2010 Medium-Term Budget Policy Statement: FEDUSA & IDASA submissions; Schedules 1 & 2 amendments of Financial Intelligence Centre Act

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Finance Standing Committee

10 November 2010
Chairperson: Mr C De Beer (ANC)
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Meeting Summary

The Committee met with representatives of FEDUSA and IDASA as part of hearings on the 2010 Medium-Term Budget Policy Statement. The FEDUSA representative said that there needed to be a reprioritisation of money from low- to high-priority programmes as well as a performance culture in which people were held accountable for their actions. The crucial economic issue was finding ways in which to increase job-creating growth. Capital inflows and the appreciation of the Rand posed serious policy challenges. Faster growth was required in order to significantly increase labour absorption, reduce high unemployment and achieve a more equitable distribution of income. If a growth rate of between 3.2% and 3.5% could be achieved between 2010 and 2014, the unemployment rate could, by 2019, be brought down to 19.8%. As the biggest unemployment rate was found in the 18 – 24 age group (largely due to lack of experience and training), government needed to prioritise investing in human resource development. South Africa was still vulnerable to any renewed global economic downturn and partnerships between government, business and labour were needed in order to create jobs. The constraints to growth, including infrastructure bottlenecks, skills deficiencies, state inefficiency and regulatory burdens which acted as a disincentive to small business activity, needed to be addressed.

Members asked what FEDUSA was doing to improve productivity and competitiveness, whether it supported the youth wage subsidy, how the high unemployment rate found in the 18 – 24 age group could be addressed, whether there were areas that needed to be looked into in order to ensure more effective partnership agreements and how government should control capital inflow.

The IDASA representative said that South Africa had still not achieved structural transformation of the economy. If the different social pressures which arose from different economic policies were not addressed effectively, the country would become vulnerable to possible destabilisation. There needed to be a shift away from focussing solely on the macro economy. There had been a slower increased rate in spending on public expenditure. There would be a slight decline in government spend in GDP over the next three to four years. As corporate income tax revenue was not expected to recover to pre-recession levels any time in the near future, personal income tax would be expected to fill the revenue gap. If the projected increase in personal income tax revenue was not achieved, income tax revenue as a whole would be worse than anticipated over the medium term. State debt service costs were the fastest-growing item of the budget. This could possibly affect what was done in other areas, such as health.

The regulatory burden on small businesses had to be relaxed. There needed to be a greater culture of saving as this would make the country less dependent on foreign income. The compulsory pension fund would, as an example, assist in this regard. Provincial departments had performed disappointingly with regards to expenditure of their health budgets.

Members asked what could fundamentally be done in order to secure growth, whether doing a
quantitative easing exercise was an option for South Africa and requested that the Committee be provided with IDASA’s recommendations.

The Committee had a
briefing on and approved the Amendments to Schedules 1 and 2 of Financial Intelligence Centre Act, 2001.


Meeting report

Federation of Unions of South Africa (FEDUSA) submission
Mr Dennis George, General Secretary, FEDUSA, said that, in relation to improved accountability by organs of state, there needed to be a reprioritisation of money from low- to high-priority programmes as well as a performance culture in which people were held accountable for their actions. There was also a need for the management of growth in its consumption expenditure as well as the obtaining of better value for money.

With relation to the economic outlook, the crucial issue was finding ways in which to increase job-creating growth. Capital inflows and the appreciation of the Rand posed serious policy challenges as it implied that export costs were low while imports were cheaper. Faster growth was required over an extended period in order to significantly increase labour absorption, reduce high unemployment and achieve a more equitable distribution of income. If a growth rate of between 3.2% and 3.5% could be achieved between 2010 and 2014, the unemployment rate could, by 2019, be brought down to 19.8%. The biggest unemployment rate was found in the 18 – 24 age group as this group often lacked experience and training. Government therefore needed to prioritise investing in human resource development. Although there were policies in place to address this issue the results of these would not be seen immediately. Learnerships and apprenticeships, such as those initiated by FEDUSA, were important.

In relation to the New Growth Path, South Africa was not out of the woods, as the sovereign debt crisis and troubled banking system faced by certain European countries had shown. South Africa was still vulnerable to any renewed global economic downturn.

Partnerships between government, business and labour were needed in order to create jobs, especially for the youth. South Africa needed to promote large-scale job creation, increased investment, greater trade, higher savings and a more competitive economy. This required addressing the constraints to growth, including infrastructure bottlenecks, skills deficiencies, state inefficiency and regulatory burdens which acted as a disincentive to small business activity. Partnerships between government, organised labour and business would rapidly reduce youth unemployment, contain price and wage increases so as to support competitiveness and higher exports, make more effective use of development finance institutions to fund domestic and regional infrastructure development and also promote the sustainable use of energy and natural resources. It would also support land reform and bolster agricultural productivity which would increase food production and boost rural development as well as remove the constraints to mining and industrial investment.

Discussion
Mr D George (DA) asked what FEDUSA was doing to improve productivity and competitiveness. Did it support the youth wage subsidy?

Mr George answered that there was a great need for this important discussion, the main question of which was related to what the output was. A balance needed to be struck between capital and labour as this would improve the country’s competitiveness. The subsidy was used as a way to reduce the production costs of entrepreneurs in order for them to become more competitive. It supported training-based programmes.

Mr B Mashile (ANC) asked how the high unemployment rate found in the 18 – 24 age group could be addressed.

Mr George answered that there was a need to look at the youth’s capabilities to function within the workplace. The learnerships and skills training programmes FEDUSA had developed had proven successful as many were subsequently employed.

Mr D Van Rooyen (ANC) asked whether there were areas that needed to be looked into in order to ensure more effective partnership agreements.

Mr George answered that there was a region agreement between business, organised labour and government to strengthen social dialogue, i.e. between employers and employees as well as bargaining councils.

Mr T Chaane (ANC) asked how government should control capital inflow. What were its suggestions around the high salaries paid to CEOs?

Mr George answered that bargaining councils needed to research wage trends for these sectors as well as look into better wage negotiations and the profitability of companies. The system could and needed to be improved.

IDASA submission
Mr Len Verwey, Economist, IDASA, said that South Africa had still not achieved structural transformation of the economy. The MTBPS was continuous with past policy. If the different social pressures which arose from different economic policies were not addressed effectively, the country would become vulnerable to possible destabilisation. The Committee would therefore have to engage with these issues in an urgent manner. As there were many challenges in the micro-economic paradigm, there needed to be a shift away from focussing chiefly on the macro economy.

In relation to expenditure of the 2010 budget there had been a slower increased rate in spending on public expenditure. There would be a slight decline in government spend in GDP over the next three to four years. As corporate income tax revenue was not expected to recover to pre-recession levels any time in the near future, personal income tax would be expected to fill the revenue gap. If the projected increase in personal income tax revenue was not achieved, income tax revenue as a whole would be worse than anticipated over the medium term.

Even with the slightly faster reduction of the deficit, state debt service costs were, at an average increase of 16%, the fastest-growing item of the budget. With a projected increase on debt and social protection, there would likely be some degree of budgetary reprioritisation over the next three years. This could possibly affect what was done in other areas, such as health.

The regulatory burden on small businesses had to be relaxed. There needed to be a greater culture of saving as this would make the country less dependent on foreign income. The compulsory pension fund would, as an example, assist in this regard. The spending by provincial departments had performed disappointingly with regards to their health budgets. This pointed to poor financial management.

Discussion
Mr N Koornhof (COPE) asked what could fundamentally be done in order to secure growth.
Was doing a QE 2 [q
uantitative easing done for a second time in USA] not feasible for South Africa?

Mr Verwey answered that the fiscal framework would only be effective if the country addressed the many social issues facing it. The QE 2 was not feasible for South Africa.

Mr George added that FEDUSA did not support the QE 2 as it believed this money would be better spent on rebuilding the country’s industrial capacity.

Mr Van Rooyen asked for the Committee to be provided with IDASA’s recommendations.

Mr Verwey replied that its recommendations had more to do with issues of governance.

Amendments to Schedules 1 and 2 of Financial Intelligence Centre Act, 2001 (Act No 38 of 2001): briefing and adoption
Mr Pieter Smit, Senior Manager, Legal and Policy, National Treasury, said that the amendments to Schedule One were technical in nature necessitated by the fact that a number of the Acts referred to in the Schedule had been repealed. The amendment of Schedule Two removed certain supervisory bodies and inserted new supervisory bodies. The amendment of Schedule Two was more substantive as the amended Schedule now included all the provincial gambling authorities as well as the provincial law societies. Certain supervisory bodies such as the JSE Securities Exchange, the Law Society of South Africa and the Registrar of Companies had been removed.

An inter-related process was the amendments of the
Financial Intelligence Centre (FIC) Act, passed by Parliament in 2008 which were coming into operation on 1 December 2010. The main objectives of this Amendment Act were to enhance structures and powers for supervision of compliance with the FIC Act and to address powers and functions of supervisors.

Discussion
Mr Koornhof asked why South African citizens could not have their own FICA numbers.

Mr Smit answered that the obligation was not placed on customers to identify themselves but rather on the institutions.

Ms Z Dlamini-Dubazana (ANC) asked why the Land Bank was not included in the list of accountable institutions. Had the Minister approved the amendments?

Mr Smit answered that the Land Bank was not included as the higher risks at this time were within the retail sector. Credit business was now being included under money laundering legislation. The Minister had consulted and approved the amendments. Minutes of his meeting with the Money Laundering Advisory Council could be made available to the Committee.

The Committee approved the amendments and the Committee Report which read:

Report of the Standing Committee on Finance on the Amendments to Schedules 1 and 2 of the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001), dated 11 November 2010.
The Standing Committee on Finance, having considered the Amendments to Schedule 1 of the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001) and Amendments to Schedule 2 of the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001), reports that the House, in terms of section 73 (3) and section 75 (3) of the Financial Intelligence Centre Act, approves the said Amendments. Report to be considered.

The meeting was adjourned.

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