2010 Medium-Term Budget Policy Statement (MTBPS): IDC, Efficient Financial Holdings, Business Unity SA, People's Budget Coalition submissions

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Finance Standing Committee

09 November 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Committee held public hearings to receive comments on the Medium Term Budget Policy Statement (MTBPS). The Industrial Development Corporation suggested that any debate around the exchange rate should focus more on the real effective exchange rate. The weakening or strengthening of the Rand did not happen in isolation, and depended also on the strength of other countries’ currencies. Despite the rand’s appreciation since January 2009, the value of South Africa’s exports of raw materials and intermediate goods had recovered, as had the value of imports in categories other than raw materials, in the first part of 2010.  Despite measures by numerous countries, their capital inflow had not been not affected, and this offered potentially favourable implications to raise the price competitiveness of exports, progressive recapturing of foreign markets, alleviation of import competition in local markets and increased foreign tourism earnings. However, there were also potential concerns, including uncertainty as to whether the interventions would meet the desired outcomes, their sustainability, cost and timing, whether the abrupt unwinding of substantial speculative positions could have a destablising effect, a potentially higher inflation rate, higher import costs and reduced wealth effect for holders of South African assets. Members asked where attention needed to be focused to facilitate economic growth and enquired whether any thorough analysis was done into the implementation measures and funding approach around regional infrastructure development.

Efficient Financial Holdings (EFH) submitted that although South Africa’s new growth plan was unclear, emphasis had been placed on reducing poverty and unemployment and boosting economic growth. The main targets of this growth plan included stringent fiscal policy, focussing on savings, a smaller current account deficit, lower interest rates, a competitive currency and lower unemployment. Improving competitiveness was of significant importance, as this facilitated wealth-creation by way of the private sector. The creation of more employment could only be fast-tracked through the creation of more businesses. However, it outlined the limitations to creation of new businesses imposed by onerous red tape, lack of access to capital, high taxes, foreign exchange (forex) regulations and labour laws. The shifting of the tax burden from the poor to the relatively rich was not sustainable, and South Africa’s Gini co-efficient would be improved by ensuring that employment figures rose. It suggested the need for more capital investment. It believed that growth could easily exceed the estimated 3%. It proposed that certain taxes could be abolished, whilst taxi taxes and no VAT-zero ratings could be introduced. EFH also submitted that the problems facing South Africa’s economy could be solved through prioritising economic growth. Members asked if the presenter was proposing that labour laws should be relaxed, and who the present beneficiaries were of the taxes that it was proposed should be abolished. They questioned the high salaries paid to Chief Executive Officers, and asked if the fact that the Reserve Bank owed the National Treasury in excess of R135 billion did not compromise its independence.

Business Unity South Africa (BUSA) said that economic recovery was still vulnerable and the pace was slow. It believed that it would take considerable effort for South Africa to reach the projected growth of 3%. The role of reinforcing infrastructure growth was particularly significant. If necessary, greater use could be made of public-private sector partnerships in order to ensure that these projects were brought to fruition. BUSA believed that the MTBPS had reached the correct balance between fiscal consolidation and promoting growth, but that since effective institutions were a major factor, there needed to be greater use of the regulatory impact assessment mechanisms in various government departments. The steps identified around the exchange rate were welcomed. It would be essential for South Africa to work with other countries towards stabilising the global economic environment. At present the global situation was favourable for developing countries such as South Africa, but growth targets needed to be supported by policies that would allow it to be sustainable, and productivity was essential. Members asked if BUSA did not support certain aspects of the MTBPS, and asked whether it had any strategy in place to ensure that the windfall from the global commodities upturn would result in the creation of jobs locally.

The People’s Budget Coalition representatives said that the MTBPS did not reflect the shifts that should be seen as part of a developmental approach. There was concern around the shift away from addressing inequality and the differentiation between financial and industrial capital. It was felt that consultation had been undermined because the MTBPS pre-empted the growth path document. It was concerned about the relaxation of exchange controls, and suggested that mechanisms to stabilise the currency had to be implemented. Serious interventions were needed to address the problem of youth unemployment, as it was drive down wages and employ younger, more vulnerable workers. The MTBPS was criticised for placing too little emphasis on fiscal policy intervention, and not dealing with ways to incorporate structurally marginalised people into the mainstream economy. Agrarian reforms also needed to be prioritised. The increasing of tariffs would also increase the economic burden of the poor, and there was concern about the lack of access to developmental income. The South African Council of Churches representative on the Coalition noted concerns around the references to public-private partnerships for National Health Insurance. It recommended that the provision of a universal income grant would go far to address inequalities. It criticised the funding of capital projects as a result of the strong rand as not looking sufficiently at developing local industry. Consumers could not be expected to service the debts of State-owned enterprises, and more clarity was needed on the statements about competition in the electricity, communication and transport sectors. The proposed wage adjustment for those employed in the public sector was of concern. Members asked if there was anything in the MTPBS that the Coalition could support. They enquired whether the Coalition’s opposition to the youth subsidy was protecting those presently employed from competition, asked how it proposed that interest rates be reduced, and whether this would reduce unemployment, and for its views on experience of other countries on tax on capital inflows.


Meeting report

Medium Term Budget Policy Statement (MTBPS) 2010: Public hearings
Industrial Development Corporation (IDC) submission
Mr Lumkile Mondi, Chief Economist, Industrial Development Corporation (IDC), said that, as there was less volatility with the real effective exchange rate than with the nominal effective exchange rate, any debate should focus more on the real effective exchange rate. The weakening or strengthening of the rand did not happen in isolation, and was largely dependent on the currency strength state of other countries. He said that South Africa’s trade account had not performed poorly, as demand depended on the strength of countries with whom it was trading. Despite the rand appreciation since January 2009, the value of South Africa’s exports of raw materials and intermediate goods had recovered to some extent in the first semester of 2010. The value of imports also started recovering in most categories (except raw materials) in the first semester of 2010.

He outlined some recent capital interventions globally. Brazil had, in October 2009, imposed a 2% Tobin tax on foreigners’ fixed-income purchases and later in the same month raised this to 6%. It had also raised the so-called IOF tax (which foreigners had to pay to invest in local derivatives) to 6%. Thailand had imposed a 15% tax on interest payments and capital gains from government and State-owned company bonds. Although South Korea had imposed no financial transaction taxes, it had put in place a series of policy measures, such as new restrictions on trades in currency derivatives and new ceilings on domestic banks and branches of foreign banks dealing with foreign exchange (forex). Despite all these measures, capital inflow into these countries was not affected.  Potential favourable implications of such interventions included the raising of the price competitiveness of exports, progressive recapturing of foreign markets if price competitiveness and stability were to be sustained, the alleviation of import competition in local markets, and increased foreign tourism earnings. Potential concerns about such interventions included uncertainty over the potential impact of interventions on, the desired outcomes and their sustainability, their cost, and abrupt unwinding of substantial speculative positions, which could possibly have a destabilising effect, concerns about the timing, a potentially higher inflation environment, higher import costs and a reduced wealth effect for holders of South African assets.

Discussion
Mr T Chaane (ANC) asked what areas needed to receive attention, in order to facilitate economic growth.

Mr Mondi answered that South Africa should create a focus on local demand and make access to capital easier for the establishment of new businesses.

Mr D Van Rooyen (ANC) asked whether any thorough analysis was done into the implementation measures and funding approach around regional infrastructure development.

Mr Mondi answered that since South Africa was a small economy, it would be easier, for example, to create a petroleum industry at source (such as Angola). The infrastructure to facilitate this had to be created. Politicians also needed to drive a regional agenda.

Efficient Financial Holdings (EFH) submission
Mr Dawie Roodt, Economist, Efficient Financial Holdings, said that although reasons provided for the global economic recession had included insufficient regulation, greed and speculators, the real reasons were loose monetary policies and political interference. Although South Africa’s new growth plan was unclear, emphasis had been placed on reducing poverty and unemployment and boosting economic growth. Targets of the new growth plan included stringent fiscal policy, a focus on savings, a smaller current account deficit, lower interest rates, a competitive currency and lower unemployment. Of major importance in the Medium Term Budget Policy Statement (MTBPS) was the need to improve competitiveness, as this facilitated wealth-creation through the private sector. Although the creation of more employment was of major importance, this could only be fast-tracked through the creation of more businesses. There were, however, limitations to the establishment of new businesses, because of onerous red tape (especially around tax registration and licences), lack of access to capital, high taxes, forex regulations and labour laws.

Mr Roodt submitted that although the rand was under-valued, this was less apparent than in the past. Possible solutions to this might include the buying of reserves, the lowering of interest rates, imposing the Tobin Tax or relaxing of the forex regulations. The latter was most favourable and was to be implemented by the Minister of Finance.

He noted that the tax burden in South Africa had shifted away from the poor and on to the relatively rich. This was not sustainable, as there were fewer rich people in the country. South Africa’s Gini co-efficient would be improved by ensuring that employment figures rose. More needed to be invested in capital in the country. The fact that the State had collected more in the way of income tax, despite 1 million jobs having being lost, indicated that the majority of the lost jobs were held by people who were not paying personal income tax. As the economy was performing very well, growth could easily exceed the estimated 3% level. Some of the taxes which he suggested could be done away with included the Secondary Tax on Companies, the Skills Development Levy, Donations Tax, Estate Duty, Securities Transfer Tax, Transfer Duties, Air Departure Tax and the Electricity Levy.  He suggested that instead the country could perhaps consider introducing Taxi taxes and no VAT-zero rates. The only means by which to address the problems facing South Africa’s economy was through prioritisation of building economic growth.

Discussion
Mr Chaane asked whether the challenges faced by those wishing to establish new businesses were related to onerous administrative processes, or to the laws regulating the relationship between employers and their employees. If the main challenge was employer/employee related, the he asked whether Mr Roodt was proposing the relaxation of these laws. He also enquired who were the present beneficiaries of the taxes that Mr Roodt suggested should be scrapped.

Mr Roodt answered that he was not advocating doing away with the labour laws. However, it was often preferable for unemployed people to hold a poorly paid job than to have none at all. Companies shifted their tax burden down to the consumers and it was therefore ultimately the consumer that paid for this. Although many of the taxes that he proposed should be scrapped did presently benefit richer people, his proposal was based more on the need to simplify the system.

Mr N Koornhof (COPE) asked whether the salaries paid to many Chief Executive Officers were not considered to be exorbitant. He also asked why share options were not spread out more equitably. He also asked whether the fact that the Reserve Bank owed the National Treasury in excess of R135 billion was not compromising its independence.

Mr Roodt answered that Chief Executive Officers were currently able to command very high salaries as there were too few of them, and the only way to change this would be by creating an environment in which the particular skills needed were developed so that more people were available to fill the positions. In answer to the question about the Reserve Bank, he noted that although its independence had not been affected by the debt, there was nonetheless a possibility that this could happen.

Dr D George (DA) asked whether VAT should not be scrapped.

Mr Roodt answered that, as personal tax and company tax could not be increased, the only other option was to collect further taxes through VAT.

Business Unity South Africa (BUSA) submission
Mr Raymond Parsons, Deputy Chief Executive Officer, Business Unity South Africa, said that when considering the short term economic outlook, it must be noted that economic recovery was still vulnerable and its pace was slow. Since trends in consumption and investment in the economy were modest, it would take a considerable amount of effort to reach the projected growth of 3%. The role of reinforcing infrastructure growth was particularly significant. The prioritisation of energy, transport and water supply was welcomed, although it was important to ensure that these projects were embedded in the plans for infrastructure spending. If necessary, greater use could be made of public-private partnerships in order to ensure that these projects were brought to fruition.

Mr Parsons submitted that the MTBPS had struck the correct balance between fiscal consolidation and supporting growth. As this was a delicate balance, this fiscal plan would have to be adhered to over the next few years. As effective institutions were a major factor in maintaining the balance, there needed to be greater use of the regulatory impact assessment mechanisms in various government departments. The steps identified around the exchange rate were welcomed. The role of the current G20 meeting was important, because it was essential for South Africa to work together with other countries towards stabilising the global economic environment. It was not easy to achieve a higher growth rate, but the global situation at present was favourable for developing countries such as South Africa. If South Africa could attain a 3% growth, its economy would double in size every 21 years. If it could attain a 6% growth rate its economy would double in size every 12 years. Growth targets needed to be supported by policies that allowed for its sustainability. Productivity was an essential aspect, and the importance of this should not be ignored.

Discussion
Dr George asked whether there was anything in the MTBPS that BUSA did not support.

A BUSA representative answered that although BUSA broadly supported the MTBPS, it had concerns around the role of tariffs on competitiveness, and the need for additional taxes. The problem was not with the fiscal policy framework itself, but rather with its implementation.

Mr M Motimele (ANC) asked whether there was any strategy in place to ensure that the windfall which resulted from the global commodities upturn would result in the creation of jobs locally.

Mr Parsons answered that South Africa had not maximised gains during the previous commodities upturn cycle. as it was not competitive enough. However, it could at present capitalise on this upswing.

Ms Z Dlamini-Dubazana (ANC) asked whether the document that BUSA had prepared could be made available to the Committee, to enable Members to engage more fully with the recommendations.

Mr Parsons said that he would make the document available to the Committee. He further suggested that it might be useful for the Committee to engage also with Productivity South Africa, as in the long run productivity would be the main source of many benefits.

People’s Budget Coalition Presentation
Ms Prakashnee Govender, Head of Department, Cosatu Parliamentary Office, said that the MTBPS did not reflect the shifts that should be seen as part of a developmental approach. There was concern around the shift away from addressing inequality, as also about the differentiation between financial and industrial capital. In relation to macro-economic policy, the MTBPS pre-empted the growth path document and thereby undermined consultation. The relaxation of exchange rate controls was also of concern. Mechanisms to stabilise the currency had to be implemented. The initiative to allow the Government Employee Pension Fund to be diversified and invested off-shore was seen as anti-development.

Ms Govender suggested that there needed to be serious interventions to address the problem of youth unemployment. Access to training was essential and was preferable to the youth being pushed immediately into the labour market. The proposed youth subsidy would allow for the introduction of a two-tier labour market through which employers would be able to drive down wage rates and also employ younger, more vulnerable workers.

Ms Palesa Nkomo, Manager, Black Sash, said that the fact that the cost of living had not changed and that the absorption of labour had not improved proved that South Africa was still mired in financial crisis. The MTBPS placed emphasis on monetary policy, with little emphasis on fiscal policy intervention, and made no mention of ways in which to incorporate structurally marginalised people into the mainstream economy. There was also concern that new entrants were finding it difficult to enter the market as a result of dominance by monopolies. Agrarian reforms also needed to be prioritised. The increasing of tariffs would also increase the economic burden of the poor. There was also a concern around the lack of access to developmental income.

Mr Keith Van Meulen, Director: Parliamentary Office, South African Council of Churches, said that the South African Council of Churches (SACC) agreed that the economy was a moral issue as it affected the quality of life of so many people. There was a concern around whether the free basic provision of water and electricity was adequate. Although SACC welcomed the proposed National Health Insurance (NHI), there were concerns around the repetitive references to the public-private sector partnerships, which seemed to allude to the NHI becoming an arm of the private sector. SACC would appreciate seeing a White Paper on the NHI in order to better engage with this issue. The increase in VAT was also of concern. The taxing of luxury goods would be more suited here. The provision of a universal income grant would go a long way towards addressing present inequalities.

Mr Woody Aroun, Parliamentary Office, National Union of Mine Workers of South Africa (NUMSA), said that there were concerns around the interest rate, the further relaxation of exchange controls and the strong exchange rate. In relation to the latter, the funding of capital projects as a result of the rand being strong at present was not paying enough attention to developing the local industry. A stronger statement around procurement also needed to be made. Consumers could not be expected to carry the burden of servicing the debts of State-owned enterprises. There needed to be more engagement around the relaxation of exchange controls.

Mr Sidney Kgara, Parliamentary Officer,
National Educational, Health and Allied Workers Union (NEHAWU), said that it was risky to invest the savings of workers abroad. The statement around the need to have more competition in the electricity, communication and transport sectors was vague, and it should be clarified whether this entailed the privatisation of these industries. There was also a concern around the proposed wage adjustment for those employed in the public sector.

Discussion
Dr George asked whether there was anything in the MTBPS that the Peoples’ Budget Coalition could support. He asked whether the lack of support for the youth subsidy perhaps amounted to protecting the presently employed members from unwanted competition.

Ms Govender answered that the Coalition supported issues around addressing and eradicating corruption. It also supported the regulation and increased supervision of banking controls. She indicated that the membership of the Coalition comprised mainly those from poorer households and who were often responsible for providing for large households of unemployed people, including youth. Youth subsidies were in effect forcing poor people to surrender the option of formal training.

Mr Chaane asked to what extent interest rates should be reduced, and to what extent this would reduce unemployment.  He also asked for the Coalition’s views on research conducted around the experiences of other countries in relation to tax on capital inflows.

Ms Nkomo answered that high interest rates attracted resulted in more capital inflow, which in turn only moved within the tertiary sectors of the financial markets but not further down. Countries that had instituted measures to stabilise their markets had higher growth. As employment-creation was only found where growth exceeded 4%, South Africa, with its projected growth of 3%, would not be seeing any major reduction in unemployment levels.

The meeting was adjourned.


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