This year’s Budget is being presented against the background of a serious and long-lasting world recession. In the United States the rate of real economic growth was actually negative in 1980, less than 2% in 1981 and, according to the latest forecasts of the Organization for Economic Co-operation and Development, will be negative again in 1982. In the United Kingdom, the real economic growth rate was minus 1,7% in 1980, minus 2% in 1981 and is now expected to recover to a small positive figure in 1982. In West Germany a growth rate of minus 1% in 1981 is expected to be transformed into a positive rate of just over 1% in 1982. In addition, the countries behind the Iron Curtain and a number of important oil-producing states have been experiencing serious economic difficulties, which have forced some of them to sell large quantities of gold on world markets. At the same time, the economic plight of most Third World countries has reached critical proportions.

In marked contrast to these depressed conditions in most other countries, the South African economy experienced what was perhaps the most vigorous boom in its history in 1980 and 1981. The facts now show that the upswing which had commenced at the beginning of 1978, continued until the third quarter of 1981 before reaching an upper turning-point. Indeed, after rising by more than 4% in 1979 and nearly 8% in 1980, the real gross domestic product registered a further increase of more than 4½% in 1981. But, as Chesterton remarked, “progress is the mother of problems”.

During the first three quarters of 1981, this moderate decline of the real growth rate was not due to any marked weakening of domestic monetary demand, but mainly the result of physical constraints, including the shortage of skilled and semi-skilled labour. Indeed, throughout 1981, total monetary demand continued to exert undue pressure on available resources, resulting in a measure of general demand inflation, rising imports and during the first three quarters of 1981, a marked further decline to historically low levels in rates of unemployment among all population groups.

In real terms, that is, after correcting for price increases, gross domestic expenditure increased by as much as 101/2% in 1981, after rising by 13½% in 1980. Real private consumption expenditure increased by 6,3% in 1981, real government consumption expenditure by 2,3% and real fixed investment by 6,7%. In addition, substantial further increases were recorded in industrial, commercial, strategic and agricultural inventories.

Inflation has remained a serious problem, as indicated by the increase of 13,6% in the consumer price index between February 1981 and February 1982, although I am glad to say that the rate of inflation has been falling for some months now. Among the factors contributing to this increase were the excess monetary demand to which I have referred, and the accompanying depreciation of the rand in terms of other currencies during 1981, with which I shall deal more fully later.

It is most gratifying, however, to note that, despite the inflation, real wages and salaries per worker in the non-agricultural sectors of the economy increased by 3,5% in 1980 and by a further 4,4% in the first nine months of 1981, by comparison with the corresponding period of 1980. To this must be added that real gross domestic product per capita increased by 4,9% in 1980 and by a further 2,2% in 1981. These figures reflect a significant rise in living standards generally. But let us heed the words of Russel P. Askue, when he cautioned “if living conditions don’t stop improving …, we’re going to run out of humble beginnings for our great men”!

From the facts I have presented it is evident that, in the field of real economic growth, South Africa outperformed most other countries in the world in both 1980 and 1981. In the course of the latter year, however, it became increasingly evident that the decline in the gold price and the world-wide recessionary conditions were exerting adverse effects on the South African economy as a whole and on the balance of payments in particular.

The price of gold declined from an average of $613 per ounce in 1980 to one of $460 per ounce in 1981 and an average so far this year of $364 per ounce. In recent weeks the price has fluctuated around the $320 level. In view of the depreciation of the rand in terms of the US dollar since January 1981, the price of gold expressed in rand has, of course, declined by much less than the dollar price over this period.

Thus, compared with the decline of 25% in the average dollar price of gold between 1980 and 1981, the rand price declined by about 16%. Similarly, compared with the further decline of 21% in the dollar price of gold between the end of 1981 and 19 March 1982, the rand price declined by 14½%. The depreciation of the rand has therefore softened the impact of the gold price decline on the South African gold mining industry, the Exchequer and the economy in general.

Despite this cushioning effect, however, the rand value of South Africa’s net gold output still declined from R10,1 billion in 1980 to R8,3 billion in 1981, and, depending upon the behaviour of the gold market and the exchange rate during the rest of 1982, could show a substantial further decline this year. As I have indicated before, if the gold price falls on average over a period of a year by $100 an ounce, it means a reduction in South Africa’s earnings from the sale of gold abroad of approximately R2,1 billion, with a consequent loss in revenue to the Exchequer of perhaps R1,1 billion.

Quite apart from gold, South Africa’s other exports were also adversely affected by the stagnant conditions in world markets and declined in 1981 by about 3% in rand value terms and by nearly 14% in volume terms. In their case, too, the depreciation of the rand had a major cushioning effect upon export incomes expressed in rand terms.

Imports, however, behaved differently. As a direct result of the buoyancy of the domestic economy, they increased in 1981 by a further 28% in value and 16% in volume. As in former years, imports of capital and intermediate goods accounted for about 85% of total imports. It is significant, however, that after reaching a peak in the third quarter of 1981, imports began to level off in value terms and to decline in volume terms.

The net effect of these and other changes was that the surplus of R2,8 billion on the current account of the balance of payments in 1980 was transformed into a deficit of nearly R4 billion in 1981. As a percentage of gross domestic product the latter deficit amounted to 5,5%. In itself this ratio was not unduly large for the particular phase of the business cycle in which the economy found itself in 1981—two comparable figures, for example, were 6,6% in 1975 and 5,4% in 1976. What was exceptional, however, was the swing from surplus to deficit of nearly R7 billion between 1980 and 1981.

Since the net inflow of capital, excluding special reserve-related movements, amounted to R1,1 billion during 1981, this naturally placed considerable pressure on the exchange rate of the rand and on the gold and other foreign reserves. To deal with this situation, the Reserve Bank and the other banks availed themselves of short-term foreign credits to a net amount of about R2 billion during the year. This served to maintain the gross gold and other foreign reserves at a satisfactory level, but the resultant increase in the so-called “liabilities related to reserves” contributed to a decline of about R2,8 billion in the net reserves during 1981.

To support the foreign exchange component of its reserves, the Reserve Bank entered into new gold swap arrangements during the fourth quarter of 1981.

Against this background, the commercial rand showed an effective depreciation in terms of a weighted “basket” of foreign currencies of 13,9% during 1981, compared with an appreciation of 10,9% during the preceding year. In terms of the United States dollar the rand depreciated by about 22% in 1981. Thus far in 1982 the rand has depreciated further against the dollar by about 7,8% and in terms of the “basket” of currencies by about 3,8%.

Although South Africa’s present balance of payments difficulties stem predominantly from the decline in the gold price and other external developments beyond our control, they must also be partly attributed to the inordinate rise in total monetary demand during 1980 and 1981. Under the impact of the huge increase in gold earnings, this rise, in turn, was fuelled by an excessive rate of increase in the broadly defined money supply (M2), which accelerated from an annual rate of 17% in the first quarter of 1980 to 41% in the third quarter, 25% in the fourth quarter and 46% in the first quarter of 1981, before showing a welcome decline to 26% in the second quarter and 10% in the third quarter.

The basic cause of this monetary expansion was the co-existence in 1979 and 1980 of an unexpectedly large surplus on the balance of payments on current account, and exchange control. In addition to raising the money supply directly, this brought about a substantial increase in the cash reserves and other liquid assets of the banks, which later enabled them to create large amounts of money by expanding their credit to the private sector. A further consequence of this situation was that interest rates declined sharply during 1979 and remained at abnormally low and somewhat distorted levels throughout the first three quarters of 1980. Given the existence at that stage of ceilings on bank credit, this understandably brought about large-scale so-called “disintermediation”, or borrowing and lending outside the banking system. The result was a weakening of the ability of the monetary authorities to influence the money supply, its velocity of circulation and interest rates.

From October 1980, however, following the abolition of the credit ceilings, the declining tendency of the gold price and the commencement of the downward trend in the net gold and other foreign reserves, the monetary and interest rate situation began to change fundamentally—a process which has continued up to the present. This transformation flowed directly from the Reserve Bank’s conscious policy of permitting natural economic forces, including the decline in the value of South Africa’s gold output and other exports, to bring about a tightening in the financial markets and a rise in interest rates. As an integral part of this policy, the Reserve Bank raised its Bank rate in four stages from 7% at the beginning of 1981 to 12½% last July.

The success of this strategy in reducing the annual rate of increase of the broad money supply to 10% in the third quarter of 1981, that is, to well below the rate of inflation, was most gratifying. A temporary setback then occurred as a result of two developments during the fourth quarter of 1981. The first was the financing of the record maize crop and other farming activities through clearing bank advances to the Land Bank. These advances rank as liquid assets for the banks and at one stage amounted to a record R2,3 billion. And the second was, under severe financial pressures, a temporary recourse to the use of bank credit by the government sector, to which I shall refer again.

Largely as a result of these developments, the banks gained additional cash reserves and liquid assets, which enabled them to continue expanding their credit to the private sector. The end result was that the annual rate of increase in the broad money supply rose to 21% in the fourth quarter of 1981.

To counter these influences, the Reserve Bank decided in November 1981 to take stronger corrective action and to permit interest rates to rise further in response to market forces. As part of this process, it not only raised its Bank rate by another 1% to 13%% in December but also allowed the Treasury bill rate to rise above Bank rate to more realistic levels. This resulted in an increase in the Treasury bill rate from below 12% in early November last year to 15,84% last Friday, 19 March 1982.

Another major policy change was the abolition, on 16 February 1982, of the previously existing direct link between Bank rate and prime overdraft rates. This step permitted the latter rates to rise in response to market forces to their present level of 20%. At the same time, the Reserve Bank discouraged banks and discount houses from excessive recourse to its discount window by applying severe penalty rates, well above Bank rate, to all such financial accommodation.

Together with the seasonal flow of tax funds to the government sector at the end of February, these measures were immediately successful in relieving the pressure on the exchange rate and the official gold and other foreign reserves by inducing the banks and the non-bank private sector to make more use of available overseas credits. The higher domestic interest rates, in particular, enabled the economy to absorb the adverse impact of the subsequent sharp decline in the gold price on the exchange rate and the official foreign reserves without undue disruption.

The key role played by interest rates in official stabilization policy during the past year and a half needs to be put into proper perspective. As recent experience in the United States, the United Kingdom, and many other industrial countries has demonstrated once again, a policy of curbing money creation at a time of excess demand will almost inevitably result in a rise in interest rates in the short term. This certainly was the case in South Africa during the past eighteen months. Indeed, the only effective way in which South African interest rates could have been prevented from rising during this period would have been for the Reserve Bank to have arranged the creation of even more credit and money—something which would, of course, have aggravated inflation and the balance of payments deficit.

Three further basic points have to be made regarding interest rates. The first is that the sharp increase in South African interest rates during the past eighteen months occurred from a level in 1979 and most of 1980 which was artificially and abnormally low.

The second point is that, even at their present levels, South African interest rates are not high in real terms, that is after correcting for the rate of inflation—and, of course, to measure the impact of any interest rate one must look at the real rate. If the consumer price index is used to deflate nominal interest rates, the present real yield on long-term government stock is only 0,7%, compared with, for example, 4,6% at the end of 1961 and 4,4% at the end of 1967. Similarly, the new maximum building society mortgage rate of 15,25% represents a real rate of interest of only about 1½%, compared with real mortgage rates of about 6% in 1961 and 1967, and over 4% in most years between 1955 and 1970. Even the present prime overdraft rate of 20% in nominal terms is not a record in South Africa at its present real level of about 5½%—in real terms it has often been as high or higher in the past.

The third point is that in real terms most South African interest rates are at present still considerably lower than those of our main trading partners. The present real rate of interest on long-term government stock in South Africa of 0,7% has to be compared, for example, with rates of about 5% in the United States, nearly 2% in the United Kingdom and 3½% in West Germany. Similarly, the present real prime overdraft rate in South Africa of about 5½% is still lower than its counterpart of over 7% in both the United States and West Germany.

From many points of view it is to be welcomed that most interest rates in South Africa are now once again positive in real terms. This not only contributes to more effective fiscal and monetary policies but also encourages thrift and provides a better return to the many holders of savings and time deposits with building societies and banking institutions. Redressing the balance between real wages, which have risen substantially in recent years, and real interest rates, should also contribute in the longer term to the creation of employment opportunities for our rapidly rising population. Now at least we are again in a position where we can in truth proclaim to the saver that “the best way to double your money is to fold it and put it back into your pocket”.

Nominal interest rates may confidently be expected to decline again as the economy cools down, the demand for loanable funds decreases and the balance of payments improves, particularly if this process is also accompanied by some decline in the rate of inflation. In the meantime, any attempt to reduce interest rates artificially by creating more money through the banking system, would undermine the official policy of financial discipline.

In last year’s Budget Speech in August 1981, I described our fiscal policy as one of “consolidation and adjustment”—consolidation of the enormous economic gains of the immediately preceding years and adjustment to the adverse impact on the South African economy of the decline in the gold price and other external developments. In accordance with this policy, last year’s Budget provided for a modest increase in expenditure of 16,8% in nominal terms, which was expected to yield a relatively low real rate of increase.

In addition, although the “deficit before borrowing” was estimated at R2 707 million, or about 3,5% of gross domestic product, a total considerably larger than that of the previous year, provision was made for this shortfall to be financed without any recourse to net money creation by the banking system. Last year’s Budget was therefore designed to be a “moderately contractionary” one which would help in curbing inflation and in bringing about balance of payments adjustment without resulting in “overkill”.

In actual fact, as I shall indicate in more detail later, the economy was so buoyant that both expenditure and revenue turned out to be somewhat larger than expected, while the actual deficit before borrowing in the end amounted to only R2 060 million, which again was considerably smaller than the Budget estimate. This in itself was a satisfactory outcome.

As far as the financing of this deficit was concerned, however, the Public Debt Commissioners suffered unexpected withdrawals and smaller net inflows of funds and were therefore unable to invest as much in government stock as they had anticipated at the time of the last Budget. The situation was further exacerbated by the need to finance very substantial imports of strategic materials through the State Procurement Fund. The result was that the government sector had no option but to resort to the temporary use of bank credit.

Since this unintended money creation was in direct conflict with official policy, I deemed it essential to take early corrective action. In addition to the steps taken by the Reserve Bank, I therefore advanced the date of the introduction of the Part Appropriation Bill to 11 February 1982 and used that opportunity to increase the general sales tax from 4 to 5% and to impose a surcharge of 10% on imported goods.

I also introduced a new method of issuing Government stock by way of tender, which immediately yielded satisfactory results, and raised the interest rate on tax-free Treasury bonds. Following the increase in Treasury bill rates to realistic market-related levels, the weekly Treasury bill tender also enjoyed wider support, and it is particularly encouraging to see the non-bank private sector investing in Treasury bills on a significant scale again.

Together with the normal seasonal shift of tax and other funds from the private to the government sector, these new and closely co-ordinated fiscal and monetary measures succeeded, during the first quarter of 1982 to date, in sharply reversing the government sector’s earlier use of net bank credit. During January there was already a decline of R376 million in the net claims of the banking sector on the government sector, and when the February figures become available, they will almost certainly show a continuation of this favourable tendency. Most of the difficulties which arose in fiscal and monetary policy in the fourth quarter of 1981, have therefore now been overcome.

What has constantly to be borne in mind is that, as things turned out, the domestic economy was more buoyant than had been generally expected, whereas both the decline in the gold price and the world recession were more severe and lasted longer than most experts had predicted. In these circumstances, the authorities, if anything, perhaps did too much to shield the domestic economy from adverse external influences.

I turn now to the implications of the present economic situation for fiscal and monetary policy in the year ahead.

Like most other countries, South Africa is at present confronted by certain difficult economic problems. Moreover, in recent weeks and months our policy options for dealing with these problems have been narrowed by external developments beyond our control. In the long run it remains our aim to achieve an optimum combination of rapid economic growth, reasonable price stability and balance of payments equilibrium. In the short term, however, priority must be given to further consolidation of the domestic economy and adjustment of the balance of payments.

I am fully aware that the economy appears to have entered a gradual downward phase of the business cycle and that the rate of real economic growth will almost certainly be lower this year than last year. But the decline in the gold price and other adverse external developments of recent months rule out any possibility of “reflation” or “stimulation” at this point in time. On the contrary, the balance of payments adjustment process now needs strong support from fiscal and monetary policies, even if this means restraining demand at a time of slower real growth. The situation therefore calls for firm control over government spending, over the cash and liquidity base of the banking system and over the money supply.

In the present difficult circumstances, the imperative need to live within our means as a nation implies a process of adjustment which cannot be entirely without sacrifice. This process is already under way. It leaves little scope in the year ahead for a significant further increase, above its present record level, in real disposable income per capita, that is, in income adjusted for inflation and taxes. The laws of economics cannot be evaded. One way or another real disposable income will be affected. In recent months the adjustment has come about largely via inflation and currency depreciation on the one hand, and increases in interest rates on the other. What form the adjustment will take in the coming year will be greatly influenced by today’s Budget. But let us at least heed the advice of Samuel Johnson: “Resolve not to be poor; whatever you have, spend less”, he said. That is our approach.

The Government considers it essential that fiscal policy should play its proper role in assisting the economy to make the necessary further adjustments. If the Budget is too permissive, the adjustments in the South African economy will still take place, but then probably via a continuation of inflation, currency depreciation and further increases in interest rates. Higher inflation cannot be an acceptable outcome. What this country sorely needs, as the saying goes, is “a non-skid coin, guaranteed not to slip through the fingers”.

Recognition needs to be given to the “trade-off” which exists in the present situation between higher interest rates, higher tax rates (or lower government spending) and exchange rate depreciation. As matters stand today, some combination of these three remedies is probably unavoidable. But they can be combined in different proportions. Thus, the more fiscal policy there is in the so-called “policy mix”, the less use has to be made of monetary policy, and vice versa. Tax increases or restraints on government spending, for example, reduce the need for interest rates to rise or to remain high. Similarly, the more use that is made of domestic monetary and fiscal policy, the stronger will be the performance of the rand in the foreign exchange market and the lower the rate of inflation.

In framing today’s Budget I have therefore kept in mind the need to achieve the optimal combination of tax rates, interest rates and spot and forward exchange rates required for dealing with the present economic situation, always bearing in mind the financial capacity of the nation. Franklin D. Roosevelt expressed it well when he said, at the height of the Great Depression in 1932—and I quote—

That, certainly, is what we will never allow.

Against this background, I believe that today’s Budget must comply with three minimum requirements. In the first place, the increase in government spending should be restricted as much as possible without disrupting the provision of essential services. Secondly, in order to assist in curbing monetary demand and to prevent undue upward pressure on interest rates, the “deficit before borrowing” in the budget as a percentage of gross domestic product should be reduced to well below its average of 3,4% over the past 22 years. And, thirdly, this deficit should be financed in such a manner that not only the Exchequer but also the government sector as a whole, including the extra-budgetary funds, will be able to avoid a net recourse to bank credit.

To comply with these three requirements in a year in which gold mining taxation is expected to decline substantially, will obviously be difficult. It is a challenge, however, which must be met in the interest of the country as a whole.

Against this background of events, I shall now proceed to deal with the Government’s Accounts, and start with the 1981-’82 financial year.

Total revenue for the financial year now ending was originally estimated at R13 160 million. The current revised estimates indicate that collections will actually total some R1 130 million more, with Inland Revenue accounting for R673 million and Customs and Excise for R457 million of this increase. The Estimates of Revenue adequately anticipated the decline in the gold price, but receipts from income tax on individuals, and to a lesser extent on companies, together with customs and excise duties, exceeded expectations.

The under-estimates were due to the fact that the economy remained exceptionally buoyant, with the result that imports and consumer demand continued at high levels throughout the financial year. Higher profits and increased employment had a pronounced effect on income tax receipts. In these matters, as in most others, it is better to err on the conservative side. The resultant smaller deficit before borrowing assisted the monetary authorities in their task of curbing the money supply by reducing the extent to which the Exchequer had to make temporary use of bank credit facilities.

Particulars of the revised estimates for 1981-’82 are reflected in the comparative table of revenues which I shall Table today.

On the expenditure side, aggregate expenditure, which was originally calculated at R15 869 million in the Main and Supplementary Budgets, is now estimated to total R16 350 million. The main reasons for this limited overrun were an increase of R208 million for servicing the public debt, R100 million for defence, R76 million for the deferred payment of provincial subsidies, R50 million mainly for housing and R28 million for bus and train subsidies.

It now appears that the amount of R100 million for defence will not be spent in the current year and will thus be available in 1982-’83. This means that despite inflationary conditions the increase in the aggregate amount spent—that is, including the statutory provisions—is hardly more than 2½%.

The net result of these revenue and expenditure developments, including the timely action taken by the fiscal authorities during the latter part of the present fiscal year—raising the general sales tax by 1% and imposing a 10% surcharge on imports—is that the deficit before borrowing at R2 060 million will turn out markedly lower than the original Budget estimate of R2 707 million.

Loan redemptions exceeded the estimate of R2 842 million and eventually amounted to R3 072 million. The rapid rise in domestic market rates and the fact that the Exchequer did not adjust its offer rates immediately, resulted in bond redemptions of some R821 million compared with a budgeted amount of R571 million.

In total, the deficit before borrowing plus loan redemptions resulted in a financing requirement of R5 132 million, which also is notably less than the original Budget estimate of R5 549 million.

The borrowing programme of the Exchequer yielded sufficient funds to cover this financing requirement and produce a small surplus. Investments by the Public Debt Commissioners amounted to R1 152 million compared with an originally expected amount of R1 850 million. This shortfall is to be ascribed primarily to larger than normal withdrawals by para-statal institutions because of larger than expected cost increases, the general tightness prevailing in the money and capital markets, and the strict fiscal and monetary policies enforced by the authorities. Deposits received from the Strategic Oil Funds were less than anticipated, while the South African Transport Services effected large net withdrawals to fund increased investments in transport infrastructure.

The shortfall was partially offset by larger sales of Government stock into the domestic markets, primarily to the non-bank private sector, and the raising of an additional R151 million in foreign loans. The fact that the Exchequer has succeeded in drawing more in foreign loans than budgeted for, clearly underlines the confidence foreign investors have in the inherent strength of the South African economy.

There is an old Arab saying that is very apt in these circumstances: “According to the amount of money a man has in his coffers, so is he respected.” The respect for South Africa amongst overseas investors is high and it is my firm resolve to keep it high—hence the attempt to keep our coffers from running dry.

Sales of non-marketable debt instruments yielded some R152 million less than the original estimate of R550 million. Both Bonus Bonds and National Defence Bonds performed below expectations.

In the result, the borrowing programme of the Exchequer is expected to yield a total amount of R5 148 million, which is marginally higher than the financing requirement and leaves me with a small surplus of R16 million to carry forward to the 1982-’83 financial year.

I now wish to deal with the 1982-’83 Accounts.

The printed Estimates of Expenditure which will be tabled today provide for total expenditure of R18 042 million. To this must be added my supplementary expenditure proposals, with which I shall deal shortly, amounting to R196 million. Aggregate expenditure will then add up to R18 238 million, only some 11,5% higher than the revised Estimate of Expenditure for 1981-’82, and on a main-budget-to-main-budget basis only 14,9% higher—remarkably low figures if one takes account of the inflation rate and the very heavy demands made on the Exchequer.

The pressure is always there to spend much larger sums, especially on the highest priority items. But, once again, we deliberately chose the course of firm financial discipline, which has served us so well for the last eight years in succession. The economic realities are such that it is, at this juncture, of paramount importance that we draw in our belts and live within our means. Samuel Butler remarked that “all progress is based upon a universal innate desire on the part of every organism to live beyond its income”. I do not know how far I can succeed in reversing universal innate desires, but so far as Government expenditure is concerned, I can try!

Our expenditure programmes must be adjusted accordingly. I should like to quote from a recent report of the authoritative Canadian Royal Commission on Financial Management—

Inherent in the process of planning and determining priorities is the judgment as to which priority needs cannot be met. The fact that some needs will not be met or will only be met partially in the expenditure proposals before the House today, does not mean that the Government places no premium on them. On the contrary, it rather implies that although the services or expenditures may be highly desirable, they are beyond our financial means at the moment.

We must accept that, because of the parlous state of the world economy, the rapid decline in the price of our major export commodity, gold—and for that matter the prices of most other primary exports—and the deterioration in the terms of trade, it is necessary to pursue our declared policy of consolidation and adjustment in order to preserve the basic strength of the economy.

As I have already indicated, South Africa’s position is not unique at the present time. Elsewhere conditions are far worse. Many of the leading industrial countries are having to contend with vast unemployment and very low growth rates and most of the non-oil raw material exporting countries are experiencing falling living standards and a serious decline in their international purchasing power. Even some of the oil producing countries, until recently awash with cash, are today in straitened financial circumstances because of the recent easing off in oil prices. We in South Africa should not be sorry if the bottle is half empty. We should be grateful that our bottle is still half full! Indeed, a good deal more than half full! Thomas Paine said, and I quote—

I am thankful that, with the co-operation of my colleagues and everyone else concerned, and the sustained efforts of the Treasury, I have been able to contain Exchequer expenditures to a level I feel we can afford. I owe a particular debt of gratitude to the hon. the Prime Minister. Winston Churchill once declared that no Chancellor of the Exchequer (Minister of Finance) could hope to carry through sound financial measures without the constant sympathetic ear of the Prime Minister. Not only has our Prime Minister been a tower of strength to the Treasury, but he firmly grasps the economic realities on which our strategy is built.

A proper control over expenditure has been achieved despite the effects of inflation and despite substantial increases in the cost of servicing the public debt, in salary and wage adjustments for the Public Service, in social and civil pensions, and in the equitable allocation of funds for a great variety of services according to carefully determined priorities, of which defence and security are the biggest.

I now wish to direct the attention of the House to certain Votes which I think deserve special mention.

The favourable economic conditions prevailing in 1981 once again pinpointed the need to develop and maintain a high level of trained manpower as a prerequisite for economic growth. A very high priority was therefore once again accorded to improving the manpower situation.

The Manpower Vote reflects an increase next year of 22,8%, to R63 million, R7 million of which has been earmarked for the Manpower Development Fund.

Five years ago, in 1977-’78, the total amount expended on education by the Exchequer and disbursed by the various educational authorities for all population groups aggregated R1,27 billion. In this coming financial year, that is, five years later, and notwithstanding serious constraints in overall Government spending, this total will rise to no less than R3,16 billion. This represents an increase of nearly 150% in only five years. This record clearly proves the Government’s belief that investment in education is the best long-term assurance of a rising standard of living for all.

An amount of R258 million was originally available in the National Housing Fund in 1981-’82 for the erection of dwellings and the provision of infrastructure. The comparative figure for 1982-’83 is nearly 28% higher, at R330 million.

The Housing Fund has been granted borrowing powers in order to enable the private sector to participate in the financing of this essential service. To give it an opportunity to do so meaningfully, provision has been made in the accounts of the Housing Fund for total outside borrowing of R150 million. I have little doubt that the private sector will make every effort to come up to expectations in this important field.

While on the subject of housing, I would like to refer briefly to the work of the Commission of Enquiry into certain Building Society Matters. This Commission received its terms of reference less than a year ago and was requested, amongst others, to consider the increases early in 1981 in mortgage rates, what alternative actions could have been taken by the building societies, and how such sharp and frequent increases might be avoided in future. Since then a number of related issues have also been referred to it for consideration.

In the course of its investigations the Commission found it necessary to undertake comprehensive statistical tabulations and analyses and to liaise frequently with the societies and with the De Kock Commission and others. I am informed that the final draft of its Report is now being prepared and that it will be submitted to the Government within the next few weeks.

As in the past, defence and security must remain one of our highest priorities. In a military context it has been the Government’s aim, within the limits of the resources at its disposal, to place the Republic in as strong and secure a position as possible. It has done this not only by developing a well-trained and hard-hitting Defence Force, but also by building up a highly effective armaments industry.

The facts speak for themselves. At the beginning of the seventies, in 1970-’71, total expenditure on Defence amounted to less than R260 million. Today the figure is fast approaching R3 000 million.

A package of improvements in conditions of service costing a record R800 million has been approved for 1982-’83. Because an early decision was reached on the remuneration package, the greater part of the provision could be allocated to the various Votes, leaving a balance of some R200 million to be included in Vote 25: Improvement of Conditions of Service.

The major improvements contemplated are a substantial general salary adjustment, the implementation of a further phase of the programme to narrow the wage gap among the different population groups, and an extension of the practice of salary differentiation among selected professional categories.

The manning of the machinery of State with sufficient numbers of competent officers is one of our highest priorities. The Government trusts that the substantial salary and related improvements brought about in the present Budget will do much to alleviate the manpower problem in the Public Service, the smooth functioning of which is essential to the country’s administration.

South Africa’s public administration has a magnificent record of efficient and dedicated service, and every possible effort must be made to enable it to uphold its high standards.

Prudent as we have been with our borrowing programme, the cost of the public debt service shows an increase of 29,5% on a main-budget-to-main-budget basis. This is largely due to the often unpredictably sharp increases in interest rates, both here and abroad. The cost of public debt was originally estimated at R1 771 million in 1981-’82, but is now expected to reach approximately R1 978 million, compared with an estimate for 1982-’83 of R2 294 million. The policy to offer investors realistic market-related interest rates is a sound one and I propose to continue with it.

In my Budget Speech last year I announced that the Government had accepted the recommendation of the Croeser Working Group to the effect that the State would in future assume responsibility for the payment of assessment rates to local authorities in respect of Government property. For this purpose I made available a sum of R20 million as a first instalment in the phasing-in process agreed upon. Despite the Exchequer’s constrained financial position, a further amount of R14 million is being proposed for 1982-’83, bringing the Treasury’s total direct allocation to local authorities in the coming year to R43,6 million.

To this amount must be added the transfer payments already being made to local authorities for ambulance and fire protection services, as well as the additional burden accepted by Government in respect of the loss of revenue for commuter services resulting from the decision to allow administration boards to retain their full profits from the sale of liquor. The upshot is that a total amount of some R92 million will in the 1982-’83 financial year accrue to local authorities.

This is indeed a significant financial contribution by central Government to assist the third tier of Government and has, in fact, already had the effect that in some cases local authorities have been able to reduce their property rates and in others to avoid increasing them, as many of them would have had to do otherwise.

The Croeser Working Group has completed by far the largest part of its comprehensive and difficult task. The only significant matters still outstanding relate to the restructuring of existing and the identification of additional sources of local authority revenue, the broad co-ordination of conditions of service with those in the rest of the public service, and certain other technical matters. None of these can be completed until such time as the Government has announced its decisions on the forthcoming recommendations of the President’s Council on these and related matters. In the meantime the Working Group will continue its important work based on the sound foundations laid by the Browne Committee.

Finally, in this regard, there is the question of local authority expenditures which, in the nature of things, have assumed considerable proportions in recent years. While central and provincial government expenditures are subjected to clearly defined control procedures, the same cannot be said of local authorities. After careful consideration the Working Group recommended, and the Government accepted the recommendation, that there should be a measure of surveillance by Treasury over the aggregate expenditures of local authorities. The best way to do this will be worked out after further consultation with those concerned.

It is clearly essential these days that all levels of government adopt and maintain effective financial discipline over their expenditures. To this end local authorities have been asked to limit the increase in their overall expenditures to a figure somewhat below the current inflation rate. This will not be an easy objective to attain, but with the active co-operation of all concerned it should be possible to limit the demands made on ratepayers, on users of municipal services, and on the capital and money markets to more realistic and sustainable levels.

Apart from the amounts already included in the printed Estimates, I now wish to propose a few additional items of expenditure to be included in the Supplementary Estimates.

The Government is fully aware of the financial problems which the rising cost of living poses for our senior citizens and less privileged persons. Furthermore, as 1982 is the Year of the Aged, I deem it a special privilege once again to be able to announce meaningful concessions to social pensioners and other social beneficiaries, as well as to military and civil pensioners.

The details of these concessions are set out in the document I will table this afternoon.

(a) Social Pensions and Allowances

The concessions I propose include an increase of R16 per month in the case of Whites, R12 per month for Coloureds and Asians, and R9 per month for Blacks. This means that the social pension for Whites will rise to R138 per month, that of Coloureds and Asians to R83 per month, and that of Blacks to R49 per month. These increases are the largest absolute amounts proposed since the inception of the respective schemes and, as is customary, will apply from 1 October 1982. The cost of these concessions will amount to a record R77,2 million in 1982-’83 and to no less than R154,4 million in a full financial year.

During the past few years it has been customary to pay bonuses to social pensioners and other social beneficiaries, and it affords me great pleasure to be able to announce that another two bonus payments will be made in the coming financial year. A total of R30 for Whites, R24 for Coloureds and Asians, and R18 for Blacks will again be paid to all social pensioners and other social beneficiaries in May 1982 and again in November 1982. The cost of these bonuses will amount to R47,3 million in 1982-’83.

(b) Military Pensions

All military pensions will be adjusted by 15% from 1 April 1982, which means that in cases where there is a 100% disability an increase of R50,40 per month will be forthcoming. The cost of this concession is R3,3 million.

(c) Civil Pensions

The Government is well aware of the problem experienced by former employees of the State, now retired. There is special regard and sympathy for the “old guard”, that is, those persons who retired some time ago on relatively low pensions.

The Government has decided, by the application of a special formula, to increase, as from 1 April 1982, the pensions of all ex-employees and other civil pensioners of the State by 10%, plus 1% in respect of each complete year of retirement as at 31 March 1982.

The cost of these increases is estimated at R66,4 million. The Civil Pensions Stabilization Account and the various pension funds will carry R62,4 million of this cost and the Exchequer the balance of R4 million.

In addition to this formula adjustment, it has been decided to help civil pensioners who have not been members of an official medical scheme by enabling them to become members of one of the official medical schemes as from 1 October 1982. An additional R5,2 million will be provided for this purpose during 1982-’83.

After due consideration of official commitments in respect of the purchase of land for the consolidation of the Black states, I am pleased to be able to propose that apart from an amount of R52 million included in the printed Estimates, a further R12 million be provided in the Supplementary Estimates for this purpose. I may just interpolate here that that is not the full total because there are also certain other sources of revenue accruing to the fund. These increases will enable the Department of Co-operation and Development to make meaningful progress with the consolidation programme.

In the tight financial situation we are now experiencing, a reduced amount of R113 million was provided for bread and bread meal subsidies in the printed Estimates. It has been decided that the bread subsidy should in future be determined on a more rational basis. The present system of subsidization will remain in force until 30 September 1982, whereafter, always subject to the Treasury’s ability to pay in any given year, the subsidy will be calculated at 5% of the total cost of a loaf of white bread, including the retailer’s margin, and 20% of the cost of a brown loaf.

In order to implement this new system, projections of total bread consumption for 1982 have been obtained, and projected cost increases have also been taken into account. Based on these projections, I wish to propose that the amount already provided for bread subsidies be increased by R45 million. This brings the 1982-’83 subsidy on bread and bread meal to within a couple of million rand of the current year’s figure.

The decision to subsidize white bread by 5% is based on the premise that the buyer of white bread be subsidized to the extent of the general sales tax applicable—at present 5%. Buyers of brown bread, however, will have the benefit of a much bigger subsidy and will therefore pay a considerably lower price per loaf.

Someone once said that “a subsidy is a formula to return your own money to you with such a fanfare that you regard it as a gift”. Whether a gift or not, to my way of thinking a contribution from the Exchequer, if it can be afforded, to the consumers of bread is very desirable in the times we live in.

But we must also have regard to the total cost involved. It must be accepted that, notwithstanding the high rate of subsidization, a rise in the price of bread as from 1 October 1982 nevertheless seems inevitable at this point.

Dried Fruit Industry

It is well known that the State is at present assisting the canning industry financially. The assistance is based on a system of marketing quotas in order to discourage overproduction and the accumulation of unsold stocks of canned fruit. In the short term, however, this policy resulted in an oversupply of fruit to the dried fruit industry and caused temporary dislocations in that industry.

In order to assist the dried fruit industry to finance the acquisition of new processing facilities and to market its surplus of dried fruit, Government has decided to extend a 5-year interest-free loan of R2 million to the sole registered packer of dried fruit in the industry. I propose that this amount be included in the Supplementary Estimates.

Tobacco Producers

Tobacco producers in certain areas are experiencing serious marketing problems resulting from, among other things, an excessively high chlorine content in their irrigation water. To date a number of the tobacco farmers affected have been forced out of the industry.

Representations made on behalf of these producers by the South African Agricultural Union and the Tobacco Board are receiving attention at present. As soon as the results of investigations which need to be completed come to hand, the Government will be in a position to take a final decision on the nature and extent of assistance to affected producers. No specific financial provision can be made at this stage, but this aspect will be dealt with in due course.

Drought Relief

After last year’s bountiful crops and favourable agricultural conditions in general in most parts of the country, South Africa is now experiencing increasingly serious drought conditions in certain areas. As is the case with producers in other sectors of the economy, the farming community is additionally faced with rising input costs, including the high cost of money. Apart from the hardship caused to the farmers affected, this combination of factors will adversely affect our food production potential, at least in the short run, and that is a serious matter for the country as a whole.

Together with the hon. the Minister of Agriculture and Fisheries and certain other colleagues, I was present when the president and other executive members of the South African Agricultural Union recently called on the hon. the Prime Minister to acquaint him of the latest position, and I can attest to the constructive and sympathetic discussions which took place. The Government lost no time in referring the matter to the Jacobs Committee for urgent study and report. As soon as the Committee’s recommendations are received, the necessary steps will be taken for the relief of what is plainly a serious situation, subject only to the financial means at the Government’s disposal.

Since the extent and nature of financial assistance required still needs to be determined, funds for this purpose are not provided for in these Estimates, but will in any case be made available at the right time.

The supplementary expenditure estimates outlined above add up to R196 million. If this amount is added to the printed Estimates of Expenditure of R18 042 million, aggregate expenditure for the year 1982-’83 will amount to R18 238 million.

Let us next consider the revenue side of the Government’s Accounts.

Estimated total revenue on the current basis of taxation amounts to R15 417 million, which is 7,9% higher than the revised 1981-’82 estimate of R14 290 million. Receipts both from Inland Revenue and from Customs and Excise are expected to increase—Inland Revenue by R912 million and Customs and Excise by R215 million. These estimates already include the increased proceeds to be collected from the one percentage point increase in general sales tax and the 10% import surcharge announced last month.

The additional revenue from these two sources, now estimated to amount to about R1 235 million, will in itself only partly offset the decrease in the collections from income tax on gold mines and gold mining leases. Estimated receipts from the gold mining industry during 1982-’83 most probably will amount to no more than R900 million, compared with R2 171 million in 1981-’82—a reduction of nearly R1 300 million in one year. This huge loss in revenue is the direct result of the adverse effect that the drop in the gold price and cost escalations are expected to have on the operating results of the gold mines.

Uncertainty regarding the future behaviour of the gold price makes it extremely difficult, if not virtually impossible, to predict with any degree of accuracy Exchequer revenues from this source. While I am certainly not pessimistic on the longer term outlook for gold—anything but—it would only be prudent to assume that the average gold price for the year 1982-’83 will be significantly below the average realized during the current financial year, and I have framed my estimates accordingly.

To sum up, on the current basis of taxation, total tax revenues of R15 417 million are available to finance total expenditures of R18 238 million. The deficit before borrowing at this stage thus amounts to R2 821 million.

Despite the financing problems we are faced with now, I wish to announce the following concessions.

In my Budget speech last year I announced that, with effect from the tax year which commenced at the beginning of this month, persons in the lower income categories who derive their income entirely, or almost entirely, from salaries, wages or pensions, will no longer be required to submit annual returns of income. In the majority of such cases the PAYE, which will be deducted in terms of the new deduction tables which came into operation on the first of this month, will represent a final settlement of their tax liability. A substantive amendment was included in last year’s Income Tax Act to make this possible.

Persons affected by this measure are those whose taxable incomes, that is, net salary after deduction of medical expenses, pension and retirement annuity fund contributions, and the allowance in respect of the earnings of a spouse, do not exceed R7 000.

The new measure cannot, of course, be applied to persons who receive substantial investment income not taxed at source, or to those whose income is received in a form other than fixed salaries, wages or pensions.

It is gratifying to note that even at the relatively low income levels, many persons are still able and willing to save, and in order to encourage savings and not to deprive them of the benefits of the new system, I furthermore propose that the first R100 of their aggregate income derived from interest and dividends be exempt from tax. This exemption will, in fairness, be granted to all taxpayers irrespective of their income, and I estimate the concomitant loss of revenue to the Fiscus for the 1982-’83 financial year at R13 million.

Although taxpayers in the category I have mentioned will not in future be required, as a matter of course, to submit returns of income for assessment purposes, I realize that factors, such as the birth of a child or abnormally high medical expenses may result in over-deductions of PAYE. In such cases, taxpayers will still be entitled to ask for an assessment and a refund of tax overpaid.

There is a point which I would like to stress in regard to the new system, and that is that it does not affect the year of assessment which ended on 28 February this year. Income tax returns in respect of that year were recently mailed and must still be completed by all taxpayers. The Commissioner for Inland Revenue will in due course advise all those taxpayers who will not in future be required to complete returns of income.

The adjustments and simplifications which I have referred to will make the tax collection system that much more cost-effective and is a further positive step in our overall tax reform programme.

It is apparent from the new normal tax rate table which will be tabled today, that the rate of tax applicable to the first R7 000 of an individual’s taxable income is 10%. Previously the rate of tax for the first R6 000 was 8% and from R6 001 to R7 000 it was 10%. The proposed new rate results in an additional R120 gross tax payable, before the deduction of rebates. The increase in the rate is not intended to be an additional impost on taxpayers but has been decided upon as part of the scheme for the elimination of unnecessary income tax assessments in the case of salary earners whose taxable incomes do not exceed R7 000, as explained. To neutralize the increase in the gross rates, an additional rebate of R120 was provided for in last year’s Income Tax Act as part of the scheme to put into operation the PAYE final deduction system as from 1 March 1982.

The sacrifice of revenue, which is confined to the R0—R7 000 income sector, is estimated at R40 million and has also already been taken into account in the printed Estimates of Revenue.

The increase in the primary rebate, taken together with the standard deductions for medical and certain other expenses and the standard insurance rebate provided for in last year’s Income Tax Act, will have the effect of raising the tax thresholds of individuals without children or dependants as follows:

Honoré de Balzac once said that “women are always afraid of things which have to be divided”. This does not seem to be the case with the vexed question of the taxation of the income of married women, a matter which continues to enjoy the attention of the Department and the Standing Commission on Taxation Policy.

It has still not been possible to formulate a preferable alternative to the present system whereby the incomes of married persons are aggregated for taxation purposes. However, as I announced during my 1981-’82 Budget Speech, one of the consequential adjustments which would be necessary to facilitate the introduction of the Final PAYE Deduction System referred to, is that the deduction allowed from the earnings of a married woman would need to be increased in two stages, from the R1 200 applicable in the 1980-’81 tax year, to R1 400 in 1981-’82, and to R1 600 in 1982-’83.

I trust that this concession will further reduce the real tax burden of women engaged in gainful employment or in a trade or profession. The loss of revenue for the 1982-’83 financial year is estimated to amount to R19 million.

I may add that the total loss of revenue as a result of the introduction of the Final PAYE Deduction System, including amounts already accounted for in the printed Estimates of Revenue, will aggregate no less than R109 million in a full year.

The effect of the final deduction system with its inbuilt standard deductions and rebates and increased deduction from a married woman’s earned income, can best be illustrated by an example. Take the case of a married couple under the age of 60 years with no children, where the husband earns R4 000 and the wife R2 500 per year, a total of R6 500. In the tax year which ended on 28 February 1982, tax amounting to some R210 had been deducted in their case. In the present tax year ending 28 February 1983, total tax deductible will only amount to R109, and no further tax returns or adjusting assessments will be issued. I regard this to be a very meaningful concession to the lower income groups in South Africa.

As indicated earlier, the provision of adequate and sufficient housing remains a problem which enjoys a very high priority with the Government. Not only have substantial public funds been allocated over the years for the provision of housing, but employers have also been encouraged by means of tax concessions to assist employees in either acquiring their own homes or in obtaining rented accommodation.

The provision of adequate financial resources, particularly for housing for the lower income groups, is at present being studied in depth by an expert committee representing the private and public sectors under the chairmanship of the Deputy Minister of Finance.

The private sector will be called upon to make a much more substantial contribution towards solving this problem, but in the meantime I feel it appropriate for the Government to offer further tax concessions specifically to encourage the construction of new accommodation for rent, at present at a premium throughout the country.

Various schemes and suggestions have been researched, but most were found to be either impracticable, too open to abuse, or even in conflict with sound taxation principles.

I am prepared, nevertheless, to offer the following concessions to investors who plan on erecting accommodation for rent: The annual depreciation allowance of 2% at present applicable to new industrial buildings will be extended to include all new housing projects which offer not less than 5 family housing units for rent. This will apply to all qualifying housing projects the erection of which commences on or after 1 April 1982.

In addition I wish to propose that an initial allowance of 10% of the cost of the project be allowed as a deduction from income in the year in which the project is completed and the accommodation is first let to tenants.

If the developer of the housing project should dispose of such property either by means of an outright sale of the whole project or through sectional title selling of individual units, or in any other way, the allowances previously granted will be recouped and included in his taxable income. Details of the allowances will be contained in the Income Tax Bill which will be presented to Parliament later in the session.

I am confident that these concessions will stimulate the provision of accommodation for rent for the benefit of those dependent on such accommodation, and will assist investors materially with their cash flow problems and return on investment.

It is estimated that the loss of revenue which this concession will entail in 1982-’83 will not exceed R1 million, but it could amount to approximately R500 000 for each R10 million invested in such projects in a full year.

The cinematograph films tax has been in operation in its present form since 1960. It is imposed at the rate of 3 cents on admission tickets of more than 35 cents, and has remained unchanged over the years. The tax has never been a substantial contributor to the State coffers and, in fact, the yield has declined dramatically over the last five years; from R1,9 million in 1975 to R0,9 million in 1980, no doubt mainly due to the advent of television.

The Standing Commission has recommended that the tax be abolished. I am in agreement with this recommendation and, in the interest of more efficient administration, accordingly propose that the tax be abolished with effect from 1 April 1982. The loss of revenue will amount to some R1 million.

The total of the concessions I have just outlined amount to R34 million and will reduce receipts from Inland Revenue from the printed figure of R13 198 million to R13 164 million.

Before turning to certain proposals for relief from excise duties, there are two further inland revenue matters to which I should like to refer.

The taxation of fringe benefits arising from employment or from the holding of an office, which has been part of our income tax law ever since its inception, has in principle been reaffirmed by the Government. The question in regard to the uniform valuation of such benefits is, however, one which should be approached very circumspectly.

Certain proposals were first put forward by the Franzsen Commission in 1970. The matter was subsequently investigated by Inland Revenue and the Standing Commission on Taxation Policy. After protracted and wide-ranging discussions, it was decided that the Standing Commission’s valuation proposals should form the basis of an in-depth inquiry by a Parliamentary Commission.

Although reports have appeared in the Press to the effect that the proposals for the taxation of fringe benefits have been shelved, I wish to give the assurance that this is not the case. The recommendations of the Parliamentary Commission, will, upon receipt, be considered by Government without delay and, if found to be acceptable, will be notified to employer and employee organizations in good time so that any legislation which may be required can be introduced early in the next year in order to ensure that the recommendations take effect as from 1 March 1983, that is for the 1983-’84 tax year.

In my Budget Speech on 26 March 1980 I indicated that I had directed the Standing Commission on Taxation Policy to investigate the initial and investment allowances accruing to manufacturers and to make recommendations to me in this regard. The matter is one of extreme complexity and, as I previously said, caution is needed before any change is made to the status quo. I am informed that the Standing Commission has made good progress in its task and am hopeful that it will be possible for the Commission to submit its recommendations to me within the next few months. It appears unlikely, however, that any consequential legislation will be introduced during the current session of Parliament.

I wish now to propose two concessions in regard to excise duties.

Natural Wines

The agricultural industry in the Western Cape is one of the main supports of the regional economy and provides an important impetus to development and growth. It is also true that agriculture in this region is much dependent upon the weal and woe of the products of the vine.

At the same time wine provides the State with not inconsiderable excise revenues and in this way assists in financing necessary expenditures. Yet it is also true that in the case of natural wines, notwithstanding a slight, albeit consistent upturn in demand, consumption per capita today is still below the 1975 level and this despite an annual average producers’ price rise of less than 9% during this period.

I wish to propose, therefore, that the full excise duty of 3 cents per litre on natural wines be abolished. Though the incidence of this duty may be small, I am told the concession will bring South Africa into line with other wine-producing countries such as West Germany, Italy, Austria, Switzerland and Australia.

The loss of revenue is calculated to amount to R6 million in 1982-’83.

In the case of natural fermented apple, pear and orange beverages I propose that the excise duty be similarly withdrawn. The loss of revenue in this case will be minimal.

Natural fruit juices are, of course, not subject to any excise duty.

Non-alcoholic Beverages

This industry has had to cope in recent times with substantial increases in input costs, one of the latest examples being an increase in the price of sugar of some 13%. Any tax concession will grant a measure of relief not only to the producer and the consumer but will also, I understand, tend to be helpful to the small businessman in the rural areas. I wish to propose, therefore, that the excise duty on non-alcoholic beverages be reduced by 1 cent per litre. This will mean an estimated loss of revenue in 1982-’83 of some R10 million.

Government notices to give effect to these proposals will appear tomorrow.

The total cost of these two concessions will amount to R16 million and will reduce the income from customs and excise duties in the printed Estimates of Revenue to R2 203 million.

The estimate of total revenue is now R15 367 million, which leaves me with a deficit before borrowing of R2 871 million at this stage.

After adding to the deficit an amount of R1 246 million to provide for loan redemptions and other loan expenditures—the latter figure is very substantially lower than total redemptions for the 1981-’82 financial year—the total financing requirement will amount to R4 117 million.

I propose that this amount be financed as follows:

This still leaves me with a shortfall of R597 million.

National Defence Bonds and Defence Bonus Bonds

I should explain that the non-marketable securities I have just mentioned comprise tax-free Treasury Bonds, tax-free Defence Bonus Bonds and taxable National Defence Bonds.

Recently in my Part Appropriation speech I announced an increase in the interest rate on Treasury Bonds and indicated that I would also deal with improvements in the terms of issue of National Defence Bonds and Defence Bonus Bonds in due course.

It has now been decided that the interest rate payable on fully taxable National Defence Bonds—which have a minimum currency of twelve months—be raised from 11% to 14% with effect from 1 April 1982 to make them more attractive and competitive in the market.

From the same date the method of calculating interest on the tax-free Defence Bonus Bonds will also be changed from the current 5% simple interest basis to a 5% monthly compounded basis, which will yield an effective 5,66% per annum over a five-year term. This compound rate of interest will also apply to all existing unredeemed investments made since the inception of the scheme provided that the Bonds are not redeemed before 1 April 1983. Interest on redemptions made before that date will continue to be calculated at the existing simple interest rate. These adjustments should at least ensure a positive flow of investment funds into these two investment media.

The loan programme set out above presupposes that funds be obtained in the domestic market in a non-inflationary manner at realistic market-related rates and care will therefore be taken to limit the individual stock issues to smaller amounts obtainable without undue difficulty and without placing undue pressures on the money and capital markets and thus on interest rates. Smaller stock issues will also ensure a more even distribution of cash flows to the Treasury throughout the year.

I also believe that the Exchequer should approach the markets for its loan requirements on a more regular basis than hitherto. The success of the Treasury’s first tender issue has been most heartening considering the difficult conditions pertaining in the market at the time, and this method will again be used for the April issue and probably for further issues during the year.

It is imperative that the shortfall of R597 million be financed in a non-inflationary manner, most suitably by way of taxation. Various options are open to me in this respect, but considering all the positive and negative effects of the various taxes, a choice had to be made as to the most desirable package under present-day and expected conditions.

I wish to turn, then, to the additional taxation proposals. As Henry Ward Beecher so aptly states it: “In this world it is not what we take up, but what we give up, that makes us rich”. Let us not give up grudgingly for the rewards will be plentiful.

In 1978 certain ad valorem duties were imposed on less essential goods such as jewellery, photographic equipment, furs and the like. I feel it essential for these items to make a further contribution to the State coffers and wish to propose that the present ad valorem duties on certain locally produced goods as well as their imported equivalents be raised from 20% and 25% to 25% and 30%, respectively.

This proposal is expected to yield additional revenue of some R28 million in the 1982-’83 financial year and should also assist in curbing consumer demand. The increased duties will become effective as from 25 March 1982 and will be applicable to all imported goods concerned which have not been cleared for home consumption before that date and to all similar locally manufactured goods which by tomorrow have not been removed from the premises of manufacturers and owners of warehouses licensed by the Commissioner for Customs and Excise.

General sales tax

General sales tax is levied on a wide variety of commercial and industrial services, for example repair services, the services of tailors, hairdressers, launderers, photographers, signwriters and printers, to mention only a few. The omission from this list of advertising services is somewhat anomalous and I feel that the taxation of such services for the purpose of producing revenue is fully justified and will not prove to be unduly burdensome.

It is, therefore, proposed to amend the Sales Tax Act to bring advertising services within the ambit of the Act as from 1 August 1982. There may be certain practical problems in this regard and I have, therefore, instructed the Commissioner for Inland Revenue to liaise with the advertising industry and media in order to iron out these problems before the legislation is drafted.

The additional revenue from this source is estimated at R31 million for a full year and at R20 million for the current financial year.

During 11 of the last 14 years a surcharge ranging from 2,5% to 10% was imposed on the income tax payable by companies. In addition, in most of these years a loan levy was also applied. The present surcharge on the basic rate of 40% amounts to 5%, which makes the effective rate of tax on all companies excluding gold and diamond mining companies—42%.

This is a low rate by world standards. In view of the fact that basic company tax rates have remained unchanged since 1970, I propose that the present 5% surcharge be incorporated in the basic rate. I propose, further, that a surcharge of 10% be levied on the new basic rate for all companies excluding gold and diamond mining companies.

The additional tax that will be collected by the increase in the effective rate from 40 to 42% and the 10% surcharge is estimated at R400 million for a full year and at R300 million for the 1982-’83 financial year.

I do not propose to increase the basic rate of tax applicable to gold or diamond mining companies. Gold mining companies pay tax according to a formula which varies with profitability, and to which is added a 5% surcharge, while the tax on diamond mines is 45% plus a 5% surcharge, an effective rate of 47,25%.

In the circumstances prevailing, however, I consider it is not inappropriate to increase the surcharge in the case of the gold mining as well as the diamond mining companies by 10%, that is, from 5% to 15%, to provide in this way much needed additional revenue from which to meet, inter alia, the increased demands which will be made on the Exchequer in the form of assistance to the marginal gold mines. In this way the more profitable mines will contribute partly to the strengthening of the total gold mining industry.

The yield from the additional surcharge on gold and diamond mining companies is estimated to amount to R115 million in a full year and R105 million in the 1982-’83 fiscal year.

The taxable income of companies carrying on long-term insurance business cannot, because of the nature of their business, be determined according to normal accounting principles and it has always been necessary to provide special rules for this purpose. Since 1959 the basic measure for the determination of taxable income from life insurers has been 30% of gross income derived from investments.

Over the years the long-term insurance industry has grown enormously and I feel it is only fair that it should make a greater contribution to the Exchequer. I propose, therefore, that the percentage of gross investment income used as a yardstick for measuring taxable income be increased from 30 to 40%.

The taxation position of the long-term life insurance industry is a matter which requires further investigation and I have instructed the Standing Commission on Taxation Policy and the Commissioner for Inland Revenue to consider the matter in depth during the recess in consultation with the whole industry and to report as soon as practicable.

The additional revenue to be collected during the current financial year as a result of this proposal is estimated to amount to R38 million.

The total additional tax that can be collected based on the proposals I have just made amounts to R491 million, which still leaves me with a deficit of R106 million.

Few will differ from Thomas Jefferson when he remarked: “The purse of the people is the real seat of sensibility. Let it be drawn upon largely, and they will listen to truths which could not excite them through any other organ.”

I wish thus to propose, finally, the imposition of a 5% loan levy on income tax payable by individuals, but subject to exempting the following taxpayers:

1. (a) Persons of all age groups whose incomes are R7 000 or less. These taxpayers, the majority of whom will fall under the Final PAYE Deduction System to which I referred earlier on, will be taxed at a fixed rate. I do feel that no further loan levy should be added to their tax;
2. (b) Persons, other than those I have just mentioned, whose basic normal income tax before the addition of loan levy amounts to R150 or less; and
3. (c) in the Year of the Aged, persons who are 70 years of age and older and whose taxable incomes exceed R7 000 but do not exceed R15 000 per annum, though remaining liable for normal income tax, will not be liable for loan levy.

Not only will the levy yield the revenue required to leave me with a small surplus for the 1982-’83 financial year, but it should also contribute, albeit moderately, to curb consumer demand by reducing personal disposable incomes and thus help in the fight against inflation. Additionally, it has the advantage that it does not presuppose an increase in the marginal rates of tax which I have striven so hard to bring down to, and keep at, lower and more realistic levels.

The levy is a compulsory loan to be repaid within a maximum period of 7 years, at simple, tax-free interest. Up to now the rate of interest has been 5% per annum, but I now propose that this rate be raised to 8%.

The yield expected from the loan levy in the 1982-’83 financial year will amount to around R115 million and R157 million for a full financial year.

After all these revenue proposals have been taken into account, there will remain a small surplus of R9 million.

When I last mentioned the “deficit before borrowing” the figure was R2 871 million. This deficit is actually the shortfall between the finally adjusted estimates of aggregate revenue and aggregate expenditure. To the estimates of revenue on the existing basis of taxation, R15 417 million, must be added the proposed increases in taxation, R491 million, and from this aggregate must be subtracted the proposed tax concessions, R50 million, to give a finally adjusted aggregate revenue estimate of R15 858 million. Likewise, to the printed Estimates of Expenditure, R18 042 million, must be added the amount of the proposed supplementary expenditures, R196 million, to give a finally adjusted aggregate expenditure estimate of R18 238 million.

The deficit before borrowing is then the difference between R15 858 million and R18 238 million, a shortfall of R2 380 million.

As is customary, a summary of the Government’s accounts is subjoined in the printed version of the Budget Speech.

COMPARATIVE STATEMENT OF THE STATE REVENUE ACCOUNT

I believe that the Budget I have presented today complies with the three minimum requirements to which I referred earlier.

First and foremost, in nominal terms it provides for an increase in total expenditure of only 11,5% above the revised estimate for 1981-’82. At the present rate of inflation this implies an actual decline in expenditure in real terms. Since additional appropriations later in the year will have to be kept to the absolute minimum, the final expenditure outturn should therefore show little, if any, increase in real terms in 1982-’83.

Secondly, the deficit before borrowing is estimated to rise only moderately from R2 060 million in 1981-’82 to R2 380 million in 1982-’83. These amounts both represent 2,8% of gross domestic product, compared with the average of 3,4% over the past 22 years.

Thirdly, provision is made to finance this expected deficit in such a way that not only the Exchequer but also the government sector as a whole, including the extra-budgetary funds, will be able to avoid a net recourse to bank credit. In other words, the Budget is designed to ensure that the government sector’s financial operations do not contribute to any increase in the liquidity base of the banking system or in the broad money supply over the financial year as a whole.

The Budget is therefore a strict and conservative one which should achieve its basic objective of contributing to the consolidation of the domestic economy and the adjustment of the balance of payments—the two main economic policy priorities at this time. It has signally succeeded in its twin objectives of keeping the deficit before borrowing to a minimum in order to place as little pressure as possible on interest rates; and in keeping a firm hand on government spending, both because of the huge drop in gold mining revenues and the imperative need to counter inflation.

To design such a Budget in the face of the expected decline of some R1 300 million in tax and lease payments by the gold mining industry and the increased cost of maintaining essential government services, was no easy task. It inevitably meant a combination of restrictions on government expenditure and increases in tax rates. Such budgetary measures are never popular, but in situations like that of today they are clearly essential to preserve the basic strength of the South African economy.

I believe furthermore that the Budget spreads the burden of adjustment in a fair and equitable manner. The increase in general sales tax from 4 to 5% and the imposition of the 10% surcharge on imports introduced in the Part Appropriation Bill last month are, of course, indirect taxes, which affect a broad spectrum of people. These steps have now been supplemented, firstly, by increases in ad valorem excise duties on mainly non-essential goods and, secondly, by increased direct taxes or surcharges on companies, including gold and diamond mines, as well as on the investment income of insurance companies. I have refrained from raising the rate of income tax on individuals, mainly because of the incidence of “fiscal drag” or “bracket creeping”, which results from the combination of inflation and a progressive tax system—although I have made concessions in the case of married women and those earning salaries, wages and pensions below R7 000 per annum. I have preferred, rather, to impose a loan levy of 5% on individual taxpayers, which is a compulsory savings measure.

Another major feature of this Budget is that, by increasing the fiscal component in the policy “mix”, it should in due course ease the burden of adjustment currently being carried by monetary policy. It should, in particular, counteract the upward pressure on interest rates and assist in maintaining the strength of the rand in the foreign exchange market.

In this regard it might be argued that the Budget is still not strict enough and that it should have provided for even larger tax increases, particularly in view of the recent further decline in the gold price and the urgent need to curb monetary demand with a view to balance of payments adjustment. It is my considered opinion, however, that the Budget is adequate for the task at hand. Of course, we shall have to continue relying on a strict monetary policy with full acceptance of the relatively high level of nominal interest rates which that implies. But in our present circumstances, I believe that is preferable to further increases in tax rates.

Although monetary demand is still high, the economy is now finally “cooling down” and the real growth rate is gradually declining. The balance of payments adjustment process is well under way and will certainly be accelerated by today’s Budget. In these circumstances, I believe that further tax increases above and beyond those already included in this Budget, might prove to be more contractionary than necessary. Hence our preference for continuing with the present tight money and high interest rate policy as part of a broader and well co-ordinated fiscal and monetary strategy.

If, however, conditions were to change materially as a result of unexpected external or internal economic developments in the months ahead, I shall not hesitate to take such further fiscal measures as might be necessary to safeguard the basic strength of the economy.

Today’s Budget once again underlines the recognition by the Government of the changed economic realities of the present time. It also signifies our resolve to take the steps necessary to ensure that the South African economy makes the required adjustments to these realities timeously and in a fundamentally sound way. Given the present parlous state of the world economy, this will inevitably entail a measure of sacrifice on our part. But if we have the courage and determination to persist with the cohesive package of economic stabilization policies we now have in place, we shall undoubtedly reap the benefits. We shall then find ourselves in a position to take full advantage of the next world economic recovery, which cannot be too far in the future.

South Africa’s economy is basically so strong and so versatile that I have no doubt that, whatever the state of the world economy and the vagaries of the business cycle, our economic future is assured. As it is, our economic performance in the world depression of the last two years and more bears comparison with the very best.

In conclusion, I wish to pay tribute to Mr. W. G. Schickerling, who retires as Auditor General on 30 April 1982 after a long and distinguished career in the Public Service. I trust that he and Mrs. Schickerling will enjoy a long and well-deserved retirement. I congratulate Mr. A. P. Ellis on his appointment as Auditor-General as from 1 May 1982. I also wish to pay tribute to my staff, to the Treasury as a whole under the leadership of Dr. De Loor as Director-General and to the Reserve Bank under the leadership of Dr. De Kock as President, for the able and dedicated way in which they have acquitted themselves of their numerous tasks.

Mr. Speaker, I now lay upon the Table—

1. (1) Estimate of Expenditure to be defrayed from State Revenue Account during the financial year ending 31 March 1983 [R.P. 2—’82];
2. (2) Estimate of Revenue for the financial year ending 31 March 1983 [R.P. 3—’82];
3. (3) Statistical/Economic Review [W.P.B—’82];
4. (4 Comparative figures of Revenue for 1981-’82 and 1982-’83;
5. (5) Taxation proposals [A. 2—’82];
6. (6) Proposals for improved social pensions and grants, military pensions and civil pensions.