Friday, 11 May 2012

Derek Key's South African Budget Speech 1994

It is my duty and privilege to present to this House and to the Nation the proposals of the Government of National Unity for the Budget for the year ending 31 March 1995.

These proposals have been formulated against the background of a sound fiscal performance in the previous year - the deficit was virtually as budgeted - and in the knowledge that a continuation of the general structure of taxation set in place last year puts progressive reduction of the budget deficit in the future within our reach.

For this to come to pass, however, continued control of the level of expenditure is vital. Consequently the Government has taken particular care in deciding on the treatment of two issues which are germane in this respect, namely funding to spearhead the Reconstruction and Development Programme and the treatment of the costs of our transition to democracy.

The President's first words to his Cabinet emphasised the overriding importance of reconstruction and development in the work and life of this Government, and in his opening address in this House he reinforced this. All members of the Cabinet responded to this message and its challenge.

This challenge, as we now conceive it, is much more comprehensive than any particular suite of projects, and consists of nothing less than focusing the nation's efforts on properly meeting the needs and aspirations of all its people.

Some of these needs are simple - shelter and the basic elements of hygiene;some are more complex - an education that will allow its subjects to contribute for a lifetime in this modern technological world;many are more complex still - arranging our society in a way that offers everyone the greatest freedom of choice and the enjoyment of personal liberty.

Every part of our society, every citizen, has a role to play in this transformation.Every activity needs to be judged by its relevance to this process and adjusted accordingly.

Government is no exception to this; the activities of every department need to be rethought and ennobled.This process has started.

Government must also play a pathfinding role for the community - provide the spearhead in the form of specific, concentrated initiatives and it is for this aspect that funding provision must be made.

As indicated in the President's speech, this year will see the allocation of R21/2 billion to the Reconstruction and Development Programme Fund, a special instrument being created by legislation which will shortly be before the House.These funds have been found from decreases within the budgeted level of departmental expenditure, in other words without increasing the planned level of total spending. A list of the amounts contributed appears in the Budget Review.In this process the social service departments have naturally been largely spared.

This diversion of funds represents slightly less than 3 per cent of the current level of consumption spending by general government, and it is our judgement that an additional figure of this order can be similarly and additionally diverted in each of the next four years without thereby increasing the overall level of expenditure in real terms.In the planning budgets for those years we have therefore pencilled in the figures of R5, 71/2, 10 and 121/2 billion for transmission to the RDP Fund, and the appropriations for all other departments will be required to adjust downwards to accommodate this.

The steady build-up of these amounts over this extended period allows both for the existing government machine to plan the adjustments needed, and for the new spending directions to be organised effectively and to develop their own momentum. Applying even the initial R21/2 billion effectively before March 31 next year already represents a real challenge which the new Government structure is planning to meet in a methodical and carefully managed way.

As the responsible Minister has explained, these fiscal injections represent only a part - though a very important part - of the programme in its entirety.They will be supplemented by contributions from other governments and from the private sector, while the departments themselves have many programmes of their own which can qualify as part of the larger programme.

We are therefore justified, we believe, in regarding the process set in train as providing ample ammunition for this long-term campaign.There is no further need to pursue calculations regarding the ultimate cost of its completion: instead we have a process in which we can have confidence and which will develop as we progress.This process is made possible by a vision of where we are heading, and how we want to get there.It will allow for programmes that stretch over several fiscal years.

Before we pass on from this topic, however, we should note that it will be vulnerable to two failures which we must guard against.If we allow the overall level of expenditure to climb in real terms we will imperil the allocations which can be made.Equally important, if we do not produce a sound, effective and attractive programme, nobody will be able to motivate the departments sufficiently to bring about the future diversions of spending which we plan.

Now let us turn to the question of the transition costs.In order to smooth the path of transition it was necessary - who could deny it? - for us to have a period in which a Transitional Executive Council was active at the heart of government, and to create and give free reign to an Independent Electoral Commission to manage a free and fair election.Both bodies delivered what was required of them, but both were operating in uncharted territory, under extreme pressure from time to time and most of the time, and neither of them subject to the need to find the income needed to cover any items of expenditure they considered necessary.

Through the grace of God, we have had a wonderful transition, but we incurred costs of R4 billion. A list of these will be found in the Budget Review.

From the point of view of fiscal discipline this is regrettable.If left without response, such a minus could wipe out all the pluses that this Government deserves for its commitment to the responsible economic governance of the country.Worse still, it could inhibit us from taking the dynamic growth- inducing steps that are called for, now that the elections have freed us from so many other constraints.

We think the citizens of this country look to us to act boldly and to free ourselves as soon as possible from the consequences of past actions.We also think that every income earner in this country can be profoundly grateful that our transition has gone so very well.We think therefore that we should join together in meeting the greater part of this bill - put it behind us - and go on unhindered to exploit the exciting potential now available to us.

In plain language that means that the Government is proposing to levy individual and company taxpayers an amount equal to 5 per cent of their taxable income. There are some important ameliorations to this.Firstly, all taxpayers will have the benefit of an abatement of R50,000. Consequently taxpayers earning less than this, which includes taxpayers paying the Standard Income Tax on Employees (SITE) only, will pay nothing, while the effective levy on a taxpayer with a taxable income of R70,000 will only be R1,000.Secondly, the adjustment to the PAYE tables for individuals will be such as to recover the appropriate amount over the period up to 31 August 1995 rather than over the 7 months to the end of February 1995.Finally, the abatement for married women will be set at a higher level, which will take into account their disadvantage in tax rates when compared to other taxpayers. The total yield of this levy is expected to be of the order of R3,4 billion of which some R2,6 billion will fall in this fiscal year with the balance being collected in the first half of the next fiscal year.

While I feel that the great majority of my fellow taxpayers will agree with this step as a way of putting the past behind us, there will no doubt be commentators a~plenty to warn that such one-time levies are inclined to continue or to recur. This will not happen in this case, since at least half the expenditure was non-recurring, and since it is our intention in any event to call a streamlined tax commission into existence to carry out a swift review of the tax mechanism with a view to assessing what improvements are required.It will be chaired by Professor Michael Katz, the chairman of the Tax Advisory Committee, and fans of will be pleased to learn that Professor Dennis Davis will be a member.Insofar as it wishes to make recommendations for the 1995/96 financial year it will have to report by the end of November 1994.The report will be published, comment will be invited and Government will then decide the issues during February 1995 in the run-up to the next Budget in March.A notice announcing the remaining members and the terms of reference is being published today.

Having dealt with these major issues we can now turn our attention to the discussion of developments leading up to today's Budget, including the outturn of the 1993/94 financial year, the economic and policy environment of the Budget and the Government's fiscal strategy.


The 1993/94 Budget was characterised by a commitment to structurally sound policies and the effective implementation thereof.This was achieved, mainly as a result of pro-active tax measures and effective expenditure controls.In this latter respect I wish to pay tribute to former Minister of State Expenditure, Mr Amie Venter, and to his department.In very difficult times they established and maintained the disciplinary framework which the Government of National Unity has happily inherited.

The 1993/94 financial year not only represented the closing of a chapter of history, but also the start of meaningful progress toward co-operation and reconciliation on economic affairs.Many examples manifested themselves in this regard. The most prominent ones were undoubtedly the negotiation for the final foreign debt arrangement, the successful application for an International Monetary Fund financial facility, and the formulation of South Africa's trade liberalisation proposals made to the General Agreement on Tariffs and Trade.The very important role of the National Economic Forum in the GATT- initiative, as well as in helping to resolve various possible issues of conflict in the management of the economy, deserves recognition.

These achievements show that the golden triangle of government, business and the unions can succeed and that it has indeed laid a foundation for future co-operation and consultation.


Today's Budget is presented against the backdrop of a much improved economic climate.Whereas previous budgets were constrained by negative rates of growth and double digit inflation, both these indicators are now moving in the right direction.We anticipate positive real growth of some 3 per cent for the fiscal year and an inflation rate in the present range, figures which are significantly better than those which the country has experienced for many years.

The economic outlook for both the international and domestic economy is encouraging. With economic growth gradually picking up in our major trading partner countries, commodity prices show some sign of rising.Coupled with the higher gold price, a continuation of the solid export performance is foreseen, although the livelier domestic economy could result in a smaller current account surplus on the balance of payments than in 1993.The peaceful conditions after the elections augur well for the continuation of the economic recovery. Increased fixed investment expenditure, an expected rise in inventories and a further recovery in real private consumption expenditure, together with a continuation of the good export performance, a significantly less burdensome foreign debt position, improved access to foreign markets, greater financial stability, improving business confidence and the present favourable agricultural conditions, are just some of the reasons for the more positive growth prospects for the economy.These factors are also being reflected in improved local and international business and consumer confidence with each day that passes.

In its investor dimension, using this confidence requires that South Africa should obtain an international sovereign credit rating, i.e. a formal measure of risk associated with a borrower's willingness and ability to fulfil the loan obligations.Most institutional investors require such a rating as part of their investment criteria and many investors set great store by them.Ratings therefore broaden the investor base for debt instruments, thereby maximising investor demand and reducing the cost of funds.South Africa has taken the first steps in acquiring such a rating in the US financial markets.The process is underway and will be completed this year.

Success in this challenging international environment will require the liberalisation of our international financial flows as soon as the pre-conditions previously stated by the Governor of the Reserve Bank have been met - primarily the replenishment of our foreign reserves.These have been rising since the inauguration and we expect the trend to continue. The Bank is closely monitoring developments and will make the necessary preparations to enable us to take action at the appropriate time.

Two important caveats should be mentioned as far as our international financial relations are concerned.Firstly, we must guard against extravagant expectations regarding immediate capital flows into South Africa.Such flows will be slow to develop and the country therefore still faces a balance of payments constraint.The need for a continued pursuance of the present responsible monetary policy stance is thus beyond any doubt.A second caveat is that our endeavours to facilitate and broaden access to international financial markets should not be seen as attempts to find additional sources of finance enabling a larger budget deficit, but rather as a substitute for domestic finance. This will not only result in a better balance between local and foreign debt, but also ease pressures on the domestic financial market to the advantage of private sector borrowers. At this point I should like to express the country's thanks to the former Director General of Finance, Mr Gerhard Croeser, who made a signal contribution to good financial governance for many years and who now represents us in Zurich as we establish closer links with the international financial community.

In forging these and our other close links with the international community we are guided by a clear vision of the kind of country we want to become:an open society, trading freely with all other nations, investing liberally to increase our productive capacity, thus creating more and more jobs which in turn leads to an ever more attractive growing domestic market and encouraging participation in the benefits of this development by our people, by our neighbours in Southern Africa and by kindred spirits all over the world.

Against this background we can now move onto the fiscal strategy for the 1994/95 financial year, and how we plan to realise it.


This Budget is the first of a number of budgets of this Government which will have to meet with three considerations, namely

  • laying the base for public finance to be one of the principle instruments for the reconstruction and development of our country ;
  • contributing, through fiscal discipline, to macroeconomic stabilisation as a crucial element in economic growth;and
  • embodying institutional change in the process of transition from the old to the new constitutional order.

This strategy obviously necessitates new policy measures and structures to underpin or, where necessary, even replace those already in place.Any discussion of the expenditure and revenue proposals must take these considerations into account.

Budget Format

Two major changes in the budget presentation must be explained.The first is the result of constitutional change and involves the incorporation into the Budget of the National Government of erstwhile revenue diversions to, and budgetary shortfalls of, former regional authorities.The second is the more comprehensive inclusion of the informal sector in the calculation of the gross domestic product (GDP) which resulted in an upward adjustment of 5,6 per cent in the GDP.

Care should thus be taken in analysing the Budget figures to ensure comparability and avoid misinterpretations.

A detailed discussion of the changed budget format, as well as various important matters which I can only briefly discuss or which time does not allow me to deal with in this speech, appear in the Budget Review.


The total estimate of expenditure from the National Revenue Account for the 1994/95 financial year is R135,1 billion, which now covers all expenditures at national and regional level, except those financed from the former regional administrations' own revenues.If we do add the latter expenditure as well, current non-interest expenditure (in other words, consumption expenditure and current transfers) grows by only 61/2 per cent.This figure will not be materially affected once allocations from the RDP Fund begin to flow and we succeed in ridding ourselves from the costs incurred during the transition.This increase is substantially below the inflation rate and bears testimony to our commitment to continued fiscal discipline.

In view of the many and varied demands on the Exchequer and the relatively small increase in estimated expenditures, continued and scrupulous financial control will be called for. The restructured Treasury Committee comprising the two deputy Presidents, the Minister of Finance and the Minister without Portfolio (who is also responsible for co-ordinating the reconstruction and development initiative) will have an important role in this regard.The Committee's main function is to assist the Cabinet in meeting the Government's budgetary commitments.Consequent upon this, reordering of expenditure priorities during the course of the financial year, which will also involve RDP related budgetary shifts and allocations, constitutes a major element of this Committee's activities.

Let me now highlight some specific expenditures from this year's Budget, details of which are printed in the Budget Review.

Civil and Military Pensions

Even in the much lower inflationary environment now ruling, it is desirable to adjust pensions on an annual basis.This year's increases in civil and military pensions reflect the appreciably lower rate of inflation and are as follows:

  • Civil pensions will rise by 5 per cent with effect from 1 April 1994 for pensioners who retired on or before 1 July 1993.Those who retired later, but before 1 April 1994, will have their pensions raised by 0,56 per cent for each completed month since retirement.
  • Pensions which have increased since retirement by a percentage which, after taking into account the increase just announced, does not yet equal seventy per cent of the increase in the consumer price index since retirement, will be further increased to that level.
  • Military pensions will rise by 5,6 per cent with effect from 1 April 1994.

Social pensions

  • An amount of R418 million is being made available for a general increase in the various social pensions and the elimination of the existing backlog of potential beneficiaries.Further details will be made available by the Minister for Welfare and Population Development.

Employment Creation

  • An amount of R292 million - this is quite separate from the RDP Fund - will be available for job creation.The improved co-operation and participation of communities under the Government of National Unity, will enhance the impact of these expenditures.

Financial and Fiscal Commission

  • The 1993 Constitution makes provision for the establishment of a Financial and Fiscal Commission.The aims and functions of the Commission are to apprise itself of all financial and fiscal information relevant to national, provincial and local government administration and to render advice and make recommendations regarding the finances of and financial relations between the three tiers of government.It is clear that the Commission will play a crucial role in respect of financial and fiscal matters at all levels of government.In this it will face a daunting task that must be tackled with the utmost urgency.I hope to make an announcement regarding the appointments to the Commission in the near future.


The present level of taxation relative to the state of the economy can be regarded as adequate. This encouraging situation is to a large extent the result of the structurally sound tax changes introduced last year.

Based on existing tax rates, the total consolidated estimate of revenue for the National Revenue Account is R104,3 billion, 11,2 per cent above the comparable figure for 1993/94.This figure includes all revenue at national and regional level, except the own revenue collections of the former regional administrations.

Excise Duties

Maintaining our sound tax structure requires that we should revise excise taxes upwards in line with the general level of price increases on a regular basis.

After consultations with the affected industries the following increases are proposed:

  • Beer: 6 cent per litre or about 2 cent per 340 ml can or so-called "dumpy".
  • Spirits, e.g. whisky, brandy, gin: about 53 cent per 750 ml bottle.
  • Cigarettes:about 7 cent per 10 cigarettes.
  • Cigarette tobacco:about 9 cent per 50 gram.
  • Pipe tobacco and cigars:65 cent per kilogram.
  • Unfortified wine:41/2 cent per 750 ml bottle.
  • Fortified wine:about 5 cent per 750 ml bottle.
  • Sparkling wine:about 6 cent per 750 ml bottle.
  • Other fermented drinks, e.g. cider:about 2 cent per 340 ml can.
  • Sorghum beer:1 cent per litre.
  • Sorghum beer powder:5 cent per kilogram.
  • Cold drinks and mineral water:about 1 cent per litre.

The increases are roughly in line with the rate of inflation but, where rates had been significantly out of line with similar products, the increases attempt to eliminate at least part of the discrepancy.

The increase in the excise duty on tobacco products is a special case.Based on health considerations, arguments have been put forward for an increase in the excise duty to fifty per cent of the retail price, which is the order of impost in many other countries.After consultations with all interested groups and taking into account industry-specific limitations and market conditions, Government has opted for a phased approach which is reflected in the announced increase.Future budgets will have to deal with the remainder of this issue.

The announced excise increases should yield some R525 million in a full year and some R350 million for the remainder of this financial year.These adjustments take effect immediately. In accordance with Section 58(1) of the Customs and Excise Act, 1964, I now lay the formal tax proposals for excise duties on the Table for consideration by Parliament.

Transition Levy

As argued earlier, a levy to defray the greater part of the transition costs is called for.The transition levy will be on individuals and companies with taxable income in excess of R50,000.


The levy will be 5 per cent, of which 3,33 per cent, based on 1995 taxable income, is to be collected by 28 February 1995 and the balance of 1,67 per cent, based on 1996 taxable income, by the end of August 1995.

In view of the existing disparity between married men and women, the levy will only be imposed on income exceeding R175,000 in the case of married women.Revised tax tables will be issued in due course.

Taxpayers of the former TBVC states will also be liable for the levy on the equivalent of ``taxable income'' as defined in the applicable legislation.

It is expected that this levy will yield an estimated R1,460 billion for the current financial year and a further R800 million up to August 1995.


A rate of 5 per cent will apply on taxable income of companies in excess of R50,000 in respect of years of assessment ending during the period of 12 months up to 31 March 1995.Assessed losses brought forward from previous years will not be set-off in determining such taxable income.

Companies registered in the former TBVC states will also be liable for the levy on the equivalent of ``taxable income``, before the deduction of assessed losses incurred during previous years, as defined in the legislation applicable to those countries.

This levy on companies is expected to yield some R1,116 billion during this financial year.

General Export Incentive Scheme (GEIS)

The GEIS scheme is currently under review within the National Economic Forum, and proposals for amendment are expected shortly.Payments under the present scheme are exempt from taxation which is unsound in principle and of small effect in increasing the incentive value of the payments to the recipients.

Notice is therefore given that we intend withdrawing the tax exemption in respect of assistance under GEIS with effect from 1 March 1995.

Based on the matters which I have dealt with up to this point, the projected budget deficit, which was 6,9 per cent last year on the updated estimate of GDP, will be 6,3 per cent for the new year. This is a meritorious decrease in the deficit, which becomes more so when we remember that a further almost 0,2 per cent of GDP will be collected in the next fiscal year as we complete our collections of the transition levy from PAYE taxpayers.

Viewing these figures the Government has decided to lose no time in taking two initiatives aimed directly at the stimulation of investment, growth and consequently jobs.

Import Surcharge

The first concerns the immediate removal of the import surcharge on all capital and intermediate goods, i.e. all goods carrying the 5 per cent surcharge. The cost to the fiscus for a full year is some R1,2 billion and for the remainder of the financial year some R800 million or slightly less than 0,2 per cent of GDP.The removal of the remaining surcharges will not be considered now as it may be more appropriate to deal with them in the light of recommendations made by the Tax Commission.

Income Tax: Companies

The second initiative is to complete the process of structural reform of corporate tax which we began last year.This involves lowering the corporate rate from 40 per cent to 35 per cent as from 1 April 1994, while partly compensating for this by raising the Secondary Tax on Companies from 15 per cent to 25 per cent with immediate effect.The net sacrifice involved this year is some 0,14 per cent of GDP or some R600 million.This will be covered in future years by the taxation of GEIS payments so that the corporate sector as such will be paying the same tax but in a framework which is far more favourable for new, small and medium companies and for those most capable of generating greater growth through heavy reinvestment of profits.

The outcome of the tax proposals is an estimated net increase on the printed estimate of R1,5 billion - a reduction of R450 million for Customs and Excise and an increase of R1,9 billion for Inland Revenue.Total revenue for the National Government is therefore estimated to increase by 11,2 per cent to R105,8 billion in 1994/95.

Before dealing with the financing of the deficit, a few other tax issues require brief mention.

Other Tax Issues

  • The harmonisation of the tax systems of South Africa and the former TBVC states will be undertaken in phases starting this year.
  • The Tax Advisory Committee is investigating the taxation of gains and losses arising from financial instruments and plans to issue a consultative document in this regard. 174x11IP0,0
  • Consideration is being given by Inland Revenue to the introduction of revised provisions to facilitate unbundling and rationalisation schemes.

Details on these issues are contained in the Budget Review and more information, where applicable, will be announced at the appropriate times.

The Budget Deficit and Public Debt

After the tax proposals take effect, the final consolidated budget deficit will be 6,6 per cent of GDP by March 1995, or equivalent to 6,4 per cent if the full collection of the levy is taken into account. This compares with 6,9 per cent last year on the same basis.This confirms that the downward trend as regards budgetary deficits is alive and well.

Total expenditure including the supplementary proposals for 1994/95 is estimated at R135,1 billion. The estimated revenue, including the tax proposals, is R105,8 billion and leaves a budget deficit of R29,3 billion.

Taking into account loan redemptions and the balance brought forward from the previous year, the financing requirement is R36,5 billion.This amount will again be financed primarily from the sale of domestic stock, although provision is also made for some foreign loans.Financing of this magnitude - inclusive of regional finances - should not influence the financial markets unduly or put upward pressure on interest rates.

As an interim measure, the Minister of Finance was on 27 April 1994 authorised to take over the debt of some R15 billion of the former TBVC states and self-governing territories, as debt of the National Government.The allocation of the asset- related part of this debt to the provinces, as determined by the Constitution, will be finalised at a later date.It should be emphasised that this is not new debt and that previous budgets provided for its servicing cost.

In contrast to the practice last year of funding the deficit in as short a period as possible, deficits are currently being funded as and when they arise.This approach not only prevents the accumulation of large exchequer balances lying idle, but also facilitates the development of a more active market for government stock.

The authorities have also implemented a system of treasury tax and loan accounts since 1 February 1994 whereby tax and loan receipts are deposited in tax and loan accounts at clearing banks, and held in the respective accounts until the money is required by Government.The flow of funds between the private sector and the Reserve Bank, which at times in the past has considerably disrupted the money market, has now been eliminated, thus simplifying money market management and contributing to better cash flow management within the government sector which, in turn, reduces the net cost of financing.


Budget planning and preparation, presentation and eventual execution, involves the dedication, co- operation and plain hard work of many people.I pay tribute to the Directors General and the staff in the Departments of Finance and State Expenditure who have made this very complex transition budget happen.The co-operation of government departments, the various regional authorities and other institutions, especially the South African Reserve Bank, was indispensable and I also thank them.

The Departments of Finance and State Expenditure will remain separate departments, but their present Directors General, Dr Estian Calitz and Mr Hannes Smit, who remain in their positions, now both report to me.

We welcome on board Mr Alec Erwin as Deputy Minister and at the same time pay tribute to his predecessor, Dr Theo Alant, who was a valued member of our team.Another relative newcomer is Mr Trevor van Heerden, the Commissioner of Inland Revenue.Mr van Heerden succeeded Mr Hannes Hattingh who retired after a distinguished career in Inland Revenue.

I look forward to working with these newcomers and have confidence that with the continued support of the rest of management and the valued advice of Dr Japie Jacobs, my Special Economic Adviser, we should be able to serve the needs of the people of our country.

The success we have achieved and need to achieve with budgetary control depends ultimately on the support given by the Head of the Government.I am very fortunate to have had unstinting support since assuming this position from my first appointment in May 1992 right up to the present day and wish to convey my sincere thanks and appreciation to the leaders concerned for this vital factor.


Building on the sound fiscal performance of the past year, today's Budget confronts the challenges head-on.The reconstruction and development imperative is addressed through the first of several allocations from existing resources to the RDP Fund.The Programme itself will also be bolstered by the existing and substantial socio-economic expenditures, which are directly or indirectly related to reconstruction and development.

Concomitantly, fiscal discipline is being maintained through the further reduction in the budget deficit as a percentage of GDP.Within that constraint it was nonetheless possible to improve the corporate tax structure and to take a major step reducing the cost of imported capital and intermediate goods.

The once-off levy on income tax effectively closes the financial book on the Transition, without jeopardising the fiscal progress made thus far.In planning our future strategies, we shall be able to draw on the insights of the Tax and the Financial and Fiscal Commissions.

This Government has the legitimacy, the capacity and the resolve to succeed.It is determined to pursue both social justice and aggressive growth - the best of both those worlds, and the Budget seeks to embody this aim.

The members of the Government, the members of this House, and our millions of fellow citizens have spent the past several years demonstrating our ability to set the highest goals - and to achieve them. This is one more.Let's do it again.

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