Gigaba FullMTBPS
Gigaba FullMTBPS
National Treasury
25 October 2017
ISBN: 978-0-621-45853-4
RP: RP312/2017
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.
Communications Directorate
National Treasury
Private Bag X115
Pretoria
0001
South Africa
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Foreword
The most urgent task before our nation is to ignite inclusive, job-creating economic growth.
The National Development Plan (NDP) targets sustained economic growth of 5.4 per cent per year to
dramatically reduce unemployment, poverty and inequality. This year, we expect the economy to grow
by only 0.7 per cent. This is clearly insufficient to achieve our development aspirations, and places
pressure on our fiscal framework.
Government remains committed to a path of fiscal consolidation. We will take steps to narrow the
primary budget deficit and stabilise gross public debt, while protecting social spending and investments
supporting economic expansion. Yet there are limits to what these measures can achieve.
The only sustainable solution for our development and the health of our public finances is to grow the
economy inclusively.
The strengthening world economy offers an opportunity to implement reforms that will enable
inclusive growth. Business and consumer confidence are exceptionally weak, and have been
undermined by political uncertainty, policy uncertainty and poor governance in several state-owned
companies. Government recognises the need for decisive action in these areas, and in July announced
14 measures to boost confidence and investment. The Medium Term Budget Policy Statement reports
on the progress of those measures.
To ensure growth benefits all, radical economic transformation is required to change the structures
and patterns of ownership, management and control of the economy, so that they include all South
Africans. Government policy should support higher levels of value addition in our exports, the use of
public procurement to promote localisation and broad-based black economic empowerment,
reindustrialisation and address market concentration, which undermines competition and raises
barriers to entry for small businesses and the historically disadvantaged.
The budget remains progressive and redistributive, and makes large contributions to transformation
and inclusive growth. Core social expenditure is protected.
Spending priorities for the medium-term expenditure framework period ahead are guided by the NDP
and the Mandate Paper. Yet pressures on the public finances are mounting. Debt is expanding and
debt-service costs are the fastest-growing category of government expenditure. In this context, a series
of risks must be managed. This will require difficult trade-offs and compromises.
Government will maintain the expenditure ceiling over the medium term. A presidential task team is
examining possible asset disposals to ensure that there is no breach of the ceiling in the current year.
Given the shortfall in revenue, new spending initiatives can only be accommodated through
reprioritisation or parallel tax increases.
I would like to thank President Jacob Zuma, the Cabinet, my colleagues across government and Deputy
Minister Sfiso Buthelezi for their inputs. I appreciate the hard and diligent work of the National
Treasury staff in putting together this Medium Term Budget Policy Statement.
Tough times require tough decisions. We are committed to making them. Working together, we can
grow the economy for the benefit of all.
Malusi Gigaba
Minister of Finance
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Contents
Chapter 1 Overview.. 1
The budget, transformation and inclusive growth.. 1
Economic outlook.. 2
Fiscal outlook.... 4
Spending priorities.............. 6
Conclusion .... 8
Annexure D Glossary...... 75
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Tables Figures
1.1 Macroeconomic projections. 2 1.1 South Africas per capita income. 2
1.2 Consolidated government fiscal 1.2 Main budget revenue and non-
framework. 5 interest spending. 4
1.3 Consolidated government 1.3 Growth in gross tax revenue and
expenditure... 7 nominal GDP 5
2.1 Economic growth in selected 2.1 Business confidence and private
countries 12 investment.. 10
2.2 Sector growth trends 15 2.2 Comparative pricing of 1GB of data
2.3 Macroeconomic performance and across Africa 14
projections..... 15 2.3 Growth in fixed investment in key
2.4 Assumptions used in the economic sectors. 16
forecast.. 18 3.1 Gross debt-to-GDP outlook without
3.1 Gross tax revenue . 21 additional fiscal measures. 20
3.2 Medium-term revenue framework 23 3.2 Medical tax credit per income group 24
3.3 Main budget expenditure ceiling 25 3.3 Medical tax credit as percentage of
3.4 Revisions to the 2017/18 taxable income of taxpayers 24
expenditure ceiling 25 3.4 Interest payments as a share of
3.5 Main budget framework 28 main budget revenue 27
3.6 Consolidated fiscal framework 29 4.1 Average nominal growth in
3.7 Total national government debt 29 spending, 2017/18 2020/21 32
3.8 Gross borrowing requirement 30 4.2 Growth in main budget expenditure
4.1 Summary of expenditure on cost and consumer inflation 34
containment related items: national
and provinces 35
4.2 Consolidated expenditure by
function 37
4.3 Consolidated expenditure by
economic classification 39
4.4 Division of revenue framework 41
4.5 Changes to division of revenue 42
4.6 Provincial equitable share 43
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1
Overview
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Economic outlook
Economic growth revised The 2017 Budget projected GDP growth of 1.3 per cent in 2017. That projection
down to 0.7 per cent in 2017, has been revised down to 0.7 per cent, following a recession in the fourth
reaching 1.9 per cent by 2020 quarter of 2016 and the first quarter of this year. Economic growth is expected
to recover slowly, reaching 1.9 per cent in 2020.
The weaker growth outlook reflects a continued deterioration in business and
consumer confidence that has gathered pace since 2014. It also flows from
perceptions of heightened risk as indicated in lower credit ratings, higher bond
yields and sluggish investment. In 2016, gross fixed capital investment declined
by 3.9 per cent, with large decreases in mining and manufacturing. Capital
investment is expected to decline by 0.6 per cent in the current year.
Conditions in the global economy continue to improve, but the risks of financial
turbulence remain high, and the longer-term outlook for growth and commodity
prices is muted.
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CHAPTER 1: OVERVIEW
Work is under way to license broadband spectrum, optimise governments asset Work is under way to license
portfolio, reform the governance of state-owned companies and encourage broadband spectrum and
private-sector participation in public investment programmes. A stronger optimise the state asset
package of measures to stimulate economic growth is being developed. portfolio
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
needs. The public sector will spend more than R300 billion each year on
infrastructure, with about half of this funded directly from the budget.
Reforms needed to transform To sustain economic growth, these measures need to be accompanied by
markets, improve national microeconomic reforms that raise productivity and labour absorption. These
competitiveness and include taking strong steps to transform markets, improve national
reconfigure urban landscape competitiveness through innovation, break down structural barriers to new
economic participants, promote manufacturing development and deconcentrate
industries dominated by a few producers. Such reforms need to be
complemented by plans to reconfigure the urban landscape, which remains
dominated by inefficient and inequitable patterns of settlement.
Fiscal outlook
Strong tax revenues, which Over the past five years, governments efforts to achieve a measured and
sustained fiscal consolidation balanced fiscal consolidation met with some success. While the stabilisation of
efforts, are now under threat debt proved elusive, expenditure remained well contained, and the primary
balance the gap between revenue and non-interest spending narrowed. This
progress was sustained by tax revenues that outperformed economic growth.
Figure 1.2 Main budget revenue and non-interest spending*
Strong revenue collection was partly the result of policy changes that raised the
rate of taxation. Growth in key sectors of the economy bolstered revenues.
Personal income taxes benefited from robust public- and private-sector wage
settlements. The expanding middle class contributed to resilient household
demand. The sustained depreciation of the exchange rate in an environment of
contained inflation lifted profits in tradable sectors, adding to company tax
receipts. Growth in capital investment continued to draw in imports, attracting
value-added tax and customs duties.
Revenue shortfall of This period of revenue buoyancy appears to have run its course. The National
R50.8 billion projected in Treasury projects a revenue shortfall of R50.8 billion in 2017/18. Lower revenue
2017/18 this year carries forward, and gross tax revenue is projected to fall short of the
2017 Budget estimates by R69.3 billion in 2018/19 and R89.4 billion in 2019/20.
This reflects slowing economic growth, but may also suggest a profound shift in
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CHAPTER 1: OVERVIEW
the relationship between economic growth and tax collection in the years
ahead.
Fiscal framework
As a result of revenue shortfalls, the consolidated budget deficit for 2017/18 is Consolidated budget deficit is
expected to be 4.3 per cent of GDP, compared with a 2017 Budget estimate of 4.3 per cent of GDP in current
3.1 per cent. The main budget deficit, which determines governments net year against projection of
borrowing requirement, will be 4.7 per cent of GDP this year. 3.1 per cent
In contrast to projections set out in the last budget, the revised projection is for
the deficit to remain at this elevated level over the medium term. On this
estimate, gross national debt is projected to continue rising, reaching over
60 per cent of GDP by 2022.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Spending priorities
Mandate Paper intended to In August 2017, Cabinet approved a Mandate Paper to guide the spending
strengthen alignment of choices of national government. Its purpose is to strengthen alignment of the
budget, medium-term national budget, the medium-term strategic framework and the National
strategic framework and NDP Development Plan (NDP) during the remaining term of the current
administration.
The paper observes that on current trends, South Africa is unlikely to achieve its
NDP goals. It also notes that there will be no additional funds available to
increase baseline expenditure over the 2018 Budget, and some programmes
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CHAPTER 1: OVERVIEW
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Conclusion
Improved confidence and Stronger economic growth is required to return the public finances to a
microeconomic reforms will sustainable position, and put South Africa back on a path of rising employment
return the economy to a and increasing prosperity. Government is committed to transformation and
higher growth rate over time confidence-boosting measures to promote investment. Combined with
microeconomic reforms, higher levels of business and consumer confidence will
return the economy to a higher growth path over time.
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Economic outlook
In brief
South Africas projected GDP growth for 2017, forecast at 1.3 per cent at the time of the 2017
Budget, has been revised down to 0.7 per cent. Over the medium term, GDP growth is expected to
increase slowly, reaching 1.9 per cent in 2020.
Despite substantial risks, the global economic outlook is improving, with growth of 3.7 per cent
forecast in 2018. Higher global growth can benefit South Africas medium- to long-term growth
prospects if the country can boost investment and export competitiveness.
Concerns about policy and political uncertainty, along with weak domestic demand, weigh heavily
on business and consumer confidence, deterring investment and job creation.
Governments economic policy, guided by the objectives of the National Development Plan, centres
on inclusive growth, transformation and competitiveness. Progress has been registered on the 14
confidence-boosting measures announced earlier this year. A series of microeconomic reforms
would provide impetus to confidence and investment.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Rebuilding confidence
Weak business and consumer Business and consumer confidence have been exceptionally weak in
confidence reduce investment, recent years, with direct consequences for investment, job creation and
job creation and household household spending. At present, concerns about policy and political
spending uncertainty, along with weak domestic demand, weigh heavily on
business and consumer confidence.
Figure 2.1 Business confidence and private investment
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CHAPTER 2: ECONOMIC OUTLOOK
Global outlook
The world economy continues to strengthen. According to the World economy is
International Monetary Fund (IMF), global growth is projected to reach strengthening, with projected
3.6 per cent in 2017 and 3.7 per cent in 2018, up from 3.2 per cent in growth of 3.7 per cent in 2018
2016.
The outlook largely reflects a recovery in demand and trade in Europe
and Asia. World trade volumes are expected to increase by 4.2 per cent in
2017. Low interest rates in the United States, Europe and Japan remain
supportive of growth. The euro area should benefit from strong domestic
demand, and better-than-expected growth in Japans net exports will
improve its performance in 2017. Brazil and Russia have returned to
growth after lengthy recessions, supported by a strong export
performance (Brazil), and stabilising oil prices and improved confidence
(Russia).
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Yet despite the cyclical upturn, there are considerable risks to the global
outlook. These include high levels of debt, continued political and policy
uncertainty in advanced economies, imbalances in the Chinese financial
system and a more rapid tightening of global financial conditions.
Risks to global outlook include Possible changes to US trade policy and uncertainty about the terms of
changes to US trade policy, the UKs exit from the European Union pose risks to global trade. Tighter
Brexit and tightening global global financial conditions could result from higher interest rates in
financial conditions advanced economies or developments that prompt global risk aversion,
raising external financing risks and reducing capital flows to developing
economies. Lower capital inflows could lead to currency depreciation,
higher inflation and rising interest rates. A debt crisis in Chinas banking
sector would lower global growth significantly, particularly for countries
that are reliant on trade with China.
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CHAPTER 2: ECONOMIC OUTLOOK
The improved global outlook can strengthen South Africas medium- to Improved world outlook can
long-term growth prospects, provided the country can boost export benefit South Africa, provided
competiveness. South Africas post-crisis growth outcomes were economy can boost investment
marginally better than those of Brazil and Russia, but worse than Chile and export performance
and Indonesia, which undertook a range of microeconomic reforms.
Agriculture
Real value added in the agriculture, forestry and fishing sector grew by Strong rebound in agriculture
21.2 per cent in the first half of 2017 compared with the same period in following good season in
2016. Good rains in the summer rainfall region led to a recovery following summer rainfall regions
a severe drought, which caused agriculture to contract in 2015 and 2016.
Maize production is expected to reach 16.7 million tons in 2017 a
115 per cent increase from the 2016 crop of 7.8 million tons. Soybean
production is expected to increase by 77 per cent. Wheat production,
however, is expected to decline by 10 per cent in 2017 due to continued
drought in the Western Cape. An ongoing outbreak of avian flu in June
2017 may lead to higher poultry prices. Growth in the sector is expected
to be sustained throughout 2017.
Mining
Mining value added expanded by 4.3 per cent in the first half of 2017 Mining recovering from low of
compared with the same period in 2016. The sector is recovering from 2016, but policy uncertainty
the contraction of 2016, supported by higher commodity prices and limits growth
growth in iron ore, manganese and copper. Mineral sales increased by
6.8 per cent in the first half of 2017 compared with the same period last
year, driven largely by coal and iron ore. Gold sales fell by 16.2 per cent
over the same period.
Declining fixed investment in mining undermines sustainable growth.
Elevated operating costs and uncertainty related to the Mining Charter
and the Mineral and Petroleum Resources Development Amendment Bill
continue to constrain growth. South Africa is currently ranked 13th in
Africa on the mining Investment Attractiveness Index. The mining outlook
remains subdued due to continued domestic policy uncertainty and rising
production costs.
Manufacturing
Real value added in manufacturing declined by 1.5 per cent and Manufacturing remains
production contracted by 1.8 per cent in the first half of 2017 compared subdued and fixed-capital
to the same period last year. Production in petrochemicals and wood and stock continues to decline
paper fell by 6.1 per cent and 2.9 per cent respectively. Capacity
utilisation in manufacturing moderated slightly from 81.5 per cent in the
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
first quarter of 2017 to 81.3 per cent in the second. Fixed-capital stock in
manufacturing has declined every year since 2009, indicating a gradual
erosion of capacity.
Finance
Bank profitability remains Financial and business services grew by 1 per cent in the first half of 2017
resilient despite declining compared with the same period in 2016. Lacklustre growth reflects high
growth in interest income levels of household debt and slowing income growth, which affects banks
and insurance companies. Bank profitability remains relatively resilient
despite declining growth in interest income, which averaged 3.8 per cent
in the first half of 2017 compared with 14.8 per cent a year earlier. Tier 1
capital adequacy, denoting high-quality reserves, rose from 12.5 per cent
to 13.5 per cent in the year to July 2017. Asset quality is strong, with
impaired advances as a share of outstanding loans at 2.9 per cent.
Employment
Formal employment declined Formal non-agricultural employment declined by 0.2 per cent in the first
by 0.2 per cent in first half of half of 2017 compared to the same period last year. Employment in
2017, and about 6.2 million community services fell by 41 041 during the first half of the year.
people are searching for work Financial and business services lost 7 681 jobs over the same period,
mostly in banking and insurance. Employment prospects in manufacturing
remain constrained. Similarly, employment growth in the trade sector is
likely to remain under pressure given low consumer confidence and weak
credit growth. Mining recovered some jobs in the first half of 2017,
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CHAPTER 2: ECONOMIC OUTLOOK
Macroeconomic outlook
South Africas projected GDP growth for 2017, forecast at 1.3 per cent at GDP growth projected to grow
the time of the 2017 Budget, has been revised down to 0.7 per cent. GDP moderately, reaching
growth is expected to increase slowly, reaching 1.9 per cent in 2020. 1.9 per cent in 2020
Household consumption
Growth in household spending increased marginally to 1.1 per cent in the
first half of the year from 0.6 per cent over the same period of 2016.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Fixed investment
Capital investment by public Total capital investment fell by 1.1 per cent in the first half of 2017
corporations has declined for compared with a 2.7 per cent decline in the corresponding period of
four quarters 2016. Investment by general government grew by 6.3 per cent.
Investment by public and private corporations fell by 3.7 per cent and
2.5 per cent respectively. Capital investment by public corporations has
declined for four consecutive quarters. In 2016, total capital investment
declined for the first time since 2010, with large decreases in mining and
manufacturing.
Private-sector investment accounts for 60 per cent of South Africas total
investment. Weak domestic demand and continued policy uncertainty
continue to curb investment plans. Over the long term, this reduces the
economys potential growth rate. Gross fixed capital formation is
expected to average 2.3 per cent growth over the next three years.
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CHAPTER 2: ECONOMIC OUTLOOK
first half of 2017, compared with 0.1 per cent of GDP in the same period
in 2016. Merchandise exports saw an uptick from R541.5 billion in the
first half of 2016 to R563.3 billion in the first half of this year. Increased
mining and manufactured exports were supported by higher commodity
prices. The shortfall in the net services, income and transfers balance
narrowed from 3.9 per cent of GDP in the first half of 2016 to 3.6 per cent
during the same period in 2017.
The current account deficit is projected to increase to 2.3 per cent of GDP
in 2017, reaching 3.1 per cent in 2020.
Inflation
Consumer price index (CPI) inflation returned to within the 3 to 6 per cent CPI inflation fell back within
target band in the second quarter of 2017. CPI inflation declined from the target band, reflecting
6.6 per cent in January to 4.8 per cent in August. Core inflation, which lower core inflation and food
excludes price-volatile items such as food, fuel and electricity, fell from prices
5.9 per cent in December 2016 to 4.6 per cent in August 2017, reflecting
weak domestic demand. Food price inflation declined from 12 per cent in
December 2016 to 5.7 per cent in August 2017 as drought conditions
subsided. Noting the improved inflation outlook, the Reserve Bank cut
the repurchase (repo) rate from 7 per cent to 6.75 per cent in July 2017.
Inflation expectations remain near the upper end of the target band.
However, the inflation outlook has improved since the 2017 Budget.
Headline inflation is now expected to average 5.4 per cent in 2017, down
from 6.4 per cent. The revisions to the inflation outlook reflect lower oil
and food prices, and a slightly stronger exchange rate assumption. The
risks to the inflation outlook remain currency depreciation, higher oil
prices, rising electricity tariffs and further sovereign rating downgrades.
Economic assumptions
The macroeconomic forecast is underpinned by a set of assumptions. Assumptions underpinning
Those related to growth and inflation for key trading partners are sourced forecast cover global growth,
from the IMF. Commodity prices and global exchange rates are informed inflation, trade and commodity
by futures curves, and calculated as a moving monthly average. Public prices
investment assumptions are based on approved infrastructure
expenditure plans. Food inflation assumptions are informed by high-
frequency indicators and analysis.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Alternative scenarios
The National Treasury has generated three alternate scenarios
quantifying some of the risks to the baseline economic forecast.
Scenarios model effects of risk Two scenarios involve downgrades to the local currency debt by global
premium increases, as well as ratings agencies. In both scenarios, the risk premium increases to varying
higher-than-expected global degrees. Global developments leading to broad aversion towards
growth developing-country debt, or a sharp deterioration in the balance sheet of
a state-owned company, could have similar effects. A moderate increase
in the risk premium could see growth slow to 0.6 per cent in 2018 and
0.9 per cent in 2019. A large increase in the risk premium could see
growth contracting by 1.2 per cent in 2018 and 0.8 per cent in 2019.
In the third scenario, global growth improves by an annual average of
0.5 percentage points over the medium term. Export commodity prices
are 5 per cent higher than the baseline. The risk premium and bond yields
are lower. Growth reaches 1.4 per cent in 2018 and 2.4 per cent in 2020.
The scenarios are presented in Annexure A.
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Fiscal policy
In brief
The economic outlook has deteriorated significantly since the beginning of the year. Gross tax revenue for
the 2017/18 2019/20 period is projected to fall short of the 2017 Budget estimates by R209 billion.
The consolidated budget deficit will widen to 4.3 per cent of GDP in 2017/18, against a 2017 Budget target of
3.1 per cent of GDP. Gross national debt is projected to reach over 60 per cent of GDP by 2022, with debt-
service costs reaching 15 per cent of main budget revenue by 2020/21.
The expenditure ceiling could be breached by R3.9 billion in the current year, mainly as a result of
governments recapitalisation of South African Airways and the South African Post Office. Government is
considering the disposal of assets to offset these appropriations during the current year.
Additional risks to the framework include more financial demands from state-owned companies, public-
service compensation pressures and new spending commitments, particularly in higher education.
A presidential task team is considering a range of steps to bring the public finances back onto a sustainable
path. Announcements will be made at the time of the 2018 Budget.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
(SAPO). These are partially offset by use of the contingency reserve, as well as
projected underspending.
Consolidated budget deficit set As a result of these developments, the consolidated budget deficit will widen to
to widen to 4.3 per cent of 4.3 per cent of GDP in 2017/18, against a 2017 Budget target of 3.1 per cent of
GDP in 2017/18 GDP. Governments short-term options to reverse this situation are limited.
Given that per capita income is falling, the economic impact of further
expenditure cuts or tax hikes could be counter-productive.
Following several years of expenditure restraint, further budget cuts will involve
hard choices and difficult compromises. Sudden or deep additional cuts that are
not well-targeted could put severe pressure on already stressed departmental
budgets. Some national departments are battling to operate within the
compensation limits set by Parliament in the current year. And several provincial
departments are running up unpaid bills to maintain service delivery levels.
Stabilising gross debt below At the same time, government is acutely aware of the dangers of unchecked
60 per cent of GDP will require debt accumulation. Debt-service costs are the fastest-growing category of
large spending cuts or tax expenditure, crowding out social and economic spending. By 2020/21, nearly
hikes 15 per cent of main budget revenue will be spent servicing debt. The National
Treasury estimates that stabilising gross debt below 60 per cent of GDP over the
coming decade will require spending cuts or tax hikes amounting to 0.8 per cent
of GDP. In 2018/19, 0.8 per cent of GDP would amount to R40 billion.
Figure 3.1 Gross debt-to-GDP outlook without additional fiscal measures
Sustainable public finances Over the medium term, government is committed to maintaining the ceiling on
require significantly higher non-interest expenditure. New spending priorities will have to be met by funds
economic growth reallocated from within existing limits. Any adjustments to the ceiling itself
would need to be matched by revenue increases.
A team of Cabinet ministers reporting directly to the President is considering a
range of proposals to bring the public finances back onto a sustainable path.
Announcements are expected to be made at the time of the 2018 Budget. More
fundamentally, sustainable public finances require a significant acceleration of
economic growth.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
The stabilisation of the rand has muted the buoyancy of import taxes and
revenue on profits in traded sectors, such as mining.
Compliance concerns Policy and administrative factors may also be contributing to the shortfall.
mounting in face of tax Behavioural responses to tax increases may be larger than anticipated and
administration challenges and revenue could perform below expectations even if taxes are hiked. Compliance
weaker tax morality concerns are mounting in the context of tax administration challenges and
weakening tax morality. Implementing the recommendations from the Tax
Ombuds report on delays in the payment of VAT refunds by the South African
Revenue Service will help to improve taxpayer confidence in revenue
administration.
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Shortfalls over the next two years are partially offset by lower payments to the
Southern African Customs Union (SACU), stronger departmental receipts, and
mineral and petroleum royalties. More detail on the medium-term revenue
framework is contained in Annexure C.
To manage the impact of lower collections, the SACU revenue-sharing formula takes account of forecast errors, with
a two-year lag. The revision in 2018/19 partly reflects an overpayment from South Africa to other SACU members in
2016/17. Similarly, lower-than-anticipated customs duties in 2017/18 will reduce revenue transfers in 2019/20.
Member states are reviewing the 2002 SACU Agreement with a view to making SACU transfers more stable.
2018/19 SACU revenue shares
R million Botswana Lesotho Namibia Swaziland South Africa Total
2018/19 revenue s ha res 19 896 5 669 17 769 5 989 43 942 93 265
2016/17 CRP a djus tment -436 -128 -398 -147 -884 -1 993
Total 19 460 5 541 17 371 5 843 43 058 91 272
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Weaker-than-expected growth The primary risks to the revenue outlook are weaker-than-expected economic
and changes in composition of growth, the effects of changes in the composition of underlying tax bases and
underlying tax bases are risks deterioration in tax morality, compliance and administration.
to revenue outlook
Tax policy, expenditure limits and debt stabilisation
To anchor a sustainable budget, structural increases in expenditure must be
matched by structural increases in revenue. As stated in the 2015 MTBPS, the
expenditure ceiling can be adjusted to accommodate new spending priorities
when a permanent source of revenue is found to offset increased spending. For
example, government is considering proposals to finance national health
insurance (NHI) through adjustments to the medical tax credit, discussed below.
Any additional tax proposals Similar consideration is needed for other emerging policy priorities, such as
need to be carefully considered proposals to increase funding for higher education and defence. Furthermore,
in light of economic and fiscal additional tax proposals need to be carefully considered in light of overall
pressures pressures in the economy and the fiscus, and the need to stabilise the debt-to-
GDP ratio.
The Health Promotion Levy, which discourages the consumption of sugary
beverages, is under consideration in Parliament, with a proposed start date of
1 April 2018. The revised Carbon Tax Bill will be published shortly.
Source: National Treasury calculations, 2014/15 *Sample only includes taxpayers that claimed medical tax credits
The 2017 Budget Speech stated that consideration is being given to possible reductions in this subsidy in future, as part
of the financing framework for national health insurance. The National Treasury is considering changes to the design,
targeting and value of the medical tax credit as part of the policy development process for the 2018 Budget. Tax data,
however, indicates that the programme is well-targeted to lower and middle-income taxpayers. The National Treasury
will seek input from the Davis Tax Committee on the feasibility of proposals to adjust the medical tax credit to fund NHI.
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Interest payments are excluded from the expenditure ceiling. So are payments
for financial assets funded by the sale of assets in the same year. This principle
was applied to the R23 billion allocation to Eskom in 2015, which was financed
by the sale of governments Vodacom shares.
As Table 3.4 shows, expenditure is expected to breach the ceiling by R3.9 billion Asset disposals being
in the current year. This is the result of large appropriations for SAA and the considered to rectify potential
SAPO. In combination, these allocations amount to R13.7 billion. Government is breach of expenditure ceiling
considering the disposal of assets to offset these appropriations. Should such in current year
disposals take place, the breach will not occur.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
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Debt-service costs
At a time when revenue is under pressure, an increasing share of tax collection
will be diverted to settle interest payments. As gross debt expands, debt service
will remain the fastest-growing category of spending over the next three years.
Relative to the 2017 Budget projections, debt-service costs will be R1 billion Mounting debt-service costs
higher in 2017/18, R2.4 billion higher in 2018/19 and R6 billion higher in crowd out social and economic
2019/20. By 2020/21, government projects that nearly 15 per cent of main expenditure
budget revenue will go toward servicing debt. This crowds out the space to fund
social and economic priorities.
Figure 3.4 Interest payments as a share of main budget revenue
Over the next two years, the impact of higher borrowing will be partially offset
by two factors. Lower interest rates have reduced short-term debt-service costs
following the Reserve Banks decision to cut the repo rate. And the stronger-
than-anticipated exchange rate has eased interest payments on debt
denominated in foreign currency.
Fiscal framework
Main budget framework
The main budget framework, presented in Table 3.5, summarises expenditure Revenue projected to grow to
financed from the National Revenue Fund. Main budget revenue is projected to 26.3 per cent of GDP in
grow from 25.5 per cent of GDP in 2017/18 to 26.3 per cent of GDP in 2020/21. 2020/21, while expenditure
Over the same period, main budget expenditure will grow from 30.2 per cent of will rise to 30.9 per cent of
GDP
GDP to 30.9 per cent of GDP.
The main budget deficit, which is governments net borrowing requirement, will
be 4.7 per cent of GDP in 2017/18, compared with a 2017 Budget projection of
3.5 per cent. Borrowing will need to be R52.8 billion higher than projected in the
current year, mainly as a result of revenue shortfalls. Over the medium term,
the main budget deficit is expected to stabilise at 4.6 per cent of GDP. The
primary balance the difference between revenue and non-interest spending
had been projected to continue narrowing. However, revenue shortfalls now
result in the primary deficit stabilising at 0.7 per cent of GDP.
27
2017 MEDIUM TERM BUDGET POLICY STATEMENT
28
CHAPTER 3: FISCAL POLICY
29
2017 MEDIUM TERM BUDGET POLICY STATEMENT
30
4
Expenditure priorities
In brief
Medium-term spending plans have been developed in the context of weak economic growth trends,
limited budgetary resources and rising pressures on the fiscus.
Over the three-year spending period ahead, consolidated expenditure will grow by an annual
average of 7.3 per cent, from R1.6 trillion in 2017/18 to R1.9 trillion in 2020/21. The fastest-growing
functions are Community Development, Learning and Culture, and Health. The fastest-growing
category of expenditure is debt-service costs, which grows by 11 per cent.
Government will protect spending on core social programmes that benefit poor South Africans.
Funding for any new policy priorities will come mainly from reprioritisation.
The division of non-interest expenditure between national, provincial and local government remains
stable at 47.6 per cent, 43.2 per cent and 9.2 per cent respectively.
Introduction
In August 2017, Cabinet approved a Mandate Paper to guide the spending Spending on new policy
choices of national government. As in recent years, additional allocations initiatives will require
over the medium-term expenditure framework (MTEF) period will be reprioritisation or matching
funded mainly through reprioritisation of existing budget baselines. tax increases
Additional resources to support spending priorities will be severely
limited by the economic outlook presented in Chapter 2 and the fiscal
policy challenges set out in Chapter 3. Structural increases in expenditure
to accommodate new policy initiatives, and resulting adjustments to the
spending ceiling, will need to be matched by parallel tax increases.
Over the three-year spending period ahead, consolidated expenditure will
grow by an annual average of 7.3 per cent, from R1.6 trillion in 2017/18
to R1.9 trillion in 2020/21. The fastest-growing functions are Community
Development, Learning and Culture (which includes post-school
education and training) and Health, with growth rates of 7.9 per cent,
31
2017 MEDIUM TERM BUDGET POLICY STATEMENT
7.6 per cent and 7.5 per cent respectively. Debt-service costs as an
expenditure category grows the fastest at 11 per cent.
Reductions in expenditure Further reductions in the expenditure ceiling may be required over the
ceiling may be required to next three years to stabilise the public finances. A presidential task team
stabilise public finances will identify savings and programme closures to improve the efficiency
and impact of expenditure. Details will be announced in the 2018 Budget.
Health 7.5
0 2 4 6 8 10 12
Per cent
Source: National Treasury
32
CHAPTER 4: EXPENDITURE PRIORITIES
33
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Determined action needs to This situation requires determined action that balances competing
balance competing demands demands and interests. These trade-offs are particularly stark in the
and interests current round of public-service wage negotiations. Since 2011,
government has been forced to restrict employee headcount growth to
accommodate rising salaries. Yet spending on compensation has
continued to grow more quickly than nominal GDP. A fair and reasonable
compromise between government and state employees in the current
round of wage talks is in the public interest.
The MTEF provides for an overall increase of 7.3 per cent a year to
accommodate improvements in conditions of service. Many departments
are already at risk of exceeding this limit, even assuming that personnel
numbers do not increase. Moderation in public-service personnel costs is
essential if improvements in service delivery are to be achieved.
Annexure B provides data on public-service employment and
compensation trends.
*Non-interest expenditure excluding payments for financial assets, skills development levy and
fuel levy sharing with metros
Source: National Treasury and Statistics South Africa
Commission of Inquiry into
A second major cost pressure over the period ahead is higher education.
Higher Education and Training
delivered its final report in The Commission of Inquiry into Higher Education and Training delivered
August 2017 its final report to the President in August 2017.
34
CHAPTER 4: EXPENDITURE PRIORITIES
Table 4.1 Summary of expenditure on cost-containment related items: national and provinces
Cost-containment related 2013/14 2016/17 2013/14 to 2013/14 to
expenditure items Audited outcome Preliminary 2016/17 Change in 2016/17 Average
R million outcome value annual growth
Consultants 6 980 6 148 -832 -4.1%
Travel and subsistence 9 828 9 305 -523 -1.8%
Catering and events 908 815 -93 -3.6%
Entertainment 44 25 -19 -17.5%
Advertising 1 246 1 094 -152 -4.2%
Newspapers and publications 270 202 -68 -9.2%
Conferences (venues and 1 241 999 -242 -7.0%
facilities)
Other expenditure (communication) 3 227 3 243 16 0.2%
Total 23 744 21 831 -1 913 -2.8%
Source: National Treasury
35
2017 MEDIUM TERM BUDGET POLICY STATEMENT
36
CHAPTER 4: EXPENDITURE PRIORITIES
37
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Provision for additional Governments antiretroviral treatment programme has been growing by
support to antiretroviral about 400 000 patients each year. The MTEF makes provision for the
treatment programme and growth in patient numbers expected with the implementation of the
early childhood education universal test-and-treat policy.
The early childhood development conditional grant will receive allocations
of about R500 million per year over the medium term to improve health
and learning outcomes. Government also proposes to shift the current
home-based care programme in the comprehensive HIV, AIDS and TB
grant to a more integrated community health worker programme. This
will include health-related early childhood development services such as
breastfeeding support for the first 1 000 days of a childs life.
Governments centralised approach to dispensing and distributing chronic
medicines allows patients to collect their medication from alternative
pick-up points such as private pharmacies. By June 2017, over 1.5 million
patients were on the programme, which is more convenient for patients
and reduces unnecessary consultations.
38
CHAPTER 4: EXPENDITURE PRIORITIES
Protection services
The NDP underlines the need for an effective criminal justice system and Pressures arising from
responsive police services. The budget will continue to fund the normal employee compensation in
operations of the departments within the justice, crime prevention and justice, crime prevention and
security cluster, giving effect to a priority of the Mandate Paper the security need to be managed
integrated operational plan to fight crime. However, this cluster needs to
manage pressures arising from employee compensation budgets. This will
require reconsideration of recruitment strategies, as well as the
composition and suitability of existing staff complements.
Medium-term priorities include completing infrastructure projects under
way, and maintaining and rehabilitating police stations, courts,
correctional facilities, and military bases and health facilities. The new
Mpumalanga High Court will open in 2018. Funding options for the
Defence Reviews recommendations are also under consideration (see
Annexure A).
Once established, the Border Management Agency will take over
management of South Africas 72 air, land and sea ports of entry. The
agency will be funded mainly through reallocations from those
departments and agencies currently involved in border control and
management.
39
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Community development
Social and economic transformation requires South Africa to overcome
the spatial legacy of apartheid. Integrated community development
requires strengthened cooperation between national government,
provinces and municipalities in housing, water, sanitation, electrification
and public transport. Over the medium term, the focus remains on
balancing resources to respond to water, sanitation and electrification
infrastructure needs in rural areas, and improving public transport
services and access to shelter in urban areas.
Public transport in smaller Creating integrated public transport networks that expand access to
cities will have greater economic activity and social services is a central objective of urban
differentiation to ensure reform initiatives. To ensure that municipal public transport systems are
sustainability sustainable, government aims to provide greater differentiation in the
norms and standards of services and infrastructure. This includes
moderating public transport service levels in smaller cities to ensure
quality services that are affordable.
New conditional grants proposed for human settlements are discussed
under the division of revenue. In addition, a new policy framework is
being developed by the Department of Human Settlements.
Economic development
Spending focused on jobs, Growing and transforming the economy to create jobs and generate the
small businesses, small-scale resources needed to fund social services is at the heart of the NDP.
agricultural production and Spending in this function will focus on expanding access to jobs,
industrial incentives supporting small businesses and small-scale agricultural production, along
with incentives for industrialisation, economic transformation and
sustainable resource management.
The Community Work Programme maintains and improves local
infrastructure using labour-intensive methods, providing income support
to unemployed persons. It provides a bridging opportunity for youth and
others who are actively looking for work. The work done by programme
participants benefits their communities. Similarly, the social sector
component of the Expanded Public Works Programme subsidises the pay
of extra workers at non-profit organisations that are performing social
functions.
Initial allocation of R1 billion The National Treasury is working with the departments of Science and
for new fund to support small Technology and Small Business Development to establish a new fund for
business and innovation small business and innovation. The fund, which will be allocated R1 billion
in 2019/20, will provide wholesale funding to private- and public-sector
incubators, which will on-lend to entrepreneurs at the concept stage.
The Department of Science and Technology, with an allocation of
R24.8 billion over the medium term, will invest in producing new
knowledge, developing human capital, and for research and innovation.
Successful land reform programmes link new farmers into agricultural
value chains. Agri-parks are central locations where smallholder farmers
can process their produce and access market networks. Funding for agri-
parks is provided through the Department of Rural Development and
Land Reform. Three agri-parks are nearing completion, and government
intends to build one such facility in each of the 44 district municipalities.
40
CHAPTER 4: EXPENDITURE PRIORITIES
South Africa is a water-scarce country. Managing limited water resources New pricing strategy to be
is critical, as shown by the recent drought and the current water crisis in completed in line with urgent
Cape Town. The Department of Water and Sanitation is expected to need to improve water
complete the water-pricing strategy in 2018/19. It will establish a new resource management
framework for how water is charged and subsidised for industrial,
commercial, agricultural and domestic use. The institutional review for
water resources, which includes establishing a national water
infrastructure agency and catchment management agencies, is expected
to be completed over the medium term.
Administrative services
The administrative services function comprises central planning and Given pressing needs in other
financial services, international relations and other general services. areas, administrative services
Government aims to build a people-centred, professional and ethical budgets will decline over
public service. Given fiscal pressures and needs in other areas, general medium term
public services will see a real decline in budgets over the medium term.
Regional integration and development are important for economic and
social progress in southern Africa. South Africa is currently chairing the
Southern African Development Community, and is set to chair the Indian
Ocean Rim Association for the next two years. The Mandate Paper
identifies these responsibilities as priorities. The Department of
International Relations and Cooperation will fund the associated costs
from its current baseline through reprioritisation.
Division of revenue
The proposed division of revenue continues to prioritise funding of
services for poor communities. Allocations to provinces focus on
education, health and other social services. Allocations to local
government subsidise the delivery of free basic services to low-income
households, and the infrastructure needed to deliver those services.
41
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Provincial allocations grow by Over the medium term, government proposes to allocate national
7.2 per cent and local departments 47.6 per cent of available non-interest expenditure,
government allocations by provinces 43.2 per cent and local governments 9.2 per cent. Over this
8.3 per cent period, national government resources grow by 6.5 per cent, provincial
resources by 7.2 per cent and local government resources by 8.3 per cent.
Provincial allocations
Nearly 80 per cent of provincial budgets are spent on health, basic
education and social welfare.
The provincial equitable share formula has been under review since 2016
to ensure that it remains impartial, fair and responsive to the needs of
the provinces. As part of the review, data used for learner enrolment,
previously based on annual surveys of schools, will now be collected
through a tracking system established by the Department of Basic
Education. The new system allows data to be verified and learners
progress to be tracked throughout their school careers. The more
advanced system results in small changes to allocations as previous over-
reporting by schools is corrected. The new data will be phased in over
three years. Changes to other components of the formula flowing from
the review will be introduced in consultation with provincial treasuries.
Programmes to prevent The equitable share has been increased by about R1.2 billion over the
violence against women and MTEF period to take account of provincial responsibilities aimed at
children get R788.2 million preventing violence against women and children, and to support
organisations that provide statutory social welfare services on behalf of
provincial departments. The latter flows from the judgement of the Free
State High Court in the National Association of Welfare Organisations and
Non-Governmental Organisations case. The court found that government
must determine a fair and transparent method of funding non-profit
organisations that provide statutory social welfare services on behalf of
the state. Research is being done to quantify the gap between current
funding and the actual cost of service provision.
42
CHAPTER 4: EXPENDITURE PRIORITIES
43
2017 MEDIUM TERM BUDGET POLICY STATEMENT
44
CHAPTER 4: EXPENDITURE PRIORITIES
Reforms over the medium term will enhance the ability of municipalities
to raise revenue to invest in their own development. Government will:
45
2017 MEDIUM TERM BUDGET POLICY STATEMENT
46
ANNEXURES
47
2017 MEDIUM TERM BUDGET POLICY STATEMENT
48
A
Fiscal risk statement
Introduction
The 2016 Medium Term Budget Policy Statement identified South Africas most significant fiscal risks as
lower-than-expected economic growth, the possibility of claims against the guaranteed debt of some
state-owned companies and higher-than-expected increases in compensation budgets.
Governments approach to reporting risks to the fiscal outlook is summarised in Figure A.1.
49
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Macroeconomic risks
As noted in Chapter 3, the most serious risk to medium-term revenue collection is a further
deterioration in the economic outlook. A related risk is uncertainty about tax buoyancy the ratio of
revenue growth and economic growth which can be affected by the composition of GDP, taxpayer
compliance and tax administration. Excluding next years proposed tax increase of R15 billion, the
current baseline assumes a buoyancy of 1.1 in 2018/19. However, if buoyancy were to decline to 1.0,
the tax shortfall would increase by R8.5 billion.
To assess the magnitude of macroeconomic and fiscal risks, the National Treasury developed three
scenarios around the baseline economic forecast. The baseline fiscal outlook is presented in Chapter 3.
Figure A.2 GDP growth scenarios Figure A.3 Gross loan debt to GDP scenarios
Scenario A Local currency downgrade with limited effects. The local currency rating is downgraded
due to the weak growth trajectory and widening fiscal deficits. Growth slows to 0.6 per cent in 2018
and 0.9 per cent in 2019. However, the impact on capital flows and interest rates is limited by stronger
world growth and increased global risk appetite. The yield on long-term government bonds is 90 basis
points higher on average compared to the baseline. Inflation expectations remain well anchored.
Scenario B Local currency downgrade with pronounced effects. The local currency rating is
downgraded without the offsetting benefits of strong global growth. GDP contracts by 1.2 per cent in
2018 and 0.8 per cent in 2019. The risk premium increases by 200 basis points and remains at that level.
The yield on long-term government bonds is 180 basis points higher on average compared to the
baseline. Borrowing costs increase, while investment and consumption decline. Inflation peaks at
6.6 per cent in 2018.
Scenario C Higher global growth and commodity prices. Global growth improves by an annual
average of 0.5 percentage points over the medium term. Export commodity prices increase by
5 per cent over the same period. The risk premium is 50 basis points lower than in the baseline
scenario, reflecting lower global risk aversion. GDP growth increases to 1.4 per cent in 2018. By 2020,
GDP growth is 2.4 per cent, as higher incomes promote stronger consumption and investment demand.
Inflation remains well anchored in the 3-6 per cent target band and the rand is slightly stronger
compared to the baseline. Bond yields are 30 basis points lower on average compared to the baseline.
The scenarios assume that no new revenue or expenditure measures are taken to compensate for fiscal
slippage. The fiscal results of the scenarios are as follows:
Scenario A would result in the primary deficit widening to 2.0 per cent of GDP by 2020/21. The
cumulative tax revenue shortfall against the 2017 MTBPS baseline would be between R130 billion
50
ANNEXURE A: FISCAL RISK STATEMENT
and R140 billion owing to the effect of lower buoyancies and weaker nominal GDP growth. As a
result, the debt-to-GDP ratio would not stabilise.
Scenario B would result in an even larger fiscal slippage. The cumulative tax revenue shortfall over
the 2018 medium-term expenditure framework (MTEF) period would be between R400 billion and
R450 billion. The primary deficit would widen to 4.9 per cent over the medium term and remain
above 4 per cent over the longer term. Debt would grow rapidly, reaching over 80 per cent of GDP
by 2022/23.
Scenario C also results in a primary deficit over the medium term. However, the primary balance
would close and go into surplus over the long term. Higher GDP growth would lead to improved tax
revenue collection over the next three years. As a result, debt would stabilise at 58.0 per cent of
GDP in 2021/22.
The fiscal scenarios assume that South Africa would be able to increase borrowing from capital markets
at affordable rates. However, in the event of a much worse fiscal position, accompanied by further
credit ratings downgrades, it is likely that bond yields would rise and the exchange rate would
depreciate. Both developments would increase debt and debt-service costs. Given the persistence of
the current account and budget deficits, sharply higher bond yields and currency depreciation could
prompt significant turmoil in domestic capital markets, reinforcing a cycle of fiscal deterioration.
120
100
80
R billion
60
40
20
0
2018/19
2019/20
2020/21
2021/22
2022/23
2023/24
2024/25
2025/26
2026/27
2027/28
2028/29
2029/30
2030/31
51
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Over the medium term, governments bond-switch programme which exchanges short-term for
longer-term debt and growing cash balances will mitigate this risk. However, the bond-switch
programme itself poses a risk if it raises the effective interest rate paid by government on debt,
potentially leading to higher debt-service costs.
South Africas sovereign debt stock is well-structured and remains comfortably within global best-
practice benchmarks. Global investors hold about 41 per cent of total outstanding debt securities
(including foreign-denominated issuances), indicating a potential exposure to capital flight. The depth
of the domestic market reduces the likelihood of a liquidity crisis. The short-term rollover risk
emanating from the Treasury bill portfolio is monitored through a benchmark limit of 15 per cent of
domestic debt. Currently, Treasury bills are below this limit.
The most pressing is higher education, where government is considering options to increase
affordability for students. The additional funding required for the post-school and education sector is
difficult to determine without firm policy guidelines. However initial costing of the options suggests that
the funding requirement could range from R17.7 billion to R40.7 billion in 2018/19. Medium-term
options are discussed in detail in Chapter 4, and the long-term costs of higher education are discussed
later in this annexure.
52
ANNEXURE A: FISCAL RISK STATEMENT
Unpaid provincial invoices. Many provincial departments are delaying payment of bills, contributing
to a rising hidden deficit that poses significant budget execution risks. Provinces started the current
financial year with unpaid bills of R26.4 billion from 2016/17, a 30 per cent increase from the prior
year. Health departments accounted for 52.6 per cent of unpaid bills.
Medical negligence claims. Medical negligence claims are legal claims for malpractice (e.g. leading
to lifelong disability) in public health facilities. Although some of these claims are legitimate, others
are unjustified or excessive. Estimated pay-outs for medical negligence claims have grown at an
average rate of 45 per cent since 2012/13, and amounted to R1.2 billion in 2016/17. The contingent
liability arising from claims against the state at the end of 2016/17 totalled an estimated R56 billion.
The Department of Health is considering establishing teams of clinical and legal experts to help
defend provinces against unjustified or excessive claims.
Financial management challenges in municipalities. Weak financial management, high
remuneration levels and poor maintenance of infrastructure threaten the sustainability of some
municipalities. While demand for services has risen, low levels of economic growth have put
pressure on consumers ability to pay for services, while transfers from national government are
growing more slowly than in the past. As a result, some municipalities have fallen into financial
distress and face liquidity problems. To manage these difficulties, these municipalities are delaying
payments to Eskom, water boards and other creditors, contributing to financial imbalances in other
parts of the public sector.
60
50
R billion
40
30
20
10
0
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
* Entities listed in schedule 2 and 3 of the PFMA
Source: National Treasury
53
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Total interest payments by state-owned companies are projected to increase from R49.8 billion in
2016/17 to R69.3 billion by 2019/20. Given the sharp increase in interest commitments, some entities
may have insufficient cash to settle their obligations unless immediate reforms are implemented to
improve governance and boost profitability.
Eskom
The largest state guarantee (R350 billion) supports Eskoms capital investment programme. Eskom is
experiencing financial turbulence because of weak governance. This has led to a qualified audit opinion
and a violation of some debt covenants with lenders. Eskom forecasts that electricity sales growth over
its planning period will be flat, with revenue growth secured through tariff increases. However, the
National Energy Regulator of South Africa could grant tariff increases below Eskoms application, as it
did during the multi-year price determination process for April 2013 to March 2018. There are also risks
that sales growth will perform below projections, or decline as households and businesses improve
their energy efficiency. If this happens, Eskom will likely apply for even steeper tariff increases.
Any of the options required to stabilise Eskom could have significant fiscal implications. If higher tariffs
slow economic activity, tax revenue collections will be lower, delaying governments fiscal objectives of
closing the deficit and stabilising debt. However, if Eskom does not secure sufficiently high tariff
increases its financial position may weaken, requiring it to seek government assistance.
Government has extended its R350 billion guarantee from 31 March 2017 to 31 March 2023 because of
delays in Eskoms capital investment programme. The extension of the guarantee will allow Eskom to
use the remaining portion to complete its planned capital expenditure programme. The Eskom board
has developed a plan to address governance concerns that they will share with lenders. The regulator is
expected to rule on Eskoms application for a tariff increase for 2018/19 as well as its Regulatory
Clearing Account application. If these applications are successful it would represent a step-change in
Eskoms future revenues. Combined with strong cost management, this could allow the utility to cover
all its obligations without fiscal support.
54
ANNEXURE A: FISCAL RISK STATEMENT
Denel
Arms manufacturer Denel faces refinancing and default risk on government-guaranteed debt
amounting to R1.85 billion. The group has struggled to refinance debt due to concerns about corporate
governance failures and corruption. Government has extended Denels guarantee to 30 September
2018. The group has exited the Denel Asia Joint Venture, which it entered into with VR Laser Asia in
January 2016, and has withdrawn its court case against the National Treasury and the Minister of
Finance.
55
2017 MEDIUM TERM BUDGET POLICY STATEMENT
C
D B
C B
2 A
B A
A
0
2020 2025 2030
A: Baseline
B: White paper enrolment target
C: Full cost of study for TVET and 30 per cent university undergraduates
D: Full cost of study for TVET and 50 per cent university undergraduates
E: Full cost of study for TVET and 75 per cent university undergraduates
Source: National Treasury
56
ANNEXURE A: FISCAL RISK STATEMENT
3.5 per cent. However, working with an assumed economic growth rate of 2.5 per cent and the white
papers costings, the National Treasury estimates that full implementation of the NHI will increase
public health expenditure to 6.8 per cent of GDP in 2025/26.
Social grants
Spending on social grants is driven by changes in the number of grant recipients and grant values. The
baseline scenario projects that the number of grant recipients will grow from 17.3 million in the current
year to 23.5 million recipients by 2030/31, with grant values increasing in line with CPI inflation. In the
baseline growth scenario, social grants rise from 3.3 per cent of GDP to a peak of 3.5 per cent in 2030,
before declining slowly thereafter. Even in the low-growth scenario, grant expenditure is projected to
peak at 3.8 per cent of GDP.
Defence Review
Recommendations flowing from the Defence Review, if implemented in full, would add R53.3 billion to
defence expenditure over the next six years. Over the longer term, the review proposes that defence
spending grow from the current level of 1 per cent of GDP to 2 per cent of GDP.
5
Per cent of GDP
0
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
*Post-school education and training: TVET and 75 per cent university undergraduates (see Figure A.6)
Source: National Treasury
Beyond current spending commitments on health, defence and higher education, the implementation
of NHI, the Defence Review and scenario E of the post-school education and training projections would
require additional spending of 6 per cent of GDP by 2030. In the absence of higher economic growth,
several of governments current policy commitments will need to be revisited, because their cost
implications appear to exceed available resources.
Conclusion
Fiscal risks are elevated over the medium term, primarily because the potential for weaker-than-
expected economic performance threatens the revenue forecast. The outlook for contingent liabilities
is also a source of vulnerability. The macroeconomic and fiscal policies outlined in Chapters 2 and 3 are,
in part, designed to reduce these risks, and ensure that governments fiscal targets are achieved.
57
2017 MEDIUM TERM BUDGET POLICY STATEMENT
58
B
Compensation data
The compensation of public employees is a core determinant of government spending. This annexure
presents budget data and trends in compensation spending. It also examines data from governments
payroll system (PERSAL) to gauge trends in public-service employment. A fuller data set is available at
www.treasury.gov.za/documents/MTBPS/2017. Headcount data has been extracted from the PERSAL
system. Two points should be noted:
The data has been adjusted to reflect the average number of full-time equivalent1 employees over a
year. As a result, there may be minor differences between the data published here and information
contained in the 2017 Estimates of National Expenditure, which provided a snapshot of unadjusted
headcounts at year end.
About 240 000 employees on governments payroll are contracted through initiatives such as the
Community Work Programme and the Expanded Public Works Programme. Since they are not part
of the public service, they are not included in the information presented in this annexure.
Unless otherwise indicated, the data is presented in real terms: rand values have been adjusted for
inflation and reflect 2016 equivalents.
1 An employee who receives fewer than 12 salary payments per year for example, because they are temporary or
contract staff is not counted as one full-time employee. Their contributions are aggregated into full-time equivalents.
59
2017 MEDIUM TERM BUDGET POLICY STATEMENT
12
0
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
Source: National Treasury (budget data)
Between 2008/09 and 2016/17, compensation spending increased by about 37 per cent in real terms,
or 4.1 per cent a year. About a quarter of the increase resulted from expanded employment, with the
remaining three-quarters due to higher remuneration.
In South Africas constrained fiscal environment, rising compensation budgets increasingly crowd out
other expenditure, including the complementary inputs required for public servants to execute their
functions effectively. In labour-intensive national departments such as defence, justice and the police
compensation absorbs a rising share of budget allocations. In provinces, compensation pressures are
particularly high in the health sector. In Limpopo, for example, compensation accounts for 71 per cent
of the health budget, up from 58.9 per cent in 2008/09.
60
ANNEXURE B: COMPENSATION DATA
The rate of expansion slowed after 2011/12. Measured by full-time equivalents, personnel numbers
peaked at 1.33 million in 2012/13 and have fallen by about 22 000 since then. In health, education and
criminal justice, employment levels have declined marginally in recent years. This decline reflects the
implicit trade-off between headcount and salaries. While the number of employees stagnated, real
remuneration per employee continued to rise after 2011/12, driving up overall spending on
compensation.
Figure B.2 Total public-service employment Figure B.3 Compensation spending, average
(full-time equivalents) remuneration and headcount trends
There are considerable variations within the aggregate trends. As a result, the data should be
interpreted with care. Reaching accurate conclusions about the composition of employment in a given
sector requires detailed attention to its specific dynamics. For example, while the total number of South
African Police Service (SAPS) employees rose from just over 170 000 in 2008/09 to 190 000 in 2016/17,
much of this increase resulted from recruitment of civilian employees. This might be viewed as
crowding out frontline staff with administrative employees. But civilian personnel cost the SAPS less to
perform tasks that would otherwise occupy the time of uniformed officers, freeing the latter to fight
crime. The number of police officers has remained broadly stable at about 150 000.
Table B.3 shows trends in employment and remuneration in the largest occupation-specific
dispensation (OSD) groups in the public service. Employment of teachers has not increased since
2009/10, but the nursing provision has continued to grow. On average, remuneration of these two
groups has outpaced inflation by more than 2 percentage points over the past seven years.
61
2017 MEDIUM TERM BUDGET POLICY STATEMENT
Table B.4 disaggregates the changes in employment by salary level for all employees on the payroll.
Although there has been significant headcount growth at managerial levels (salary levels 13-16), the
greatest share of growth has been in the ranks of those receiving OSDs. These are generally skilled
professionals rather than managers. Absolute declines in employment at the lowest salary levels largely
reflect progression and promotion of employees to higher levels, as discussed below.
Remuneration trends
Employee salaries have increased by an average of 29 per cent since 2008/09. Average remuneration
per employee has grown from about R260 000 a year (in 2016 rands) in 2008/09 to R335 000 a year in
2016/17. This rise in remuneration is the result of several factors:
62
ANNEXURE B: COMPENSATION DATA
Figure B.4 Average cost-of-living adjustments Figure B.5 Real average remuneration by OSD group
and consumer inflation
From 2008, when OSDs were introduced into the salary structure, they had a pronounced effect on
average remuneration, as shown in Figure B.5. In general, non-OSD public servants earn significantly
less than designated occupations. Teachers earn more than the other large OSD groups. Smaller OSD
groups receiving higher salaries such as doctors, lawyers and engineers are not shown in the figure.
Other improvements in conditions of service boost average remuneration levels. These include a
complex mix of negotiated benefits, allowances, overtime provisions and practices that make it difficult
to provide a single statistic summing up the effect of bargaining outcomes on remuneration.
Notch progression, where employees move up the scale within their salary level.
Promotions as vacancies arise, and the upgrading of personnel in line with revised job descriptions.
Wholesale promotion of personnel from one salary level to another. In 2013/14, for example, all
clerks were upgraded from level 1 - 4 to level 5, and from level 5 to 7.
While progression and promotions are intended as performance-linked incentives, in many sectors they
have become automatic. As a result, most public servants receive an automatic cost-of-living
adjustment and an increase from salary-scale progression. On average, promotions and notch
progressions increase governments wage bill by 1.5 per cent each year.
Figure B.6 shows that between 2008/09 and 2016/17, the proportion of public servants in the lowest
four salary levels fell from 26.8 per cent to 20 per cent, while the proportion of staff distributed across
levels five to seven rose from 43.8 per cent to 50.8 per cent. This upward drift in the distribution of
employees raises average remuneration significantly over time.
63
2017 MEDIUM TERM BUDGET POLICY STATEMENT
15 16.4
14.1
12.2
10 12.1
10.7 10.5 10.9
8.6 8.0 8.4
6.9
5
5.3 5.2 5.4
3.9 4.5 4.5
2.6 2.2 2.8
0
1 2 3 4 5 6 7 8 9 10 11-16
Salary level
Source: National Treasury
This reflects two factors. First, cost-of-living adjustments and other improvements in remuneration
have been targeted to benefit lower-income earners. Second, allowances set in nominal terms such as
housing allowances and employer medical contributions constitute a larger share of the remuneration
of lower-income employees, who receive larger proportional gains when such allowances are improved.
The combination of salary adjustments, improved benefits and upward progression has resulted in a
large increase and equalisation in remuneration levels in the public service over the past decade. In
2016/17, nearly 461 000 public servants (37 per cent of the total) earned more than R20 000 per
month, up from 17 per cent, or 199 000, in 2008/09. Just 17 percent earned less than R10 000 per
month in 2016/17, compared with more than 35 per cent of public servants in 2008/09.
Figure B.8 based on data from South African Revenue Service tax filings shows that public servants
tend to receive higher remuneration than taxpayers in general at every point of the distribution up to
the 90th percentile. While the income of the median taxpayer in 2014 was just under R100 000, the
income of the median public servant was over R260 000. Only at the highest income levels do public
servants earn less than the average taxpayer. Taxpayers in the 95th percentile earned about
R682 000 compared with R563 000 earned by public servants in that percentile.
64
ANNEXURE B: COMPENSATION DATA
Figure B.7 Distribution of public servants by real Figure B.8 Distribution of income of public
average monthly remuneration in 2016 prices servants compared with all taxpayers
Source: National Treasury Source: National Treasury based on SARS data for 2014
The income of public servants is more equally distributed than is the case for income-earners as a
whole. The highest-paid 1 per cent of public servants receive an income 23 times that of the lowest-
paid 1 per cent. By comparison, the income of the top 1 per cent of all taxpayers is 633 times more than
the lowest 1 per cent.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
66
C
Technical annexure
Main budget expenditure ceiling
The expenditure ceiling differs slightly from main budget non-interest expenditure due to technical
modifications introduced in the 2015 Medium Term Budget Policy Statement. The ceiling excludes
payments that are directly financed by dedicated revenue flows and others not subject to policy
oversight. These include:
Payments for financial assets financed by the sale of assets in the same fiscal year: Funds allocated
to equity investments financed from the sale of assets are deficit-neutral. The increases in associated
spending levels are generally not financed through adjustments to departmental allocations. For
example, in 2015/16, the Eskom and the New Development Bank capital contributions amounting to
R25 billion were financed from the sale of Vodacom shares. This transaction was deficit-neutral.
Payment transactions linked to the management of debt: This includes premiums paid on new loan
issues, bond switches and buy-back transactions, revaluation profits or losses on government's
foreign-exchange deposits at the Reserve Bank when used to meet government's foreign-currency
commitments, and realised profits and losses on the Gold and Foreign Exchange Contingency Reserve
Account. These items relate to debt and currency transactions that are not financed through
adjustments in departmental appropriations.
Direct charges that relate to specific payments made in terms of legislation that provides for the
collection and transfer of such receipts outside of the main budget: These include skills development
levy contributions and the International Oil Pollution Compensation Fund. Skills development levy
contributions are paid to the National Skills Fund and the sector education and training authorities. In
general, the payment schedule to the National Skills Fund is revised to align it directly with anticipated
receipts from the levy.
Table C.1 Expenditure ceiling calculations
R million 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Non-interest expenditure 1 017 102 1 115 827 1 158 989 1 249 753 1 333 493 1 438 718 1 544 053
Technical adjustments
Skills development levy -13 839 -15 156 -15 233 -15 771 -16 929 -18 299 -19 819
Eskom equity contribution -23 000
New Development Bank -2 019
Debt management and -1 526 -682 -1 778 -250
GFECRA transactions
1
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
BORROWING REQUIREMENT
Main budget deficit 166.4 168.4 167.8 219.6 222.0 243.1 265.3
Refinancing of redemptions 48.8 32.0 73.1 28.7 48.7 109.4 68.2
Gross borrowing requirement 215.2 200.4 240.9 248.3 270.7 352.5 333.5
5.6% 4.9% 5.5% 5.3% 5.4% 6.6% 5.8%
GOVERNMENT DEBT
Gross loan debt 1 798.9 2 019.0 2 232.9 2 530.5 2 829.6 3 094.2 3 415.6
46.6% 49.4% 50.7% 54.2% 57.0% 58.2% 59.7%
Net loan debt 1 584.2 1 804.6 2 008.3 2 294.2 2 568.5 2 863.6 3 179.4
41.0% 44.2% 45.6% 49.1% 51.7% 53.9% 55.6%
1. Unspecified tax policy measures announced in the 2016 Budget. The details will be announced in the 2018 Budget
2. Mainly revaluation profits on foreign-currency transactions and premiums on loan transactions
3. Technical adjustments explained in table C.1
Source: National Treasury
68
ANNEXURE C: TECHNICAL ANNEXURE
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
70
ANNEXURE C: TECHNICAL ANNEXURE
Table C.5 National and provincial expenditure outcomes and mid-year estimates
2016/17 2017/18
Original Adjusted Audited Over(-)/ Original Adjusted Actual
budget estimate outcome under(+) budget estimate
1 spending
April to
R billion September
2
71
2017 MEDIUM TERM BUDGET POLICY STATEMENT
72
ANNEXURE C: TECHNICAL ANNEXURE
Skills levy and sector education and training 17 640 15 462 15 233 229 16 641 15 771 7 954
authorities (Higher Education and Training)
Magistrates' salaries (Justice and Constitutional 2 040 2 010 1 846 164 2 141 2 041 925
Development)
Judges' salaries (Office of the Chief Justice and 920 950 931 19 966 966 478
Judicial Administration)
International Oil Pollution Compensation Fund 2 4 -2 10 10
(Transport)
Total direct charges against the National Revenue 590 923 589 793 588 653 1 140 636 178 636 064 312 830
Fund
Provisional allocation not assigned to votes 267
Contingency reserve 6 000 6 000
National government projected underspending -3 000 -3 000 -3 000
Local government repayment to the National -1 200 -1 200 -1 500
Revenue Fund
Total 1 318 338 1 308 725 1 305 486 3 239 1 409 215 1 413 100 686 212
1. The audited outcome for Parliament is converted from accrual to cash. Amendments to Parliament's budget are determined independently
of the national governments budget processes in accordance with the Financial Management of Parliament and Provincial Legislatures Act,
2009 as amended
2. National Revenue Fund payments previously classified as extraordinary payments
Source: National Treasury
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
74
Glossary
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Core inflation A measure of the change in price level that excludes temporary
shocks and represents the long-run trend of the price level.
Countercyclical fiscal policy Policy that has the opposite effect on economic activity to that
caused by the business cycle, such as slowing spending growth in a
boom period and accelerating spending in a recession.
Credit rating An indicator of the risk of default by a borrower or the riskiness of a
financial instrument. Grades such as AAA, Baa2 and D are given,
signifying the extent of the borrowers capacity to meet its financial
obligations or the probability that the value of the financial
instrument will be realised. See also rating agency.
Crowding-in Increase of private investment as a result of government spending.
Financial account (of the A statement of all financial transactions between a country and the
balance of payments) rest of the world, including portfolio and fixed investment flows, and
movements in foreign reserves.
Financial and Fiscal An independent body established in terms of the Constitution to
Commission make recommendations to Parliament and provincial legislatures
about financial issues affecting the three spheres of government.
76
GLOSSARY
Fiscal drag The tendency of inflation and earnings growth to push taxpayers into
higher tax brackets
Independent power producer A private-sector producer of power for the national grid.
Indirect grant A grant allowing a national department to perform a function on behalf
of a province or municipality. No funds are transferred, but the end-
product of the grant, such as infrastructure built, is generally
transferred to provincial or municipal ownership.
Inflation An increase in the general level of prices.
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
Inflation targeting A monetary policy framework intended to achieve price stability over
a certain period of time. The Reserve Bank and government agree on
a target rate or range of inflation to be maintained.
Labour force participation The ratio of employed and unemployed workers (the labour force)
relative to the working age population.
Main budget expenditure National government expenditure and transfers to provincial and local
government financed from the National Revenue Fund, excluding
revenues and spending related to social security funds, extra-
budgetary institutions and provincial own revenue. See also
consolidated government expenditure.
Medium-term Expenditure The committee responsible for evaluating the budget submissions of
Committee national departments and recommending allocations.
Medium-term expenditure The three-year spending plans of national and provincial governments
framework (MTEF) published at the time of the Budget.
Medium-term strategic The five-year strategy of government coinciding with the electoral
framework term.
Monetary policy The actions taken by a countrys monetary authority (e.g. the Reserve
Bank), normally focused around money supply and interest rates.
Money supply The total stock of money in an economy.
National budget The projected revenue and expenditure flowing through the National
Revenue Fund. It does not include spending by provinces or local
government from their own revenues.
National Development A national strategy to eliminate poverty and reduce inequality.
Plan (NDP)
National Revenue Fund The consolidated account of national government into which all taxes,
fees and charges collected by the South African Revenue Service and
departmental revenue must be paid.
Net asset position The total value of a companys assets minus its liabilities.
Nominal exchange rate The current rate of exchange between the rand and foreign
currencies.
Non-interest expenditure Total expenditure by government less debt-service costs.
Primary deficit/surplus The difference between total revenue and non-interest expenditure.
When revenue exceeds non-interest expenditure there is a surplus.
Primary expenditure Non-interest expenditure by government.
Primary sector The agricultural and mining sectors of the economy.
Private-sector credit extension Credit provided to the private sector by banks. This includes all loans,
credit card balances and leases.
Productivity A measure of the amount of output generated from every unit of
input over a period of time. Typically used to measure changes in
labour efficiency.
Protectionism When a country restricts international trade to protect domestic
industries.
Public entities Companies, agencies, funds and accounts that are fully or partly
owned by government or public authorities and regulated by law.
78
GLOSSARY
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2017 MEDIUM TERM BUDGET POLICY STATEMENT
80