Budget Speech 2005 by Minister of Finance Trevor A Manuel, Parliament,
23 February 2005
We assert that our country, as a united nation,
has never in its entire history enjoyed such a confluence of encouraging possibilities.
On behalf of our government, we commend our programme to the country, confident
that its implementation will help to place us on the high road towards ensuring
that we become a winning nation and that we play our role towards the renewal
of Africa and the creation of a better world.
Acting together, we do have
the capacity to realise these objectives. And sparing neither effort nor strength,
we can and shall build a South Africa that truly belongs to all who live in it,
united in our diversity!" - President Thabo Mbeki, 11 February 2005
We have recently celebrated the international success of Ladysmith
Black Mambazo's new album Lift Your Spirit Higher. This past weekend, the world
acclaimed the production of the popular opera, uCarmen, sung in isiXhosa, and
filmed here in Khayelitsha, which won the Golden Bear award as the best film at
the Berlin Film Festival. It is entirely fitting that the new season of hope and
rising confidence of our nation, in this second decade of democracy, should be
proclaimed in this way, in music and in theatre.
We also celebrate this
year the pledge of the Congress of the People fifty years ago that we would strive
together, side by side, to win equal rights and opportunities for all South Africans,
black and white. Even as we enjoy the fruits of the progress made in our first
decade, we know that our work is not complete until all our people have achieved
freedom from want, freedom from fear, freedom from prejudice, freedom from injustice.
In order to complete this liberation, the most vulnerable among us must
see their rights to development being realised with each passing year, through
progressive advances in access to land, education, training, health care and economic
opportunity. This is achieved, as President Mbeki has reminded us, through the
Programme of Action of a Government that cares for its people, that makes socially
just choices and that is committed to service delivery in the spirit of batho
In this context, and with the President's permission, I would like
to convey the best wishes of our Government and people to the delegates who are
now convening at the United Nations in New York to undertake a ten-year review
of the Beijing commitments, relating to the critically important issue of the
emancipation of the women of the world. What we will say today is also focused
on ensuring that we achieve further advances in our own pursuit of this central
aspect of the new society we are working to create.
We have noted with
concern the recent violent demonstrations in some areas, including local communities
in the Free State and a number of our institutions of higher learning. As our
President has said, the Government must act firmly against those who break the
law and destroy public property or attack the police. Nonetheless, we understand
the impatience that motivates some of those who are drawn into these demonstrations.
Part of our task as public representatives is to continue to explain, even as
we celebrate our progress, that just as Rome was not built in a day, neither will
the new South Africa be liberated from its painful past in a day.
Speaker, the 2005 Budget seeks to contribute to the season of hope of which we
have spoken, through reinforcing the momentum of our social and economic progress.
In framing the Budget, it is this vision that has been our practical guide
a vision rooted in the actual, lived experience and struggles of ordinary people.
Thousands of South Africans have again taken the time and trouble to provide
me with advice in the form of "Tips for Trevor". As always, it has been
both humbling and inspiring to share in some of the many ways in which the public
finances impact on people's daily lives.
Education and skills development,
quite rightly, feature strongly. Tshepiso Mathabatha writes:
invest more in education, because people need the skill and knowledge to be able
to compete in a job market with relevant experience."
Then there were
interesting proposals on financing new priorities. Anesce Stapelberg of Hoerskool
Wonderboom suggested a special bond issue to finance infrastructure for the 2010
"With the money brought in, we can build stadiums, roads
or whatever is needed. Then use the profit made from the soccer games to pay the
bondholders back, and that way the whole of South Africa can be a part of the
journey towards building a better future."
And from a remote rural
village, Lutendo Nethononda captures the feelings of many South Africans:
has become necessary that we shift our priorities to Infrastructural Development.
This is important because even the old lady of Maliboho requires a taxi or bus
to move from the mountains to the nearest shop to buy mieliemeal. Infrastructural
development will create jobs, improve the rural economy, improve accessibility,
and alleviate poverty
Lutendo goes on to remind us of the social
dimensions of our tax policies:
"Sin taxes should be increased. Alcohol
and smoking are major causes of troubles in our country."
agrees with that, of course. Mthetheleli Baqwa has a different view:
cannot live without entertainment and if you always increase the price of beer
and brandy then the culture of entertainment will die, which will be unfair for
There was also the advice, from someone whose name
I should perhaps not disclose, that lobola money should be a tax-deductible expense,
"... as it is a social responsibility put upon one's shoulder unwillingly."
Which simply goes to illustrate that you can't keep everybody happy, all
of the time. But the messages I have received, and the voices we have heard in
our izimbizo, convince me that South Africans, black and white, urban and rural,
are overwhelmingly in agreement on the key values that should underpin our budgetary
policies. We agree that we need more rapid growth of our economy. We agree on
a development strategy that is broad-based and invests in all our people. We agree
on the need to reduce inequality and fight poverty.
Acting together, Madam
Speaker, we have the capacity to realise these objectives.
More rapid growth: Over the past decade we have laid the
macroeconomic and fiscal foundations on which increased investment and a stable
business environment rest. In the years ahead we must see more rapid expansion
in the productive capacity of our businesses, creating jobs for work-seekers,
while also growing the revenue base that makes possible an expanded envelope of
public services to citizens.
Broad-based development: Over the past decade
we have invested in meeting basic needs, expanded investment in municipal infrastructure
and extended social grants to children and others in need. In the decade ahead,
we must invest in improving the quality of education, housing and health services.
These elements of the social wage contribute over time to skills and productive
opportunities, so that dependence can give way to self-reliance.
poverty and inequality: Over the past decade we have transformed social policy
and service delivery based on principles of non-racialism and non-sexism. In the
years ahead, we must make more rapid progress in building a society founded on
solidarity, in which we give practical expression to our shared interest in addressing
the needs of the most vulnerable.
We can face the new season of hope with
eyes of pride, acting together to realise a shared vision.
Let me comment briefly, Madam Speaker, on our economic
progress over the decade past and the policy framework for the years ahead.
of the South African economy has averaged 3,2 percent a year over the past four
years. We expect a continued expansion of between 4 and 4,5 percent over the next
three years, signalling a significant step-change in the pace of economic growth.
At the same time, we have seen consumer price inflation fall to 4,3 percent for
the year to December 2004, and it is expected to remain comfortably within the
3 to 6 percent target range over the period ahead.
This is a marked improvement
on the position we were in a decade ago. It is the fruit of sound macroeconomic
performance and monetary management, improved competitiveness, structural reform
and a fiscal policy framework designed to underpin sustainable growth and investment.
Real income per person over the past decade has increased by 15 percent.
With average growth projected at over 4 percent a year over the period ahead,
real per capita income will rise by at least 30 percent in the second decade of
freedom. We surely need to target growth of at least this order of magnitude if
we are to see the progress we desire in making hunger history, in facing the season
of hope with pride and vision.
We must also confront the challenge of making
our growth pro-poor. Four aspects of our development policy for the decade ahead
are particularly critical:
- As we step up the pace of investment in
modern transport, communication, water and energy networks, we need to ensure
that we build a more efficient economic landscape, that we contribute to more
balanced development between suburbs and townships, between urban and rural areas
and between the first and second economies. We need to press more urgently on
the labour-absorbing potential of infrastructure and building programmes.
also seek to strengthen the links between further education and training and workplace
requirements. This means we need to modernise our colleges, bring industry and
commerce more actively into the governance of education and training, and ensure
that funds set aside for skills development are more effectively used.
must address the barriers to small business development and job creation that
arise from cumbersome municipal planning and approval procedures, or from overly
burdensome administration of the tax laws, environmental regulations or labour
- We need to mobilise, with a greater sense of partnership
directed at long term development, both our capacity to save and the accumulated
capital under the stewardship of our financial institutions and corporations.
Although there is still work to do, I am encouraged by the progress and commitments
that have emerged from the Financial Sector Charter process. I believe we have
a shared understanding that will lead to public and private sector funding of
infrastructure, housing, empowerment and business development rapidly growing
over the decade ahead, giving practical expression, appropriate for our times,
to a pledge, fifty years ago, that the national wealth of our country is the heritage
of all South Africans.
There are aspects of these economic challenges
to which I will return shortly, in dealing with our tax and spending proposals.
Advancing social development
More rapid growth makes greater
progress in social development possible, and, in turn, well-targeted investments
in human capabilities contribute to rising productivity and sustained growth.
Over the past decade we have made steady progress in raising the proportion
of spending on social services that goes to the poorest 40 per cent of our people.
Welfare and social assistance, education, land restitution and housing have evolved
into strongly redistributive expenditure programmes, bringing the average value
of services, of the social wage, that goes to the poorest 40 per cent of households
to an estimated R956 a month.
The R956 a month estimate is based on HSRC
research using 2002 household survey data. (The estimate includes schooling, health
care, housing, social grants and access to subsidised water and electricity.)
Over the decade ahead, there will be other priorities in our social development
- There is, for example, the imperative to provide every child
with education opportunities that meet both the knowledge requirements and social
challenges of our future, and to ensure that a caring and competently managed
health service is available in every community.
- There is the complementary
challenge of transforming the desolate landscape of townships and new housing
settlements into sustainable and viable communities, whose riches speak for themselves,
whose streets carry songs of laughter, whose character reflects our season of
hope. In this Budget, we recognise the need to give greater impetus to investments
in housing, in community infrastructure, in municipal services and in local economic
development not just as projects of government creativity.
there are rural development challenges to address. We will departments or municipalities,
but as constructive partnerships that mobilise local enterprise, private capital,
indigenous propose allocations to the Department of Land Affairs today that will
enable the land restitution programme to complete its work over the next three
years. We have put in place a comprehensive agricultural support programme for
emerging and resource-poor producers, and the Minister of Agriculture will introduce
this year a new credit scheme for small-scale farmers.
- Social solidarity
also encompasses the work of reducing crime and insecurity, investing resources
in more effective policing and a robust justice system. We have set ourselves
daunting targets for reducing the incidence of serious crimes. We are also called
upon to play a part in promoting peace and security elsewhere in Africa.
all these, and many other dimensions of social development, there is an unavoidable
tension between the magnitude of the challenge and the limits of our capacity.
The Budget is, as always, the practical resolution of this tension, in so far
as the period ahead can be planned and programmed. But its implementation is the
real expression of our social intent, and this relies on the shared efforts and
energies of public servants, workers, businesspeople, citizens, all our people,
who embrace the future with hope, and eyes of pride.
Acting together, Honourable
Members, we do have the capacity to realise these objectives.
This social intent also embodies our commitment
to build a more just, more equal society, in which steady progress is made in
reducing the gulfs that divide rich and poor, black and white, men and women,
rural and urban.
On some dimensions, there have been notable advances.
Real wage improvements and public expenditure on services have contributed to
rising living standards of many people. A recent research report indicates rapid
growth in the numbers of black households entering middle income bands, associated
in part with higher demand for skilled and professional labour.
targets and transformation initiatives in education, in employment and in procurement
are contributing to better racial and gender representivity. Corporate restructuring
and equity participation schemes have brought changes to the ownership, management
and strategic direction of many companies.
Yet our income distribution
remains highly unequal. We are gaining a deeper understanding of the role of public
policy in shaping the distribution of income and opportunities. Today sees the
release of the results of a study of the shifts since 1995 in the distribution
of government expenditure on education, health, welfare services and housing.
This research shows that whereas aggregate social spending increased in real terms
by 14 per cent per person between 1995 and 2000, spending on the poorer 40 per
cent of households increased by 25 per cent per person signalling a steady
increase in the redistributive social wage.
There is nonetheless room for
further improvements in the quality and targeting of services, and the management
and effectiveness of government programmes.
So, for example, we have directed
attention this year at the costs and complexity for small businesses of the tax
code, because there is compelling evidence that simplified arrangements can assist
significantly in creating an environment conducive to enterprise development.
Under the leadership of the Ministry of Education, we have developed proposals
for improving the targeting of funding for schools and the regulations governing
school fee exemptions, because this is such an important vulnerability for poor
Mindful of the difficulties many young people find in breaking
into the job market, we have worked with the Ministry of Labour in promoting learnerships,
backed by tax deductions for participating companies, and we will learn more about
options for skills development and work initiatives from the projects of the Umsobomvu
Youth Fund and the expansion of public works programmes this year.
National Empowerment Fund receives further funding this year, and we are certain
that it will make a growing contribution to broadening the reach of business empowerment
and transformation. Through Government's procurement framework, an increasing
proportion of contracts are going to small businesses and to black-owned or women-owned
businesses. The Minister of Trade and Industry has taken the lead in developing
both improved support for small and new businesses, and common codes to guide
the design of empowerment projects.
Two further distributional aspects
of public policy receive attention in today's Budget. As announced last year,
there will be changes to the way in which travel allowances are taxed, as these
deductions have created unwarranted benefits for higher income earners. There
will be a change, also, to the tax treatment of medical scheme contributions,
which will have the effect of reducing the cost of medical scheme membership to
lower income families.
Expanding medical scheme membership and ensuring
that our public hospitals provide an accredited cost-effective service to both
uninsured patients and medical scheme members, are critical hurdles to be overcome
before a more inclusive social health insurance arrangement can be implemented.
Members of the House will appreciate that the measurement of inequality
and the impact of public services on relative disparities in standards of living
is difficult, and needs to be the subject of further work. Several commentators
have suggested that social policy would be assisted by our adoption of an official
poverty measure, as is done by many countries. I believe this proposal has merit
and will seek further advice this year on the design of a poverty line for South
Madam Speaker, let me return briefly
to the outlook for the economy, before detailing this year's spending plans and
Growth in the global economy
accelerated to nearly 4 percent in 2004, from 2,4 percent in 2003. China and developing
Asian economies are continuing to industrialise and deepen their services sectors
rapidly, on the strength of high savings rates, broad skills pools and competitive
export sectors. Growth has also recovered strongly in the United States, but its
sustainability is threatened by huge imbalances in both the fiscal accounts and
the balance of payments.
Economic growth on the African continent has averaged
about 4 per cent over the past three years, with encouraging signs of an improved
trade response in several countries to the global expansion. However, the pace
of economic development in Africa remains tenuous. Far more needs to be done to
attract investment, intensify education and training, deepen financial markets,
open up trade relations and harmonise regulatory and legal environments. We will
continue to give support to initiatives of NEPAD directed at these challenges,
and we note that the Commission for Africa has given impetus to the international
response to the trade and finance issues facing our continent.
reforms that cannot take root in a context of war, or constitutional uncertainty,
or political opportunism. And so all of us, all of Africa, and all who recognise
Africa as part of a shared humanity, owe an immeasurable debt of gratitude to
those who are tirelessly working for peace and overcoming the fractures that trouble
Global expansion is expected to slow in 2005, with further
moderation in 2006. High oil prices and the overhang of the US deficits are likely
to hold back growth and some commentators anticipate an extended slowdown
as a result of international trade and financial imbalances. Although our economy
remains vulnerable to this uncertainty, our trade and financial links are increasingly
diversified and our growth has a robust domestic impetus both sources of
strength in an uncertain world.
South Africa has experienced strong growth
in commodity exports in 2004, but has also seen rising imports in response to
domestic demand and the strength of the rand. Expenditure on maritime vessels,
new airplanes and, in the third quarter, oil, added significantly to the import
trend in 2004. This resulted in a widening of the current account deficit to an
estimated 2,3 per cent of GDP, and it is expected to continue to widen moderately
over the next three years.
For this reason, it is important that we should
continue to attract foreign investment and portfolio inflows, providing the external
capital required to finance the shortfall between our export earnings and import
The cumulative surplus on the financial account was over R60 billion
in the first nine months of 2004, partly attributable to a resurgence of foreign
investment in shares on the Johannesburg Securities Exchange. We have seen further
upgrades in the rating of government's domestic and external debt, which also
signals foreign capital market confidence in the South African economy.
for the domestic economy
Several fundamental strengths lead us to project
further upward momentum in our economic growth performance over the next three
· Moderation of inflation and the sound and consistent management
of monetary policy by Governor Mboweni and the Reserve Bank have brought interest
rates down to their lowest levels in 24 years.
· Gross fixed capital
formation increased by 9 percent in 2003 and an estimated 7,5 percent in 2004,
contributing to a broader and deeper platform for growth and productivity advances
· Following several years of decline, South African mining
production expanded by over 4 percent a year in 2003 and 2004. Output of gold
mines has continued to decline, but platinum, coal, diamonds and other minerals
are benefiting from growth in demand and prices on international commodity markets.
· Value added in the construction sector grew by over 6 percent
in 2004. There is strong growth in the residential property market. Further impetus
will be given to building and construction growth by inner city refurbishment
encouraged by our urban renewal tax incentive, accelerated investment in low-income
housing and municipal infrastructure and several large economic infrastructure
projects over the decade ahead.
· Official foreign exchange reserves
have increased to over US$15 billion, which is more than four times the current
short term debt level. Reserves held by the private banking sector have also increased
strongly, contributing to a marked improvement in the nation's overall balance
sheet and reduced vulnerability to the inherent volatility of international financial
· There are also encouraging signs of progress in broadening
participation and greater resilience of small enterprises across many areas of
economic activity. The official labour force survey suggests that non-agricultural
employment has increased by about 280 000 jobs a year since 2000. Small and medium-sized
contractors are competing increasingly successfully for government roads and public
works projects. Micro-enterprises offering cellphone services, catering, accommodation,
entertainment, household and personal services are both a growing feature of the
economic landscape and at least to some extent a bridge to further opportunities
and more formal business formation. The notable growth of 18 per cent in the VAT
revenue base this year is just one indicator of a steady expansion in the numbers
of registered, viable business enterprises.
Taking into account the anticipated
global slowdown and the continued relative strength of the rand, our expectation
is that the South African economy will grow by 4,3 per cent this year and an average
of 4,2 per cent over the next three years. Gross fixed capital formation growth
is projected to average 7 per cent a year with exports rising by about 4,5 percent
a year. We expect CPIX inflation to average 4 per cent in 2005, rising to between
5 and 5,5 percent in 2006 and 2007.
Madam Speaker, it is pleasing to note
that we have revised upward the growth estimates for 2004 and 2005 tabled before
this House in February last year. Changes in the economic outlook arise partly
from changes in the global or domestic market environment. But at least two critical
areas of economic performance are firmly within the scope of our influence and
I refer to the need to accelerate the pace and quality
of infrastructure investment, partly a responsibility of government departments
and partly of our major parastatals, and to the need to address deficiencies in
municipal planning and service delivery and in the regulatory and administrative
environment that impede business development and job creation. These were rightly
amongst the urgent priorities articulated by President Mbeki in the State of the
Nation Address on 11 February.
the fiscal policy considerations and broad outline of a proposed framework for
the 2005 Budget were set out in the Medium Term Budget Policy Statement tabled
in October last year. We outlined a framework for accelerated growth and broad-based
development, focused on five policy priorities:
- Increasing the rate
of growth and productive investment
- Encouraging employment and development
of the second economy
- Social development and mobilising human resources
- Improving the State's capacity to promote growth, broaden development
and combat crime, and
- Strengthening international relations for growth
Due to the strength of the economy and the excellent
work of Commissioner Gordhan and his tax and customs team, we are now projecting
to raise R11 billion more this year than budgeted. Non-interest spending is R5,2
billion higher than the original estimate, with the largest adjustments being
for social grants, drought relief and municipal rates and taxes. Our deficit this
year should come in at 2,3 per cent of GDP, and debt service costs will be 3,5
per cent of GDP. Members of the House will recall that debt service accounted
for 5,6 per cent of GDP six years ago, and I know you will share my firm intent
not to reverse this progress.
Our budget framework for the next three years
sees revenue as a share of GDP average 24,2 per cent. We anticipate a deficit
of 3,1 per cent of GDP next year, falling to 2,7 per cent by 2007/08. Total expenditure,
excluding interest costs and a contingency reserve, rises from R363 billion in
2005/06 to R428 billion by the end of the MTEF period.
allow an additional R74,4 billion to be added to the baseline allocations of national
departments, provinces and municipalities over the next three years. Consolidated
real non-interest expenditure will grow at 7,5 per cent next year, and an average
of 5 per cent over the MTEF period ahead.
In framing these projections,
we have been mindful that infrastructure spending by municipalities and public
enterprises is expected to grow strongly over the years ahead, complemented by
rising spending on public assets through public-private partnerships of various
kinds. Significant projects include:
- completion of the Port of Ngqura,
Berg River Water Scheme in the Western Cape and further development of the Olifants
River and Groot Letaba River dam systems in Mpumalanga,
of the Camden, Komati and Grootvlei power plants and upgrading of the Matimba
- construction of a hydroelectric pumped storage scheme at Braamhoek
and two coastal gas turbine plants,
- investment of some R27 billion in
electricity transmission and distribution networks over the next five years,
of a demonstration plant by the Pebble Bed Modular Reactor company,
R4,9 billion locomotive and wagon fleet renewal and modernisation programme,
of the Coallink line to Richard Bay and the Sishen-Saldanha link,
- a new
container terminal for Durban and port capacity expansion in Cape Town, Richards
Bay and Saldanha, and
- the building of a new multi-purpose Durban-Johannesburg-Pretoria
fuel product pipeline.
The contingency reserve and unallocated funds
for transport infrastructure in the MTEF proposals for the next three years allow
for additional allocations to critical infrastructure investment projects in the
Adjustments Budget, where project planning is well advanced and business plans
have been approved.
Division of revenue
Madam Speaker, nationally
collected revenue is divided equitably between national departments, provinces
and local government, as required by the Constitution. The resulting allocations,
and details of various conditional grants to provinces and municipalities, are
set out in the Division of Revenue Bill tabled before the House today. National
departments account for 37 per cent of the allocations and provinces almost 58
per cent. Grants to municipalities total 5 per cent of available resources, growing
by 13,3 per cent a year, which is the fastest growing component of the budget.
The intended consolidation of social grants administration in a single
national Agency reporting to the Minister of Social Development results in a significant
change to the budget framework. Social grants and associated administrative expenditure
are now fully budgeted for on the national Social Development vote, as conditional
grants to provinces. These funds will be ring-fenced and separately managed by
provinces, as an interim step towards establishing the new Social Security Agency.
In 2005/06, R135 billion will be distributed between provinces in terms
of the equitable share formula, and R75 billion will be allocated as conditional
grants from national departments.
Provinces and municipalities are at the
front-line in providing the many services required by our people. The last decade
saw their establishment, and steady increases in the resources transferred for
For the decade ahead, the intergovernmental framework will
see significant changes:
- New allocation formulas are being phased
in for both the provincial and local government equitable shares,
grants are under review, and will be reformed to reflect more appropriately their
role in giving effect to national policy objectives for concurrent functions,
RSC levies will be eliminated in 2006, and
- Metropolitan and selected
urban municipalities will play an increasing role in the delivery of housing and
The Government's Programme of Action rightly highlights
the importance of addressing those weaknesses in governance systems or financial
administration that hold back public service delivery, both in provincial departments
and municipalities. Our season of hope rests in considerable degree on the pride
and vision with which provincial officials, local councillors and municipal staff
take up this challenge. Acting together, we do have the capacity to overcome the
Medium term expenditure allocations
Madam Speaker, we indicated in the Medium Term Budget
Policy Statement that significant additional allocations for social grants would
be made in today's Budget, that land restitution would be a priority and that
community and social infrastructure investment would be accelerated.
have already noted the immense contribution of our social grants system to the
income security of the most vulnerable, and in particular to the support of children
under the age of fourteen. This expansion in the redistributive thrust of the
budget carries a cost. Of the R74 billion in additional allocations over the MTEF,
a total of 30 per cent is added to the social grant programmes, bringing aggregate
social security spending to R55,4 billion next year and 12,7 percent of consolidated
spending by 2007/08.
In addition to providing for rising beneficiary numbers,
the MTEF allocations provide for inflation-related adjustments to social grants.
With effect from April 2005, the maximum old age, disability and care dependency
grants will rise by R40 to R780 a month, foster care grants increase by R30 to
R560 and the child support grant goes up by R10 to R180 a month.
Budget provides for several other significant spending adjustments:
billion for the new comprehensive housing strategy and R1,7 billion for municipal
and sanitation infrastructure,
- R6 billion to complete the land restitution
- R3 billion for transport infrastructure and services,
billion for improved buildings and equipment for further education colleges, and
R776 million for the National Student Financial Aid Scheme,
- R6,9 billion
to contribute to improved salaries for teachers and R4,4 billion for pay progression
in the SA Police Service,
- R1,4 billion to support our African development
agenda, including peace-keeping operations, institutions of the African Union
and the Pan African Parliament.
Economic development and investment
Our developmental objectives require a careful balance between direct
income support, improved public services such as education, health and municipal
services and investing in social infrastructure such as housing, water, sanitation,
roads and public transport. Some of these priorities, Madam Speaker, are exclusively
or mainly the responsibility of government. But in other areas, such as economic
development and investment in productive capacity, we seek to complement and reinforce
private sector growth and initiative.
We are particularly mindful of the
need to improve the alignment between public infrastructure and investment plans
and business development opportunities.
Increased investment in transport
infrastructure and systems accordingly features strongly in the 2005 Budget proposals.
These are shared responsibilities of national, provincial and local government,
and details of the additional R3 billion to be allocated will be tabled in the
Adjustments Appropriation later this year. Projects related to the requirements
of hosting the 2010 Soccer World Cup will receive early priority.
economic development initiatives for the MTEF period ahead include the following.
- A new Micro Agricultural Finance Scheme is proposed, to complement
the Comprehensive Agricultural Support Programme and provide further assistance
to emerging farmers and land reform beneficiaries. An amount of R1 billion is
available for this initiative if which R600 million is expected to the allocated
over the next three years.
- R400 million a year is allocated to the Trade
and Industry vote for the National Empowerment Fund.
- R885 million over
the next three years goes to the taxi recapitalisation programme, together with
additional resources on the Transport vote for improved traffic law enforcement.
million is proposed on the Communications vote to contribute to investment by
the South African Broadcasting Corporation in the modernisation of its equipment
As in the past, Madam
Speaker, additional allocations for social service functions mainly go to provinces.
In addition to substantial adjustments for social grants, this year's Budget provides
for improved salaries for educators and social workers, a new conditional grant
for further education colleges, funds to enable provinces to fulfil their responsibility
for primary health services formerly provided by non-metropolitan municipalities,
and an additional R180 million a year for tertiary health services.
the critical role of technical skills in a growing economy, R1 billion will be
invested over the next three years in improved facilities, equipment and support
in further education and training colleges. Through strengthened ties with the
skills development programme, sector education and training authorities and employers,
colleges have to take their rightful place at the forefront of industrial progress
and technology change.
Additional allocations go the Arts and Culture vote
for management of Robben Island Museum as a World Heritage Site and for hosting
the 29th session of the World Heritage Committee this year.
to supplementary resources for the National Student Financial Aid Scheme which
assisted about 100 000 students in 2004, the National Department of Education
receives funding for an education management information system to integrate the
flow of information from schools and colleges.
The Department of Labour
receives additional allocations for an integrated call centre and improved inspectorate
services. Its oversight of the national skills development strategy remains a
central priority, as the flow of funds to sectoral education and training authorities
and the National Skills Fund will amount to R5 billion in 2005/06, rising to R6
billion by 2007/08.
Housing and community development
me turn to the challenge of building houses, security and comfort for all. We
cannot, in good conscience, build dormitory suburbs characterised by neglect,
settlements that have no sports facilities, entertainment, business opportunities,
social or policing infrastructure.
If Sophiatown, in the midst of its destruction
fifty years ago, could give birth to the rythms of kwela, the patha-patha jive,
the musical genius of Miriam Makeba and Kippie Moeketsi's Shantytown Sextet, and
the talents of Todd Matshikiza, Can Themba, Walter Nhlapo how much more
will be possible as the shadows come to life in District Six, Marabastad and Cato
Manor and as the new spirit of uCarmen ineKhayelitsha emerges in Botshabelo,
Motherwell and Chatsworth?
On the strength of a new Plan for the Development
of Sustainable Human Settlements, the period ahead will see a shift of direction
and greater impetus given to investment in housing and the development of residential
communities. The central aim is to replace or upgrade all informal settlements,
which currently house some 1,4 million households, by 2014. In this practical
way, we seek to give further expression to the vision President Mbeki has reminded
us of: that South Africa belongs to all who live in it.
through which free basic services and investment in infrastructure for low-income
communities are supported, increase by a total of R5,4 billion over the MTEF baseline
Justice, crime prevention and security
justice, crime prevention and security cluster, additional allocations are made
to the Safety and Security vote to continue the expansion of police numbers and
improve remuneration, to Correctional Services to increase the capacity of prisons
and establish a seven-day working week, and to Justice and Constitutional Development
to improve court administration and continue to modernise information systems
and strengthen court security.
Government plans to increase the number
of police officers from 139 000 in 2003 to 165 850 by 2008. The Department of
Justice plans to appoint 40 new magistrates over the new year, and 1 000 vacancies
will be filled at courts and to support prosecutorial services. Over the next
three years, accommodation capacity in correctional service facilities will increase
by 12 000 bed spaces.
Governance and administration
of this House are well aware of our responsibility to ensure that we have a capable
state, one that is able to give effect to its administrative duties and responds
effectively to meeting the needs of the poor. We are conscious of many shortcomings
in our present system of administration. Better governance and administration
must remain a central focus of both the executive and our legislatures.
services rendered by the Department of Home Affairs are critical to providing
citizens with access to basic benefits and other government services. Additional
allocations of R800 million over the MTEF period are recommended for strengthening
capacity of the Department and implementation of its transformation strategy.
The Independent Electoral Commission also receives supplementary funding, primarily
for the forthcoming local government elections.
Other revisions to core
administrative functions include:
- R1,6 billion for the Public Works
vote, to address shortfalls in municipal rates and service payments on government
buildings, to upgrade buildings at land ports of entry and address maintenance
backlogs at government buildings
- Replacement of the preliminary allocations
on the Statistics South Africa vote for a census in 2006 with allocations for
a new community survey and improvements in the quality of various economic and
social statistical series, and
- An additional R250 million for Parliament's
MTEF, to improve both internal governance and services to committees.
relations, peace and security
Lastly, Madam Speaker, let me refer to
the contribution of the fiscus to our international relations, peace and security
commitments. The 2005 Budget will again reflect our rising contribution to a season
of hope for the African continent, and to putting the concerns of the poor on
the agenda of world opinion.
Additional allocations amounting to R350 million
over the MTEF period are proposed for the Foreign Affairs vote, contributing to
the costs of hosting the Pan African Parliament, expanding representation in Africa
and elsewhere, contributing to the African Union's peacekeeping programme and
modernising the department's information systems.
On the Defence vote,
further amounts of R300 million a year are allocated for peace support operations
in the Democratic Republic of Congo, Burundi and the Sudan.
Turning now to our tax proposals we have enjoyed the benefit
in the past year of strong revenue growth associated with the economic recovery,
and for the period ahead we can again provide moderate tax relief while continuing
to promote certainty, consistency, fairness and a broad-based tax structure. The
revenue requirement for 2005/06 is R370 billion, or 9½ per cent more than
the 2004/05 revised estimate of R338 billion.
Tax measures are again prominent
in "tips for Trevor". Nobathembu Dwenga suggests that it is time to
abolish the secondary tax on companies, Marianne Visser proposes that public servants
should be exempt from paying personal income tax, Warren Smith writes again that
the tax on retirement savings should be abolished. Unfortunately we cannot do
all of these things. But I am pleased to be able to advise Sarah Uys, who has
written for the past two years on the question of income tax on pensions, that
we are deeply mindful of the difficulties of elderly people who often care for
several other family members, and of widows trying to make ends meet without becoming
a burden on their children. Further relief to pensioners is part of this year's
Personal income tax relief
The proposed revisions
to individual income tax rates and brackets for the 2006 tax year provides relief
of R6,8 billion for individuals and households. This represents compensation for
the effects of inflation and real tax relief in all income groups, with about
62 per cent of the total relief going to those earning below R200 000 a year.
Personal income tax relief also benefits many self employed individuals and micro-enterprises,
providing a further stimulus to small business development.
tax threshold, below which no tax is payable, is raised from R32 222 to R35 000.
For taxpayers over the age of 65, the threshold increases from R50 000 to R60
In addition, the interest income exemption for individuals is raised
from R11 000 to R15 000, and for those over 65 from R16 000 to R22 000. These
adjustments will cost about R310 million, and serve in part to encourage savings
Tax treatment of health care funding
A reform of
the tax treatment of medical scheme membership and health care costs is also proposed.
The present allowance for two-thirds of a medical scheme contribution to be paid
tax-free will be replaced by a capped tax deduction. This will have the effect
of limiting the tax loss associated with more expensive medical scheme options,
while increasing its monetary benefit to lower income taxpayers, thereby enabling
more people to afford medical aid.
The change will also remove the present
disparity between employed and self-employed individuals. Other adjustments to
the deductibility of medical expenses will accompany this reform. For administrative
reasons, and to allow employers and employees to adapt their remuneration arrangements,
the changes will take effect in 2006 and will only lead to a revenue loss in subsequent
Motor vehicle allowances
As indicated at the time
of the 2004 Budget, a revised approach to the calculation of deemed business travel
expenses against a motor vehicle allowance will be introduced this year.
change will lower the tax benefit associated with deemed motor vehicle use calculations,
particularly where the vehicle value exceeds R360 000. From 1 March 2006, the
monthly taxable value of the use of a company car is to be increased from the
current 1,8 percent to 2,5 per cent.
These changes will yield an additional
R1,5 billion a year, but only once assessments for 2005/06 are finalised in the
course of 2006. Taxpayers are advised to anticipate higher final payments on assessment
Taking into account the steep rise
in property prices over the past two years, it is proposed that the transfer duty
exemption threshold should be raised from R150 000 to R190 000, together with
an increase in the upper threshold from R320 000 to R330 000. The duty payable
on a property of R330 000 or more will fall by R2 300, making houses slightly
more affordable. The total revenue loss is estimated at R450 million.
Both the National Treasury and SARS have focused closely
over the past year on aspects of the tax law and its administration that inhibit
small business development. We are now able to initiate a series of programmes
aimed at making life easier for small businesses, some of which will be implemented
immediately and others over the next three years. Following the call of the President
in this house two weeks ago, three broad reforms are proposed.
relief of R1,4 billion is targeted at small business companies to make resources
available for growth and investment. This includes the extension of relief to
a broader range of service companies, and raising the turnover limit for eligibility
from R5 million to R6 million. In addition, the graduated rate structure will
be adapted as follows: qualifying small companies will pay no tax on the first
R35 000 of taxable income, 10 per cent on income in the range R35 000 to R250
000, and 29 per cent thereafter. Small businesses will also be eligible for a
simplified 50:30:20 depreciation write-off rate for non-manufacturing assets,
while manufacturing assets will continue to qualify for 100 per cent write-off.
additional relief of R367 million will form part of streamlining ongoing filing
obligations. This will involve halving the number of VAT payments small businesses
make in a year and exempting them from the skills development levy.
a package of administrative interventions by SARS will be implemented to assist
small businesses on the ground with their tax and in an innovative step
their broader business management. SARS will provide community tax helpers,
help desks, extended hours and accounting packages, free of charge.
Madam Speaker, the special tax allowances for strategic industrial
projects introduced four years ago will lapse in July 2005. Since its announcement,
a more favourable depreciation regime for manufacturing assets has been introduced
and a more direct programme of government investment in critical infrastructure
is under way.
The revenue laws this year will also contain measures to
facilitate company restructurings, deal with undesirable tax avoidance arrangements
in the film industry, and to assist public benefit organisations that rely in
part on income from business activities.
Taking into account the overall
improvement in our effective rate of tax on companies achieved through base-broadening
measures and more effective tax administration, the company tax rate will be reduced
from 30 per cent to 29 per cent for the year ahead. This results in a revenue
loss of R2 billion.
Removal of transaction taxes on debit entries
of the House will share our concern that access to banking services should be
kept affordable and efficient. This is largely a matter for the banking sector
to address and we welcome the progress made in making low-cost bank services available
over the past year. We understand that some 550 000 Mzanzi accounts have already
been registered. Government must also play its part, and so we propose to remove
the stamp duty on debit entries and instalment credit agreements with effect from
1 March 2005, as these fall disproportionately on lower income groups and are
administratively inefficient. This will cost R350 million a year.
This year's changes in excise duties on alcoholic beverages
are as follows:
- Tax on beer is raised by 11c per 750ml bottle or 5c
per 340 ml can.
- Tax on fortified wine rises by 23c per 750ml bottle and
on natural wine by 18c a bottle.
- Ciders and alcoholic fruit beverages
go up by 5c per 340 ml can.
- Duties on spirits are increased by R1,47 per
750 ml bottle.
Duties on tobacco products are increased by between
7 and 15 per cent, maintaining the present 52 per cent total tax burden. A packet
of 20 will cost 52 cents more.
The increases in alcohol and tobacco product
duties will raise R1,3 billion in additional revenue.
In keeping with these
health-related fiscal measures, we propose also to abolish excise duties on sun
protection products, at a cost of R10 million a year.
The Air Passenger
Departure taxes will be increased by 9 per cent this year, to R60 for travel to
SACU countries and R120 for international departures to other destinations.
The general fuel levy on petrol and diesel will be raised by
5 cents a litre on Wednesday 6 April, broadly in line with inflation. This increase
will raise an additional R950 million. At the same time, the diesel refund concession
for primary producers will be raised.
With effect from January 2006, when
the octane structure of petrol sold in South Africa will be changed, a supplementary
levy on 95 octane unleaded petrol in inland areas will be imposed for demand management
The Road Accident Fund levy will again increase by 5 cents a litre,
to permit further progress to be made in clearing claims backlogs and stabilising
the financial position of the Fund.
Proposed use of exchange control
Members of the House will recall that in 2003 we announced
an exchange control amnesty and accompanying tax measures to allow past transgressors
of exchange controls to declare their assets and regularise their financial positions.
More than 43 000 applications have been received and total assets disclosed are
estimated at R65 billion.
On the strength of the amnesty levy proceeds
and the permanent increase in the income tax base associated with foreign asset
disclosures, we propose to set aside R3 billion over the next three years for
investment in community infrastructure, targeted at lifting the quality of life
in new housing areas, upgraded informal settlements and old townships. This development
challenge, that we may demonstrate visibly that South Africa belongs to all who
live in it, has to be a shared project of national and provincial government,
municipalities, community organisations and the private sector. We must seek to
build partnerships that mobilise our most creative energies in constructing recreational
and sports facilities, health and education services, administrative infrastructure,
business opportunities and community resource centres.
And so, with eyes
of pride and vision, acting together, we can embrace the season of hope ahead.
Madam Speaker, let me conclude by returning to the words of former President
Mandela, in his recent appeal to world leaders to join the Make Poverty History
Campaign: "Do not look the other way; do not hesitate. Recognise that the
world is hungry for action, not words. Act with courage and vision."
preparing this Budget, we have been privileged to have President Mbeki's guidance
at hand, and his resolute commitment to our Programme of Action.
like to express appreciation also to Deputy President Zuma, to my Cabinet colleagues,
and especially members of the Ministers' Committee on the Budget, for support
and sharing this responsibility.
Deputy Minister Jabu Moleketi has brought
a fresh and welcome perspective on our deliberations.
We have also had
the privilege of working with nine new Provincial Executive Council members responsible
for finance. They have distinct challenges to face, and I am profoundly grateful
for their expertise and energy, and for the commitment and enthusiasm with which
they have joined the finance team.
We continue to enjoy valued support
from many others:
- Governor Tito Mboweni and the staff of the Reserve
- Statistician-General Pali Lehohla, his staff and members of the
- Renosi Mokate and members of the Financial and Fiscal
- Convenors and representatives of the business, labour and
community constituencies of Nedlac, and its head, Herbert Mkhize,
Nene and Buti Mkhaliphi, co-chairs of the Joint Budget Committee, Tutu Ralane
who chairs the Select Committee of Finance and Rob Davies, chair of the Portfolio
Madam Speaker, I introduced Lesetja Kganyago as the Director-General
of the National Treasury to the House at this time last year. I am pleased to
report that his leadership and dress sense continue to be inspirational.
Gordhan remains a pillar of strength, and we are all deeply indebted to the staff
of the Revenue Service, National Treasury and the Ministry of Finance.
of the House, fellow South Africans, our country, as a united nation, as President
Mbeki has asserted, "
has never in its entire history enjoyed such
a confluence of encouraging possibilities... sparing neither effort nor strength,
we can and shall build a South Africa that truly belongs to all who live in it,
united in our diversity!