Budget Review - National Treasury

1 BBudgNaRepub21get R2018ational Treablic of SoutFebruaryReview8 asury th Africa 2018 w ii ISBN: 978-0-621-46020-9 RP: 03/2018 The Budget Review 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 iiiiv ivv vvvi vii Foreword The 2018 Budget arrives at a moment of opportunity for South Africa. A renewed sense of optimism has provided a much-needed boost to confidence and investment . The economic outlook has improved. And government has expressed a new resolve to strengthen policy coordination. Yet this positive turn of events should not blind us to the enormous economic and fiscal challenges facing our country.

2 Economic growth is far too low to reduce alarmingly high unemployment and inequality. Revenue collection, on which government depends to fund social and economic spending programmes, will fall short of projections by billion in 2017/18. The finances of several state-owned companies are in a precarious state. The 2017 Medium Term Budget Policy Statement (MTBPS) pointed out that extraordinary measures would be needed to stabilise the public finances. Without such measures, we would only delay the debt reckoning, and a growing share of spending would be absorbed by interest payments. The 2018 Budget proposals address these concerns with resolve. The Budget sets out a programme of expenditure cuts identified by a Cabinet subcommittee amounting to R85 billion over the next three years, and reprioritises spending. Several tax measures, including a value-added tax increase and maintaining the top four tax brackets with no inflationary adjustment, will raise an additional R36 billion in 2018/19, enabling government to narrow the revenue gap.

3 Social grant payments will increase faster than inflation to offset the effect of higher taxes on poor households. The Budget also responds to new policy initiatives. This includes an allocation of R57 billion for fee-free higher education and training over the medium term, as announced in December 2017. The fiscal measures in this Budget entail a difficult adjustment. They will require increased spending discipline in government and resilience from the people of South Africa. Nonetheless, these measures will protect the government s ability to meet its constitutional obligations over the long term, and ensure that we retain fiscal sovereignty. As a result of these steps and the improved growth outlook, the Budget deficit is projected to narrow to per cent of GDP in 2020/21. Gross loan debt, which in the MTBPS projections was set to breach 60 per cent in 2021/22, is now projected to stabilise at per cent by 2022/23.

4 Government is committed to setting the country on a new path of growth, employment and transformation. In the months ahead, we will end policy limbo in key areas and address governance concerns with renewed vigour. We will build a social compact with business and labour to speed up investment and job creation. And we will continue to improve planning for major infrastructure projects to ensure value for money. I would like to extend my thanks to Cabinet, the Minister and Deputy Minister of Finance, Parliament s finance portfolio committee, the Ministers Committee on the Budget and my colleagues across government for their contributions to the 2018 Budget , which took shape in a highly complex environment. I would also like to thank my predecessor, former Director-General Lungisa Fuzile, for his many years of service to the country. I am especially grateful to the team at the National Treasury , who have worked diligently for the people of South Africa through extraordinarily challenging times.

5 Dondo Mogajane Director-General: National Treasury viii ix Contents Chapter 1 Restoring economic confidence and stabilising the public 1 1 Growth, policy choices and spending 2 Stabilising the public 4 Summary of the 7 The Budget 12 Chapter 2 Economic 13 13 Global 15 Domestic 16 Sector 21 investment and transformation for inclusive 24 Chapter 3 Fiscal 27 27 Stabilising the public 28 Fiscal 33 Elements of the consolidated 34 Chapter 4 Revenue trends and tax 37 37 Revenue collection and 38 Tax 41 Measures to enhance tax 50 Chapter 5 Consolidated spending 51 51 Revisions to spending 52 Consolidated government 55 Medium-term spending and social 56 Chapter 6 Division of revenue and spending by provinces and 69 69 Division of 70 Provincial revenue and 72 Municipal revenue and 76 Chapter 7 Government debt and contingent 81 81 Financing 82 Borrowing performance and 83

6 Government debt and debt-service 88 Contingent 90 Chapter 8 Financial position of public-sector 93 93 Financial health of public 94 State-owned 95 Development finance 100 Social security 102 Government Employees Pension 103 x Annexure A Report of the Minister of Finance to 107 Annexure B Tax expenditure 121 Annexure C Additional tax policy and administrative 125 Annexure D Public-sector infrastructure 139 Annexure E Public-private 153 Annexure F Building a financial services sector that serves all South Africans .. 159 Annexure G Summary of the 165 169 Statistical 183 Two annexures are available on the National Treasury website ( ): W1 Explanatory memorandum to the division of revenue W2 Structure of the government accounts xi Tables Macroeconomic outlook summary .. 7 Consolidated government fiscal framework.

7 8 Impact of tax proposals on 2018/19 revenue .. 9 Consolidated government expenditure by function .. 9 Division of revenue .. 10 Projected state debt and debt-service 11 Combined financial position of public institutions .. 11 Economic growth in selected countries .. 15 Macroeconomic performance and projections .. 17 Assumptions used in the economic forecast .. 20 Sector growth trends .. 22 Consolidated fiscal framework .. 28 Macroeconomic performance and projections .. 29 Expenditure ceiling .. 32 Consolidated operating and capital accounts .. 34 Main Budget framework .. 35 Revisions to main Budget revenue and expenditure estimates .. 36 Consolidated Budget balance .. 36 Budget estimates and revenue outcomes .. 39 Budget revenue .. 40 Impact of tax proposals on 2018/19 revenue.

8 42 Total combined fuel taxes on petrol and diesel .. 48 Personal income tax rates and bracket adjustments .. 48 Estimates of individual taxpayers and taxable income .. 49 Changes in specific excise duties .. 49 Adjustments to the expenditure 52 Baseline reductions by sphere of government, before funding fee-free higher education and training .. 52 Additional allocations over the MTEF period .. 55 Consolidated government expenditure by economic classification .. 56 Consolidated government expenditure by function 57 Learning and culture 59 Health expenditure .. 61 Social protection expenditure .. 62 Average monthly social grant values .. 62 Community development expenditure .. 63 Economic development expenditure .. 65 Agriculture and rural development expenditure .. 66 Peace and security 67 General public services expenditure.

9 68 Baseline reductions by sphere of government, before funding fee-free higher education and training .. 70 Division of nationally raised revenue .. 71 Provincial equitable share .. 73 Conditional grants to provinces .. 74 Transfers to local government .. 77 South Africa s current sovereign credit ratings .. 82 Performance against strategic portfolio risk benchmarks .. 83 Financing of National government gross borrowing requirement .. 84 Domestic short-term borrowing .. 85 Domestic long-term borrowing .. 85 Foreign-currency commitments and financing .. 87 Change in cash balances .. 88 Total National government debt .. 89 Analysis of annual increase in gross loan debt .. 89 National government debt-service costs .. 89 Government guarantee exposure.

10 91 Combined financial position of public 94 Combined balance sheets of state-owned companies .. 96 Borrowing requirement of selected state-owned companies .. 97 Financial position of selected development finance institutions .. 100 Borrowing requirement for development finance institutions .. 101 Financial position of social security funds .. 102 Selected revenue and expenditure of the Unemployment Insurance Fund .. 102 Revenue and expenditure of the Road Accident Fund 103 Selected income and expenditure of GEPF .. 104 Breakdown of assets under management by PIC .. 104 Figures Gross debt-to-GDP outlook .. 2 Total public-service employment (full-time equivalents).. 5 Average cost-of-living adjustments and 5 Potential impact of selected NDP reforms on GDP growth .. 6 investment and business confidence.