President Jacob Zuma has given us a clear and historic challenge to “write a new story about South Africa – the story of how, working together, we drove back unemployment and reduced economic inequality and poverty”.

This Budget has been crafted at a challenging but hopeful time. Economic uncertainty will be with us for some time, yet we have a programme of economic change that can steadily roll back unemployment, poverty and inequality.

We have demonstrated excellent resilience during the post-2008 crisis. We now need to introduce dynamism among all South Africans. It requires extraordinary national effort from all role players, committed not just to identifying the barriers to progress, not just to proposing solutions, but also working together over the long haul.

Our new story, our period of transition, is about building modern infrastructure, a vibrant economy, a decent quality of life for all, reduced poverty and decent employment. It is a story that must be written by all of us. Not just by the government. Not just by business. Not just by unions. South Africans from all corners of this country.

The legacy of our past is not only that of difficulty and despair. We can draw pride from the celebration of the ANC’s centenary, and build on this past to get things done today. The idea of unity in action, working together to realise practical goals, must be revived. The idea of an active citizenry, drawn into motion by dedicated activists and inspired by a compelling vision of the future, has to be renewed.

Every one of the past 100 years has seen our nation overcome obstacles. Some may have been beyond our control, the result of changes to which we were compelled to adjust. Some were the result of our failure to act, even when the solutions were known to us. Others were the unintended consequences of our own successes.

A towering leader of our movement, Walter Sisulu, wrote from his prison cell on Robben Island: “In a certain sense, the story of our struggle is a story of problems arising and problems being overcome. It is understandable that many of the problems should generate much controversy and emotion. However cool and detached we may strive to be in our analysis, the fact remains that we are deeply involved and interested parties and the solutions we adopt are solutions we ourselves have to implement.”

We will not turn away from our challenges. We must confront them boldly, and with hope. In harnessing all the resources at our disposal, we have to do more, with less; we must work smarter and harder. South Africans must focus on our strengths and opportunities, to identify and activate the levers of economic and social change at our disposal.

The president has given effect to the wisdom of Walter Sisulu; through the work of the Planning Commission this country now has a 20-year vision. We now have a massive infrastructure plan also extending over 20 years, which will increase the job-creating potential of our economy.

Big issues

We remain steadfast in addressing the challenges of creating jobs, cutting poverty, building infrastructure and growing our economy. In brief, we advise the following:

n The global environment remains highly uncertain. While there are signs of a revival in the US economy, Europe is in recession, and huge risks cloud the global economic outlook.

n South Africa’s finances are in good health. A budget deficit of 4.6 percent of gross domestic product (GDP) is projected in 2012/13. We plan to cut the deficit to 3 percent of GDP in 2014/15, and public debt will stabilise at about 38 percent of GDP.

n An expansion in infrastructure investment is a central priority of the 2012 Budget.

n Special emphasis is given to improving competitiveness in industry, investment in technology, encouragement of enterprise development and support for agriculture.

n Total spending will reach R1.1 trillion next year, representing some 32 percent of GDP.

n Education, health and social assistance will remain the largest categories of expenditure, sustaining and expanding the social wage over the medium-term expenditure framework (MTEF) period ahead. Investment in people is at the centre of our growth and development strategy.

n Job creation will be supported, with a particular focus on unemployed youth.

n A personal income tax relief of R9.5 billion will be provided, with further measures to increase tax compliance.

n Measures are proposed to invigorate household savings.

n We will strengthen financial management in the public sector, pursue value for money with the greatest possible vigour and ensure that taxpayers’ money is well used.

n Fraud and corruption will be combated with changes to procurement policies and practices and tough law enforcement.

Giving the budget practical effect cannot be a project of the government alone. In Setswana, we say “Mabogo dinku a thebana”, meaning “we have to work together to achieve more”.

The government has supported the recovery from the 2008 recession, but as we expand infrastructure investment, we have to see business investing in our future.

The government has expanded social assistance to households over the past decade, but employment and economic growth have to be the main future drivers of income growth and poverty reduction.

The government is responsible for developing effective municipalities and broadening access to services, but business, civil society and organised labour have to be partners in building cohesive communities and promoting social solidarity.

And so, in tabling the 2012 Budget, we have to say: this is what we undertake to do, not just as the government, but as a nation. Our development requires every one of us to ask – what can I do for my country, my people, our future!

World is changing

A historic shift in economic power is taking place.

n In 2012, global output is projected to expand by 3.3 percent. Advanced economies are expected to grow 1.2 percent, while developing Asia will grow by 7.3 percent and sub-Saharan Africa by 5.5 percent.

n Negative growth is forecast for the euro area, impacting on trade in many other economies.

n In the past 5 years, China has expanded by 60 percent and India by 45 percent. Advanced economies barely show positive growth. A recent World Bank study argues that “new growth poles are redefining the global economic structure”. This study predicts that emerging economies will grow on average by 4.7 percent a year, while advanced ones will grow 2.3 percent between 2011 and 2025.

n The speed of change is unprecedented and places emerging economies at the centre of the global economy. The evolving world we face presents us with both challenges and opportunities. To succeed in this environment, we have to seize the opportunities. As a major mining economy, we should be benefiting more from the continued buoyancy in commodity markets internationally.

We need to take advantage of rising demand for agricultural and manufacturing goods. Some 85 million manufacturing jobs in China will shift to other countries in the years ahead. Do we have the right policies, conditions and boldness to enable local businesses to gain from these immense shifts in the patterns of production and trade?

There are expanding opportunities in Africa, the second-fastest growing region in the world. This growth is sustained by high commodity prices, but also reflects a youthful, increasingly educated population, rapid urbanisation and a new entrepreneurial spirit. Ten years ago there were fewer than 10 million internet users in Africa. Today there are 100 million.

As well as developing South African business interests in the continent, we should use the strength and sophistication of our financial system to turn us into a gateway for investment into, and development of, Africa.

Both the National Development Plan and the New Growth Path recognise that to compete in the global economy requires flexibility, innovation and leadership, in government and the private sector. We have to build an adaptable economy. This requires dynamic partnership between the government, the private sector and civil society.

At the same time, the crisis and its aftermath have revealed intractable problems in the old system. Growing inequalities in income and wealth have undermined economic growth and social well-being. The difficult task of moderating and reversing inequality requires active government intervention. Unregulated capitalism is clearly in crisis.

What to expect

In building partnerships that will take us through this crisis, we have to implement a strategy for faster and more inclusive economic growth. We are not doing well enough in growing our economy and creating jobs for our young people.

n The South African economy has averaged 3 percent growth a year since 2009. Against the background of the slowdown in the global economy, real GDP growth is likely to fall to 2.7 percent in 2012.

n We expect a recovery to 3.6 percent and 4.2 percent growth in 2013 and 2014, but these are modest rates of expansion relative to the social and developmental challenges we face and the opportunities that our mineral wealth and human capabilities offer.

n On present trends, the deficit on the current account of the balance of payments will widen from 3.3 percent in 2011 to 4.4 percent GDP in 2014.

n There was a welcome recovery in job creation during 2011, but employment has not yet returned to its 2008 peak and the unemployment rate remains high at 23.9 percent.

2030 vision

Through Zuma’s leadership we have a vision for our country and our economy – where we want to get to in the next 20 years. Our New Growth Path recognises that special employment initiatives have to be a priority in our present circumstances, while in the longer term growth in agriculture and manufacturing, and investment in a knowledge-based economy must be prioritised.

The draft National Development Plan identifies several key objectives:

n Lowering costs for both households and business;

n Increasing public infrastructure spending;

n Growing our manufacturing and agricultural sectors;

n Raising mining output;

n Improving the functioning of the labour market, particularly to help young people access work; and

n Raising competitiveness and exports.

In each of these areas there are steps proposed over the three years ahead. Our development strategy requires a capable state, and active citizens. We need parents to work with the state to deliver quality education, community leaders that will help protect neighbourhoods; business leaders and trade unions to grow the economy; and investors to create jobs. In isiZulu, “Uzothola kanjani uhleli ekhoneni”, meaning “how far will you get if you are sitting in your corner?”.

Levers of change

If we are to succeed in putting our economy on a more rapid and inclusive growth path to 2030, we need to effectively direct and manage the levers of change – levers that activate both public and private sector energies and capabilities. These include:

n Our public-sector infrastructure programme;

n Support for industrial development and special economic zones;

n Investment in science and technology;

n Support for emerging farmers and beneficiaries of land reform;

n Expansion of employment programmes; and

n Improvements in further education and skills development.

Fiscal framework

A sustainable fiscal framework, based on the principles of counter-cyclicality, debt sustainability and intergenerational equity underpins our growth strategy.

We can be proud of the collective wisdom and will of our government in making the tough decisions that have kept our fiscus on a sustainable track. Reprioritisation, savings, haircuts – these have been executed with singular determination. The consolidated resources available to the state over the MTEF period amount to R4.5 trillion, taking into account the investment plans of state enterprises and development finance institutions.

Key features of the budget framework include:

n Real growth in non-interest expenditure averaging 2.6 percent over the medium term, bringing spending in line with long-term revenue trends;

n Additional allocations of R55.9bn over the next three years, including R9.5bn for an economic support package;

n Tax revenue stabilising at about one-quarter of GDP;

n A cut in the budget deficit from 4.8 percent in 2011/12 to 3 percent in 2014/15.

n A public-sector borrowing requirement of 7.1 percent of GDP in 2011/12, declining to 5 percent in 2014/15 before rapidly rising again as the infrastructure plan of the government accelerates.

By phasing in our fiscal consolidation over the medium term, we avoid the social and economic dislocation associated with more rapid adjustments, while still stabilising the fiscal position without burdening the economy and future generations with huge debt.

Infrastructure fund

The Presidential Infrastructure Co-ordinating Commission (PICC) has made progress in identifying projects and clarifying long-term investment plans to drive economic change.

The Budget Review lists 43 major infrastructure projects, adding up to R3.2 trillion in expenditure. Over the MTEF period ahead, approved and budgeted infrastructure plans amount to R845bn, of which just under R300bn is in the energy sector and R262bn in transport and logistics projects. These projects are funded in various ways:

n The fiscus meets the costs of public-service facilities such as schools and courtrooms, hospitals and rural roads.

n Public entities such as Eskom and Transnet finance their investments from internally generated surpluses and borrowing from the capital market. This means they have to generate sufficient revenue from tariffs and charges to repay debt over time, and cover operating and maintenance costs.

n A mix of tax finance and cost recovery in some cases.

n Private sector investment plays a substantial role in several sectors. Access to telecoms services is financed by private operators, and our airlines industry has several private sector players. The first round of over 1 200 megawatts of renewable energy projects was recently successfully tendered to independent power producers. Private sector capacity can also be mobilised through construction and operating concessions.

n The Development Bank of Southern Africa will play a coordinating role in raising finance, in partnership with multilateral finance institutions, foreign investors and other investment funds. The Industrial Development Corporation similarly invests directly in income-generating projects, in partnership with other investors.

South Africa has deep and liquid capital markets, through which long-term capital can be raised at competitive rates by the government, state enterprises and the private sector. Our development finance institutions are capable of raising capital and co-financing investments of the private sector, state entities and municipalities. These are considerable strengths – they mean that we do not have to rely on expensive external finance or complex structured arrangements.

But the key consideration is the impact and economic viability of our infrastructure investments. The PICC will ensure expert project assessment, subject to appropriate standards of review and public accountability – a critical requirement before investment decisions are taken.

No good project will be short of funding.

Infrastructure plan

We are aware of several weaknesses in the state’s infrastructure capacity. In the past, spending has lagged behind plans. Our estimate is that in 2010/11, R178bn was spent out of a planned R260bn, or just 68 percent. We have to do better than that – state enterprises, municipalities and government departments all need to improve their planning and management of capital projects.

In addition to long delays, we have often experienced significant cost overruns in infrastructure projects. So we shall step up the quality of planning, costing and project management, so that infrastructure is delivered on time, and on budget.

This means that government departments and municipalities that do not spend, underspend or misspend their allocated funding, will risk losing the allocations. The relevant officials will also be held liable for such misdemeanours. The Treasury will proactively monitor the spend of grants to ensure value for money, adherence to Expanded Public Works Programme targets and implementation of operational and maintenance programmes.

Several measures are in place to improve infrastructure project implementation and build management capacity.

n Within state-owned entities, development finance institutions and the private sector, considerable capacity is already mobilised in project planning and management.

n The Infrastructure Development Improvement Programme assists national and provincial departments, focused largely on education and health projects and support for provincial public works departments. The Construction Industry Development Board has played a key role in developing standards and procedures for government tenders.

n A new Cities Support Programme will get under way this year, initially in eight metropolitan authorities, focused on improved spatial planning, public transport systems and management of infrastructure utilities.

n The Municipal Infrastructure Support Agency will be established by Minister Richard Baloyi this year, focused on rural municipalities that lack planning capacity.

n Technical assistance to municipalities is also provided through the neighbourhood development plan, which supports 220 projects aimed at catalysing business investment in township partnership projects.

n The infrastructure skills development grant supported 150 graduate interns in engineering and spatial planning in 2011/12, and will extend to a further 43 municipalities over the period ahead.

n Special attention will be given to the procurement processes for major infrastructure projects, to ensure both value for money and development of local suppliers and support industries.

Training and mentorship schemes have a critical role to play in addressing capacity constraints of departments and municipalities. But professionalism, hard work and commitment to value for money are preconditions for successful project delivery. There can be no compromise on the basic principles of sound financial management in ensuring that resources are mobilised efficiently to serve our people.

A capable state focussed on delivery requires a passionate and patriotic public service – without those few individuals whose only desire is to profit from the state.

Toll taking

The underlying principles are that the tax system should be fair, efficient, transparent, certain – and, where possible, uncomplicated. Tax revenue recovered during 2010/11 and 2011/12, following a decline in 2009/10 during the global recession. Although tax revenue is slightly lower than our estimate in February last year, the revised estimate for 2011/12 of R739bn is R10bn higher than projected in last year’s Medium Term Budget Policy Statement.

This year’s tax proposals:

n Personal income tax relief of R9.5bn, which takes account of inflation and provides modest real tax relief.

n As from March 1, 2012, the tax credit for contributions to medical schemes will be introduced, at a rate of R230 a month for the first two beneficiaries and R154 each for additional beneficiaries. Taxpayers 65 years and older and people with disabilities will be included in the second phase of this reform, which will be implemented in 2014. These reforms will significantly improve the fairness of the personal income tax system.

n Reform of the tax treatment of contributions to retirement funds is also envisaged, to take effect in 2014. To encourage voluntary savings, consideration is given to the introduction of tax-exempt short- and medium-term savings products.

n The secondary tax on firms will be terminated in March and a withholding tax on dividends will be implemented in April. This will align South Africa’s tax treatment of dividends with that in most other countries. Pension funds will benefit from this transition as they will receive dividends tax free. The dividend tax will be introduced at 15 percent.

n The introduction of capital gains tax (CGT) in 2001 was an important step in broadening the tax base. To reduce the scope for tax arbitrage and broaden the tax base further, the CGT inclusion rate for individuals and special trusts will be increased in March from 25 percent to 33.3 percent, and for companies and other trusts from 50 percent to 66.6 percent. To mitigate the impact on middle-income earners, the various exclusion thresholds are increased.

n Good news: there will be further tax relief for small businesses and microenterprises.

n In the corporate tax environment, further steps will be taken to limit excessive debt financing. Amendments to the mark-to-market taxation of foreign currency and other financial instruments will be phased in and the governance and tax treatment of property loan stock entities will be aligned with the present treatment of regulated property unit trusts

Tax relief is proposed for housing developers and employers who provide housing below R300 000 a unit.

n The minister of trade and industry has published draft legislation to provide for the creation of special economic zones. Tax relief is under consideration for businesses that invest in these zones.

n A revised policy paper on a carbon tax will be published this year for a second round of public comment and consultation. As set out in the Climate Change Response White Paper approved by the cabinet in 2011, the need to price carbon emissions and the phasing in of a tax instrument for this purpose are accepted.

n The levy on electricity generated from non-renewable sources will increase from July and will replace the current funding mechanism for energy efficiency initiatives. There should be little overall impact on electricity tariffs.

n The general fuel levy on petrol and diesel will rise with effect from April, as will the Road Accident Fund.

n The Square Kilometre Array radio telescope project will qualify for VAT relief.

n It is proposed that a national tax based on gross gambling revenue be introduced from April. A similar base will be used to tax the national lottery.

n Duties on tobacco products will rise between 5 percent and 8 percent this year. In beer and spirits, an increased benchmark tax burden is proposed, to be phased in over two years.

n South Africa has a financial transaction tax on securities transfers, at a rate of 0.25 percent. It is proposed that the current exemption for brokers should be abolished. Transactions for the broker’s benefit will be taxed at a lower rate.

The inclusion of financial derivatives in the base of the securities transfer tax is also under consideration.

Tax admin

Whereas several nations are confronting severe austerity measures and significantly higher taxes, we are able to propose tax relief of R2.3bn overall, partly on the strength of our tax policy and administration, and in part because millions of South Africans pay their taxes and duties in full and on time.

The recent Voluntary Disclosure Programme has attracted about 18 000 applications, and has yielded almost R1bn in additional tax so far. It has also provided useful insights into areas of non-compliance that will receive focused attention.

Poor tax compliance is also apparent in respect of trusts and in parts of the construction sector, and the role of tax practitioners and other intermediaries will come under scrutiny.

Within the trade environment, customs officials will continue to focus attention on under-valuation of imports, especially in textiles, using a reference price database which industry is helping to update.

Since April, 230 taxpayers have been prosecuted for tax-related offence. A further 1 500 tax-related cases await prosecution with the National Prosecution Authority. Since April 2011 more than 700 000 taxpayers have been penalised for failing to submit an income tax return on time as required.

These and other measures have increased the proportion of on-time submission. The SA Revenue Service received 5 million returns during the most recent tax season – 23 percent more than the year before.

The Tax Administration Bill has been approved by Parliament. It incorporates the common administrative elements of current tax law into one piece of legislation, and makes further improvements in this area. The bill is expected to be promulgated and most of its provisions brought into force in 2012. During 2012, South Africa will establish a dedicated ombudsman for tax matters.

Medium-term spend

In our spending recommendations, we have taken advice from Amanda Mzulwini: “I think that you should spend money on things that matter, like improving health care, building more schools in the rural areas and building clinics.”

n Job creation is a central priority. An additional R4.8bn over the 2012 MTEF period is provided for the expanded public works plan, bringing its allocation to a total of R77.8bn.

n Spending on education will grow from R207bn in 2012/13 to R236bn in 2014/15. Additional allocations of R18.8bn over the medium term are accommodated.

n Medium-term priorities in health include hospital infrastructure, the comprehensive HIV/Aids treatment and prevention programme, and expanding health professional training. Progress in these areas will strengthen the public health system, paving the way for the introduction of national health insurance. The health sector is allocated an additional R12.3bn over the next three years. R1bn is allocated for National Health Insurance pilot projects and increasing primary health care visits.

n Social welfare priorities include the early childhood development and Isibindi childcare and protection programmes. These beneficial initiatives are allocated an additional R1.4bn over the MTEF. Expenditure on social grants will grow from R105bn in 2012/13 to R122bn in 2014/15.

n The budget for transport, energy and communication services increases from R84bn in 2012/13 to R98bn in 2014/15, rising by an annual average of 8.4 percent. An additional R4bn is allocated to the Passenger Rail Agency of South Africa to purchase coaches. The agency will also receive R1bn to build three depots and upgrade signalling.

n Energy’s focus is on demand-side management to address limited supply until new generation capacity comes online. An additional R4.7bn is allocated to complete the installation of 1 million solar water geysers.

n Investment in municipal infrastructure and human settlements will grow from R120bn to R139bn. Additional allocations of R9.9bn over the medium term are proposed.

n Allocations of R15.8bn are provided for economic services and environmental protection. The Department of Trade and Industry receives the bulk of this funding – R5.8bn for the manufacturing competitiveness enhancement programme and R2.3bn for industrial development and special economic zones. And R1.9bn goes to the Department of Agriculture, Forestry and Fisheries to improve agricultural support services. The Land Bank receives R1bn to conclude its recapitalisation.

n The Science and Technology Department’s spend swells to R12.1bn in 2014/15.

n The Department of Home Affairs receives funding for an integrated computer system and upgrading border post infrastructure and housing.

n Defence, public order and safety will grow from R140bn to R158bn. The sector receives R7.6bn to boost service, staff numbers and infrastructure.

n National Health Insurance is to be phased in over 14 years. The new system will require funding over and above current budget allocations to public health. An additional revenue source will be needed in 2014/15 amounting to R6bn in that year.

n The introduction of tolling to finance the Gauteng Freeway Improvement Programme has caused considerable public reaction. The total debt associated with the project is R20bn. To contribute to a further cut in the toll burden, a special appropriation of R5.8bn is proposed, to be included in 2011/12 expenditure.

Fraud

The Treasury has issued new laws that require departments to submit annual tender programmes, limit variations to orders, and require disclosures of all directives. Progress is being made in identifying and dealing with those who have abused the system.

A procurement officer will monitor procurement across the government. The tax clearance system will be strengthened to ensure that those who have defrauded the state cannot do business with the state.

We need stronger rules, as the government, to improve financial management capability across national and provincial departments.

Finance growth

Progress is being made on several financial sector reforms. There is now agreement between stakeholders on enhanced targets for empowerment financing and access to financial services. A revised financial sector charter code will be gazetted shortly for public comment.

But high costs in savings products undermine the national objective of getting our people to save more. The financial industry must take more urgent steps to reduce costs and introduce more appropriate products, including annuities.

Business growth

Initiatives in progress to strengthen support for business sector growth include small enterprise financing and a simplified tax regime for small businesses. The National Tooling Initiative is under way.

Given the current global economic context, there is understandable caution in the business sector about investment and future growth prospects. Many firms have accumulated large cash balances instead of investing them or distributing to shareholders.

The time has come to confront uncertainty – from government’s side, we are committed to an environment that will encourage business investment; from the side of business, we seek investment for the long term, enhanced competitiveness and training commitments.

Spend on new jobs

This time last year, funding was allocated to a new jobs fund. Project allocations of R1bn have been committed, and a second round of project applications will be announced shortly. We released a discussion paper proposing a youth employment incentive last year. It is under discussion at Nedlac, where the labour constituency has expressed reservations. In our view these concerns can be addressed in the design and implementation of the incentive. We would all like to see greater urgency in resolving this matter.

Poverty, inequality

Reducing unemployment is the centrepiece of our approach to reducing poverty, but it is not the only measure. Social spending comprises 58 percent of government expenditure next year, up from 49 percent a decade ago. The budget gives social grants to almost a third of the population, it pays for largely free services at public health facilities and no-fee schools for 60 percent of learners, and it pays for housing, water and electricity in poor communities.

Social security reform and the phasing in of National Health Insurance will improve the effectiveness and coherence of redistribution through the fiscus. But of course, redistribution is not a substitute for economic growth and job creation. And so the quality of the poverty reduction we achieve over the decades ahead will depend on our success in broadening development to include historically disadvantaged sectors and communities, as envisaged in our New Growth Path and draft Development Plan.

Now it’s our turn

We have a budget that gives effect to the challenges our president has set us – to accelerate growth, expand investment, support economic development and confront poverty and inequality.

In former president Nelson Mandela’s words: “The future of our country is in your hands. It will be what you make of it today. In the competitive international market place to which we are opening our economy, success and even survival of the nation will depend on you.”

This is an edited version of the speech.