies, roads that are impassable when it rains, trains that break down or poor and telecommunication linkages. These are understood to be large, long-term, costly challenges.

A temporary increase in the electricity levy, from 3.5c/kWh to 5.5c/kWh, to assist in demand management was proposed to reduce the electricity constraints. This additional 2c/kWh will be withdrawn when the electricity shortage is over. In the absence of a carbon tax, the electricity levy serves both to promote energy efficiency and encourage lower greenhouse gas emissions. Secondly, an increase is proposed in the energy-efficiency savings incentive from 45 c/kWh to 95 c/kWh, together with its extension to co-generation projects.

Special economic zones are allocated R3.5 billion over the medium term, mainly for infrastructure development.  

However, not all infrastructure services qualify for budget funding. The Deputy President’s approach to resolving the Gauteng Freeway financing matter was endorsed. This involves cost recovery from users being a key foundation of infrastructure sustainability, together with fiscal support for access to essential services. A national contribution to meeting the associated cost will be proposed in the Adjustments Appropriation.

National government is working closely with metropolitan municipalities to invigorate urban development. As the NDP emphasises, realising the economic dividends of urban growth requires a new approach to providing infrastructure, housing and public transport services, while overcoming the spatial divisions of apartheid.

Burden of taxation

The state intends to increase tax revenue by R 17 billion. The most important taxation changes in revenue terms are an increase in the fuel levy, where the Minister has taken advantage of low oil prices, and a 1% increase in marginal rates of taxation on taxable incomes of above R 181 900 per annum.  

There will be 50 cents a litre increase in the Road Accident Fund levy. The increase is required in order to finance the progress made by the RAF administration in clearing the claims backlog. But it also reflects the current compensation system, which has accumulated a R98 billion unfunded liability, is not sustainable. Legislation to establish the new Road Accident Benefit Scheme will be tabled this year, to provide for affordable and equitable support for those injured in road accidents. Once the legislation has been passed, the levy will be assigned to the new scheme.

A special revenue proposal is a one-year relief measure in respect of Unemployment Insurance Fund contributions. Unlike the Road Accident Fund, the UIF has an accumulated surplus of over R90 billion.

The burden of regulation and corruption

Private investment and partnerships with state-owned companies are elements of government strategy for strengthening infrastructure investment and improving service delivery. As indicated in last year’s Medium Term Budget Policy Statement, fiscal support to state-owned companies over the period ahead will be financed through offsetting asset sales so that there is no net impact on the budget deficit. The required turnaround in performance and delivery on government priorities will be closely monitored, under the Deputy President’s oversight.

Supplying goods and services to government is set to be simplified from April 2015 when one central supplier database will be introduced. This means that suppliers will be relieved of the burden to register on a different database when soliciting business from more than one state entity. The Minister said the database will interface with the South African Revenue Service (SARS) and the Companies and Intellectual Property Commission (CIPC) as well as the payroll system.  This will enable the electronic verification of suppliers’ tax and BEE status as well as the identification of public servants doing business with the state.

The South African Reserve Bank, the Financial Intelligence Centre and the Revenue Service work closely to monitor capital flows. This assists in identifying movements of funds for tax reasons. Internationally, there is increasing collaboration between bank regulators and tax authorities, and so progress is being made to reduce both capital leakage and tax evasion. Drawing on advice of the Davis Tax Committee, amendments will be proposed to improve transfer-pricing documentation and revise the rules for controlled foreign companies and the digital economy.

Overall assessment

The Minister and the Treasury have done well under the circumstances.  The Budget focuses on macroeconomic stability, including fiscal stability, and has a plan for keeping public debt manageable.  The degree of growth policy coherence is substantial.  We look forward to further support to growth from Treasury processes still under way.

Eythan Morris
Researcher
eythan@hsf.org.za