Mixed bag in Nene's first budget

2015-02-25 16:54
Finance Minister Nhlanhla Nene. (Pic: : Leanne Sta
Finance Minister Nhlanhla Nene. (Pic: Leanne Stander, Photo24)

Cape Town - Some taxation increases coupled with certain relief measures in a generally subdued but optimistic 2015/16 budget were announced by Finance Minister Nhlanhla Nene on Wednesday.

Presenting his first main budget as finance minister in the National Assembly, Nene said the 2015/16 budget was aimed at rebalancing fiscal policy to give greater impetus to investment, to support enterprise development, promote agriculture and industry, and make cities engines of growth.

The primary challenge was to deal with the structural and competitiveness problems holding back production and investment in the economy.

The most important of these was the security and reliability of energy supply.

"Electricity constraints hold back growth in manufacturing and mining, and also inhibit investment in housing and raise costs for businesses and households," he said.

"Mainly for this reason, our projected economic growth for 2015 is just two percent, down from 2.5% indicated in October last year.

"We expect growth to rise to 3% by 2017."

Interest rates

CPI inflation peaked at 6.6% in June last year, and had subsequently declined to just 4.4% last month. It was expected to average 4.3% in 2015, laying a foundation for economic growth, he said.

Higher growth was possible if good progress was made in responding to the electricity problems or if export performance was stronger.

"The best short-term prospects for faster growth lie in less energy-intensive sectors such as tourism, agriculture, light manufacturing, and housing construction.

"These are also sectors that employ more people, and so they contribute to more inclusive growth. Efforts to support these sectors have to be intensified," he said.

Although the fiscal position was constrained, there were considerable financial strengths on which South Africa’s growth strategy could build.

Interest rates had remained moderate, which reflected the credibility of fiscal and monetary policy and the favourable inflation outlook.

The capital market rates at which government and the corporate sector borrowed had declined over the past year, signalling continued investor confidence in the economy.

The exchange rate depreciated by 11% against the US dollar in 2014, after declining by 15% in 2013.

"This coupled with low inflation contributes to our trade competitiveness, and partially offsets the deterioration in commodity prices.

"Our banks and other financial institutions are well-capitalised. South Africa has a buoyant capital market, is open to foreign investors, and is a major contributor to foreign direct investment elsewhere in Africa.

"Our company law and tax frameworks are robust, and we have excellent property market institutions," he said.

Spending priorities

In the budget framework tabled, a consolidated deficit of 3.9% of GDP was projected for 2015/16, falling to 2.5% in 2017/18.

Consolidated non-interest expenditure would rise from R1.123trn this year to R1.4trn in 2017/18, which was an average real increase of 2.1% a year.

The share of personnel compensation was projected to remain about 40% of non-interest spending. Interest on state debt would rise from R115bn this year to R153bn in 2017/18.

Reductions in budget allocations had been targeted at non-critical activities. Cost containment and reprioritisation measures would limit growth in allocations for goods and services to 5% a year.

Spending on catering, entertainment and venues was budgeted to decline by 8% a year, travel and subsistence would be cut back by four percent a year, in real terms.

"But allocations for critical items such as school books and medicine, for police vehicles’ fuel and for maintenance of infrastructure, will grow faster than inflation.

"Compliance will be reported by the auditor general," Nene said.

The budget framework included an unallocated contingency reserve of R5bn, R15bn in 2016/17, and R45bn in 2017/18.

This could allow for new spending priorities to be accommodated in future budgets.

"It takes into account that the economic outlook is uncertain and that both weaker growth and rising interest rates are possible over the period ahead."

Over the next three years, government’s gross debt stock was projected to increase by about R550bn to R2.3tn in 2017/18.


Redemptions on debt issued over the past decade would add R190bn to the medium-term borrowing requirement.

Net loan debt of national government was expected to stabilise at less than 45% of GDP in three years time.

"South Africa’s liquid capital market and our standing in international markets enable us to meet this borrowing requirement. But we are mindful that debt sustainability requires a prudent budget framework and improvements in both saving and investment."

Nene said R2.7bn had been allocated over the medium-term under the mineral policy and promotion programme to promote investment in mining and petroleum beneficiation projects.

R108m had been allocated for research and regulatory requirements for licensing shale gas exploration and hydraulic fracturing.

Unemployment remained the single greatest economic and social problem, he said.

R10.2bn had been allocated over the MTEF period to manufacturing development incentives and support for growing service industries, such as business process outsourcing.

The manufacturing competitiveness enhancement programme would spend R5.4bn and would help 1450 companies with financial support to upgrade facilities and skills development.

Police services

The jobs fund would spend R4bn in partnership with the private sector on projects creating new employment, supporting work-seekers, and addressing structural constraints to more inclusive growth.

The community work programme would be extended to all municipalities.

Social grants played an important role in protecting the poorest households against poverty. Social assistance beneficiaries numbered 16.4 million in December 2014.

"In order to accommodate the growth in numbers, the budget proposals include an additional R7.1bn on the social development vote.

The country was still confronted with unacceptably high levels of crime. Government spending on public order and safety and on defence would therefore continue to increase, from R163bn this year to R193bn by 2017/18.

Police services received about 48% of the total allocation.

Over the medium-term, a total amount of R492m had been reprioritised to improving access to justice. This would increase capacity for court support personnel, public defenders and prosecutors.

Nene said consolidated government spending in 2015/16 was expected to be R1.35trn and revenue about R1.189trn.

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