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ISBN: 978-0-621-46020-9 RP: 03/2018

The Budget Review is compiled using the latest available information from departmental and other sources. Some of this information is unaudited or subject to revision.

To obtain additional copies of this document, please contact:

Communications Directorate National Treasury Private Bag X115 Pretoria 0001 South Africa Tel: +27 12 315 5944 Fax: +27 12 407 9055

The document is also available on the internet at: www.treasury.gov.za.

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Foreword The 2018 Budget arrives at a moment of opportunity for South Africa. A renewed sense of optimism has provided a much-needed boost to confidence and investment. The economic outlook has improved. And government has expressed a new resolve to strengthen policy coordination.

Yet this positive turn of events should not blind us to the enormous economic and fiscal challenges facing our country. Economic growth is far too low to reduce alarmingly high unemployment and inequality. Revenue collection, on which government depends to fund social and economic spending programmes, will fall short of projections by R48.2 billion in 2017/18. The finances of several state-owned companies are in a precarious state.

The 2017 Medium Term Budget Policy Statement (MTBPS) pointed out that extraordinary measures would be needed to stabilise the public finances. Without such measures, we would only delay the debt reckoning, and a growing share of spending would be absorbed by interest payments.

The 2018 Budget proposals address these concerns with resolve. The budget sets out a programme of expenditure cuts identified by a Cabinet subcommittee amounting to R85 billion over the next three years, and reprioritises spending. Several tax measures, including a value-added tax increase and maintaining the top four tax brackets with no inflationary adjustment, will raise an additional R36 billion in 2018/19, enabling government to narrow the revenue gap. Social grant payments will increase faster than inflation to offset the effect of higher taxes on poor households.

The budget also responds to new policy initiatives. This includes an allocation of R57 billion for fee-free higher education and training over the medium term, as announced in December 2017.

The fiscal measures in this budget entail a difficult adjustment. They will require increased spending discipline in government and resilience from the people of South Africa. Nonetheless, these measures will protect the government’s ability to meet its constitutional obligations over the long term, and ensure that we retain fiscal sovereignty.

As a result of these steps and the improved growth outlook, the budget deficit is projected to narrow to 3.5 per cent of GDP in 2020/21. Gross loan debt, which in the MTBPS projections was set to breach 60 per cent in 2021/22, is now projected to stabilise at 56.2 per cent by 2022/23.

Government is committed to setting the country on a new path of growth, employment and transformation. In the months ahead, we will end policy limbo in key areas and address governance concerns with renewed vigour. We will build a social compact with business and labour to speed up investment and job creation. And we will continue to improve planning for major infrastructure projects to ensure value for money.

I would like to extend my thanks to Cabinet, the Minister and Deputy Minister of Finance, Parliament’s finance portfolio committee, the Ministers’ Committee on the Budget and my colleagues across government for their contributions to the 2018 Budget, which took shape in a highly complex environment. I would also like to thank my predecessor, former Director-General Lungisa Fuzile, for his many years of service to the country. I am especially grateful to the team at the National Treasury, who have worked diligently for the people of South Africa through extraordinarily challenging times.

Dondo Mogajane Director-General: National Treasury

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Contents

Chapter 1 Restoring economic confidence and stabilising the public finances…………………………………………. 1 Overview…………………………………………………………………………………………………………………………………….. 1 Growth, policy choices and spending pressures………………………………………………………………………….. 2 Stabilising the public finances……………………………………………………………………………………………………… 4 Summary of the budget………………………………………………………………………………………………………………. 7 The budget documentation………………………………………………………………………………………………………… 12 Chapter 2 Economic overview………………………………………………………………………………………………………………… 13 Overview…………………………………………………………………………………………………………………………………….. 13 Global outlook……………………………………………………………………………………………………………………………. 15 Domestic outlook……………………………………………………………………………………………………………………….. 16 Sector performance……………………………………………………………………………………………………………………. 21 Investment and transformation for inclusive growth………………………………………………………………….. 24 Chapter 3 Fiscal policy…………………………………………………………………………………………………………………………….. 27 Overview…………………………………………………………………………………………………………………………………….. 27 Stabilising the public finances……………………………………………………………………………………………………… 28 Fiscal framework…………..……………………………………………………………………………………………………………. 33 Elements of the consolidated budget…………………………………………………………………………………………. 34 Chapter 4 Revenue trends and tax policy……….………………………………………………………………………………………. 37 Overview……………………………………………………………………………………………………………………………………. 37 Revenue collection and outlook…………..…………………………………………………………………………………….. 38 Tax proposals………………………………….…………………………………………………………………………………………. 41 Measures to enhance tax administration…….…………………………………………………………………………….. 50 Chapter 5 Consolidated spending plans………………………………………………………………………………………………….. 51 Overview……………………………………………………………………………………………………………………………………. 51 Revisions to spending plans……………………………………………………………………………………………………….. 52 Consolidated government expenditure……………………………………………………………………………………… 55 Medium-term spending and social priorities…………………………………………………………………………..... 56 Chapter 6 Division of revenue and spending by provinces and municipalities………………………………………… 69 Overview…………………………………………………………………………………………………………………………………… 69 Division of revenue……………………………………………………………………………………………………………………. 70 Provincial revenue and spending………………………………………………………………………………………………. 72 Municipal revenue and borrowing……………………………………………………………………………………………. 76 Chapter 7 Government debt and contingent liabilities………………………………………………………………………….. 81 Overview…………………………………………………………………………………………………………………………………… 81 Financing strategy……………………………………………………………………………………………………………………... 82 Borrowing performance and projections…….…………………………………………………………………………….. 83 Government debt and debt-service costs…….……………………………………………………………………………. 88 Contingent liabilities……………………………..…….……………………………………………………………………………. 90 Chapter 8 Financial position of public-sector institutions………………………………………………………………………. 93 Overview…………………………………………………………………………………………………………………………………… 93 Financial health of public institutions………………………………………………………………………………………… 94 State-owned companies……………………………………………………………………………………………………………. 95 Development finance institutions……………………………………………………………………………………………… 100 Social security funds…….……………………………………………………………………………………………………………. 102 Government Employees Pension Fund………………………………………………………………………………………. 103

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Annexure A Report of the Minister of Finance to Parliament………………………………………………………………………………… 107 Annexure B Tax expenditure statement…………….…………………………………………………………………………………………………. 121 Annexure C Additional tax policy and administrative adjustments……………………………………………………………………….. 125 Annexure D Public-sector infrastructure update…..………………………………………………………………………………………………. 139 Annexure E Public-private partnerships..……………………………………………………………………………………………………………… 153 Annexure F Building a financial services sector that serves all South Africans ……………………………………………………… 159 Annexure G Summary of the budget…………………………………………………………….………………………………………………………. 165 Glossary………………………………………………………………………………………………………………………………………………………………………. 169 Statistical annexure…………………………………………………………………………………………………………………………………………………….. 183 Two annexures are available on the National Treasury website (www.treasury.gov.za): W1 Explanatory memorandum to the division of revenue W2 Structure of the government accounts

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Tables 1.1 Macroeconomic outlook – summary ....................... 7 1.2 Consolidated government fiscal framework ............ 8 1.3 Impact of tax proposals on 2018/19 revenue .......... 9 1.4 Consolidated government expenditure by function ................................................................... 9 1.5 Division of revenue .................................................. 10 1.6 Projected state debt and debt-service costs............ 11 1.7 Combined financial position of public institutions .. 11 2.1 Economic growth in selected countries ................... 15 2.2 Macroeconomic performance and projections ............................................................... 17 2.3 Assumptions used in the economic forecast .......... 20 2.4 Sector growth trends ............................................... 22 3.1 Consolidated fiscal framework ................................ 28 3.2 Macroeconomic performance and projections ....... 29 3.3 Expenditure ceiling .................................................. 32 3.4 Consolidated operating and capital accounts .......... 34 3.5 Main budget framework .......................................... 35 3.6 Revisions to main budget revenue and

expenditure estimates ............................................. 36 3.7 Consolidated budget balance .................................. 36 4.1 Budget estimates and revenue outcomes ............... 39 4.2 Budget revenue ....................................................... 40 4.3 Impact of tax proposals on 2018/19 revenue .......... 42 4.4 Total combined fuel taxes on petrol and diesel ....... 48 4.5 Personal income tax rates and bracket adjustments ............................................................. 48 4.6 Estimates of individual taxpayers and taxable income ..................................................................... 49 4.7 Changes in specific excise duties ............................. 49 5.1 Adjustments to the expenditure ceiling................... 52 5.2 Baseline reductions by sphere of government, before

funding fee-free higher education and training ....... 52 5.3 Additional allocations over the MTEF period ........... 55 5.4 Consolidated government expenditure by economic

classification ............................................................ 56 5.5 Consolidated government expenditure by function 57 5.6 Learning and culture expenditure............................ 59 5.7 Health expenditure .................................................. 61 5.8 Social protection expenditure ................................. 62 5.9 Average monthly social grant values ....................... 62 5.10 Community development expenditure .................... 63 5.11 Economic development expenditure ....................... 65 5.12 Agriculture and rural development expenditure .... 66 5.13 Peace and security expenditure............................... 67 5.14 General public services expenditure ........................ 68 6.1 Baseline reductions by sphere of government, before funding fee-free higher education and training .................................................................... 70 6.2 Division of nationally raised revenue ....................... 71 6.3 Provincial equitable share ....................................... 73 6.4 Conditional grants to provinces ............................... 74 6.5 Transfers to local government ................................ 77

7.1 South Africa’s current sovereign credit ratings ........... 82 7.2 Performance against strategic portfolio risk benchmarks ................................................................. 83 7.3 Financing of national government gross borrowing

requirement ................................................................ 84 7.4 Domestic short-term borrowing .................................. 85 7.5 Domestic long-term borrowing ................................... 85 7.6 Foreign-currency commitments and financing ............ 87 7.7 Change in cash balances .............................................. 88 7.8 Total national government debt .................................. 89 7.9 Analysis of annual increase in gross loan debt ............ 89 7.10 National government debt-service costs ..................... 89 7.11 Government guarantee exposure ............................... 91 8.1 Combined financial position of public institutions…….. 94 8.2 Combined balance sheets of state-owned companies ................................................................... 96 8.3 Borrowing requirement of selected state-owned companies ................................................................... 97 8.4 Financial position of selected development finance institutions ...................................................... 100 8.5 Borrowing requirement for development finance institutions ...................................................... 101 8.6 Financial position of social security funds ................... 102 8.7 Selected revenue and expenditure of the Unemployment Insurance Fund .................................. 102 8.8 Revenue and expenditure of the Road Accident Fund 103 8.9 Selected income and expenditure of GEPF .................. 104 8.10 Breakdown of assets under management by PIC ........ 104 Figures 1.1 Gross debt-to-GDP outlook ......................................... . 2 1.2 Total public-service employment (full-time

equivalents)………………. ................................................ 5 1.3 Average cost-of-living adjustments and inflation........ 5 1.4 Potential impact of selected NDP reforms on GDP growth ................................................................. 6 2.1 Investment and business confidence .......................... 14 2.2 GDP and unemployment ............................................. 14 2.3 Commodity prices........................................................ 16 2.4 Job gains/losses in formal non-agricultural sector ...... 17 2.5 Emerging-market currency performance .................... 18 2.6 Effective exchange rate movements ........................... 18 2.7 Components of the current account ........................... 19 3.1 Main budget revenue and non-interest spending ....... 30 3.2 Tax revenue performance and projections.................. 30 4.1 Contribution to gross tax revenue by tax instrument .. 41 4.2 Comparative standard VAT rates by country ............... 43 4.3 Corporate income tax as a share of GDP ..................... 44 5.1 Nominal spending growth by function over MTEF ...... 58 6.1 Funded and unfunded municipal budgets ................... 78 7.1 Maturing redemptions ................................................ 86 7.2 Ownership of domestic government bonds ................ 86

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