Medium Term Budget Policy Statement 2018 - treasury.gov.za

1 Medium Term Budget Policy Statement 2018 National treasury Republic of South Africa 24 October 2018 ii ISBN: 978-0-621-46859-5 RP: RP415/2018 The Medium Term Budget Policy Statement is compiled using the latest available information from departmental and other sources. Some of this information is unaudited or subject to revision. To obtain additional copies of this document, please contact: Communications Directorate National treasury Private Bag X115 Pretoria 0001 South Africa Tel: +27 12 315 5944 Fax: +27 12 407 9055 The document is also available on the internet at: iii Foreword The South African economy is at a crossroads.

2 Since the presentation of the 2018 Budget , we have experienced a technical recession. Although the outlook for global growth is positive, there are storm clouds on the horizon, with growing risks for developing countries as trade tensions mount and financial conditions tighten. We have been able to avoid the most damaging circumstances that have affected other developing countries owing to our strong macroeconomic framework and prudent debt management. Yet we too have experienced some devaluation of our currency and rising bond yields. The central challenges we confront as a nation are to raise economic growth and reduce unemployment. GDP growth is now expected to average per cent in 2018, rising gradually to per cent by 2021.

3 At 27 per cent, the unemployment rate remains alarmingly high. Government needs to take some difficult decisions to get the economy on a higher growth path and to encourage job creation. Over the Medium term, the President s plan to support economic recovery provides essential elements needed to bolster confidence. A crucial component of this package is our intention to partner with the private sector to increase investment in public infrastructure. We are establishing an infrastructure fund that provides a clear signal to investors, draws on technical expertise, and supports improved project assessment, planning and implementation. Over the longer term, we require reforms to change the structure of our economy, raise productivity, increase competition and reduce the cost of doing business.

4 We also need to find a way to sustainably manage government s wage bill, which consumes about 35 per cent of public resources. Despite tax increases announced in February, revenue growth projections have been revised down. As a result, government s borrowing requirement increases over the next few years. The expenditure ceiling, however, is unchanged from the 2018 Budget . Government remains committed to ensuring fiscal sustainability. The gross debt-to-GDP ratio is expected to stabilise at per cent by 2023/24. Nonetheless, public expenditure continues to grow in real terms. Over the next three years, government will spend trillion, including trillion on health and education, and R911 billion on social development.

5 We must be frank about the challenges we confront. The quality of public expenditure is often poor and governance problems are often severe, particularly in provincial and local government, and state-owned companies. Government is tackling these problems. As reforms take hold, economic activity, revenue collection and public spending efficiency should improve. In the interim, however, distressed institutions at all levels of the public sector are risks to the public finances. I would like to thank my predecessor, former Minister Nhlanhla Nene, as well as Deputy Minister Mondli Gungubele, the Director-General and the staff of the National treasury for their commitment to the Constitution, and their diligence in protecting the public finances on behalf of all South Africans.

6 I can promise my new colleagues in the National treasury that much more hard work lies ahead for all of us in the interests of our country. TT Mboweni Minister of Finance iv Contents Chapter 1 The economy at a 1 1 Restoring confidence and strengthening 2 Rebuilding state 5 Overview of the 6 Conclusion .. 8 Chapter 2 Economic 9 Boosting growth, investment and job 9 Global 10 Domestic 11 Sector performance and 15 Implementing growth-enhancing 16 18 Chapter 3 Fiscal 19 Fiscal resilience in a constrained 19 Revenue performance and 20 Expenditure performance and 23 Fiscal 25 Financing and debt management 27 Risks to the fiscal 28 28 Chapter 4 Expenditure 29 29 Expenditure priorities and 30 In-year spending 32 Spending prioritiesby function 33 Division of 37 40 Annexure A Fiscal risk 43 Annexure B Compensation 51 Annexure C Technical 57 Annexure D 69 v Tables Macroeconomic Consolidated government fiscal 7 Consolidated government

7 Expenditure .. 8 Economic growth in selected 11 Macroeconomic performance and 12 Assumptions used in the economic forecast .. 14 Gross tax Revised revenue Medium -term revenue Main Budget expenditure Revisions to the 2018/19 expenditure ceiling .. 24 Main Budget framework .. Consolidated fiscal Total national government National government gross borrowing requirement and 28 Consolidated expenditure by 30 Consolidated expenditure by economic 32 Division of revenue Changes to division of revenue .. Provincial equitable 38 Figures Growth in fixed-capital Growth in fixed-capital stock by 3 Headline, food and administered price 14 Main Budget primary Gross debt-to-GDP Real main Budget non-interest spending 24 Average nominal growth in spending Consolidated government expenditure by 31 11 The economy at a crossroads In brief South Africa finds itself at a crossroads.

8 This Medium Term Budget Policy Statement (MTBPS) highlights the difficult economic and fiscal choices confronting government over the next several years. During 2018, South Africa has faced lower-than-expected economic growth and exchange rate depreciation. The global outlook remains positive, but is characterised by greater risk, particularly for developing economies. State institutions are being repaired and renewed, but serious governance challenges exist across the public sector. Government remains committed to fiscal sustainability, but there has been fiscal slippage since the 2018 Budget . Tax revenues have been revised down, partly due to higher value-added tax refunds.

9 Despite spending pressures materialising, the expenditure ceiling remains intact as the anchor of fiscal Policy . The consolidated Budget deficit narrows from per cent in 2019/20 to 4 per cent in 2021/22. Gross debt is expected to stabilise at per cent of GDP in 2023/24. The President s economic stimulus and recovery plan is intended to address the country s most pressing challenges: anaemic economic growth and high unemployment. The initiative includes an infrastructure fund to be developed in partnership with the private sector, reforms to enhance economic growth and improve governance, and support for urgent education and health needs. Introduction he Medium -term expenditure framework (MTEF) commits public resources of trillion over the next three years.

10 Of this amount, trillion or per cent will be allocated to education, health, the provision of water and electricity services, and social grants. At the same time, government intends to consolidate the public finances in a balanced manner by maintaining the spending ceiling and ensuring that debt stabilises over the longer term. In combination, these commitments support economic and social development, and ensure sustainable support to millions of South Africans who live in poverty. Yet the resources available cannot be substantially expanded without faster economic growth and job creation. Poor economic performance in the first half of the year has put additional strain on the public finances.