Fiscal Framework and Revenue Proposals: Public hearings (Day1)

Meeting report

Fiscal Framework and Revenue Proposals: Public hearings
The Chairperson welcomed the Kenyan delegation, noting that this Committee had recently visited Kenya to study how it had set up its budget office.

Financial and Fiscal Commission submission
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, tabled the submission of the Commission (FFC) on the fiscal frameworks, pointing out that this was done in terms of the Money Bills Amendment Procedure and Related Matters Act (the Act).

He briefly outlined the context in which the recommendations were being made. The recognition of the global economic environment, and the impact of global trends on South Africa, was important. The FFC had earlier made a recommendation for fiscal consolidation, coupled with cushioning and laying the foundations for future economic growth. Government’s overall response was positive. The FFC had projected that the economy would only fully recover by 2015. This fiscal framework (FF) concentrated on job creation, skills development and infrastructure spending. There was a split of resources, with 47% to national, 44.3% to provincial and 8.7% to local governments. There was recognition that the moderate impact of the recession scenario was beginning to emerge. If matters worsened in the rest of the world, especially Europe and America, the time frame for recovery might be longer. Those were still cautionary issues, which the Minister had highlighted.

The key drivers emerging from the recession were that industries who provided the majority of exports were mining and quarrying, and manufacturing. The FFC was very much aware of, and supported, the stance of government on the exchange rate, and it was important that government and the South African Reserve Bank (SARB) should continue to moderate the effect of capital flows on the exchange rate.

Economic growth was at the centre of job creation, and it was necessary to consider what jobs might be able to be sustained. Improvements in skills development, and strengthening of the education system, were highlighted. This called for concerted effort across all the spheres of government, and the provinces must be seen as key implementers and role players, in both education, where they implemented policies, and in strengthening the healthcare system, to ensure that healthy future generations were able to contribute. Research and development were also important.

Mr Khumalo noted that some progress had been made on the Millennium Development Goals (MDG), but there were still steps to be taken to reach some goals by target dates. For instance, government was likely to be able to achieve Goal 1, but not Goals 4 and 5, particularly health. This year’s budget demonstrated targeting of programmes that were in line with the goals. Hopefully, there would be further increases in the health budget. However, he cautioned that it was not merely a case of putting money into the system. FFC was concerned that some provinces were overspending, yet there did not appear to be a concomitant improvement in the quality of the services, and it was necessary to look at what was driving the overspending. The Minister had made reference to the National Health Insurance (NHI) and tabled proposals on its financing. Although the FFC had not yet been able to look at the detailed proposals, it had carried out some preliminary exercises, although it must still interact with the proposals more fully.

Dr Ramos Mabugu, Research Director, FFC, noted that financing improved debt and household income. He tabled a graph showing that if the NHI was to be run through domestic financing, Gross Domestic Product (GDP) would rise in the short term but then fall to a lower level. If, however, if was financed by household income taxes, this would result in a fall in private consumption and lesser investment. In the short term, however, if domestic expenditure was expanded to finance the implementation, there were rises. He also tabled an investigation of the fiscal deficit under these two scenarios. When financed through debt, there would be high interest initially, whereas a tax financing model had a lower impact on the debt to GDP ratio, suggesting that the latter option was preferable. The FFC had also looked at the debt to GDP ratio, which would initially rise, then stabilise at around 5% of GDP over the longer term. For the deficit position, tax financing would be preferable, but it would lead to lowering of financial consumption. Both scenarios, in the long term, would result in GDP coming down.

He added that other risks had been identified. Research indicated that oil price increases, if they continued to increase, would reduce GDP by 2.25% to 2.5% in the long term (20 year) cycle. FFC ran simulations on the economy to ascertain the potential risk. In the long term, this could worsen the government deficit by 12% to 22%, depending on whether there was subsidisation.

Debt service costs had also been identified as an ongoing concern, although FFC acknowledged that it was necessary for government to borrow in order to pursue countercyclical policies. Foreign exchange risk exposure must also be considered. Personnel costs were still rising as percentage of government spending, which posed another risk. The FFC was pleased that a contingency reserve had been set aside for inevitable factors, but said this may need to strengthen.

In relation to the revenue estimates and tax proposals, Dr Mabugu summarised that the FFC welcomed the proposed tax structures designed to support economic growth. FFC also believed that the fuel levy increase was reasonable, but said that continued increases needed to be approached with caution, as if the fuel prices rose too high, this could have a recessional effect on the economy. “Sin taxes” on alcohol and tobacco made sense, but FFC pointed out that both were addictive products, and some households could therefore end up allocating less of their income to household food or education to cover the increase in sin taxes, and suggested that anecdotal evidence would need to be taken into account. The environmental levy could have potentially negative effects, but was supported by the FFC. The FFC awaited proposals on amelioration, especially for poor households.

Mr Khumalo outlined how the FFC proposed that the Fiscal Framework could be improved. FFC had begun some work on the proposed guidelines for fiscal sustainability, and would be holding discussions with National Treasury (NT). In many countries, rules had been implemented because of sustained fiscal crises, and would be used to assist economies to smooth out. South Africa was fortunate in that its Constitution already contained rules for conduct of fiscal policy, and there was also legislation. However, FFC highlighted that it was important to re-examine how these measures had been enforced to date, to ensure that significant value was achieved. FFC had also set out some focal areas on which the foundations for growth could be laid. The New Growth Path (NGP) had already identified the sectors to be targeted for jobs. It was necessary for government to be aware of, evaluate and factor in risks when developing the fiscal framework. It was also important that stakeholders should be given the opportunity to interact on any new matters. The NHI and proposed guidelines were good examples, which vindicated the high ranking that South Africa received, and this transparency was to be welcomed.

Discussion
Mr S Swart (ACDP) noted that there was an indication that government would consolidate the fiscal position in line with economic growth. He asked if the economic growth path suggested by government was sustainable. The domestic economy relied on the global economy, which was showing high personal debt levels, and the global economy was further affected by slowing in China, a volatile situation in Middle East. It would be necessary to consider how this would impact on South Africa. There were already concerns last year with increase of deficit and debt levels, and these forecasts had all risen again.

Dr D George (DA) noted the question whether South Africa would achieve higher growth through its fiscal stance. South Africa was now projecting a lower rate than had been outlined in the Medium Term Budget Policy Statement (MTBPS. There was increased expenditure but lower GDP growth. That seemed to indicate that South Africa did not expect spending to stimulate the economy. He wondered if this budget was focusing too much on consumption spending and not enough on production spending. Technically, counter cyclical policies said that when the economy was shrinking, government would increase expenditure to kick-start economic activity. That did not appear to have happened.

Dr George referred to the proposed tax structure designed to support economic growth, as set out on page 12. He thought that this would not happen, particularly since government itself said that it expected the economy to shrink.

Dr George said that levies were inflationary, and this was exacerbated by the situation in the Middle East, and he wondered if the increase in levies was not thus misplaced.

Mr Khumalo responded that FFC could not tell government how to mitigate risks around fiscal frameworks, and that was a policy decision.

Mr N Koornhof (DA) said that of the share of revenue going to the provinces, much of that was being paid to the provincial wage bill. He asked if the FFC would be able to conduct a study whether there was value for money in the provinces.

Mr Khumalo said that FFC was looking at what provinces and different organisations were doing, and FFC would be able to provide some figures so that Members could decide if value for money was being achieved. It was not the mandate of the FFC to make that assessment. A conscious decision had been made to have this sphere of government.

Ms Z Dlamini-Dubazana (ANC) said that the presentation was not quite what she had expected, as she would have liked to see more suggestions, so that the Committee could engage with them and consider if they were feasible.

Ms Dlamini-Dubazana referred to the proposals around financing of the NHI through tax funding, noted that contributions would be needed from the private sector and asked if FFC had any guidelines on how to achieve this.

Ms Dlamini-Dubazana asked for more information on foreign exchange.

Ms Dlamini-Dubazana pointed out that one of the aims of “sin taxes” was to stop unacceptable behaviour of smoking and drinking, and she sought further clarification on the comment about social problems.

Mr D van Rooyen (ANC) added to this by asking how severe the social effects mentioned by the FFC might be, and what other options there were.

Mr B Mashile (ANC, Mpumalanga) urged the FFC to do research on the “sin taxes” to influence how they were treated in the next budget. He agreed that it was hoped that spending on tobacco and alcohol would drop if the price increased, but he also agreed that some families were being prejudiced because in fact there was still as much consumption, and therefore increased spending on these items. He did not think that the social effects could be generalised across all of South Africa.

Mr S Marais (DA) did not believe that the objective of “sin taxes” was to influence human behaviour, as this was not a fiscal function. He wondered if this suggested that any alcohol brewed from fruit or flowers would then attract “sin tax” for growers. He asked if FFC had looked at the effect of these taxes on the profitability of the primary agricultural sector, and the effect on jobs lost and maintained, noting that there were claims that farming was becoming less profitable and jobs were being lost.

Mr E Sogoni (ANC, Select Committee on Appropriations) asked whether “sin tax” was not supposed to strike a balance between the health of society, and allowing people to exercise their choices of consumption.

Mr Khumalo noted these comments but said that the position was not quite as simple as suggesting that people must be taxed to persuade them to behave properly. Such tax was a good way to raise revenue, but there was no point in “beating a dead horse”. Government should ensure that other interventions were also made to address addiction and rehabilitation of those who were addicted, to support the primary tool. He agreed that anecdotal evidence had been suggested of the effects on families, but stressed that this must be coupled with other supportive programmes.

Mr van Rooyen asked whether the investments in education were on track, would yield the required results, and were appropriate to achieve the aims. He also asked if there was any evidence demonstrating the results of the investments in health and education on economic growth.

Mr Marais noted that the FFC projected that GDP would not recover to “business as usual” by 2015, and he asked what this meant. He asked if FFC disagreed with the proposals to create new jobs, for which an average of 7% GDP over 10 years would be needed. He also asked if the FFC had looked at specific applications in this FF. Government had put job creation at the forefront, but he asked how much of the funding went as a direct injection to small and medium businesses, and how much to the Sector Education and Training Authorities (SETAs). He also asked if the FFC had looked at specific applications, such as the allocations to the National Youth Development Agency (NYDA), and whether the spending would achieve the framework’s aims.

Dr Z Luyenge (ANC) said that the FFC had reflected on the quantification of the expenditure and the impact of such expenditure, which was appropriate, and therefore had pre-empted some questions. However, answers were still needed on how to assess impact. The Auditor-General tended to look at spending patterns and figures, rather than quantifying the impact of spending, which meant that departments could receive clean audits without actually producing any service delivery improvements.

Mr Khumalo noted that although the Auditor-General had traditionally provided financial information, it was also now attending to performance information audits, and that was one way the gap could be addressed. The FFC had also suggested that government needed to take stock of what provisions were already in place, before adopting any new rules and procedures.

Dr Luyenge noted that the budget said little about facility development of sport in rural areas. Although local government was supposed to deal with this via a Municipal Infrastructure Grant (MIG), there was no ringfencing of funds for facility development of sport as a 2010 Legacy project.

The Chairperson noted that this question could be posed to the Minister.

Mr Khumalo said that the questions on sport had also been raised when the Minister and National Treasury briefed the Committee. There were some vexed questions about where the function for sport lay, and this had actually been questioned by Gauteng, who asked how the budget for sport was determined. The South African Local Government Association (SALGA) was also concerned about unfunded mandates. There was a need for a clear assignment of powers and functions between the provinces and municipalities, who had in the past been responsible.

Mr van Rooyen asked when the FFC proposals around the NHI were likely to be available.

Dr P Rabie (DA) noted that the NHI would pose fiscal risk, and a comparison of the tax burden in South Africa to other developmental countries gave rise to serious concern. He asked if FFC could specify the fiscal risk involved and the long term implications. It had been suggested that any increase in public spending would need to be financed by increased tax. However, the ratio of personal debt to disposable income was already far too high. If there was a huge debt burden, it would impede economic growth and long term growth.

Mr Khumalo said that today’s submission represented the preliminary views of the FFC only, and must be considered together with its submissions in May 2010 and on the MTBPS, when it had noted that there was not yet sufficient information to allow it to take a position. The Minister had now highlighted matters around NHI and guidelines for sustainable fiscal policy and the NGP. The FFC submission in May 2011 would contain more detailed recommendations. He added that in response to this, and other questions, more detail could be found in the FFC’s written submission circulated to Members. 

Mr Sogoni said that some of the comments seemed to have distorted what was said in the MTBPS. In the short term, there was likely to be a rise in debt, which would peak, possibly in 2012/13. There was a suggestion that South Africa might not be able to drop after that, given the level of debt at the moment. However, South Africa seemed to be moving in the right direction, looking at the predictions of National Treasury. The MTBPS suggested that the shortfall was likely to be around 6.9% but this had lessened to 5.3%. This seemed to indicate progress to reduce the debt, which in turn suggested correct investment in the economy.

Mr Sogoni asked for clarity on the comments on between fiscal consolidation and job creation. The State of the Nation Address and the Minister’s remarks seemed to indicate that there was clarity on where resources would be allocated, to ensure that jobs were created, and he was not sure exactly what was suggested now.

Mr Sogoni also said that Members needed to consider their roles, and he wondered if they were not being too passive. Members should be calling the Executive to account for where resources were going.

Mr M Swart (DA) questioned the job creation portion of the Expanded Public Works Programme (EPWP), noting that already there was R800 million underspending. If this was supposed to be an incentive scheme, then there was something wrong with the scheme.

Mr Khumalo said that many of the questions he had not answered directly would be answered by a study of the written submission from the FFC, which he would not repeat because of time constraints.

Dr Mabugu replied to the questions on economic growth. He pointed out that corporate tax and personal tax had impacts, and this budget showed prioritisation of corporate, then personal, then consumption taxes, and this was in line with what would be expected from a good tax structure for economic growth.

On the question of public expenditure for economic growth, based on some econometric evidence quantifying income against expenditure, Dr Mabugu said that health and transport showed positive growth, and were receiving high priority. FFC thought that the priorities for health and transport were well handled, and based on sound economic principles.

Dr Mabugu said that in order to understand these projections, it was necessary to consider what would have happened if the economic crisis of 2008/9 had not occurred, at which stage the economy was growing at around 5%. If government had done nothing, and simply continued on the same track it had been then, the growth rate now would not be at this level. The context of the growth path must be seen against the background of the global crisis. The three to four percent growth must be compared to the previous year, but it must be accepted that the economy would not attain the levels that it might have done if there had not been a crisis.

Co-Chairperson Mufamadi noted these comments, and said that the budget review, on page 2, set out a policy statement on projections on the NGP. There were various figures mentioned in relation to creation of jobs. There was mention of creation of 5 million jobs over the next decade. However, it was also said that 41% of the economically active population was actually engaged in formal employment, and South Africa would need to create 9 million jobs in the next 10 years. There were also figures around the 25% to 26% unemployment rate. He asked how accurate the figures and statistics were. He also asked what actual percentage growth FFC believed that South Africa should be targeting. Even a growth rate of 4.5% would not suddenly create the 5 million jobs.

Mr Khumalo noted that this question would be answered by some of the work that FFC was currently doing, begun after the Minister of Economic Development briefed the Committee.

Dr Mabugu added that the figure of 5 million jobs was premised on a calculation that an economic growth of 3% could create 2.4 million jobs, and therefore 5 million jobs would require 7% economic growth, and the numbers should rise to 9 million jobs by 2020, which would also then require a greater growth rate per annum. It must be remembered that the figures quoted related to 2011, and there was still almost a decade to increase the growth rate past the 3% to 4% mentioned for this year. The Committee would have to consider what the growth drivers must be, and there would be time to put them in place.

Ms Dlamini-Dubazana said that this was a critical point. She did not think that any proper explanation on growth rate and job creation could be given prior to Census 2011,.

The Chairperson said that South Africa must hope that it was not hit by another economic crisis, as it was affected by other economies. He added that these figures were all projections.

South African Institute of Tax Practitioners (SAIT) and Association of Chartered Certified Accountants (ACCA) submission
Mr Mike Schussler, Economist, South African Institute of Tax Practitioners (SAIT), tabled slides on the health, wealth and population size of the world, showing South Africa’s comparative position. However, he noted that in South Africa life expectancy was low, at 52 years. Both these concerns, and identified opportunities needed to be addressed before South Africa could move forward to where its competitors were.

He outlined the emerging market economic outlook, noting that emerging markets included countries such as Vietnam and Thailand. The developed world represented only about half of the world economy, so developing and emerging economies were also important trade partners. He outlined the Organisation of Economic Development and Cooperation (OECD) Industrial Production growth rates, and noted that in the industrial world, some countries were already in another recession. He also tabled slides on the oil price, noting the drastic effect of recent Middle East instability and the effect of the rising oil price on inflation rates.

Mr Schussler noted that the South African GDP was recovering from the recession, which had been the worst in 28 years. It had not gone back to the 2005/6 levels. There was room to manoeuvre. He noted that there were problems in definitions of statistics. He cited the example of “unemployment”, saying that it was necessary to look at who was included in this category. In many rural areas, work seekers were discouraged. Around 41% of all adults in South Africa were employed, which represented 13 million people, but 19 million were not working, which included students and housewives. That led to a high dependency ratio. Another way was to look at the active labour force as  percentage of the adult population, but this also showed a decline, as did the percentage of employed people. South Africa rated in the bottom twelve out of 189 countries in terms of its active labour force statistics, and he pointed out that these countries included countries such as Tunisia and Muslim states where women were also excluded from the market.

Mr Schussler then outlined the cost of jobs. The figures of 5 million had been mentioned, but that might be underestimating what was actually needed. The cost of a job included not only a salary, but also infrastructure, IT requirements, rental of space, and he added that there would also need to be a 4.9% growth each year on top of that, without making any of the current workers wealthier. If the increase was to be tested at government rates, then there would need to be 6.5% increases. That in turn meant that the motor subsidy rate would have to grow 13.3%. In order to create more jobs than that, the private sector rates would have to rise 78%, government rates by 10% and the motor subsidy rate by 13.3%. Nobody in the world had yet achieved this kind of growth.

There was a serious problem, because not enough people were working, and some people were being paid too much. South Africa’s wages to its government service employees were amongst the highest in the world, close to France, Belgium and Norway. Other African countries, such as Nigeria, were at the 5% mark, as opposed to South Africa’s 12%.

Mr Schussler added that the percentage of formal employment by the total public sector (including State Owned Enterprises) was higher in South Africa than in Netherlands and Czech Republic, and third behind Sweden and France. This indicated that there was not much room for manoevre in this sector, so not many jobs were likely to be able to be created in the government service.

Mr Schussler then noted that, based on an annualised growth rate from 2000, the numbers of those “unemployed” had declined, although he noted again that this could be affected by the definitions used. The population was growing at 1.5% per year, but those not economically active (not working or not looking for work) was growing 2.7% a year. Already not enough jobs had been created in the last decade. There was a drop in jobs during the recession, and South Africa would now have to grow even quicker to absorb people into the labour market. The government sector, on the other hand, showed 15% more jobs over the last 4 years, in comparison to the private sector’s decrease of 2.6% over the same period.

Mr Schussler then set out where the jobs were to be found (see attached slides for detail) and tabled the employer numbers. He explained that statistics garnered in 2006 indicated that 1.77 million were employers, of whom 1.12 million were self-employed. 301 000 employers employed more than 4 other people. The numbers of self-employed had declined and was currently at 1.1 million only and it was necessary to look at why this happened, and to consider the effect of this loss of self-employed people, who were industrious and worked long hours. The average earnings in the formal sector were set out. He urged that South Africa needed more employers. He reiterated that 301 000 employers were at the top end, and this represented less than 1% of the adult population. Because they were in short supply, they were therefore precious and should be given tax breaks, services when they asked for them, because they were all creating jobs. They paid about 90% of company taxes, made a contribution to 84% of personal tax, via their employees. The average numbers of employees per employer, however, had also declined by about half since the 1980s, and it appeared that since 2002 about 20 000 employers had disappeared, and so had the jobs they offered, which accounted for a loss of about a quarter of a million jobs.

Mr Schussler then expanded on the problems facing employers. Their administrative burden was high, and this should be reduced substantially. Again, he urged that there should be a change of attitude, to support and give recognition to private firms. He suggested that there was a need to stop concentrating on the poor to the exclusion of the “rich”, so that the “rich” should also be serviced so that they, in turn, could serve the poor better by employing them. He noted that employers had proven their worth, and government must ask what they needed and wanted.

Mr Schussler noted his own experiences, where his small firm, who employed full and part time employees, was deregistered by the Companies and Intellectual Property Registration Office (CIPRO) for failure to fill out one form. He noted that CIPRO had requirements for annual data collection, which not involved time set aside to fill out the forms, but also required that accountants be hired to assist. He suggested that there was a need to consider whether the CIPRO data was in fact used for statistical purposes, or what else was done with it, and if the requirements were really justified.

Mr Schussler suggested that there should be automatic inflation adjustments on business tax threshold levels, saying again that small businesses were not being given the tax breaks they needed, but were instead being asked to pay more taxes. This included levies. He pointed out that for practical purposes the SETA levies that many small firms had to pay became another form of tax, as they could not afford to release their employees for training. Local government collected 3.5 times more in property rates from businesses than natural persons, but it must be asked whether they were doing more for these businesses, who were also paying rates comparable to European countries for electricity, water, refuse and other services, yet without as much efficiency in service. Small businesses were not included in Local Economic Development (LED) plans. He added that because South Africa was levying such high corporate tax, the 301 000 employers also deserved to be held in high regard.

Mr Schussler said that the necessity to comply with other laws – those on financial requirements (FICA), and cellphone registration (RICA), the King III requirements and similar pieces of legislation or policy, took up an enormous amount of time, simply to keep hosting websites or making sales. He submitted that it was not possible to grow the law by rules and regulations, as only accountants and lawyers ended up making money, and many of these laws were “scaring” new businesses and allowing consultants to climb on the bandwagon.
The cost of compliance was high.

Mr Schussler pointed out that all government considered together raised revenue that accounted for 36% of GDP, excluding the SOEs, and there was a need for more efficient government, because if government failed, then everyone failed. He tabled figures on who collected what (see attached presentation), and the annualised growth rates between 2004 and 2012. National and personal income tax had grown, yet fewer workers were paying more in tax. Value Added Tax (VAT) had grown at the same rate as GDP. In relation to payment of taxed, many of the taxpayers were registered in the lower salary categories, with fewer at the top. Two thirds of taxes came from salaries and wages, whilst pensioners paid between 3.2 and 5%. The profile of individual taxpayers showed why government could not raise taxes. 13 million people were working, and 5.9 million were registered for tax, yet only 5.1 million were liable to submit returns and only about 4.6 million were liable to pay tax. Only 2.1 million taxpayers earned more than 150 000 per year, and they paid 90% of all personal income tax. That figure was one-third of the numbers of people on welfare. He pointed out that many of these taxpayers were teachers, nurses and other public sector employees, who were generally regarded as “lower-paid”, yet although they thought they were “poor” they could also be classified as “rich” because they had a job. Personal income tax accounted for about 8.4% of GDP, yet taxpayers received little in return. These were the realities.

Mr Schussler pointed out the figures for revenue at all levels of government, as a percentage of GDP, and said that local government could be said to be charging tax when it levied electricity charges. Total government expenditure was currently at R977 billion but would run into trillions if this included local government. The biggest spend was on education, but the question must be asked why South African schoolchildren did not perform as well as their counterparts in other African and world countries. A 30% pass rate was not acceptable.

Government employees were the largest expense – at 11%, but there was a need to increase their productivity. The highest salaries were also to be found in government, which paid better than the private sectors, especially the SOEs. Eskom salaries averaged half a million rand per employee, and this was comparable to the highest salaries in the USA, but was not appropriate for a developing country.

Mr Nicholas van Wyk, Head: Technical Policy, ACCA, then dealt with the call for tax simplification and job creation. He said that the planning of the Income Tax Act in 2005 had produced a consolidated piece of legislation that was easier to understand and that eliminated overlaps and inconsistencies. However, this needed to go further. The United Kingdom had created an Office of Tax Simplification, with an independent body making recommendations to Parliament on how to simplify the tax system, ease administration and reduce uncertainty. He suggested that there was not a need for new content, as the Katz Commission proposals were acceptable, but for simplification of procedures and reduction of administrative costs, identifying the areas that caused complexity and uncertainty. Although South African Revenue Services (SARS) was active, it was not part of a broader grouping that could give independent advice and consider how best to simplify, whether content needed changing, and reduction of burdens to taxpayers.

Discussion
The Chairperson noted the remark that government had to succeed. He pointed out that in Kenya, 78% of the labour force worked in agriculture, and this would be a useful letter for South Africa.

Dr George asked if the budget, in SAIT’s view, provided sufficient stimulus to business, within the available fiscal context.

Mr Schussler responded that the fiscal environment was tight, and it was difficult for the Minister to make up his revenue needs, and SAIT appreciated this. Many aspects of job stimulation still needed to be clarified so that situation was not yet certain.

Dr George noted that there were too many unproductive and overpaid employees and asked what Government should be doing to resolve this.

Ms Dlamini-Dubazana asked if the private sector would be likely to contribute to job creation and whether SAIT could come up with a better model for government senior executives’ remuneration packages.

Mr Schussler responded that worldwide, there were problems with civil servants, and South Africa was not unique in paying them more than the private sector. However, other countries had made changes to this; for instance Greece and France had cut both salaries and benefits, Ireland was introducing a 5% pay cut in the public sector, and even in USA, civil servants were having to give up some of their past gains. The basic premise was that civil servants did not face as many risks as those in the private sector as government could not “close its doors”, and this was recognised by the fact that in South Africa civil servants did not have to pay to the Unemployment Insurance Fund. There were also civil servants in the SOEs, and he pointed out that it was difficult to justify asking people to pay more for their electricity when they saw the salaries paid to Eskom and municipal employees, whereas the consumers received far less.

Mr Koornhof asked whether SAIT, in making its comparison of private sector and State salaries, had included share options and bonuses. He also asked if SAIT supported high bonuses and share options, and asked if it was not possible that Eskom might have taken its cue from the private sector.

Mr Schussler said that SAIT had included bonuses, but not necessarily share options. Its figures were derived from the Stats SA quarterly employment survey figures. It was certain that SOEs and government employees received substantially more money than government employees. He added that the private sector’s value-add through exporting and delivering services should also be taken into account.

Mr S Swart thanked Mr Schussler for his comment on the impact of laws on business. He said that some laws did have regulatory impact studies built in, such as the labour legislation, but he wondered whether there was not deficiency in the New Economic Development and Labour Council (Nedlac) process, where laws were to be discussed. He noted that the State President had announced that discussions were being held with business and wondered if these issues had been raised.

Mr Schussler noted that Nedlac was dominated, in its business chamber, by large businesses, who saw now reason to afford small businesses any breaks. There were regulatory impact studies on the labour market, but these were not necessarily always taken into account, and the drafters of the labour laws had commented that these were not very good. He suggested that possibly no impact assessment was done before deciding on the introduction of new toll roads in Gauteng. Every piece of infrastructure was being paid for by more charges, for electricity, ports, rail and road. There was also the question of how to compete against the rest of the world.

Mr T Chaane (ANC) asked in which sectors SAIT recommended that jobs could be created, and in what way.

Mr Schussler said that the President and Minister of Finance had indicated that SOEs would also need to create jobs, but, in the light of his earlier comments, that was difficult since the SOE jobs were currently costly. The world populations were getting older, which meant that advanced economies would have to pay pensions that they could not always afford. It might be possible to consider bringing into South Africa pensioners from other countries, who would then create employment for other sectors, such as the doctors or domestic workers. He said that creation of initiatives did not always have to relate to industrial initiatives. There was also a need to raise South African tourism.

Mr Chaane felt that some of the assumptions given were overstretched. He thought, in particular, that the argument that every taxpayer would carry three others receiving social benefits was an over-exaggeration, pointing out that tax was not only being allocated to social grants.

Mr Chaane asked if SAIT could give a breakdown of the 2.1 million people earning around R150 000, so that there was not a distortion of the statistics.

Mr Schussler said that the figures came from Statistics SA, and whether or not the figures were exactly current, the principle and the percentage comparisons would be the same. This showed that there was huge difference between SOE salaries, for instance, and private individuals.

Mr Chaane asked how SAIT thought that simplification of tax laws would help with the objective of creating jobs.

Ms Dlamini-Dubazana noted the presenter’s concern about the costs of administration. She asked what SAIT, as a body, did to train clients and small businesses, and whether it was assisting to empower people.

Ms Dlamini-Dubazana did not necessarily agree that the 301 000 employers ought to be given any special accolades, as many of them had been responsible for past policies. She noted that the major employer was government. She asked if, when commenting on the public service strike, the increases in food and fuel had been taken into account. She also asked how much companies like the MTN and banks had contributed to job creation.

Mr Schussler said that in China, the fact that the State had effectively “got out of” the economy had improved growth. The State was necessary, but the right balance must be achieved. He noted that the infrastructure spend in South Africa was amongst the lowest in the world, and that no other government had a situation where more people were on welfare than in jobs – and even then, he pointed out that the definition of a job required that work of only one hour a week, and that did not even have to be paid work.

Mr Mashile felt that much of what Mr Schussler had said made sense, although he did feel that there were some exaggerations. He commented too that the statement that corporate tax and red tape led to small businesses closing down was an oversimplification, and asked what informed this viewpoint.

Mr Schussler stressed that the statistics used emanated from Statistics SA, government speeches, tax statistics and South African Social Security Agency. Although information was available on where people were employed could be found, it was clear that the majority of taxes (excluding VAT, which everyone paid) came from those creating the jobs  in the first place and working in the private sector. The figure of 2.1 million came from official tax statistics, and it was a fact that these people paid 90% of all personal taxes in South Africa.

With regard to the costs of doing business, Mr Schussler added that the question must be asked what all the rules and regulations were achieving. Many of the bodies had grown to something enormous. The compliance requirements had a huge cost implication for businesses, not only in terms of having to pay other professionals, but also in terms of the time spent on fulfilling these requirements. It was necessary to look at whether the red tape was necessary, why the information was being collected, and why fees were required. If nothing was being done with the information, then there was no point in requesting it. Large employers could afford to employ professionals, but medium and small businesses were suffering.

He reiterated that already 20 000 employers had closed their doors in South Africa. This was linked to a range of aspects, but he urged that it should be made easy for businesses to survive.

Mr Mashile was worried about the statement that more attention should be paid to the “rich” rather than the “poor”, saying that government could not service the rich in the hope that they would take care of the poor.

Co-Chairperson de Beer noted that there was a need to give people dignity both in work and in decent work, to ensure that they had food and warmth, and the question was how to structure the economy to achieve this.

Mr Schussler agreed that everyone in South Africa needed the dignity of a job, and should be given the opportunity to make him or herself “rich”. In relation to the definitions of “rich” and “poor” he reiterated that only 41% of adults in South Africa worked, which meant that anyone having a job fell on the “richer” side of the equation. He urged that South Africa could not spend itself into a welfare state. He agreed that those unemployed included children, but even those countries paying out grants tended to make them conditional upon the parent, for instance, having to take the child for vaccination or to school. He believed it was important to help people to help themselves.

Co-Chairperson de Beer said that the definition of “rich” would not be settled. Although those with work were certainly empowered, they could not be described as “rich” in first-world terms, and it was necessary to assist the poor and take into account where South Africa had been and wanted to go.

South African National Non-Government Coalition (SANGOCO) submission
Mr Jimmy Gotyana, National President, SANGOCO, said that his organisation believed that poverty and inequality were violations of human rights. Fiscal instruments at the disposal of government should be used to support a coherent social policy aimed at social stability. Lessons from the global crisis showed that market fundamentalism was not a suitable model to drive economic growth. SANGOCO believed that countries must explore new economic growth models, looking at full employment, income distribution, income security, development and trade, with environmental and social sustainability. The common thread of inclusive growth was not well articulated in a tangible form.

SANGOCO welcomed the budget, but remained cautious on its impact.  Increased government spending was noted, and SANGOCO agreed that government needed to play a central role in economic growth. However, it was concerned that the GDP growth of 3.4% would not guarantee job creation, saying that it should be pegged at least at 4%. Many countries had a budget deficit of higher than 5.3%.

SANGOCO was concerned with the minimal allocations to rural development, as it believed this would be a backbone to achieving food security, as well as providing unskilled labour. The budget failed to recognise or give sufficient resource allocations to the role of the informal economy.

SANGOCO was concerned about electricity and rates hikes, which it felt would lead to cuts in basic services. It called for national government to strengthen provincial departments, particularly education and health. Local government was allocated less than 9% allocation, and it was concerned about national government’s ability to monitor expenditure of conditional grants. It was also concerned about limited parliamentary oversight and delays in implementing the Money Bills Act.

SANGOCO welcomed the allocation of resources to energy and green economy, for environmental sustainability but was concerned about the lack of substance on the green economy projects, in the light of their potential to stimulate job creation. It would welcome interventions that sought to eradicate the lack of participation of young people, but there had been criticisms of the Youth Wage Subsidy and its apparent assumptions around pricing of youth labour, so SANGOCO called for extensive consultation on this to ensure broad participation of social partners.

It welcomed additions to grants, although was concerned about the smaller percentage increases to foster care compared to old age, disability or dependency grants. SANGOCO looked forward to the publication of the comprehensive social security reform paper that SONA and the budget promised.

Mr Gotyana added that SANGOCO also welcomed the proposed increases in health funding and the commitment to investment to strengthen the public health sector. However, it was concerned that the additional R11 billion would not translate into improvements in delivery of health care unless there was a  reasonable plan to address endemic and systemic problems with budgeting and expenditure within health departments at all spheres of government. The People’s Budget Campaign would  be giving a more detailed presentation the following day. It was difficult, at present, to determine what health services were being delivered and how much they would cost. The Constitutional right of access to health care services could only be achieved if the budget was aligned to health needs and priorities, and if sufficient information was available to formulate and implement budgets.

SANGOCO welcomed the commitment to job creation but believed that the same vigour must be displayed to accelerate delivery in infrastructure and service. He also commended reduction of the measures to combat corruption by tighter controls over tender and public documents.

Mr Gotyana concluded by urging Parliament to fulfil its constitutional obligation to provide the necessary oversight and assistance to provinces, particularly in relation to improving health budgets and monitoring. 

Discussion
Mr M Makhubela (COPE) asked for further clarity on the comment that the Minister’s speech had not articulated some issues.

Mr Makhubela noted that the grant increases had been criticised, but asked what a suitable percentage might be.

Ms Phelisa Nkomo, Advocacy Manager: Black Sash, Member of People’s Budget Campaign (PBC), responded that SANGOCO in general thought that the budget must be seen in the context of overriding poverty and that it would like to see a comprehensive package to address skills and education. It also wished to suggest a proper assessment of learnership programmes, before investing more funds, including an examination of exactly where the funding for SETAs was being channelled and how many people were being trained, to avoid the situation where people would be produced with skills that did not fit the market and therefore did not enable them to become productive. Once there was more interaction on the specifics, the PBC would be able to deal with the modalities. 

Ms Nkomo thought that it was not the function of the PBC to suggest what percentage increases would be sustainable, but instead it wished to urge government to look at different forms of support. She pointed out that the foster care grant was below inflation. She urged the government and Parliament to look at whether the social security system was responsive to those trapped in cycles of poverty. Certain key issues stood out; including the fact that the market was shrinking and not absorbing labour, the fact that development in rural areas provided food security, so there was a need to invest more resources there, otherwise government would be missing the opportunity to develop the economies locally and stimulate funding. If unskilled labour continued to move to urban communities, they could also not absorb the labour because skills were needed, and so she urged the need to shift resources to become more effective.

Mr Swart and Dr George asked if SANGOCO welcomed the youth wage subsidy, and wondered if the main concerns revolved around issues of consultation.

Ms Nkomo said that the concerns were to avoid the assumptions that young people were highly paid and under productive, and SANGOCO was calling for consultation to discover why people were active in the labour market, and around labour prices.

Co-Chairperson Mufamadi added that the presentation seemed to suggest that there was not in fact a developmental state in South Africa, but a government state. The presentation also suggested that government was a problem, but it was necessary to look at whether it was the State or private sector who had stabilised the economy, and whether, and for what reasons, matters should continue along the same path. He highlighted page 4, giving an analysis of the emerging markets, and said it was necessary to look at what had contributed to the imbalance and what role was played by domestic consumption in China.

Ethicore Submission
Mr A Waheed Patel, Managing Director, Ethicore Consulting and Advisory Solutions, noted that Ethicore was a strategic consultancy providing services in public policy and regulatory affairs. He agreed that it was good for the fiscal framework when government worked well. Although he was not an economic expert, he would like to present some thoughts on the long term practical implications of some of the reforms.

The Minister of Finance had acknowledged the defining effect of the recession, as well as the need to stand back and reflect on the way that this country had acted prior to the recession. He believed that the recession had not only exposed the work of governments around public finances, but also the risks and dangers of short-term approaches to strategic planning. The tendency to concentrate on the short term posed the question of inter-generational challenges and responses and the legacy that they must leave, and secondly, the question of how to ensure that for next-generation, sustainable businesses and government planning, allocation and utilisation of resources. He would urge that a longer-term perspective was required.

Mr Patel submitted that “business as usual” was not an option. There was a need to be creative, innovative and cautious of risk. This required considerations beyond the short-term view and political mandates, and would affect the way in which government approached oversight, budgeting, public finance management, and planning and economic interventions. There were already legislative instruments available, but it was important to consider how they could best be exercised, to pursue economic, social and human development. Some were already operative, such as the National Planning Commission, monitoring and evaluation, the New Growth Path (NGP), the green economy priorities and the Climate Change Green Paper and Integrated Energy Resource Plan, and the strengthening of the financial sector. South Africa had been protected during the financial crisis by sound decisions, and the question was how Parliament would carry this over to its budget work.

Mr Patel said short term needs were important, but must be balanced against long term needs. This was not an entirely new issue, but there was greater urgency for understanding the complexity. Real effect must be given to the Act, and Parliamentary oversight and accountability, and he welcomed the introduction of National Treasury Budgetary guidelines, as all this sent an important message to other non-State actors. 

The new emerging economies had taken a long-term view of how to align resources; the “Asian Tigers” had taken a ten to fifteen year developmental approach. Although the USA still had the largest economy in the world it was nonetheless threatened because its approach was based on shorter-term results. At the institutional level, this meant that most Chief Executive Officers would only stay in position for up to six years. On the one hand, this created pressure for success, but it also meant that governmental priorities changed from election to election. Short term offerings were made, but long-term needs suffered.

Ethicore reiterated the need for a longer-term perspective, and striking a balance. A shift to a longer term perspective would reinforce faith in public finance management and oversight. He shared the view that there was a need to capacitate the Parliamentary Budget Office to give support to decision making.

Discussion
Ms R Mashigo (ANC) said that she had some difficulty in understanding the presentation, as, for instance, social development needs must be met immediately.

Mr Patel said that this was precisely the point; it should be recognised that whilst there were still some short-term needs, consideration must also be given to how best to make the transition to more strategic interventions, where welfare handouts could be decreased and people were helped into productive economic activity. He suggested that no country should be concentrating on the short term without also taking a longer view of how to move to achieve better education, skills development, and self-reliance. He was suggesting that the Committee should be doing this analysis, both for meeting current needs and creating longer-term investment, and it needed the capacity to do so.

Dr George agreed with the need to take a long–term view, but was not sure how Ethicore felt about the current budget.

Mr Patel said that the Minister had not suggested that the budget was focused only on present needs. The question was whether the budget was doing this in the right way, to add maximum value, and was embarking on the right trajectory and spending in the right areas.

Congress of Traditional Leaders (CONTRALESA) submission
Mr Ntuthyko Khuzwayo, Deputy President, Contralesa, noted that Contralesa’s interest in finance was quite specific. The concept of job creation was particularly important, because economic growth should affect every sector of economic development. For a number of years the rural communities and rural sector had been advocating formulation of a strategy that was skills and vocational-based, so that rural youth, when migrating to towns, already possessed skills enabling them to trade in urban areas, to move away from the position in the past, where many only had access to matric education and were then used for cheap labour.

He said that there was a need to promote a skills-based education system that would help to create businesses in rural areas. Contralesa had participated in discussions around the protection of traditional knowledge, with the Department of Trade and Industry (dti), and had identified a further problem that most of the opportunities, as well as the departmental or support offices, were located in the major cities, which made it difficult for people from rural areas to access government assistance. The Revised Industrial Policy Action Plan (IPAP2) had highlighted job creation opportunities, including concentrating certain skills in municipalities. However, there remained many challenges around accessing micro-finance.

Contralesa was particularly in favour of rural development. Many traditional lands were now opening up. More land had been allocated for agricultural processes, yet it was still very difficult to access other support for mechanisation and finance. Rural people were willing to partner in making land available, but Contralesa called for assistance to pursue and support the ideas.

Mr Zolani Makiva, Head of Presidency, Contralesa, emphasised that there were about 800 senior traditional leaders, in Traditional Councils, but that they could not execute their duties effectively and efficiently, due to lack of funding. Traditional councils represented every sector of the communities, and should be assisted, so that they could alleviate unemployment in their areas.

Mr Makiva added that infrastructure was another fundamental issue, and serious consideration should be given to whether it was worth upgrading gravel roads every three years, rather than simply putting in a tar road, which would also improve access to hospitals, schools and other services. Many clinics were not accessible, especially when there was referral, and ambulance services were not available.

Discussion
Ms R Mashigo (ANC) said that she was interested to hear this presentation. She had never seen any strategic plans from Contralesa. She asked what plans it had to keep skills in the rural areas, saying that integrated development plans and memoranda of understanding could be used to attract returning graduates.

Mr Makiva said that the strategic plans would be made available. Although the National House of Traditional Leaders Act had established the National House as a third house of Parliament, and it also had provincial and local Houses, they were ineffective because of lack of resources, and this must be addressed by the National Assembly. There was some interaction at provincial level.

Mr Khuzwayo said that few economic initiatives existed in rural areas, and in reality most people who travelled to rural towns did not spend anything in the towns, but merely budgeted for their taxi fares to look for work. Only recently had Contralesa been given the opportunity to liaise with departments, and a draft Memorandum of Understanding was being finalised with dti, in terms of which the Traditional Courts would provide the space for dti to assist with registration of cooperatives. At the moment the only viable businesses were taxis, but there had been some problems in getting them registered. There was currently only one model that had created wealth, and most rural places were continuing to produce cheap labour.

Ms Mashigo asked what role the local municipalities should play in the IDP.

Ms Mashigo asked how the local economy could be tapped, and whether any institutions had suggested how to address rural development and specialised skills. She wondered whether there was not over-dependence on government. She noted that much land still vested in traditional leaders.

Ms Dlamini-Dubazana asked whether Contralesa had any structure focusing on economic growth in a particular area.

Dr George asked for clarity about the comment that land would be made available, and asked if this meant available to private owners, so they could generate wealth, or if this meant to tenant farmers.

Mr Khuzwayo said that poverty and landlessness remained realities. Not all land defined as “productive” land had been transferred back to the majority of South Africans. In one province, only 3% of farmers were African, and they were all from one area. They were farming successfully but no other communities were able to market comparable produce. When communities had put in land claims, the communities had given the rights to communal land associations, which also created problems. Currently, traditional leaders were encouraging entrepreneurs to access land, and although it was not being valued, they were asked to come up with plans, to state how many people would be employed, and were encouraged to produce

Ms Dlamini-Dubazana pointed out that there were numerous projects in different areas. She wondered what the participation and contribution, and relationships with the MEC, were in relation to those projects. Most of the issues raised concentrated on local government.

Mr Khuzwayo said that the projects were pilots, which were not even the initiatives from Contralesa, which found that its ideas would be taken up by institutions. A particular project was run by the University of Fort Hare, who would set the character of the project, despite the fact that this would be outside the indigenous ways. He said that many traditional methods of farming and irrigation could be effective, including use of windmills, but this again posed the question of non-availability of resources.

Ms Dlamini-Dubazana asked if Contralesa was getting a provincial allocation.

Mr Makiva said that none of the 800 traditional councils had a budget. They operated from a zero base, bore their own expenses for travelling and any actions taken were financed by the communities. They received nothing from the provincial budgets.

Co-Chairperson de beer said that there was a line function at national level. However, a key point was that provision of land alone would not suffice and that support was needed. Climate change and global warming were impacting severely on agriculture. He asked what traditional leadership could do to encourage communities to plant trees, as a job creation project that would also contribute to carbon initiatives. He agreed that there were the highest levels of unemployment in rural areas, but said that dti and the Department of Agriculture should discuss how best to encourage active growth in these areas, to avoid the move to urbanisation. He said that the EPWP could become more meaningful in rural areas, and cited a road building project in KwaZulu Natal. All these factors must be considered in the context of the NGP. 

Mr Khuzwayo stressed that Contralesa considered itself a stakeholder. It would champion any rural development.

The meeting was adjourned.