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Highlights of South Africa's Budget Speech 2015

2015-02-25 14:15:00 SA Commercial Prop News

Highlights of the South African National Budget Speech 2015/16 delivered by Finance Minister Nhlanhla Nene to Parliament on Wednesday, Cape Town.

The 2015 Budget Review documentation is structured differently, increasing transparency. There is a new section on the financial position of public sector entities and an annexure on the progress in infrastructure spending.

Economic Context:

SA’s economic growth forecast has been reduced to 2% from 2.5% projected during the Mini Budget in October. Growth expected to rise to 3% by 2017. SA will benefit from the lower oil price but commodity exports softer.

Best prospects for growth in the short term lies in less-energy intensive sectors such as tourism, agriculture, light manufacturing and housing construction. Government efforts to support these sectors have been intensified.

SA inflation as measured by the CPI peaked at 6.6% in June 2014; is dropped to 4.4% last month and is expected to average 4.3% in 2015.

Although SA’s fiscal position is constrained, there are three major strengths on which the country’s growth strategy can be built: Low interest rates; trade competitiveness enhanced by the weaker exchange rate; well capitalised banks and other financial institutions and strong legal and tax frameworks.

Budget Framework and fiscal policy

Fiscal room created during the boom leading up to the Global Financial Crisis enabled Government to push expenditure and widen the Budget Deficit and cushion the country from a potential hard landing. But this resulted in an increased debt burden and substantial repayments are coming due.

Fiscal rebalancing is now a priority – it has included cost containment measures, and intensified efforts to improve expenditure efficiencies. But it has become apparent tax increases can no longer be postponed. The financial health of households and businesses is the primary consideration in the selection of tax options.

As outlined in October’s MTBP Statement, the key features of the budgeting framework are:
Dropping 2014’s expenditure ceiling by R25bn over two years.
Increasing taxes by R17bn in 2015/16.
Revising spending plans across all of the public sector.
Consolidating public sector employee numbers.
Financing SOEs where required without increasing the Budget Deficit.

In this 2015/16 Budget, a consolidated Budget Deficit of 3.9% of GDP is projected, falling to 2.5% in 2017/18.

Government spending excluding interest repayments will rise from 2015/16’s R1.123 trillion to R1.4 trillion in 2017/18, an average increase of 2.1% a year.

The share of spending on personnel will stay at 40% of non-interest spending.

Interest payments on State debt will rise from R115bn this year to R153bn in 2017/18.

Government spending on goods and services to be limited to a maximum of 5% a year.

Spending on catering, entertainment and venues to be reduced by 8% in real terms; travel and subsistence by 4%.

Spending on school books, medicine, fuel for SAPS vehicles and equipment maintenance to rise by more than inflation.

The Budget includes an unallocated contingency reserve of R5bn this year; R15bn in 2016/17 and R45bn in 2017/18 allowing for new priorities to be accommodated.

Over the next three years Government’s gross debt stock is projected to rise by R550bn to R2.3 trillion. Redemptions of debt issued in the past decade will add R190bn to the medium term borrowing requirement.

Government debt to GDP ratio is expected to stabilise at 45% in three years’ time. The liquid domestic market and SA’s standing in global capital markets means the borrowing requirement can be met provided the prudent Budget framework is maintained along with improvements in savings and investment

Medium term expenditure and division of revenue

The National Government’s share of non-interest expenditure is 48%; provinces receive 43% and 9% is allocated to municipalities.

Basic services has been priorities for municipalities. A review of local Government infrastructure grants is being conducted to produce a simpler framework and consolidated financing requirements.

Economic development

Support for the Oceans Economy has been prioritised with R296m allocated over the next three years to enhance climate change research and management of ocean resources.

The Square Kilometre Array (SKA) astronomy partnership will receive R2.1bn over the next three years.

Investment in mining and petroleum beneficiation projects will receive R2.7bn over the next three years.

An allocation of R108m has been made for research and for drafting regulatory requirements for licencing shale gas exploration and fracking.

Support for agricultural development is strengthened through a R7bn allocation to provinces over the next three years. Access to finance for emerging farmers will be expanded in collaboration with the Land Bank.

Since 2008, 1 459 farms have been supported and 4.3m hectares acquired for redistribution. A further 1.2m hectares will be acquired in the next three years with R4.7bn allocated to recapitalise and develop farms.

Employment and enterprise development

Unemployment remains SA’s single greatest economic and social challenge. Government measures include tax incentives for employment and investment, support for enterprise development, skills development and employment programmes.

2billion has been allocated over the MTEF period to manufacturing development incentives and support for growing service industries, such as business process outsourcing. The manufacturing competitiveness enhancement programme will spend R5.4 billion and will assist 1 450 companies with financial support to upgrade facilities and skills development.

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

The new Small Business Department will spend R3.5 billion on mentoring and training support to small businesses.

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 work programme will be extended to all municipalities. Its allocations increase by 21 per cent a year.

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 EPWP programmes.

A total of R590 million has been allocated to the Green Fund over the medium term, for strategic environmental projects in partnership with the private sector.

Health and social protection

Health spending will reach R178 billion in 2017/18.

The ARV treatment programme now reaches 3m patients. Mother- to-child transmission of HIV has decreased from 20% a decade ago to 2% last year.

5 billion is shifted from provincial budgets to the national Department of Health to enable the National Institute of Communicable Diseases to be directly funded.

Progress has been made over the past year in preparing for the transition to national health insurance. A discussion paper on financing options will be released shortly by the National Treasury, to accompany the NHI white paper.

Social assistance beneficiaries numbered 16.4 million in December 2014. In order to accommodate the growth in numbers, the budget proposals include an additional R7.1 billion on the Social Development vote.

With effect from 1 April the old age, war veterans, disability and care dependency grants will increase by R60 a month to R1 410; child support grants increase to R330; foster care grants increase by R30 to R860.

Education, sport and culture

The number of qualified teachers entering the public service is projected to increase from 8 227 in 2012/13 to 10 200 in 2017/18 with R3.1 billion in bursaries allocated to improve teacher training.

A total of170 million workbooks will be distributed to 23 562 public schools over the three next years. Each learner in Grades R to 9 will receive two books per subject each year in numeracy, mathematics, literacy, language and life skills.

The school infrastructure backlogs programme is allocated R7.4 billion for the replacement of over 500 unsafe or poorly constructed schools, as well as to address water, sanitation and electricity needs. All schools will meet the minimum norms and standards for school infrastructure by 2016.  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.

Post-school education and training

Allocations to post-school education and training exceed R195 billion over the medium term, increasing at an annual average of 7.1 per cent.

University operating subsidies will amount to R72.4 billion. 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.

Transport, energy and communications

Over the next three years R1.1 billion is allocated for the upgrade of the Moloto Road to improve safety and mobility on this road.

The Passenger Rail Agency’s R53 billion ten-year renewal programme is in progress – the first 44 new train sets, or 528 coaches, will be delivered over the next three years.

Over R80 billion is allocated to over 220 water and sanitation projects and for local roads.

R105 billion will be spent on housing and associated bulk infrastructure requirements.

Over R18 billion in electrification funding will provide for 875 000 households to be connected to the grid or to receive off-grid electricity.

1 billion is allocated for broadband connectivity in government institutions and schools.

Concerns regarding the socio- economic impact of eTolls in Gauteng have been heard, and revised monthly ceilings will shortly be proposed. There will be a national contribution to meeting the associated cost. Measures will also be taken to ease compliance and improve enforcement. But cost recovery from road-users will continue to be the principal financing mechanism for this major road system.

Transforming urban areas

Amendments will be proposed to the Municipal Fiscal Powers and Functions Act to clarify the rules surrounding bulk infrastructure charges, and ensure an equitable and transparent system of contributions by land developers.

Metropolitan councils will announce details of their investment programmes in their forthcoming budget statements. The Treasury, the Department of Cooperative Governance and the Development Bank of Southern Africa will host a conference on urban infrastructure investment later this year to enable private investors to obtain further details of financing opportunities that will arise from this new programme.

Allocations for water, sanitation and electricity in rural municipalities have been increased substantially. R4.3 billion will be spent over the next three years to build capacity and strengthen systems for financial management and infrastructure delivery.

Defence, public order and safety

Government spending on public order and safety and on defence will continue to increase, from R163 billion this year to R193 billion by 2017/18. Police services receive about 48 per cent of the total allocation.

Over the medium term, a total amount of R492 million has been reprioritised towards improving access to justice. This will increase capacity for court support personnel, public defenders and prosecutors.

In order to strengthen the independence of the judiciary, the Office of the Chief Justice has been established as a new department. It becomes fully operational on the 1st April 2015, with a budget over the MTEF period of R5.2 billion.

The fight against corruption remains a central priority. Additional allocations have been made to the Public Protector and the Financial Intelligence Centre for increasing their human resource capacity.

Budget provision for border safeguarding and regional security amounts to R2.8 billion and R4.5 billion, respectively, over the next three years.

Financial management: ensuring value for money

National Treasury review of public sector supply management was published last month, and is a candid reflection of our current state of public sector procurement, the reforms that are needed and the opportunities that an efficient, transparent SCM system presents.

In future, all books delivered to schools from January 2016 will be managed through a centrally negotiated contract and all school building plans will be standardised and the cost of construction will be controlled by the Office of the Chief Procurement Officer.

Routine maintenance of school buildings and minor construction works will be decentralised. This will be accompanied by measures to combat inefficiency and corruption at district and school level.

From April 2015, a central supplier database will be introduced. Suppliers will only be required to register once when they do business with the state. This will significantly reduce the administrative burden for business, especially small and medium-sized enterprises. The database will interface with SARS, the Companies and Intellectual Property Commission and the payroll system. It will electronically verify a supplier’s tax and BEE status, and enable public sector officials doing business with the state to be identified.

A central e- tender portal will be implemented from April this year. It will be compulsory that all tenders be advertised on this portal, and all tender documents will be freely available there.

Government has committed to settle accounts from small businesses timeously – payment of suppliers within 30 days will now be included among other SCM requirements in the performance agreements of accounting officers.

Tax proposals

The current projection is that tax revenue will amount to R979 billion in 2014/15, or about R14.7 billion less than the budget estimate a year ago. Budget revenue will be R1 091 billion this year, or about 8.2 per cent more than in 2013/14.

The 2015 Budget tax proposals aim to increase tax revenues as required, limit the erosion of the corporate tax base, increase incentives for small businesses and promote a greener economy.

Personal income tax rates will be raised by one percentage point for all taxpayers earning more than R181 900 a year. However, tax brackets, rebates and medical scheme contribution credits will be adjusted for inflation, as in previous years. The net effect is that there will be tax relief below about R450 000 a year, while those with higher incomes will pay more in tax.

An increase in the general fuel levy of 30.5 cents a litre will take effect in April.

Following recommendations of the Davis Committee, a more generous tax regime is proposed for businesses with a turnover below R1million a year. Qualifying businesses with a turnover below R335 000 a year will pay no tax, and the maximum rate is reduced from 6 per cent to 3 per cent.

The rates and brackets for transfer duties on the sale of property will be adjusted to provide relief to middle-income households. The new rates eliminate transfer duty on properties below R750 000, while the rate on properties above R2.25 million will increase.

Excise duties on alcoholic beverages and tobacco products will again increase:
the tax on a quart of beer goes up by 151⁄2 cents,
a bottle of wine will cost 15 cents more,
a bottle of sparkling wine goes up by 48 cents,
a bottle of whisky will be R3.77 more;
a pack of 20 cigarettes goes up by 82 cents.
The net effect of these proposals on 2015/16 tax revenue is an increase of R8.3 billion, which will bring tax revenue for the year to R1 081 billion, or about 10.4 per cent more than 2014/15 tax revenue.

Further tax proposals

A temporary increase in the electricity levy, from 3.5c/kWh to 5.5c/kWh, to assist in demand management. This additional 2c/kWh will be withdrawn when the electricity shortage is over.

Secondly, an increase is proposed in the energy-efficiency savings incentive from 45 c/kWh to 95 c/kWh, together with its extension to cogeneration projects. Other measures under consideration include enhancing the accelerated depreciation for solar photovoltaic renewable energy.

The introduction of a carbon tax in 2016 will provide an additional tool to deal more sustainably with the current electricity shortage, while lowering the electricity levy. A draft carbon tax bill will be introduced later this year for a further round of public consultation.

Amendments will be proposed to improve transfer-pricing documentation and revise the rules for controlled foreign companies and the digital economy.

The Road Accident Fund levy is increased by 50c a litre from the present levy of R1.04. It is required in order to finance the progress made by the RAF administration in clearing the claims backlog. It also reflects the unsustainability of the current compensation system, which has accumulated a R98 billion unfunded liability. Legislation to establish the new Road Accident Benefit Scheme will be tabled this year.

The second 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 contribution threshold will be reduced to R1000 a month for the 2015/16 year. This means that employers and employees will each pay R10 a month during the year ahead, putting R15 billion back into the pockets of workers and businesses.

Financial position of public sector institutions

To stabilise Eskom’s financial position, it will apply to the regulator this year for adjustments towards cost-reflective tariffs. In October 2014 we announced a broad package for Eskom, including a capital injection of R23 billion, governance improvements, operational cost containment and additional borrowing and support for required tariff increases. If further support is deemed necessary, consideration will be given to an equity conversion of government’s subordinated loan to Eskom.

Government has also stepped in to address the financial position of South African Airways. SAA reported a net loss of R2.6 billion in 2013/14, as a result of high operating costs, losses on several international routes and valuation adjustments. We have made guarantees of R14.4 billion available to SAA, of which the airline has drawn R8.3billion. Measures to achieve operational efficiencies and restore profitability are now in progress.

Guarantees have also been provided to the South African Post Office, subject to implementation of its turnaround strategy. This involves revised universal service obligations and delivery targets, taking into account the decline in the mail and courier business and the shift to digital communication.

Development finance institutions

The DBSA will take the lead in developing South Africa’s municipal debt market in order to accelerate both public and private sector investment in urban renewal.

The IDC aims to mobilise R100 billion over the next five years to promote faster industrial development, mineral beneficiation and agro-processing.

The Independent Power Producer Programme will be extended to include new generation capacity from hydro, coal and gas sources to complement Eskom’s base- load energy capacity. Co-generation and demand management initiatives are also being supported.

The Government Employees Pension Fund remains well-funded and soundly managed. Pensioners of the GEPF, the Associated Institutions Pension Fund and the Temporary Employees Pension Fund, as well as recipients of special and military pensions, will receive a 5.8 per cent pension increase with effect from April 2015.

Financial sector reforms

From 1 March 2015, the new tax free-savings accounts will be available.

Significant progress has been achieved in relation to retirement reforms, and consultations with NEDLAC will continue. The first draft of default regulations will be issued shortly for public comment.

The bill establishing two new regulatory authorities, the so-called “twin peaks” reform, will be tabled this year. We have strengthened regulations for banks, and will be doing so this year for insurers, derivatives and hedge funds. We will be taking steps to strengthen the supervision of large financial groups and collective investment schemes, particularly money market funds.

Under its curatorship, African Bank is now generating positive cash flows. We announced a R7 billion backstop last year, but our expectation is that the bank will be stabilised without recourse to taxpayer funds.

The problem of excessive household indebtedness remains a serious challenge. Approximately 45 per cent of credit-active consumers have impaired credit records. This results in part from poor market conduct by lenders and financial advisors. Government welcomes initiatives of employers in the private sector who have audited garnishee orders applied to their employees, and have taken steps to identify illegally-issued orders.