Medium Term Budget Policy Statement: public hearings

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JOINT BUDGET COMMITTEE

JOINT BUDGET COMMITTEE
8 November 2001
MEDIUM TERM BUDGET POLICY STATEMENT: PUBLIC HEARINGS

Relevant documents
Medium Term Budget Policy Statement 2001
IDASA submission
People’s Budget submission
SACOB submission (see Appendix)

SUMMARY
Three organisations made submissions to the Committee: IDASA, the People’s Budget and SACOB. The People’s Budget welcomed increased allocations for welfare but submitted that it was not enough to overcome poverty. IDASA also submitted that more money is needed in welfare and proposed that government reprioritise in favour of social development. SACOB made recommendations on how to approach the social and economic problems in SA.

MINUTES
IDASA - Budget Information Service
The presentation was made by an IDASA delegation (Mr R Wildeman, Ms A Hickey
Ms J Adams, Ms J Streak, Mr P Whelan) that looked at the following issues:
- The optimism in the MTBPS growth forecast and why IDASA expects market growth to do little to reduce poverty via employment;
- Under-spending problems and the effectiveness of spending in key programmes important for growth and poverty reduction seen in relation to the new emphasis on capital and infrastructure spending and the HIV / AIDS allocations in the MTBPS
- The extent to which one of the government’s social service spending programmes, the norms and standard in public ordinary schools, is targeted at the poor;
- Why the allocation size of the allocation to social development may not be sufficient.

Questions
Mr Masutha (ANC) referred to IDASA submission on unemployment and said that the submission is lacking because it does not refer to the huge skills development fund and how this will contribute to the skills level in SA.

Mr Sikakane (ANC) said that there is a presumption of disinformation and that government is not doing enough to fight HIV / AIDS. He commented that SA does more than any African government. He asked for IDASA’s comment on the government’s role in AIDS awareness.

Mr Cwele (ANC) said that many have pointed out that SA has a diverse export market and therefore we are not as badly affected by the current slump. IDASA says that there will be a deeper and longer recession in the US, Europe and Japan. How does IDADSA come to this conclusion.

Mr Zita (ANC) referred to the IDASA submission that not enough money is spent on social development. He asked where must government get the money from: more tax or from re prioritising.

The IDASA delegation responded as follows:
- The skills development was considered but was deliberately not included because it relates to a period before the MTBPS. Even if it was included it will only have an impact further down the line.

- The most important consideration is that provinces are not spending money on HIV / AIDS. Capacity is crucial and government underestimated the challenges of a multi sectoral plan. The policy of government is good and the increase in the allocation is welcomed.

- Idasa is asking for re prioritisation because social development and social grants were a constitutional obligation. Adequate budgeting can be more cost effective.

- In clarifying the IDASA position as to the ‘worsening and deeper recession’, IDASA said it was concerned that the impact of the recession on exports would be greater than what Treasury suggests in its model. It already appears that exports are falling. The US interest rates cuts show that sentiment has not yet turned around.

- There is an imbalance between labour supply and demand partly because of the restructuring of the economy from mining to manufacturing and due to the lack of investment in skills development in the past. The types of skills asked for and what is supplied varies in all countries but because it has not been adequately addressed in the past it will take a while before it is overcome. If Labour cannot address this imbalance then it must be addressed through the social development programme.

Ms Sonjica (ANC) referred to IDASA’s submission that 22.8 million people live below the poverty line. She asked how recent was the statistic and how was this figure arrived at.

Mr Ralane (ANC) said that Israel is in a state of war but yet its currency depreciation is not nearly as bad as South Africa’s. He asked why everyone raises the question of stability and certainty yet there are such examples as Israel occurring in the world.

Due to time constraints, the Chair asked that the questions by Mr Ralane and Ms Sonjica be replied to in writing.

The People’s Budget
The People’s Budget is represented by the South African Council of Churches (SACC), the South African NGO coalition (SANGOCO) and Congress of South African Trade Unions (COSATU). The delegation consisted of Mr Bheki Ntshalintshali (COSATU Deputy General Secretary), Mr Coleman and Ms Tregenna (COSATU) Rev Damon and Mr Tilton (SACC) and Ms Mvimbi (SANGOCO).

The response to the 2001 MTBPS was structured as follows:
- Overall Macroeconomic Analysis
The macroeconomic policy had not attracted investment, created jobs and increased economic growth. It was submitted that government increase the deficit i.e. borrow more and the resources be invested social development and infrastructure.
- Expenditure
This dealt with the allocation to social development and concludes that the transfers to social welfare are inadequate. The concern about under spending is also discussed.
- Revenue
It welcomed SARS ability to collect more than what was expected but criticised Treasury for not taking into account this increased revenue and using it for social service delivery.
- Democratising the Budget Process.
Finally it was submitted that the Budget process must be democratised by tabling an amendment to the processing of money Bills (in terms of section 77 of the Constitution) to make the budget process more transparent and to increase participation. (See the written submission for the detailed response by the Peoples Budget).

Discussion
Mr Cwele (ANC) noted that it was submitted that insufficient funds are given for HIV/ AIDS. He asked what would be sufficient to deal with the current challenges.

A committee member said that is has been stated over and over that there is no capacity to spend at lower levels of government and that these spheres do not know when to plan to spend the money: before or after the funds are received. The People’s Budget represents the masses and asked what contribution they make to increase opportunities for the people.

Mr Hanekom (ANC) asked what is a ‘quality job’ that the submission referred to. The working for water project is a low paying job but does the People’s Budget see this as a quality job. The first prize is a good high-wage job, but sometimes any job is better than no job. He asked for a comment on this point.

Ms Sonjica (ANC) asked if the basic income grant would lead to dependency syndrome.

Mr Zita (ANC) commented that the submission shows that the positive steps of government are supported. The Peoples Budget has submitted that there are problems with job shedding because of technology. He wanted to know what was COSATU's assessment of technology.

Ms Mahlangu (ANC) asked if the Medium Term Expenditure Framework process was not sufficiently transparent and participatory. If the People’s Budget still wanted legislation enacted to amend the processing of money Bills, what must be in that legislation? She asked what can be done so that government can convince everyone that the process is democratic.

Response
SACC said that the Budget Committee is a step in the right direction but money Bill amendment was still needed because it will allow Parliament to engage with Treasury and to make certain changes where Parliament thinks necessary. The MTEF gives a three year indication and this process needs to be engaged in. However Treasury at the end of the day still has too much power and Parliament needs to play a stronger role. If Parliament cannot change the budget then the public submissions that are made do not count for much.

Ms Mvimbi (SANGOCO) said that social security is a constitutional right. There is great poverty and the basic income grant would benefit the poor. Learners at school cannot be productive because they are too hungry and children die of malnutrition. This grant is the way to go in South Africa. It must be a universal grant not based on a means test because then people will have no incentive to look for work.

Mr Coleman (COSATU) added that old age pensions are often shared in households and that the Child Care grant does not reach its intended targets. The basic income grant will act as a stimulus and not cause dependency.

- There is a need to promote sustainable quality jobs. The working for water project is important but it is limited.

- If technology is used well, it can increase quality jobs. New technology must be linked to increased, improved services. If new technology is introduced, the services that are provided cannot stay the same. It is important that all the alternatives to job shedding be investigated because there are many cases where proper investigation has revealed that job shedding had not been necessary.

Ms Tregenna on the HIV / AIDS question said that in the February People’s Budget the following strategies were put forward:
- Increased condom distribution at a cost of R1 billion because there is not enough condoms available and most are put at government buildings.
- The cost of treating 20% of persons infected with the cheapest regime of drugs will be R6 billion a year
- The prevention of mother to child transmission will cost R100-200 million a year.

South African Chamber of Business
Mr Wakeford, CEO of SACOB, presented the submission (see Appendix) to the Committee.

Discussion
Mr Ralane (ANC) commented that the pension fund surplus legislation tries to redress the imbalances of the past yet business is not even able to consider a trade-off.

Ms Sonjica (ANC) said that there is a view that prolonged global recession would affect exports. She wanted SACOB to comment. Secondly she said that the Rand is undervalued and asked the reason for this and what can be done to strengthen the Rand.

A member referred to SACOB’s concern about the financial viability of local government and asked what can be done to get out of that vicious circle.

Mr Cwele (ANC) said that SACOB has asked for Secondary Tax on Companies (STC) to be abolished. This is to make investors happy but was it not private sector’s responsibility to ensure that we have a growing economy and plough back instead of asking for tax-free dividends.

Mr Masutha asked if SACOB believed that creating jobs is the responsibility of government and what suggestions does SACOB have to fight unemployment. He said that in reality business uses any excuse not to invest in SA. He wanted to know if the reluctance to invest is related to genuine structural barriers.

Mr Pieterse, in response to SACOB’s proposal that the Post Office be privatised, said that the Post Office delivers services to the poor and that private companies do not care about this issue. Secondly he asked how business viewed the current political conflict in the Western Cape and if business would invest in the province.

Dr Rabie (NNP) asked what is an acceptable threshold for personal income tax.

Ms Mahlangu asked why business has a problem with the government subsidy to the Post Office. We are trying to restructure and transform the Post Office to ensure that rural areas receive proper services.

Response
Mr Wakeford said that the Pension Fund Surplus is a conflict area but did not want to elaborate because submissions had already been made. The worst case scenario would be to have to go back twenty years because it would result in admin backlogs and congestion of the judiciary. What the Bill does is take capital out of general savings instruments. SACOB agrees in applying the principles in the Bill to the future but going back 20 years will cause severe hemorrhaging.

- World trade is definitely slowing down. This means that SA must broaden out to other markets and grow export volume. Small business needs to be assisted on the export front.

- It is difficult to determine the value of the Rand but it is safe to say that it is undervalued. SA at the end of the day is part of the emerging basket of countries. The forex market has not been opened up entirely yet. Foreign exchange controls should be removed and the Rand should be allowed to find its floor.

- Local government stability must be restored and this is a developmental challenge. Growth is not the only answer. We need to consider what functions can be outsourced and the national fiscus must be applied to local government. At the moment the transfers are skewed in favour of national and provincial government. Money must be given to local government to make them sustainable.

- Business is not responsible for creating jobs. Business, as a consequence of investment and wealth creation, creates jobs. SA had to go through a radical transformation to become competitive and as result jobs were lost, but now SA can export fully assembled vehicles to world markets. Employment will be generated by mobilizing investment for growth. In the short term, public works projects could create jobs but these are not sustainable.

- Government needs to beef up social service delivery and reduce debt and one way to do this is through privatisation. Privatisation does not always lead to job loss. The cell phone industry did not take any jobs away from Telkom and they employ about 30 000 people.

- If it is to be the Post Office of Social Service Delivery then the government must clearly say so because up to now they have not.

- On the conflict in the Western Cape, he said that democracy is robust and the more altercations that take place the better. It is important to challenge each other and stop being politically correct.

- The tax threshold should be reduced by 1% per year for the next 10 years.

There were no further questions.

Appendix:
SACOB SUBMISSION REGARDING THE MEDIUM TERM BUDGET POLICY STATEMENT (MTBPS); THE ADJUSTMENTS APPROPRIATION BILL AND THE MEDIUM TERM EXPENDITURE FRAMEWORK (MTEF)

Introduction
SACOB acknowledges the importance of the National Budget as a policy statement that not only addresses public financial issues but also makes an important impact on the performance of the economy over the short to medium term. More importantly it also guides the sustainability and growth of the economy in addition to providing some certainty and predictability.

As the Budget also affects the efficiency of business and their continued participation and performance in the economy, certain aspects are regarded as important to address at this stage. In SACOB’s media statement following on the Minister of Finance’s address on 30 October 2001, issues were highlighted but with this submission these proposals and comments are unpacked in more detail.

The tragic events of September 11 have accelerated and exacerbated the global slowdown. Given South Africa’s successful foreign trading experience which accounts for 50% of GDP and has also accounted for much of our economic growth – we are now bound to witness some of our domestic weaknesses as more attention is focussed on beefing up domestic growth through the need for the mobilisation of domestic capital and more risk taking for investment. The weakness and depreciation of our currency is attributed to a number of factors – one being the lack of domestic growth as capital (both local and international) chases high growth economies.

Our performance against other emerging markets with which we compete for production and capital has been mediocre. Our macro-economic policy framework should therefore focus on imaginative supply side measures to unleash greater risk taking by capital and hence foster the required growth levels to address our unacceptable levels of unemployment and socio-economic deprivation.

It is also obvious that the responsibility for achieving high growth levels not only lies at the doorstep of the Minister of Finance but all stakeholders in the economy. Many of the onerous conditions and regulations that impede risk taking are for the attention of other Ministries.

Fiscal Manoeuvrability
SACOB acknowledges the responsible way the Minister of Finance and his personnel have succeeded in applying sound fiscal policy. These efforts brought about macro-economic stability and laid a sound basis for future growth. Business realizes how difficult and cumbersome the process of fiscal adjustment can be. It can also be a prolonged process to turn around public finance trends once they are on course. Notwithstanding the difficulty in changing trends, SACOB proposes that some of them be revisited in order to assist the economy to get onto a higher road of sustainable economic growth. There could never be a "right time" to address these issues but SACOB believes that a start should be made with the next budget. A review of the MTEF may be required in some instances, while a slight adjustment might serve the purpose in other cases.

Adjustments Appropriation Bill - 2001
SACOB wishes to congratulate the government on reducing the budget deficit from the envisaged 2,5% to 2,3% of GDP. The majority of adjustments could not have been realistically foreseen and are in the main well motivated and acceptable. However SACOB would be lacking in its duty to its members if it failed to point out its concern regarding the following:

The R300 million a year subsidy to the post office. This institution should be focussed on "sustainability" imperatives in order to offer a value proposition for future privatisation.

An appropriation of R300 million to the Mpumalanga Government for cash flow purposes. It is however comforting to note that remedial action is underway in terms of financial management in that province.

Development and enhancement of small business
The Regulatory Review for Small Business that was published in 1999 should again be assessed and a checklist of achievements in terms of the recommendations be made, and a strategy implemented to address those that have not yet received attention.

Of special importance to the fiscus is the tax on personal service companies. The application of proposals in this regard should be reconsidered. Of further importance is the personal tax burden on the middle-income group and the effect it has on the sole proprietor and medium sized businesses. SACOB welcomes the Minister’s acknowledgement of this problem and his intentions to address it. Tax and regulatory relief would go a long way in inducing small business risk taking and expansion.

Capital Programmes
SACOB welcomes the shift in expenditure emphasis to capital expenditure as this will assist in reducing government dissaving, contribute to fixed capital formation and induce private sector activity and investment. Recurrent expenditure in relation to capital expenditure remains too high and should receive ongoing emphasis and attention as part of the medium term outlook. Budget "roll overs" should be avoided particularly with regard to capital programmes.

Service delivery and implementation capacity
Appropriate service delivery and lack of capacity to implement the very good policies of South Africa have frequently been mentioned as the Achilles heel of public finance. The ultimate success of fiscal policy and the effects on the economy depends heavily on service delivery. The most optimal application of taxpayers’ money determines the effect the public sector’s participation in the economy has on growth and the sustainability thereof.

The application of norms and standards, and the performance measurement of expenditure, should feature prominently in the auditing and appropriation of budgetary resources. This should be done annually.

A serious effort should be made to use private sector expertise or outsourcing to assist in enhancing service delivery in the public sector. This should not be done on top of but in place of the current dispensation. This particularly applies to capital expenditure programs and projects.

Financial vulnerability of Local Government
SACOB remains concerned about the continued financial weakness, vulnerability and fiscal sustainability of local governments. Sundry debtors were close to R22 billion at the end of the second quarter of 2001 representing an increase of 15,2% since 1997. Sundry creditors increased from R9,7 billion in 1997 to nearly R11 billion at the end of June 2001.

Given the fact that local governments are the "real" site of delivery, remedial action, greater national fiscal consideration and contingency planning requires emphasis in the medium term outlook.

Borrowing requirements of the national budget
The Budget for 2001/2002 will be remembered as an opportunity lost. It is a pity that the 2001 privatisation process faltered on the back of opposition not only on technical and feet dragging issues, but also on some ideological debates. The timing of privatisation should always be "now". The developments in the Post Office are a case in point. It is no use bringing in private sector management while retaining conditionalities that cannot be commercially justified. This type of interference eventually leads to the enterprise becoming a non-viable commercial venture that has no value to an investor as a proposition for privatisation.

SACOB therefore urges Government to ensure that state enterprises are conducted on a commercial basis. Social objectives should be financed in a transparent way by appropriations from the Budget. Once viable, the privatisation of these entities should continue without hesitation.
SACOB is afraid that non-adherence to the process described above will continue to place a heavier burden on the fiscus in future and that policy credibility will be affected.

The use of off shore loan facilities as a contingency exercise because of the lack of privatisation has not only resulted in an opportunity lost in terms of FDI, but it has also enlarged state debt and the accompanying service costs – especially when the deteriorating value of the Rand is taken into consideration.

Effective privatisation would also have introduced more competition and hence price reductions – contributing to lower inflationary pressures and consequently lower interest rates. This contributes to the "cost of capital" being lower and mobilises risk taking in the economy by the private sector.

Much needed continuation of tax reform
SACOB encourages the Minister to continue the tax reform process. The reform that was applied during the last two years to a large extent targeted income and wealth taxes, especially the higher income group.

Again SACOB urges government to reconsider the application of CGT and residence based tax. This is of the utmost importance for not only private capital formation in the economy, but also with regard to FDI. Although the case for these taxes might be valid in developed economies, South Africa should consider its tax structure within an emerging market context. Taxation on savings and retirement funds should also be reconsidered to mobilise additional domestic saving which is performing badly as a percentage of GDP.

SACOB also advocates that further consideration be given to abolishing special tax on companies (STC) and to the position taken on pension fund surpluses. This latter position will not only further undermine the savings culture in the economy, but could also lead to immeasurable distortions in the capital markets.

Tax restructuring with a movement away from direct taxes to indirect taxes should be the guiding principle. If this leads to a heavier burden on the poor and the destitute, zero rating of for instance VAT on certain basic consumer goods can be considered. Transparent budgetary allocations should also be evaluated with a strong emphasis on delivery mechanisms and accountability.

Management of Inflation
SACOB welcomes the success in bringing down inflation to the levels we experience today. Maintaining the targets at the current level for 2003 is a pragmatic and realistic move given the potentiality of exogenous forces and regulated prices. The suggested "escape clauses" are indicative of this reality and are thus supported by SACOB. Inflation is a war never won and the tightening of the targets in 2004 and 2005 is commendable. However, leaving
this responsibility to the monetary authorities alone is a gross misconception of the process of a continuous rise in the general price level - as inflation is defined. All economic participants should contribute to this process otherwise more stringent monetary action in order to achieve these targets would have dire consequences for economic growth and the sustainability thereof. It is therefore also compelling that all public sector entities which either conduct business enterprises or preside over regulated prices should fall in line with the targets. To use the price mechanism for re-distributive, cross subsidies or other social objectives could lead to serious economic consequences in an environment of inflation targeting.

Conclusion
SACOB trusts that the views expressed here will be seriously considered at the earliest possible opportunity. The 2002/2003 Budget is the ideal starting point given the slowdown in the world economy and the need to place domestic economic activity on the front burner.

SACOB also wishes to thank the Budget Committee for the opportunity to comment. We are committed to partnering South Africa, its government and its people in order to achieve economic growth and prosperity for all. We commend the Minister of Finance and his team for taking bold and courageous steps for the achievements thus far.

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