Budget Hearings: Organised Labour & Non-Profit Sector

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Finance Standing Committee

28 February 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
1 March 2002
BUDGET HEARINGS: ORGANISED LABOUR & THE NON-PROFIT SECTOR

Chairperson: Ms Hogan (ANC)

Documents handed out:
Submission by FEDUSA (Appendix 1)
Submission by the Non - Profit Partnership (Appendix 2)

Relevant document:
Cosatu letter to Committee Chairperson (Appendix 3)

SUMMARY
It was the turn of organised labour to present their view of the Budget. FEDUSA submitted that it was unlikely that the Budget would bring about an increase in economic growth. It agreed with the expansionary fiscal policy but these are measures to save the economy from the consequences of the depreciating Rand. NACTU was scheduled to present but could not be present.
The Non-Profit Partnership took up the plight of the non-profit sector for more extensive tax relief and for more consultation with National Treasury on issues affecting this sector.

MINUTES
FEDUSA submission
Ms Humphries, the Parliamentary Officer of FEDUSA, presented the submission.

The focus areas of the presentation was FEDUSA's view on government's fiscal policy, monetary policy, defending the currency, their comments on the 2002 / 03 Budget and the consequences of the budget for economic growth and job creation (See Appendix 1 for full submission).

Discussion
Ms Hogan referred to the limited use of the Skills Development Fund and understood that business had to enroll employees. She asked what administrative problems were being experienced.

Ms Humphries replied that the SETAs (Sector Education and Training Authorities) were suppose to be up and running by March 2000. Many had been established but are simply not functioning. In the building industry the SETA has not even made contact with the employers so no training is taking place. Some sectors such as the textile industry are working well.

Mr Andrew (DP) commented that he had been contacted by a person in the building industry who had a plan for training but could get no response to his telephone calls or letters.

He referred to the FEDUSA view that SA Reserve Bank (SARB) is too focussed on inflation targets only. He said that there did not have to be inflation targets, government decided to have them. He asked if it would be better if there were no inflation targets.

Ms Humphries replied that the FEDUSA view is that there should be no inflation target.

Mr Moloto (ANC) asked what areas does FEDUSA want SARB to focus on.

Ms Humphries wanted the SARB to look at job creation and the currency. SARB must bring in macro-economic policies to facilitate job creation and protect the currency. She added that this approach will ensure investment in SA.

Ms Hogan clarified that FEDUSA wants the SARB to be more growth-orientated - Ms Humphries said that was correct.

Prof Turok (ANC) commented that FEDUSA has many members involved in industry and asked if she knew at what capacity industry was functioning. Secondly, he wanted to know what did FEDUSA feel was the more important, demand or supply.

Ms Humphries replied that she had figures on capacity and would make them available to him. On demand and supply, she replied that FEDUSA's stance is determined by its affiliates.

Mr Ralane (ANC) said that the submission implied that Zimbabwe is one of the reasons for the depreciation of the Rand. He wanted to know why does SA's currency depreciate faster than countries in turmoil. Secondly, he wanted to know if FEDUSA thinks that the labour market is too inflexible in respect to job creation.

Ms Humphries replied that a variety of factors contributed to the fall of the Rand and it seemed as if all the factors happened at the same time. In response to the second question she said that FEDUSA does not believe that the market is inflexible. Ways must be found to increase productivity. One way is the training of the employed and unemployed. Other countries had started to address this. Argentina is an example of where the entire rail system was privatised into business units and if the unit profits, it goes back to the workers.

Mr Moloto asked for FEDUSA's view on the learnership programmes being introduced by government.

Ms Humphries replied that it is welcomed because it is an incentive for employers to enroll workers.

Ms Joemat (ANC) asked what it means when FEDUSA says that government must not partake in the production process.

Ms Humphries replied that government must get partners to assist in programmes and not start running businesses themselves. This way we can get investment into the country.

The Non-Profit Partnership (NPP)
Before the presentation Mr Andrew asked the NPP to explain how the organisation fits into the non-profit sector.

Mr E Saldanha (Executive Director) replied that the NPP had been founded in 1998 in response to the dwindling amount of financial support. At the time it was a joint venture between Charters Aid Foundation, SANGOCO and the Southern African Grant Makers Association. Now the NPP is an independent structure.

Mr Saldanha had a prepared introduction but indicated that he would have to deviate. The question posed by Mr Andrew is indicative of how little is known about the non-profit sector and therefore he felt he had to digress from the more polite introduction.

Two things was asked of the Committee. The first is to rethink the role of the non-profit sector and secondly to think as the NPP as a troublesome but very pleasant neighbour who will now more regularly knock on the door of Parliament to lobby for the needs of the non-profit sector.

He said that the changes to the Income Tax Act were not coming fast enough. The NPP had done workshops in five provinces with organisations that provide services in such areas as HIV/AIDS and housing. They all say that the legislation is messy and does not go far enough. The NPP is constantly reminded that there must be better synchronicity of the Income Tax Act, the Companies Act and other legislation that has an impact on the non-profit sector. It was submitted that the currently legislation does not make for efficient service delivery.

To illustrate the position of the non-profit sector in South African society, Mr Saldanha quoted statistics from a study conducted by Wits University and commissioned by Johns Hopkins University (Washington). The study is the first attempt to map the non-profit sector in South Africa in terms of the scope of the sector, its expenditure, revenue raised and the geographical spread.

The study finds that the non-profit sector is a major economic force. Its expenditure is R9.3-10 billion which is 1.2% of GDP in 2000. The non-profit sector employs a larger workforce than the mining industry and National Government. It is a major contributor to social development, the development of social capital and empowerment. Further the study found that there are 98 970 non-profit organisations (NPO) in SA. In 1998 the non-profit sector raised R14 billion in revenue in SA from service fees, dues and investment income.

Mr Saldanha said that he had quoted these statistics to show that the non-profit sector is a serious, creative, important and committed player. He expressed his disappointment that only two paragraphs of the 36-page Budget Speech had been committed to the non-profit sector.

In conclusion, he emphasised that the Income Tax Act is chosen as the focus point for lobbying because of the exemptions that the non-profit sector wants from government.

Mr Saldanha handed over to Ms Karen Nelson who spoke on how the Budget affects the non-profit sector with a special focus on the Budget Speech. [See Appendix 2 for the submission including the original introduction].

Discussion
Prof. Turok commented that the President had stressed that SA must move towards becoming a people-centered and people-driven country and therefore the NPP plea for a new approach in the way government looks at the non-profit sector is correct. He said that the Committee ought to take this on board in any way that it can.

He also commented on the point that the NPP should have a closer relationship with Treasury that he did not agree that it should be structured.

Prof. Turok understood that the NPP has capacity problems but suggested that they examine all legislation to see how it can be improved to make SA more people-driven and to see how it impacts on broader society.

Mr Saldanha replied that the NPP is broadening its efforts beyond the Income Tax Act. It is looking at a range of Acts and said that the organisation will be coming to Parliament with many more submissions

Mr Andrew asked if the NPP had applied itself to come up with precise wording for a general catch-all category of what a non-profit organisation is. In this way it can stand up to scrutiny and be better pushed by the Committee as a option.

Ms Nelson replied that it was being dealt with by a technical team and various options are being pursued. There is a delay because of problems such as the possibility of abuse. She said that definitive legislative proposals have been put forward in respect of legislation. There is an attempt to put the general category in words and the NPP is interacting with SARS on this issue.

Mr Andrew asked if sports club are included in the 98 000 organisations found by the study.

Ms Nelson replied that amateur sports clubs are included but religious based organisations do not qualify for an exemption.

Ms Joemat asked if there are a category of organisations affiliated to the NPP because there are sports organisations that raise a lot of money.

Ms Dlamini (NPP) replied that the NPP is strict in ensuring that that the organisation provides services and caters for the needs of the community and not just an exclusive group which is often the case with sport groups..

Ms Hogan clarified that the NPP wanted a definition for what defines an NPO rather than an endless list. Ms Nelson agreed and added that the NPP has a written submission on this and can make it available. The list approach cannot fulfill the purpose it is intended to do. She was in no way dismissing the benefits of the list but only saying that it is too specific. She submitted that a list by way of example of who qualifies for exemption, is better.

Ms Hogan asked what was meant by the NPP wanting closer interaction with Treasury.

Mr Saldanha replied that they are looking for a dialogue where Treasury listens to their views before the budget is drawn up. He was aware that Treasury is not obliged to consult the non-profit sector but the NPP had been involved in one meeting that had lead to the broadening of the list. This is the kind of interaction that the NPP is looking for. A meeting every three to six months with Treasury to put across its views would be welcomed. As long as there is some sort of regularity.

Ms Hogan replied that she would be hesitant to link consultation to the budget because then everyone would want to meet with Treasury before the budget. She asked if the NPP wanted the 5% exemption in section 18A of the Income Tax Act to be raised.

Mr Saldanha said very much so. He undertook to provide a document to the Committee that deals with how and why the current legislation is so messy.

Mr Ralane questioned the statistics that state that the non-profit sector employs more people than the mining industry. He also referred to the R14 billion revenue raised by the NPS and commented that it seems as if there is enough money for them.

Mr Saldanha replied that the methodology is contained in the full study and added that the methodology won an international prize for the group of researchers.

To the second question he said that R14 billion is a lot of money but if you consider that there is more than 90 000 non-profit organisations then the R14 billion is a drop in the ocean.

Prof. Turok commented that the request for interaction with Treasury must be thought through carefully. Treasury often consults with a broad spectrum of interested parties before a draft bill. To set up something especially for the NPP is risky because then everyone would want the same. He said that the NPP must think about what they are asking for.

There were no further questions.

Appendix 1
THE FEDUSA MACRO-ECONOMIC PERSPECTIVE
1 INTRODUCTION
In this submission attention will firstly be given to FED USA's stance on economic policy in line with Governmental policy, secondly the Government's Economic strategies are examined and thirdly crucial aspects of the 200212003 Budget will be highlighted. For the purposes of this committee the main focus will be the comments on the 200212003 Budget.

2 FEDUSA'S ECONOMIC IDEOLOGY
To be able to evaluate government's economic policies and strategies, it is foremost necessary that FEDUSA have an ideology based on clear principles. In the following sections attention will be given to this aspect by considering the role of government in the economy in an economic development strategy. Thereafter, attention will be given to government's implementation of its strategies through GEAR, the MTEF and the National Budget.

2.1 THE ROLE OF GOVERNMENT
The role of government is related to the type of economic system in a country. It is today generally accepted that neither a socialist centralised economy nor an unfettered free market could ensure the needs of a society. The unfettered free market economy is inefficient as it leads to the concentration of wealth and massive disparities in society, resultant in inherent instability. A socialist centralised economy in turn in equally ineffective, in that it is unable to meet the problems of demand and distribution in addition to depriving society of its rights to freedom and self-actualisation.

Today, most economies are so-called mixed economies, in other words systems that are predominately free market systems, but contain elements of government involvement where the government as well the private sectors, has a role to play. (i) The relative roles of government and the private sector however differ from one country to another, and there is an ongoing debate about the proper roles of the two.

FEDUSA recognises the fact that current mainstream development thinking has evolved towards pragmatism. (ii) The question is not whether the state or the private sector should dominate. Each has a unique role to play. It is also realised that the role of government depends on a range of factors, such as its administrative capacity, the country's stage of development, and the external conditions it faces.

In considering the role of government in the economy, FEDUSA realises that the proper role of government must also be guided by economic development experience of countries over years. According to the World Development Report (iii) fifty years of development experience have yielded four important lessons; firstly, macroeconomic stability is an essential prerequisite for achieving economic development. Secondly, economic growth does not trickle down itself; human
needs must be addressed directly. Thirdly, development is not triggered by one policy, but that a comprehensive approach is needed. Fourth, institutions matter sustained development should be rooted in processes that are socially inclusive to changing circumstances. Sustained development requires institutions of good governance that embody transparent and participatory processes and other arrangements between the government, the private sector and other elements of civil society.

The process of globalisation, in other words, the progressive integration of the world's economies, requires that government also reach out to international partners to manage changes affecting trade, financial flows, and the global environment.

In the light of the above, FEDUSA believes that the South African government has a prominent role to play in the economy. It does not mean that government should directly partake in the production process. Accept for providing the economic and social environment, such as security and infrastructure, conducive to economic growth and development, macroeconomic fundamentals, such as economic stability, development in South Africa requires that government should take on an active role to ensure the improvement of the living standards of all the population.

Another implication of the above is that it is not possible for government alone to ensure economic development, but in collaboration with its social partners as well as with its international partners.

In terms of the above, FEDUSA is of the viewpoint that:

- Government, Business and Labour all have a social responsibility;
- Government should ensure law and order and that economic fundamentals are maintained;
- Government, assisted by Business, provides for and maintains the country's infrastructure
(hospitals, schools, roads etc.)
- Government is committed to ensuring the acquisition and provision of basic necessities to all;
- Organised labour is accepted as an integral part of the South African economy and is politically
independent;
- Labour is not merely a factor of production, but an integral part of profit-driven entrepreneurial
initiative and capital outlay, and should therefore partake in profit sharing.
- FEDUSA therefore prescribes to an economic development strategy with a human face.

2.2 ECONOMIC STRATEGIES
Although FEDUSA has not as yet developed a broad and integrated economic strategy, there seem to be agreement that the following are important elements of this emerging strategy:

- Concentration on economic development and employment creation rather than economic growth;
- High priority on a truly consultative process between the different social partners in the economy;
- Active government involvement of government to ensure economic development, by way of
initiatives and by using market-oriented instruments such as fiscal instruments to ensure development
with a human face.
- Macroeconomic as well as social stability to attract foreign direct investments'
- Liberalisation of the trade account according to the requirements of the WTO;
- Orderly sequencing of capital account liberalisation, giving attention to methods to avoid disruptive
short term capital flows;

More specific goals include:
- Promotion of savings via fiscal measures;
- High priority to domestic safety and security;
- High priority on education and skills development to give every one a chance to participate in
public life; and
- High priority to SMME's development

3 GOVERNMENT'S ECONOMIC POLICY STRATEGY
In broad government's economic policies are governed by the Constitution which commits government to social justice in public policies, democratic institutions of policymaking and public accountability, and a market-based economic system with a clear regulatory and public service delivery role. (iv)

The Reconstruction and Development Programme (RDP) is government's broad social and economic plan, which presented a way to reach certain broad goals such as:

- A competitive fast growing economy which creates sufficient jobs for all work seekers;
- A redistribution of income and opportunities in favour of the poor;
- A society in which sound health, education and other services are available to all; and
- An environment in which homes are secure and place of work are productive.

The goals of the RDP are stated in very general terms and are only supposed to provide a broad social plan and not a definite strategy.

The task of actually establishing workable strategies to take the RDP further rested with the different national and provincial departments and from a more macroeconomic point of view with the GEAR strategy.

At the time that GEAR was introduced, government has already embarked on a process of reconstructing the economy.

The elements of the GEAR strategy (v) published in June 1 996 include:
- A faster fiscal deficit reduction to counter inflation, free saving funds for private investment, and to lower public debt cost which could be used to finance social services;
- Gradual relaxation of trade and exchange control;
- Consistent monetary policy to prevent a resurgence of inflation;
- Tax incentives to stimulate new investment in competitive absorbing projects;
- Speeding up of the restructuring of state assets process;
- A strengthened levy system to fund training on a scale commensurate with needs;
- An expansionary infrastructure programme to address service deficiencies and service backlogs
- An appropriately structured flexibility within the collective bargaining system; and
labour
- An expansion of trade and investment flows in Southern Africa.

At the time of the issuing of GEAR it was envisaged that if the economic policy
instruments were successful:
- Economic growth would increase to 6.1 per cent in 2000;
- Formal employment in the non-agricultural sector would grow by 4.3 per cent and new jobs created
would increase by about 400 000
- Current account deficit would be 3.1 per cent of GDP;
- Inflation would lower to 7.6 per cent;
- Gross savings would be about 21.9 per cent of GDP;
- Exports growth of manufactured goods would reach about 12.8 per cent; and
- Real bank rate would be approximately 3 per cent in 2000;

Up to 1999, macroeconomic considerations received high priority. This is illustrated by the fact that the budget deficit of national government came down from not less than 5.8 per cent in 1996/97 to an expected 2.3 per cent in 2001/2. This was accomplished by lower current expenditure. As this gap was not filled by private sector investment as envisaged, this probably had an influence on the lower growth that SA experienced during the last couple of years.

It is now already a well-known fact that government thus far has attained only limited success in its set goals. While the inflation, export, deficit targets have been comfortably reached; government is well short of its growth, savings, and employment targets.

More specific:
- Although SA experienced moderate growth levels, this did not lead to employment creation. In stead
the economy is still shedding jobs;
- Exports increased and contributed to economic growth, but only a few large companies benefited.
Manufacturing exports increased but was accompanied by job-shedding;
- Although South Africa's real exports have grown, its relative international competitiveness seems to
have decrease;
- The relatively low level of domestic savings and the lack of foreign direct investments are still
serious constraints to economic growth and development; and
- SMME's are seriously constrained in their capacity to generate income and therefore to create jobs
because of factors such as difficulty to access finance, training and information deficiencies

The failure of government to reach its goals because of various reasons necessitated the amendment of its targets.

Probably the most important instrument of government to accomplish its economic goals is its annual budget. Since 1989/99 Government has changed from budgeting for a one-year period only to multi-year budgeting. The purpose of this Medium term Expenditure Framework (MTEF) is to assist in the evaluation of the budget and also to enable spending agencies to plan ahead with greater certainty.

The MTEF is released yearly as part of the so-called Medium Term Budget Policy
Statement (MTBPS) of the Minister of Finance, together with a chapter on the
Fiscal Framework, Taxation and on Macroeconomic Policy and Outlook.

The MTBS, although it does not replace the annual budget is a useful document to give an indication to the different role players of fiscal developments over the next three years. The extent of revenue and expenditure amendments will however still is made on Budget day.

4 THE MTBPS FOR 2002
The MTEF projections are based on the assumption that economic growth will increase from 2.4 per cent in 2001/2 to 3.1 per cent in 2002/3. For 2003/4 economic growth of 3.6 per cent is expected and 3.7 per cent in 2004/5. Theses growth rates are however still well below rates that are required to provide any relief for the millions of unemployed. Inflation is expected to fall from 6 per cent in 2001/2 to 5.3 per cent in 2002/3. The Minister also indicated that the inflation targets would be adjusted downwards.

Although the low economic growth rate is partly caused by unforeseen circumstances, it again draws the attention to the need to introduce imaginative schemes to boost employment opportunities.

Compared to other developing countries, SA is in a position that it has a satisfactory balance of payments and budgetary position.

4.1 FISCAL POLICY
Government's fiscal policy can broadly be summed up as gaining the approval of the "Washington consensus" by getting the "economic fundamentals right and then benefiting from subsequent inflows of foreign direct investment to grow the economy. Getting the fundamentals right include achieving budget deficit reduction targets, debt to GDP targets and generally shrinking the role of government in the society, including the sale of state assets. In order to achieve this Government has had to
reduce consumption spending with the result that the public service is currently being reduced in size and social spending has been reduced in real terms over the GEAR period. The sale of state assets is another key element of Government's economic policy. It is argued that the sale of state assets will bring capital inflows into South Africa and the proceeds of the sales will go primarily to reducing state debt.

4.2 FEDUSA'S VIEWS ON GOVERNMENTS FISCAL POLICY
FEDUSA' s views on fiscal policy can be summarised in the following points:

- FEDUSA believes that social capital is as important, if not more so at
this stage in South Africa's development, as capital expenditure. Without adequate social capital South Africa will continue to be characterised by a dualistic socio-economic system with winners and losers in society. This in turn raises the possibilities of significant social disruptions.

- On the positive side FEDUSA supports the efficiency that the Minister of Finance is forcing into public spending. Levels of corruption appear to be down in the Public Service and free spending is being dealt with. Unfortunately these controls have exposed the dire lack of management skills in the Public Service with large amounts being unspent at the end of each fiscal period. These unspent amounts are amounts allocated for delivery purposes that are then unspent when managers of these funds do not have the skills to disperse them. This has cost implications for the fiscus (while the budget runs at a deficit) and social costs for South Africa.

- In the areas of revenue collection, FEDUSA applauds the increased tax collection efficiency that has in effect brought significant windfalls to government with unforeseen levels of income. While important in the recent years budgets. it is unrealistic to expect this to continue and government will need to look at other sources of revenue. Of concern is the trend over the last decade to place the tax burden primarily on salaried individuals while the overall contribution from companies has been in decline. Another area for concern is the huge number of individuals falling outside the tax net -the informal sector; this is a source for further revenue efficiencies.

- FEDUSA is also concerned with the arms procurement package. The package is at odds with the objectives of reducing the deficit and accompanying interest on loans so that funds may be freed up for social expenditure. The arms procurement programme was initially costed at about R26 billion but current estimates are that the deal will cost in the region of R80 billion three years later. Despite the controversy around the allocation of contracts, Fedusa's concerns are about the size and structure of the programme. Fedusa needs to question the delivery of the job-creation contracts and investment that were part of the awarding of contracts three years later. The promised inflows of new investment and job creation appear to be limited at this stage.

4.3 Monetary Policy
FEDUSA endorses the independence of the SARB but believes that the activities of the SARB are too narrowly focussed on inflation targets. The SARB has a
responsibility in stimulating the economy and job creation. Utilising interest rates to achieve narrow inflation targets is the primary focus of the SARB and has led to the unnecessary dampening of economic growth and job creation. This has also been shown to be the wrong response to currency depreciation.

4.4 Defending the Currency
2001 was characterised by sudden and dramatic depreciation of the Rand. This has had the positive effect of reducing the costs of South African exports and the South African sourced input costs (including labour) of manufacturing. On the other hand it has led to huge escalations in imported input costs and threatens to push inflation above the SARB' 5 inflation targets. This would then lead to higher interest rates as the SARB tries to squeeze inflation out of the SA economy.

We do not believe that it is the role of the SARB to vigorously defend the SA Rand. While the SARB has publicly stated that it will not intervene (i.e. raise interest rates or buy dollars) to support the Rand, the reality is that it is not in a position to do so in that the SARB does not have sufficient funds to mop up excess Rand liquidity in the market and pushing up Interest rates will further stifle the real economy. While the currency's instability is the result of a variety of factors, some of which include speculative attacks based on links to emerging markets and the Zimbabwe crisis, FEDUSA believes that the real vulnerability of the Rand stems from the weak South African economy. Economic growth and socio-economic investment in South Africa are the only real strategies to stabilise the currency. It then follows that currency stability is more a function of fiscal policy than monetary policy, particularly in the long- term.

Instead FEDUSA suggests that the SARB adopt a more pragmatic position in line with those economies with stable currencies in which reduced interest rates are utilised to stimulate economic growth. High interest rates are seen as a major obstacle for foreign investors and inflate the required return needed to justify investments in South Africa. The much-needed capital inflows that will stabilise the currency will only happen in a growing vibrant economy.

4.5 ECONOMIC POLICY STANCE IN THE LIGHT OF INTERNATIONAL ECONOMIC
DEVELOPMENTS (WORLD WIDE ECONOMIC DOWNTURN AND HAPPENINGS IN New York
The Minister of Finance indicated it would use monetary and fiscal policy to soften the expected downturn in economic activity. Regarding monetary policy, a lowering of interests can be expected if conditions allow it. From a fiscal point of view, the Minister indicated that he considers an appropriate policy mix of tax relief, accelerated infrastructure spending, and support for social services and municipal infrastructure development. These measures are meant to support the momentum of growth and economic development.

The fiscal policy switches from macroeconomic considerations to microeconomics matters announced in last years MTBPS is therefore confirmed for this year.

4.6 EXPENDITURE
According to the MTEF for the next three years, expenditure increases will focus on health services and social grants, municipal infrastructure and housing, improved police and justice services and critical administrative services to citizens. The electrification programme will also be stepped up.

4.7 ECONOMIC AND BUDGETARY OUTLOOK IN THE LIGHT OF RECENT SHARP DEPRECIATION OF THE RAND AND THE INTEREST RATE HIKE
As indicated above, the MTEF was based on a scenario of an increase in economic growth, higher private and public investments and therefore also an increase in employment opportunities and a falling inflation rate. The question to be addressed is to what extent wills the economic assumptions have to be adjusted and how will this new economic scenario affect national revenue and therefore national expenditure for the 2002 fiscal year? A second question to be addressed, is how economic policy stance will be affected? It was envisaged in the MTEF that the stance of both monetary and fiscal policy would be stimulatory in 2002/3. The increase in the bank rate implies that the stance of monetary policy for the last part of 2002/2 is mildly deflationary.

In the following sections the economic implications of the interest rate hike of 1 per cent will firstly be considered, thereafter the depreciation of the Rand. Then the possible combined implications will be addressed.

There is a lot of speculation on why the repo rate was increased. The increase came after the appointment of the Myburgh commission of investigation on irregularities in exchange rate dealings and the announcement on the M Cell "privatisation" transaction. These two events favourably affected the Rand exchange rate. The increase in the repo rate was probably meant to strengthen the Rand via a higher interest rate, which was meant to send a message to speculators and also to keep the real interest rate intact, which would stimulate foreign financial investments. Initially the effect was to worsen the exchange rate. In the mean time the Rand seem to stabilise.

Although the increase in the bank rate was probably specifically aimed at improving the exchange rate and therefore avoiding future inflationary pressures via imported goods, it will no doubt also have negative effects on domestic private investments and consumer demand. The increase in interest rates will therefore affect our economic growth negatively. The actual affect will however depend on whether there will be further interest rate increases. It is not expected that the same will happen with the Asian crises when interest rates increased a couple times. Rather it is expected that there will be no further increases, or at most one further increase of 1 per cent.
From a budgetary point of view, the interest rate hike will increase public debt cost on new government paper.

An important aim of GEAR is to move SA in the direction of export led economic growth via a gradual depreciation of the Rand. While a gradual depreciation would have a favourable influence on the SA economy, the sudden and huge depreciation would have positive as well as negative affects on the economy. As mentioned above, the weaker Rand will, with a time lag, increase our inflation rate. On the positive side, export earnings will be boosted. To the extent that these export earnings will trickle down to an increase in domestic demand in general, it will have a positive effect on consumer demand and eventually on economic growth and employment. As mentioned above, the trickle down effect did not always happened in the past and only a few large export companies benefited.

Another positive outcome will be that the large increase in exports earnings wills eventually also benefits the exchange rate. There is usually a time lag between exports and the eventual receipt of dollar by the monetary authorities. It is therefore expected that once exporters start to receive there export earnings, the Rand should start to improve.

The net effect of the interest rate increase and the sharp and sudden depreciation of the Rand will probably be that SA's economic growth rate will be lower during this fiscal year, while the inflation rate will be higher than envisaged. It is expected that if the Rand stabilises or improve somewhat, economic growth could be 0.5 to 1 per cent lower, while the inflation rate could be 1 to 2 per cent higher than what the Minister envisaged in his MTEF. In nominal terms that would mean that the National Revenue would remain the same as in the MTEF, or be slightly higher. As public debt cost will be slightly higher, the actual amount available for distribution would probably the same as contained in the MTEF.

In the light of the above, it is expected that monetary policy for 2002/3 would be neutral, while fiscal policy would be expansionary and in line with MTEF projections.

5 FEDUSA COMMENTS ON THE 200213 BUDGET
The Minister of Finance based his budget for 2002/3 on an expected economic growth rate of 2.3 per cent and an inflation rate of.6.9.per cent, which is lower than envisaged in the MTEF, namely a growth rate of 3.1 per cent and an inflation rate of 5.3 per cent. This was expected because of the sharp depreciation of the Rand at the end of last year and the interest rate increase. This is in line with FEDUSA's estimates.

The Minister expects that total national expenditure after adjustments) will be R287, 909 million (an increase of 9.6 per cent) and total revenue R265, 217 million. (An increase of 6.7 per cent.). This implies that the budget deficit will rise from.1.4 per cent in 2001/2 to 2.1 per cent in 2002/3. Expenditure will therefore increase in real terms by some 2.7 per cent. This expansionary policy stance is in line with what the Minister envisaged in the MTEF. Revenue however increased more than expected, so that the budget deficit will be 2.1 per cent instead of 2.6 per cent as envisaged in the MTEF.

Sound macroeconomic principles dictate that monetary and fiscal policy should not clash, but move in the same direction. Although FEDUSA welcomes the planned expansionary budget, it is concerned that inflationary pressures may built up during the 2002/3 fiscal year if the supply side of the economy does not respond in a positive way. This could force the monetary authorities to adopt a more stringent policy. There is therefore a possibility that fiscal and monetary policy may clash. The monetary and fiscal authorities are urged to consult on a regular basis to avoid a possible clash.

5.1 CONSEQUENCES OF THE BUDGET FOR ECONOMIC GROWTH AND JOB CREATION
As indicated in his MTEF, the Minister plans to use fiscal policy measures to soften the negative effects of the slower economic growth rate caused by unforeseen circumstances such as the New York bombing and the worldwide economic downturn. The sharp depreciation of the Rand during November and December 2001 also added another dimension to economic events in SA. It is therefore unlikely that the Budget would bring about a large increase in the economic growth rate. Rather, the expansionary fiscal policy measures would at most try to save the economy from the negative consequences of the factors mentioned above. FEDUSA agrees with this strategy.

FEDUSA note with appreciation that microeconomic issues, will, as in the case of last year's budget, again receive priority above macroeconomic issues.

The lack of employment-creating economic growth, coupled with low real per capita income, remains SA's most urgent economic problem. The Budget, from a macroeconomic point of view, should therefore be evaluated against the possible progress that will be made with this goal. More specific, the Budget should be evaluated not only on its effects on the number of employment, but also on its influence on the quality and welfare of employees.

Employment-creating growth is affected by demand-side as well as by supply-side factors. In this regard, buoyant, (but not excessive) consumption expenditure is needed to induce firms to engage in investment and production activities. Access to savings at a reasonable interest rate, input costs and tax rates are important, as well as economic and social stability.

As envisaged in the MTEF, this year's Budget is expansionary and would lead to an increase in investment, production, and total demand in the economy. As mentioned above, this would counteract the negative effects of external factors. This increase in demand would have a positive influence on economic growth. Past experience has shown that higher growth does not necessarily lead to more employment. More direct supply side measures are needed to accomplish this.

5.2 INVESTMENT
To engage in investments requires the necessary demand but also savings at a reasonable rate of interest. Government is commended for its huge improvement over the last couple of years in its effect on the country's savings. From being a large negative saver, using savings to finance current expenditure, Government has turned around its position and is currently only using savings to finance investment expenditure. The lowering of the Budget deficit brought this about. This undoubtedly had a positive effect on our savings and also contributed to the current lower interest rate structure.

The eventual aim of Government is to totally eradicate the budget deficit. This could be done by increasing government's revenue and/or to decrease expenditure. If this would happen, and if the private sector does not fill this gap, this could lead to lower economic growth and higher unemployment. FEDUSA therefore urge Government to consider the effects of this policy step before proceeding.

Although it would seem as if Government has improved its position on savings, the promotion of private savings need attention. FEDUSA is of the opinion that Government has a role to play via the Budget to promote private savings. The increase of the tax exemption level of R4000 (R5000 for persons over 65) of interest on savings for persons under 65 to R4000 (R1OOOO for persons over 65) would probably be too low to induce individuals to increase savings to a great extent.

FEDUSA notes that Government is again utilising foreign loans to supplement domestic financing of the Budget. FEDUSA is of the opinion that this could strengthen the current movement to lower levels of interest rate in SA, and also future investment and job creation.

In the past, as is the case in this year's Budget, personal income tax is given largely to lower and to the middle income groups. The tax relief in this year's Budget of R15 billion will again largely go to the low and middle income groups, although some tax relief will also go to the other income groups. As these groups are not savers, it will largely affect consumption expenditure. Although tax relief to lower income earners is important, FEDUSA is of the opinion that taxes relief to middle and higher income earners will have positive effects on savings and eventually on investment and job creation. The lowering of the maximum marginal personal income tax rate to 40 per cent from 42 per cent is welcomed by FEDUSA. As envisaged in the MTEF this will bring the personal income tax and company taxes nearer to each other.

Investment does not only depend on demand-side factors, but also from factors on the supply side. In line with a movement from a macroeconomic focus to a microeconomic focus, the Budget contains expenditure as well as revenue measures would could have favourable consequences for investment, economic growth and employment creation.

As mentioned above, FEDUSA places a high priority on SMME's development because of its employment creating ability. It was also noted above that SMME's are constrained in their capacity to generate income and employment because of various factors. From the revenue side, the more favourable tax depreciation allowances applicable to SMME's are continued this year. A further important step this year is the increase in the existing threshold of R100 000 to R15O 000 of the taxable income that falls under the 15 per cent graduated company tax rate. Government is commended on these continued steps to promote SMME's.

Another important goal of FEDUSA mentioned above is that high priority is given to education and skills development. In its previous input on the Budget FEDUSA pointed that expenditure on education actually decreased on average during the last couple of years. For 2002/3 Government budgeted for a real increase for this item. Government is commended for this. FEDUSA however noted that expenditure on education in SA is less efficient than in other developing countries. Government is urged to take the necessary steps to improve the efficiency in education expenditure.

The skill development levy, which was increased in last year's Budget to 1 per cent, would remain at 1 per cent this year. FEDUSA has noted with concern that a large amount of the previous year's skills levy has not been used. There is clearly a need for Government to give a high priority to the improvement of the administrative machinery to effectively redistribute these funds. A first step has already been taken with the introduction of the tax allowance for learnerships. Education and skills development would not only have favourable effects on investment in SA, but is probably the only way to give every one a chance to participate in public life.

The lack of social stability remains an important contributory factor for the lack of domestic and domestic investment in SA. Last year Government increased its expenditure on justice. This year, in line with the priorities set out in the MTEF, expenditure on this function is increased to employ more policemen. FEDUSA wants to commend Government on the steps it has taken in the last couple of months to improve the position of justice and protection services. FEDUSA is however not convinced that Government has done enough in this regard. Government is urged to give further serious attention to this very serious problem in consultation with business and labour.

In the 2001/2 Budget Government started to play a more active role in promoting investments. This was done by way of tax incentives for companies that embarked on certain strategic industrial projects, as well as substantial increases in allocations for infra-structural investment by national and provincial governments. As envisaged in the MTEF, allocations for municipal infrastructure will be increased substantially, especially in rural areas. In this year's Budget, Government continues with this strategy. Accept for the steps already mentioned above, further steps include accelerated depreciation allowances to encourage business investment and employment. This more active involvement by Government is commended by FEDUSA. as this would contribute a great deal in the uplifting of the poorer sections of the population.

5.3 TAXATION ON RETIREMENT FUNDS REMAINS AN AREA OF GREAT CONCERN TO
FEDUSA
Unfortunately, the measures taken in reducing and restructuring individual taxation did not extend to taxation on retirement funds. The current rate of 25% on gross interest and net rental income can be viewed as a contributing factor to the disappointingly low levels of domestic savings. It is widely accepted that a country's prospects for economic growth and prosperity depend largely on the economy's capacity to save. The tax on retirement funds is in effect a penalty that forward -looking, hard - working citizens are made to pay. After all, if you want less of anything, you tax it! We surely do not want less domestic savings in a country that desperately needs investment. A gradual phase down of this tax is suggested. Since it contributed 2.8% of total government revenue in the 1999/00 budget and contributed 2.6% in the 2000/2001 budget, it surely can be reduced without severely impacting the fiscus. Therefore no mention of change to retirement taxation leaves taxpayers uncertain as to how their pensions and provident fund lump sums will be taxed at retirement. The announcement to appoint a task team to deal with this aspect of policy is welcomed. FEDUSA would like to engage with the task team and the National Treasury on this important stance relating to taxation and will monitor the functioning of the task team and endeavor to make relevant input where required.

FEDUSA believes that the time is right to increase domestic savings by lowering the rate of taxation on retirement funds. The future tax position of retirement funds creates a climate of uncertainty as it affects long - term planning and retirement incentives. The citizens of the country need to do their long - term planning in a climate of certainty. People should be given incentives to be able to provide for their own retirement that will bring relief to the already overburdened welfare pensions provided by Government. The taxation on the interest and rental income of retirement funds should be decreased and lowered to acceptable levels. The purpose of retirement provision is to provide for old age and not to cover the debts of costs incurred by Departments not being able to limit expenditure.

5.4 REDISTRIBUTION OF INCOME
As in last year, the 2002/3 Budget contains further steps from the revenue as well as the expenditure side to bring about a more equal distribution of income. The larger tax decrease for the lower income groups, expenditure on municipal infrastructure in rural areas as well as free government services to the poorer sections in rural areas will contribute to a more equitable distribution of income.

It is however generally accepted that fiscal measures alone can only to a limited extent contribute to a more equal distribution of income. The actual effect that this Budget will have on income distribution will in the final instance depend on whether it will bring about higher employment-creating economic growth and development.

i) Ham, GN: Economic Systems, Hot, 1964, p21
ii) World Bank: World Development Report 1999/2000, Oxford University Press, p2
iii) World Development Report, 1999/2000, p1
iv) National Treasury: Budget Review 1997, p1
v) National Treasury: Growth, Employment and Redistribution - A Macroeconomic Strategy
vi) National Treasury: 2001 Medium Term Policy Budget Statement

This submission has been prepared with the assistance of Dr. June van Tonder (Bureau of Economic Policy Studies), University of Pretoria & FEDUSA Parliamentary Office, Cape Town.

Appendix 2
BUDGET 2002 AND THE NON-PROFIT SECTOR
SUBMISSION BY THE NON-PROFIT PARTNERSHIP

Introduction
We appreciate the opportunity to address the Committee on tax policy and specific 8udget proposals as they impact on the non-profit sector, or civil society.

As always we acknowledge the progress made in this area of tax policy Since the release of the Katz Commission's Report on the taxation of non-profit organisations, in 1999. More specifically we wish to thank this Committee for its efforts in facilitating interaction between the sector and SARS, and more recently National Treasury. Through this process, we have laid the foundations for a tax framework that (at the very least) has attempted to shed its archaic nature and has attempted to keep up with developments in the sector locally, and best practices abroad.

Through this process, for the first time in the fiscal arena, we have begun to explore and experience the results and rewards of constructive engagement between decision-makers in government and stakeholders in the sector. It is safe to say (I think) that in relation to SARS we have managed to institutionalise this interaction to a certain extent, in relation to National Treasury - it may be too early to tell!

The need for institutionalised dialogue with Treasury becomes obvious in the context of certain Budget proposals that in our opinion do not necessarily reflect the priorities of the sector in its overall aim of poverty relief and sustainable development.

Before dealing with the topics outlined in the Committee's invitation, we do wish to register our disappointment with the Minister's oversight in failing to mention civil society's contribution to "the spirit of partnership between Government and the private sector, that undermines Africa's new approach to development". We are unclear whether this is an intentional omission, or a mere definitional issue? In any event we note that any further extension of tax benefits to the sector has to be based on government's belief that the sector is an important partner in the process of service delivery and poverty relief. It is the sector's role in, and contribution to, our young democracy that must encourage a more liberal and enabling fiscal environment; not its capacity to extract hand-outs by nagging long and hard enough!

An assessment of various aspects of the Minister's speech
By and large the speech as it relates to the non-profit sector reflected mainly on progress in the implementation of recently introduced tax reform initiatives. It recognised that this is a dynamic process which (already) requires revision and review.

We comment as follows on specific statements regarding progress on tax reform initiatives:

The Increased thresholds for tax deductible donations by Individuals
We welcome this move to align allowable donor deductions for individuals (previously limited to 2% of taxable income) with that for companies (5% of taxable income). We do, however, wish to note that there was no justification for this differentiation between individuals and companies in the first place. Therefore, in "raising" this threshold, government was merely removing an anomaly identified by the Katz Commission. We submit that the issue of deduction limits will need to be re-visited once more pressing matters are finalised.

Broadening the range of organisations qualifying for tax-deductible donations and tax exempt status
It is true that this was the prevailing intention throughout the reform
process. However, last year wren the lists of qualifying activities were released, the shocking reality was that instead of extending the benefit, the amended framework actually narrowed the ambit of both the benefit of tax exemption and deductible donations. In practical terms this
meant that several organisations that previously enjoyed tax exemption or donor deduction status, would lose their benefits as their activities
were not specifically included on the lists.

Revision of the Public Benefit Activity Lists
This process is on-going, but nonetheless very difficult, if not impossible. This difficulty arises primarily from the way in which the lists were drafted; it purports to be an exhaustive list of eligible activities rather than a list that sets out to illustrate by way of example, the kinds of activities that should qualify for the benefits Such a document was bound to be problematic since it is impossible to produce a list of activities that accurately reflects the scope of non-profit work / activity.*

* This has become quite clear to SARS through the many Compliance that they received via the campaign and directly, of organisations, many of whom previously had exemption and section 18A status, who have been left off the list and thus have no hope of accessing the benefits!

Furthermore as the needs of society change, now activities will evolve. In this context, the necessary and regular revision of the lists may result in an unmanageable document too lengthy to be efficient. In the absence of a general category of activity (an argument that we have not given up On) there will always be worthy activities that fall through the gaps". We therefore urge this Committee to seriously consider our proposal that a 'catch-all' or general category of public benefit activity be included in the list.

Revised list to Include provision of health services to the poor and care of the terminally ill, and persons with severe physical or mental impairment
In commenting on this proposal we are assuming that the "list" referred to is the list of activities qualifying for donor deduction as opposed to tax exemption. This proposal is welcomed. We wish to draw attention to the fact that organisations working in this field, especially the last-mentioned category, on many occasions expressed their concern and were rightfully perplexed, about the obvious omission of this category of activity in the Budget speech of 2000 when these tax proposals were first mentioned. It was noted at the time that there seemed to be very little consultation with the sector regarding the extension of this particular tax benefit.

Extending the benefit of donor deduction to trans-frontier peace parks
Our final comment illustrates our frustration with the lack of consultation, in this instance, between National Treasury and the sector in respect of the priorities and needs of the sector. It was always our understanding, endorsed by this Committee that the extension of section 18A would depend on various factors, most importantly the cost of this benefit to the fisc. In this context we believe proper consultation is very important. If this sought-after benefit is to be extended in a piece-meal manner, the sector must be involved in the process. It not so engaged1 the danger exists that the needs of the sector are ignored.

The need for institutionalised dialogue be highlighted
Our last comment highlights the need for a structured approach in respect of consultation between the sector and National Treasury. We indicate that we are both willing and ready to begin this institutionalised dialogue. We believe it is in both the sector and National Treasury's interest that we are pro-active in identifying potential policy pitfalls rather than re-active when these problems do arise.

Conclusion
In the light of our submission there remains one pressing concern: How did the trans-frontier peace park find its way onto the section 18A list? More especially, how does this activity fit in with national priorities as outlined by the President in his state-of-the-nation address.

Whilst we appreciate and acknowledge government's right to determine national priorities and in line with this, its right ~ extend tax benefits accordingly, our question still remains - how does trans4rontier peace parks fit into this construct? We are extremely puzzled that in the unexpected extension of this benefit activities focused on sustainable development in our communities were overlooked.

In reflecting on the past two years since Budget 2000 and its radical proposals in respect of the NPO sector, and the ensuing negotiations around amendments to the tax legislation I think we can safely say that our interaction with SARS has been institutionalised and constructive. It is our sincere wish that this will become true of our interaction with National Treasury on policy issues.

Appendix 3:
To Ms B. Hogan, Chairperson of the Portfolio Committee on Finance
From: Mr N Coleman, Head of Cosatu's Parliamentary Office

26/02/2002

Dear Ms Hogan

Thank you for your invitation to the 2002 Budget Hearings.

As you are aware, COSATU has not made a submission on the budget since March 1997, when our then-Deputy General Secretary Zwelinzima Vavi explained to Parliament's Finance Portfolio Committee that:

"We are frustrated both by the nature of the budget process which renders meaningless both contributions from civil society and the deliberations of the elected people's representatives. For this reason we have, after some deliberation, decided that unless the budget process is fundamentally transformed to accommodate real public input and effective parliamentary oversight, this submission on the 1997/98 budget will be our last. We will only participate in future parliamentary budget hearings if meaningful participation is made possible through a reformed budget process."

As you are aware, the Constitution (at s77) requires the enactment of legislation which will empower parliament to amend money bills, such as the budget, instead of the current system of voting to accept or reject them. Our legal advice is that government is in breach of the Constitution in this regard. Without such legislation the participation of parliament in respect of money bills is reduced to a ritual.

Participation in parliamentary discussions after release of the budget, even if there is a process prior to finalisation of the budget, is a futile exercise for organs of broader society, as no changes can be effected. It is for this reason that COSATU has not made formal submissions to parliamentary budget hearings for the last four years, although we have publicly released our detailed analysis of and position on the budget every year.

The ANC Elections Manifesto contained a commitment to ensure that elected representatives in national, provincial and local spheres have the appropriate powers to shape budgets. COSATU calls on the Portfolio Committee on Finance to ensure the urgent tabling of an adequate Money Bills Amendment Procedure Bill. The Committee has in the past expressed support for such legislation, but were not satisfied with the draft tabled previously by the Department of Finance.

The spirit and letter of the Constitution expressly states that an important aspect of South Africa's democracy is the transformation of the highly secretive and centralised budgetary process inherited from the apartheid regime into a more open and participatory process. Over and above the legislative challenges of democratising the budget process, there is a need for increased participation - of parliament, Nedlac, and society at large - in the budgetary process.

There are no developments which have given us cause to review our position since 1997. In fact, we are disturbed that for yet another year, the budget will be passed without elected representatives having any meaningful influence over it. We will as a result not be making a submission in this year's hearings. If however the Committee would like to engage in discussions with us on the procedural questions of budget reform raised in this letter, we would be willing to do so.

We would appreciate it if this letter were distributed to all members of the Committee.

Yours faithfully
NEIL COLEMAN
HEAD OF COSATU PARLIAMENTARY OFFICE

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