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South Africa Table of Contents

South Africa


The government's strong role in shaping the economy was especially evident in the large number of parastatals, or state corporations, that it established beginning in the 1920s. Its primary goal was to strengthen import-substitution industries, which had started to grow during World War I, by providing infrastructure improvements and basic materials. Among the first such enterprises were the Electricity Supply Commission (Eskom) and the South African Iron and Steel Corporation (Iscor), both founded in the 1920s, and the Industrial Development Corporation (IDC), established in 1940 to support other new industries. The IDC helped to establish many other state corporations, including the Phosphate Development Corporation (Foskor); the South African Coal, Oil, and Gas Corporation (SASOL); and the Southern Oil Exploration Corporation (Soekor). In addition, many state corporations also founded subsidiary companies in partnership with private firms, and many held controlling shares of stock in private firms.

Private individuals were allowed to purchase shares in many state-owned corporations. The government generally appointed a majority of corporate directors, but senior management made most personnel decisions independent of government control. The government's primary avenue of control over state corporations was by granting or withholding loans of state money. The electricity parastatal, Eskom, was always allowed to raise money publicly, but most other state corporations relied on government funds for capital financing.

The anticipated private-sector participation in these parastatals did not materialize, however. Investors showed little interest in purchasing parastatals' stock. Iscor suffered the embarrassment of an almost total public refusal of its stocks when they were offered for sale in 1929. In fact, most state corporation ventures were viewed as unprofitable and were funded by the government because of a lack of private interest. In 1979, however, after oil sales from Iran had been cut off, the synthetic fuel corporation, SASOL, offered shares to the public; investors eagerly bought all that were available and fully supported two more such issues.

In February 1988, President P. W. Botha announced plans to privatize several state-controlled industries, including Eskom, Foskor, and Iscor, as well as state-operated transport, postal, and telecommunications services. The reasons given for the privatization effort were that it would reduce public criticism of the government role in these enterprises and that these parastatals themselves were no longer profitable for the government. State corporations had been the major recipients of large foreign loans that were called in and cut off in 1985, leaving them with serious capital shortages. Sale of the corporations' assets could both ease the debt burden and provide the government with new revenue for much-needed social programs for the poor.

Iscor was the first major parastatal to be sold, in November 1989. Its sale raised R3 billion for the treasury. The government then scaled down its plans, and in the early 1990s the future of privatization was unclear. Officials estimated that the roughly R250 billion needed to finance the purchase of the largest state corporations probably could not be found inside the country. The argument for privatization was also weakened by the worsening investment climate as political negotiations stalled and violence increased. Government opponents, especially the ANC, vigorously opposed privatization--viewing it as a ploy to maintain white control in preparation for majority rule.

In 1995 the Government of National Unity began to develop its own privatization program. Late that year, Deputy President Thabo Mbeki announced that the government would seek equity partners in Telkom and in South African Airways and that it would sell several smaller parastatals outright. The announcement provoked strong protests from labor unions over the threat of job losses and over labor's exclusion from the policy decision-making process.


The government enjoyed surplus budgets in most years during the 1970s and the early 1980s, until chronic high inflation and gold price fluctuations combined to diminish the business tax base in the mid-1980s. The severe decline in real gold prices reduced tax revenues to less than 2 percent of total revenues in FY 1990-91, compared with 25 percent of total revenues in the boom year a decade earlier (see table 7, Appendix).

The personal tax base had always been relatively narrow because of the limited income of the large black population (about 76 percent of the total population) and the relative affluence of most whites (about 13 percent of the population). Searching for additional revenue during the late 1980s, the government tried to avoid higher taxes on businesses and instead relied on deficit financing. For example, in FY 1987-88, the deficit was 5.8 percent of GDP as part of a deliberate fiscal stimulation of the economy. This pattern of spending continued, and the budget deficit rose to 9 percent of GDP in 1993.

The erratic price of gold during the 1980s led to other budget problems, fueling the cycle of reduced industrial revenue, currency devaluation, and high inflation. The government attempted to encourage business development through lenient tax policies, but average incomes continued to be low so this strategy failed to bring in the needed government revenues. The government tried to increase its revenues by "widening the net" of goods and services taxed in 1991, when it introduced a 10 percent value-added tax (VAT) to replace the former 13 percent general sales tax. Then, in an effort to encourage capital spending, businesses were exempted from paying the VAT on capital inputs. And to encourage investment, other forms of tax, such as corporate taxes, taxes on gold mines and gold companies, and import surcharges on capital goods, were reduced. By 1995 the VAT had been increased to 14 percent.

The FY 1994-95 budget projected revenues of R105.8 billion and expenditures of R135.1 billion, leaving a deficit of R29.3 billion, or about 6.2 percent of projected GDP (see table 8, Appendix). To raise revenues, the government planned to sell domestic stocks, increase foreign borrowing, and increase excise taxes on alcohol and tobacco products--expected to bring in an estimated R525 million. The government also levied a one-time, 5 percent "transition levy" on individuals and businesses with taxable incomes of more than R50,000, expecting to enhance its revenues by about R2.25 billion through this measure.

In March 1995, the ANC-led government's budget for FY 1995-96 estimated total revenues at roughly R123 billion and expenditures at R153.3 billion, with a budget deficit of R29.7 billion and a gross borrowing requirement (including interest on previous debt) of R38 billion. Government revenues were to be enhanced by higher taxes on alcohol, tobacco, and gasoline (and a higher, 43 percent maximum rate on individual incomes). The budget was well received overall, and the Johannesburg Stock Exchange generally held steady after it was presented.

The proposed government budget for FY 1996-97 projected revenues of roughly R145 billion and expenditures of R174 billion, with a projected deficit equivalent to 5.1 percent of GDP. Principal projected new revenues included taxes on monthly retirement income, while revenues from import tariffs would be reduced or eliminated. Proposed budget allocations included roughly R7.5 billion for salary increases and pay adjustments for government workers, intended to reduce the inequities of the apartheid era. The budget also envisioned expenditures of roughly R5.5 billion for education, R10.2 billion for military spending, and R9.8 billion for the police.

Data as of May 1996

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