Fiscal Framework & Revenue Proposals 2010: People's Budget Coalition & Business Unity submissions

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Finance Standing Committee

25 February 2010
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The People’s Budget Coalition (PBC) and Business Unity South Africa (BUSA) tabled their submissions on the 2010 Fiscal Framework and Revenue Proposals to the two Committees, sitting jointly. The PBC was a civil society coalition which comprised COSATU, the South African Council of Churches (SACC) and the South African Non-Governmental Organisation Coalition (SANGOCO). It called for a budget that would allow meaningful and substantial investment of resources towards the reduction of poverty and unemployment, and could be measured against the five top priorities in the African National Congress (ANC’s) election manifesto, which lay in the areas of health, education, the creation of decent work and sustainable livelihoods, the fights against crime and corruption, and rural development, land reform and food security. Its submission addressed the budget balance, tax policy, monetary policy and inflation targeting, and it gave a commentary on several areas of the budget speech and review.

PBC highlighted that the poor were most in need of relief, and called for expansion of the current list of VAT zero-rated goods beyond the list of 18 basic foodstuffs, also asking that consideration be given to including other goods such as zero-rating childrens’ clothing, footwear and educational books. The PBC also proposed a reduced Value Added Tax (VAT) rating for specific goods. It felt that the current tax proposals were not sufficient to address the macro-economic imbalances that South Africa faced. It was disappointed that the Minister had failed to move away from the monetary policies of the past administration, despite his claim to have learned lessons from the crisis. PBC had expected monetary policy to be changed to target employment directly as a primary focus of policy. PBC would escalate the struggle for the scrapping of inflation targeting.

The PBC commented on the proposals for youth employment, public health, Public Private Partnerships (PPS), medical aid memberships, social security, corruption and the Competition Authority proposal on Banking. It was concerned that there was no direct indication of any direct funding for the National Health Insurance (NHI) in the budget.

Business Unity South Africa (BUSA) felt that the budget had continued on a proven macroeconomic framework, and was also pragmatic in addressing underlying economic challenges. It had found the budget speech useful in the enhancement of investor confidence and noted a good response to it by the currency markets and Johannesburg Stock Exchange. It stressed that commitment to a prudent macroeconomic framework was vital, but that fiscal policy alone could not successfully address South Africa’s challenges. It felt that this budget had struck a good balance between the prioritisation of job creation, poverty eradication and economic growth. It was also built on a solid macroeconomic framework which had been largely acknowledged for mitigating the full impact of the global economic crisis for South Africa.

BUSA was in agreement with the commitment to improve efficiency in government spending was keen to explore areas supportive of improving the value for money. Government commitment to combating corruption was a cornerstone, and its own efforts were outlined. It regarded the budget outcomes of upgrading healthcare, improving education quality, the support of rural development, job creation, public safety, the building of sustainable housing settlements and improving government efficiency as reasonable. BUSA commended the additional R3.6 billion allocated to the Department of Trade and Industry for employment creation and industrial investment. In regard to revenue estimates, BUSA concurred that broadening the tax base was the best approach to achieve higher revenues in the long run.


Meeting report

2010 Fiscal Framework and Revenue Proposals: Continuation of public submissions
Submission by the People’s Budget Coalition (PBC)
Mr Tony Ehrenreich, Provincial Secretary, Congress of South African Trade Unions (COSATU) introduced the submission for The People’s Budget Coalition (PBC). He described the PBC as a civil society coalition that comprised COSATU, and its affiliate National Union of Mine Workers South Africa (NUMSA), the South African Council of Churches (SACC) and the South African Non-Governmental Organisation Coalition (SANGOCO). He indicated that Mr Woody Aroun, NUMSA Parliamentary Officer, and Mr Keith Vermeulen, SACC Parliamentary Officer, were also present.  

Ms Prakashnee Govender, Head: Parliamentary Office, COSATU, delivered the PBC’s submission, thanking the Committee for the opportunity to voice its stance and commending the Committee on ensuring an increasingly inclusive and participatory role for civil society in the budget process through the enactment of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009. The PBC welcomed the emphasis in the Minister’s speech on the need for a common vision and “common purpose so that we can use all our talents, skills and resources to tackle our economic and social challenges”. The PBC called for a budget that would put meaningful and substantial investment of resources towards the reduction of poverty and unemployment. It would need to be measured against the five top priorities in the African National Congress (ANC’s) election manifesto, being health, education, the creation of decent work and sustainable livelihoods, the fights against crime and corruption and rural development, land reform and food security. The PBC appreciated the Minister’s agreement with COSATU that “it is essential that we urgently adopt a completely new growth path to transform our economy into one based on labour-intensive industry and one that meets the basic needs of our people.”

PBC’s submission was divided into matters pertaining to the budget balance, tax policy, monetary policy and inflation targeting, as well as commentary on proposals in the budget speech and budget review.

With regard to the budget balance, the PBC quoted the Minister’s remarks that “the foundation of any fiscal policy is sufficient revenue to finance public expenditure. To achieve this, deficit will need to continue to trend downwards beyond 2012/13. This will require spending growth to moderate as revenue continues to rise”. The PBC perceived that to be a narrow view and said that the gap between the real interest rate and the growth rate of the economy played a huge role in determining the dynamics of public debt. Ms Govender said that such a fiscal framework was biased towards financial investors through inflation targeting, because it permitted the real interest rate to lie above the growth rate of the economy. PBC said that insofar as fiscal policy was concerned, the rise in the interest rate, or the drop in the inflation rate would increase the interest cost of public debt, and limit government’s ability to use deficit spending as a means to accelerate job creation. The PBC noted that the Minister did not mention the contribution of interest payments in government spending in his Budget Speech. One of PBC’s criticisms about the budget was its failure to isolate what should be considered a “crisis” or “stimulus response”. Many technical questions arose pertaining to the budget policy framework, such as the responsiveness of tax policy to income distribution, as well as the unemployment rate – which were variables of concern to the Minister. PBC would table its issues about the macro-economic policy at the forthcoming Alliance Summit. It was incorrect to suggest that the proposed fiscal framework allowed for expansionary government spending.

With regard to tax policy and corporate tax, PBC believed in the long-term there was going to be a need to review the current disproportionate tax burden that was imposed on individuals as opposed to companies. PBC noted there would be proposals for a review of the current income tax thresholds. Since the number of people earning above R1 million had increased, PBC would be proposing the introduction of an additional threshold so that people earning this would be expected to pay an additional and higher special wealth tax.

Ms Govender said that the poor were in need of relief and that the PBC would welcome government expanding the current list of vat zero-rated goods beyond the list of 18 basic foodstuffs. She said that consideration should also be given to including other goods, such as zero-rating childrens’ clothing, footwear and educational books. The PBC proposed a reduced Value Added Tax (VAT) rating for specific goods too. The PBC said that the current tax proposals were not sufficient to address the macro-economic imbalances that South Africa faced.

PBC approved of the priority to close tax loopholes and broaden the tax base.

With regard to fuel and environmental taxes Ms Govender said that the PBC acknowledged the importance of increasing tax revenues and the adoption of a responsible approach towards environmental matters. She said that PBC’s main concern regarding these proposals revolved around their timing and implications for an economy that was already under massive strain.

She noted that PBC was, however, disappointed that the Minister had failed to move away from the monetary policies of the past administration, despite his claim to have learned lessons from the crisis. It had expected monetary policy to be changed to target employment directly as a primary focus of policy, as stipulated in the Election Manifesto of the ANC as well as the Alliance. The deviation from this by the Minister proved that without mass power, elected leaders tended to be sucked in by the power of finance capital. PBC would escalate the struggle for the scrapping of inflation targeting.

In regard to Youth Employment, PBC said that the strategy to stimulate youth employment should be located in the broader employment policy of government. It felt that there was no coherent employment policy framework yet that fed into the budget process. PBC would be seeking clarity on the proposed subsidy to employers that would lower the cost of hiring young people without work experience. It was concerned that that type of system would lead to a two-tier labour market. PBC noted that the youth subsidy was aimed at youth unemployment but said that it failed to acknowledge that youth unemployment was linked to structural unemployment and historical disadvantages pertaining to education and skills opportunities. There was a need to be socially conscious when tackling the unemployment problem. Ms Govender said that the approach should be one that progressively reduced individuals younger than 21 years from participating in the labour force, as they should ideally either be in school or a post school education or training facility.

With regard to public health, Ms Govender said that there was no direct indication of any direct funding for the National Health Insurance (NHI) in the budget. In regard to Public Private Partnerships (PPPs), Ms Govender said that the PBC opposed PPPs as service providers, and was concerned with government’s fervor in committing itself to PPPs in the health sector.  The PBC’s written presentation made reference to medical aid memberships. PBC noted that social grant increases were minimal. However, it welcomed the Minister’s stance on corruption and said that it would be supportive of the proposed measures. It was happy with the Minister’s statement on recommendations pertaining to the Banking Enquiry panel of the Competition Commission.

Business Unity South Africa (BUSA) submission
Mr Coenraad Bezuidenhout, Director: Business Parliamentary Office, Business Unity South Africa, introduced the BUSA submission, referring Members to the written document for more detail. BUSA noted that the budget had continued on a proven macroeconomic framework, but was also pragmatic in addressing underlying economic challenges. It found the budget speech useful in the enhancement of investor confidence and noted that the currency markets, as well as the Johannesburg Stock Exchange (JSE), had responded in a good way.

BUSA stated that commitment to a prudent macroeconomic framework was vital but that fiscal policy alone could not successfully address South Africa’s challenges. Micro-economic challenges needed to be included for the improvement of economic growth. BUSA itself was already playing a leading role in fighting corruption and was chairing the National Anti-Corruption Forum. It was also at the forefront of dealing with issues pertaining to competition, and that they had launched the Business Competition Forum in 2009. It adopted a broad approach with the form of a response to the budget as well as micro economic areas.

BUSA believed that the budget had struck a good balance between the prioritisation of job creation, poverty eradication and economic growth. It believed that the budget had been built on a solid macroeconomic framework, which had been largely acknowledged for mitigating the full impact of the global economic crisis for South Africa.

BUSA supported the focus on the key policy levers to achieve policy objectives , but noted certain areas that needed further discussion. These included the proposals on wage subsidies as well as youth unemployment. With regard to industrial policy, BUSA would be engaging with details pertaining to the Industrial Policy Action Plan at the National Economic Development and Labour Council (NEDLAC) Trade and Industry chamber. 

With regard to the exchange rate regime and monetary policy BUSA concurred that “monetary and exchange rate considerations were important elements in adapting to global development and in creating an environment supportive of growth and employment creation”. It added that it was supportive of the counter- cyclical framework approach and that it was comfortable with a budget deficit at 7.3% of the Gross Domestic Profit (GDP) for 2010, only if it was temporary and would not lead to structurally high deficits.

With regard to economic outlook BUSA said that it contended that the upward revision of the growth forecast to 2.3% GDP for 2010/11 and 3.6% for 2012 was realistic. These targets were a vast improvement from the negative growth for 2009.

In regard to revenue estimates, BUSA concurred that broadening the tax base was the best approach to achieve higher revenues in the long run. With regard to carbon taxes, BUSA said that it recognised the need to move towards a lower carbon economy, particularly in view of the carbon border taxes that were being contemplated in some of South Africa’s trading partners.

BUSA was also in agreement with the commitment to improve efficiency in government spending and was keen to explore areas supportive of improving the value for money. It noted that the commitment to combating corruption was a cornerstone.

BUSA said that the budget outcomes of upgrading healthcare, improving education quality, the support of rural development, job creation, public safety, the building of sustainable housing settlements and improving government efficiency were reasonable. It was also pleased with the additional R3.6 billion allocated to the Department of Trade and Industry for employment creation and industrial investment, and expressed its interest in playing a role in the design of that specific programme.

BUSA welcomed government’s additional investment in infrastructure. It said that the increase in allocations by R6.7 billion for municipalities and the R2.5 billion additional Municipal Infrastructure Grant (MIG) should help with the alleviation of service delivery pressures at local government level. It was also supportive of the public sector infrastructure programme for the next three years.

Discussion
 
Dr D George (DA) applauded BUSA for its commitment to work with government on corruption. He said that he was looking forward to receiving a report on that from BUSA.

Dr George said that, in regard to broadening the tax base, there was a view that cash businesses were not paying their fair share of taxes. He asked BUSA to explain what businesses were doing about that. He also asked BUSA if there was anything on the fiscal framework that it would want to change and how it would propose doing it.

Mr Bezuidenhout stipulated that the fiscal framework, as well as the Medium Term Expenditure Framework (MTEF) was sound, and that it made provision for year by year engagement. With regard to cash businesses not fulfilling tax mandates, BUSA said that it had a tax committee who was looking into that, but made the point that there was very little that the Chamber itself could do if businesses did not comply with tax rules.

Dr George asked COSATU about issues pertaining to inflation targeting. He said that he understood its stance that inflation most affected the poor, and asked for its stance on an alternative to managing inflation. He also wanted to know how COSATU proposed that National Health Insurance be funded as it would cost a substantial amount to do that.

Mr N Koornhof (COPE) also asked about inflation. He said that, according to the IMF Emerging Marketing Monitor, South Africa was not doing very well, other than in the area of interest. He made reference to the comparison between inflation and short-term interest rates and asked both delegations what a fair inflation target would be. He was also concerned as to how the country would achieve lower interest rates.

Mr Koornhof indicated that the entire world was in a debt crisis and would eventually be seeking credit. He said that struggling countries would turn to the market in order to pay their debt. He said that South Africa and the State Owned Enterprises would also be following this route, and was concerned about the clashing for credit.

The COSATU representative responded that it did not believe that it was good to set an inflation target, as this had a direct effect on its constituency. It would rather not set a target for inflation, but view monetary policy holistically. It agreed with SARS on the broadening of the tax base and also made reference to the additional tax proposals that were made in its submission. COSATU added that these additional taxes could to some extent help fund the deficit.

Mr Bezuidenhout said that the issue on inflation was indeed very complex, as it was well known that a lower inflation rate was very good for any economy. He agreed that high inflation rates affected the poor the most. He pointed out that the target did not derive from the Reserve Bank, but that it was a Cabinet decision to set the target for the inflation rate, and the Central Bank just implemented the target set by Cabinet. The issue around targets was open for debate and here was always room for a difference of opinion.

Mr T Harris (DA, Western Cape) referred to BUSA’s stance on environmental taxes and asked for greater detail on it.

Mr Bezuidenhout said that BUSA was influenced by the objectives that drove the implementation of carbon taxes. Carbon taxes assisted with the problems of climate change. BUSA maintained that money from environmental taxes should not be used for anything but for environmental purposes.

Mr Harris asked both delegations how the structural problems in the labour market should be resolved.

Mr Bezuidenhout made reference to the training scheme, which was experiencing roll out delays. There were some logistical issues noted in this regard, and with efficiency and skills development. More applications had come through from the Commission for Conciliation Mediation and Arbitration (CCMA) and the CCMA had started to report more positively on the issue.

Ms Govender said that this depended on the specific sector, as well as economic background. Some of the issues arose from vacancy rates, as well as skills inadequacies. Lack of opportunities was another  issue to be taken into consideration.

A Member asked for more detail on COSATU’s opposition to the PPPs and the actual problems that arose in terms of these partnerships.

Ms Govender noted that COSATU’s main concern was that there was a possibility of corruption within the PPPs. The private and public sectors also had very different ways of operating, and further concerns lay around operational issues.

Mr B Mashile (ANC, Mpumalanga) noted that it seemed BUSA was in favour of many of government’s proposals, but that there was a commitment to advocate the deregulation of business. He asked for more clarity on that.

Mr Bezuidenhout said that the concerns about de-regulation were not arbitrarily selective choices, but were based on extensive research to see what worked and what did not work.

Mr Mashile said that he was in agreement with most of the PBC’s submission but that he needed more commentary on the issue of those who were currently in the labour market, although they might be under 21 years old, who could not go back to school. He noted that they were a consequence of the past government and that that problem needed to be addressed.

Ms Govender accepted that it was not everyone under 21 currently in the labour market who could return to school. However, she emphasised that the 15-18 years olds at least should not be in the labour market but in some form of schooling system or Further Education and Training (FET) College. COSATU was proposing mechanisms such as training and skills development.

Dr Z Luyenge (ANC) commended BUSA’s stance on assisting government in the fight against corruption.

Mr S Montshitsi (ANC, Gauteng) also commended BUSA’s commitment to assist government to fight corruption. He noted the issue of price fixing and the corruption deriving from the competition between companies. He wanted to know what the relationship was between BUSA and the Competition Board.

With regards to competition, BUSA said that they were engaged with the Competition Commission and that

Mr Bezuidenhout reiterated that BUSA was involved in an anti-corruption forum. A contravention of the Competition Act also, in its view, amounted to corruption. Competition was vital for an economy. BUSA believed in an enterprise driven economy and competitiveness. BUSA’s tax committee was looking into non-fulfilling of tax obligations by cash businesses.

Dr Luyenge wanted to know if there was any commitment from BUSA with regard to climate change.

Mr Bezuidenhout said that BUSA was influenced by the objectives that drove the implementation of carbon taxes. He reiterated that carbon taxes assisted with climate change and that money from environmental taxes should not be used for anything but for environmental purposes.

Dr Luyenge displayed concern about the percentage that businesses contributed to job losses in South Africa.

Dr Luyenge asked PBC about the creation of informal jobs, and he requested more clarity about the jobs to which the PBC was alluding.

Ms Govender said that the criticisms around informal jobs were not directed only at government, but related to the private sector as well. In COSATU’s view, informal jobs compromised the quality of employment.

A Member asked how PBC had derived its stance on South Africa’s Gini co-efficient actually worsening in comparison to the apartheid era, and asked on what specific studies or resources that stance was based.

Ms Govender responded that these comments had been statistically derived, and were more of an indicator. Statistics SA, as well as others, had provided the information.

The meeting was adjourned.

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