Fiscal Framework and Revenue Proposals: public hearings (day 2)

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Finance Standing Committee

01 March 2011
Chairperson: Mr C de Beer (ANC, N Cape), Mr T Mufamadi (ANC)
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Meeting Summary

The Committee continued with public hearings on the fiscal framework and revenue proposals. The South African Institute of Chartered Accountants noted that at this stage it could not provide meaningful review because the details of how the tax amendment proposals would be implemented were still needed. The Institute believed that the budget was well balanced and welcomed the learnership tax incentives, termination of capital gains foreign currency rules, and tax relief for group companies, but needed clarity on transfer of contingent liabilities, and dividends tax. It thought that incentives were required for small businesses. It did not think the proposals on capped deductions to retirement funds, or exempt interest, would incentivise savings, and did not agree with proposals around research claims.  

PriceWaterhouseCoopers welcomed the certainty in the change from Standard Tax on Companies to the new dividends tax, reorganisation of controlled foreign companies, and supported the proposals around alignment of transfer duty charges, the Youth Employment Subsidy and learnership allowance, which it hoped would become permanent. It was hoped that red tape would not become a problem. There were concerns around how National Health Insurance (NHI) would be funded. It was concerned that the retirement benefit and exempt interest proposals would not encourage saving, and urged that there should not be changes to provident fund withdrawals. PriceWaterhouseCoopers had received several comments on the gambling tax, relating to the effective tax that the National Lottery already imposed, and unintended consequences of unregulated gambling and avoidance. It was concerned about aligning income from gains and capital, and conversion of medical expenses. Tax practitioners urged that the tax provisions must be very precise, and called for more capacity at National Treasury, to attend to urgent outstanding matters.  Members asked for alternatives to the research and development proposals, discussed the possible funding of the NHI, asked if the capping could be seen as a wealth tax, and discussed alternatives for gambling tax. They noted that the issue of carbon tax was still to be discussed. Members also asked about Industrial Development Zones and discussions with Treasury.

Business Unity South Africa (BUSA) thought the monetary policy was credible, with sound fiscal policy to attract Foreign Direct Investment. It supported the relaxation of exchange controls and amassing of foreign reserves, and the inflation target, noting the need to eliminate the primary deficit but urged regulatory review of tax policy. Urgent and comprehensive debate was needed on public sector salaries. BUSA welcomed the recognition that decent jobs were linked to competitiveness of enterprises. It thought better delivery, and more influence from the private sector, was needed for the Sector Education and Training Authorities (SETA). The Expanded Public Works Programme had been appropriate for the cyclical downturn, but monitoring and evaluation were needed, as well as comparisons with alternative programmes. The incentives for employment were supported, but BUSA wanted a review around the allocation to the Industrial Policy Action Plan (IPAP2) sectors, in view of competing suggestions. It encouraged the DFI Council having oversight over entrepreneurial support through the National Youth Development Agency. There were concerns around implementation of the infrastructure allocations, and not all transport logistic challenges were addressed. The playing fields for public and private sectors must be levelled, and the State should also be subject to feasibility studies. A mature debate would be needed on different policy instruments to support the green economy. Members asked about engagement with National Treasury, support from industry on the move to rail transport, and suggestions to maintain stability of currency. BUSA was also asked to comment on a suggestion to cap private sector wages, whether the job subsidy would change labour flexibility, whether more jobs should be created, and how to monitor businesses in rural areas. Members questioned use of SETA funding in the past, inflexibility on wages, how bonuses were regarded, and how competitiveness could be improved.

The Industrial Development Corporation was concerned about the steep rise in government debt, and said that the promises that the budget would not impact negatively on future generations were not supported by the moves. Debt was linked to efficiency, where South Africa did not have a good track record. Gross savings were far too low, and the retirement savings schemes proposals created a great disincentive. IDC would have preferred taxes on luxury goods. South Africa’s pressures from external sources were summarised.  IDC was concerned about the imposition of “stealth tax” and the fact that levies were not ringfenced. Infrastructure was also of concern, and South Africa needed a far better growth rate if it was to address challenges of inequality and poverty. The Cooperation urged that State and procurement policies must ensure maximisation of local content. Too many employment issues were on the table, and there was insufficient reference to small enterprises. The Cooperation urged continuous monitoring of the impact of incentives. IDC would be putting R10 billion to a concessionary fund to support the job strategy, but cautioned that other constraints to growth must be addressed that were making business difficult. Members discussed whether the suggestion to tax luxury goods might not amount to double taxation, asked when IDC would like to see a reversion of counter-cyclical policies, asked about the focus on mining, how to avoid red tape, and imposition of levies. They also questioned the R10 billion job scheme.

The Federation of Trade Unions in South Africa (FEDUSA) said that employment creation lagged behind recovery and a more proactive stance was needed that took into account the proper roles of government and the private sector. FEDUSA commended government and the South African Reserve Bank (SARB) for dovetailing the fiscal and monetary policies effectively. It made several recommendations to address the continuing challenges of jobless growth, high unemployment, unequal income distribution and poverty. Social protection was a key factor. There were some misperceptions around the civil service wage bill. It urged that the macro economic framework and the allocations to current and capital spending must achieve a proper balance with public service delivery. It was concerned about borrowing to finance consumption, and hoped this would not be permanent. FEDUSA urged that any further employment subsidy must be training based, should facilitate entry into the labour market, and reduce dependency on welfare benefits, and should only apply to tax-compliant companies. It did not agree with treatment of retirement contributions as fringe benefits. Members asked about interaction with National Treasury, details on unemployment, the suggestion to raise the compulsory age for schooling, the public sector wage bill and the Youth Employment Subsidy. 

The Peoples Budget Coalition said that South Africa must achieve a more equal society and the budget could be used as a tool to improve the lives of people. GDP growth could be countered by a high Gini coefficient. It believed that more should have been allocated to Early Childhood Development. It was concerned at the high numbers of children not attending school, particularly those with HIV or disabilities, lack of psychological support, poor education in communication and poor facilities at schools, and made recommendations on these. PBC also felt that the “patchwork” system of social security should be replaced with a basic income grant and different system. It cautioned that without sufficient funding aligned to sectors, the Industrial Policy Action Plan would not succeed. Access to jobs was vital, as unemployment was the biggest threat to stability. Youth unemployment was linked to the education crisis, regardless of wage subsidies and incentives. The Coalition and COSATU were opposed to the Youth Employment Subsidy, because of lack of capacity to enforce, which could result in abuse undermining the objectives, and further noted that this was not approved by Nedlac and should not be approved in this budget. It also criticised insufficient attention being paid to rural development. It was also very concerned with a suggestion that the NHI might be funded by increasing VAT, as this would negatively impact on the poor. The Coalition outlined similar comments to FEDUSA on the public sector wage bill. COSATU then expanded on its argument that government had failed to adopt the correct economic policies or fiscal and monetary stance to address the persistent challenges, ignoring the structural crises. The worst was the persistent increase of unemployment, stark inequalities and declining quality of education. It was not advocating fiscal non-discipline, but a change of focus. Most of Members’ questions were linked to the alternatives that the Coalition and COSATU proposed, the suggestions for a comprehensive social security system, how tax policy could be made more transparent and the stance on the Youth Employment Subsidy and National Youth Development Agency. Members also asked what had happened to the Job Fund created in 1998. COSATU urged that compartmentalisation was not assisting, that no initiatives would succeed without an overarching and systematic structure, and requested more time to engage. 

Meeting report

Fiscal Framework and Revenue Proposals: Public hearings
South African Institute of Chartered Accountants (SAICA)

Mr Muneer Hassan, Project Director: Tax, South African Institute of Tax Practitioners, commented that the Institute (SAICA) would be providing comment on the fiscal framework and revenue proposals, but that at this stage it was difficult to provide meaningful review because there were no details of how tax amendments proposals would be implemented.

However, SAICA believed that the budget was well balanced and welcomed the learnership tax incentives, which augured well for transformation and growth. It also welcomed termination of capital gains foreign currency rules. Pooling arrangements were very important. It welcomed relief in this stance. The Minister mentioned provisions around the transfer of contingent liabilities in a sale or business, but would welcome clarity on whether it was the seller or buyer who could claim deductions.  It would also welcome tax relief for group companies, and noted the proposal to extend the outstanding debt payments from the current position of twelve months, which was impractical. He noted, however, that there were no specific incentives for small business corporations, which would be addressed later.

Paragraph 4 (see attached document) set out the comments on social security and retirement. He set out that current non-contributory funds would be regarded as a fringe benefit, but clarity was needed on whether the employee’s deduction would include employer contributions. This was essentially a merging of retirement fund contributions. He then noted that although employee contributions to provident funds were currently no tax-deductible, the budget proposed that from March 2012 employees would be allowed to deduct up to 22.5% of their taxable income for contributions to pension funds, provident funds and retirement annuities, with a rand value of limit of R12 000 per annum to R200 000 per annum. SAICA pointed out that this capped the contributions of employees who had taxable incomes in excess of R888 888, and this would have a major impact of their funding and would not incentivise retirement savings.

Ms Deborah Tickle, Member of Tax Committee, SAICA, addressed business taxes. SAICA welcomed the fixing of the date for introduction of dividends tax but remained unclear on the three months notice period. She then noted that in relation to inbound dividends, the wording implied that these would be treated in the same say as local dividends, but where Double Taxation Agreements with other countries existed, the local tax might be more than offshore tax. There were queries whether this was the intention. She also explained that the position was not clear where a person held more than 20% of the shares, and what the position would be to recipients in South Africa and foreign countries. In regard to closure of dividend schemes, she said that the cost of the preference share funding for valid Black Economic Empowerment (BEE) transactions should not be increased by taxing preference share dividends. National Treasury (NT) should be cautious about unintended consequences.

Ms Tickle said that the Research and Development (R&D) Incentive currently allowed for additional claims by taxpayers in respect of R&D. However, to address concerns that taxpayers were claiming late, NT had proposed that all R&D must be approved by the Department of Science and Technology (DST). Ms Tickle said that it was possible that DST would not have the capacity to cope with the numbers of applications, and that returns might be submitted too late, or that taxpayers would simply not bother to claim the incentive, which would have a negative result.

Mr Puleng Manyaka, Project Manager: Tax, noted that there was nothing in the Budget Speech on the Small Business Corporation (SBC) tax incentive, and the threshold of R14 million turnover and income exceeding R300 000 had not been adjusted since 2007. Once they exceeded that threshold they would need to pay corporate tax of 28%. This amount should be adjusted, at least to reflect inflation.

He then referred to tax savings. Although SAICA welcomed the Minister’s proposals on the increase of exempt portion of interest to R22 800, it felt that this increase, representing only 2.24% to 3.12%, was insufficient to encourage taxpayers to save. It did welcome the proposed new initiatives for individuals who would be incurring costs in financing studies and housing, but urged that they should not replace the current interest exemption.

PriceWaterhouseCoopers (PWC) submission
Professor Osman Mollajee, Tax Partner and Director, PriceWaterhouseCoopers, and Associate Professor: Tax, University of Western Cape, noted that some of the issues had been addressed by SAICA, but he also had outlined issues in a letter sent to the Committee.

PWC commended South African Revenue Services (SARS) on its continued success in increasing tax collection, but pointed out that although there had not been much change in the fact that a combination of personal tax, value added tax (VAT) and corporate tax together represented about 85% of NT’s total tax collection, there was far greater divergence between the comparative contribution of each. This, however, reflected the success of SARS in growing the individual tax base.

Prof Mollajee thought that the budget was in line with what had been expected, without being overly-generous or overly-harsh.

PWC welcomed the certainty in the change from Standard Tax on Companies (STC) to the new dividends tax. There appeared to be a clear commitment from NT in encouraging investment and capital flows. There were some questions around R&D, but NT had indicated an intention to clarify some aspects. The ability of Controlled Foreign Companies (CFCs) to reorganise internally would also be welcomed. The proposal for the Youth Employment Subsidy, especially in the professional environment, was also welcomed, although there were some questions around it, which he would address later. The learnership allowance was supported, together with the removal of the sunset clause, and PWC hoped that the outcome of the review would be that the learnership allowance would be a permanent fixture. PWC also supported the alignment of transfer duty charges, which would probably mean that companies and trusts would be treated alike.

Prof Mollajee noted that the Minister had been criticised for not providing enough detail, but noted that this was not generally a problem insofar as tax proposals were concerned. The “devil in the detail” was discussed each year when the draft legislation was prepared. However, some potential concerns and talking points had been isolated. The first related to National Health Insurance (NHI) and how it would be funded. PWC said that the uncertainty around the funding was probably overshadowing the debate on the route to follow.

PWC supported the changes on retirement benefits, but there was some concern whether these would not be neutralised by contribution deductions. He agreed with SAICA that the R200 000 cap sent the wrong message as on the one hand South Africa stressed that better investment would be necessary, yet on the other hand was not creating incentives. The same applied to the minuscule increases in the interest exemptions. He also said that currently there were pension, retirement annuity and provident funds, and a person would select his or her chosen fund according to the benefit. Until now, a person had been able to draw the entire benefit in a lump sum, out of a provident fund, whereas the others limited a person to a one-third lump sum withdrawal. He said that the freedom of choice as to which fund to choose should remain, and said that the fact that a person was capable of drawing out the full benefit did not necessarily imply that the money would be wasted or not re-invested to create benefits.

Prof Mollajee then returned to the Youth Employment Subsidy. The proposal was that employers would get this from the payroll system, so they could effectively claim their own subsidy, which made sense. However, red tape must not be an impediment to the subsidy.

PWC had received several comments on the gambling holding tax. Some reiterated that the National Lottery was in any event a tax that funded civic initiatives. However, he was concerned that it would be easy for individuals to avoid this tax, which might encourage unregulated gambling and a reversion to a culture of non-compliance. Only the lottery and certain jackpots might be caught by taxing at source.

PWC also had some concerns around aligning the income and gains from capital. Dividend income was exempt, but rental income was fully taxable. This raised the question whether there would be substantial reductions in exemptions and how this would be done.

The conversion of medical expenses from the current deduction system to a tax credit system was supported as more equitable and appropriate, but PWC was concerned about how the conversion process would work.

Prof Mollajee then noted that tax practitioners felt that anti-avoidance provisions needed to be very precise. Every year, general commercial transactions were caught by overly-broad provisions. Dividend schemes and  anti avoidance were the topics of the 2010 budget and anti-avoidance legislation, and NT had been asked to clarify those; he hoped that the Minister’s comments underpinned that exercise. If the legislation was not sufficiently clear, people would tend to ignore it. He added that clarity was also needed on base costs for Capital Gains Tax (CGT), pointing out that this could not be determined because the formula related to the selling price. The Carbon Tax Discussion Paper had attracted substantial comment, and few people thought the proposals could be passed in their current form, so PWC would welcome further research on this. 

Prof Mollajee then commented on an issue not relating directly to the budget. He said that NT’s Tax Policy Unit was overburdened with day-to-day operations, which meant that important and critical initiatives were not being attended to. The consolidation of the South African Income Tax Act was needed urgently, since it was last consolidated in 1962 and, although numbered from sections 1 to 112, actually contained 325 sections, of which 47 had been repealed. It had been amended so many times that a lay person could not understand it. This was only one example, and he called for resourcing of this Unit

Discussion on the two submissions
Mr D van Rooyen (ANC) asked about the R&D comments, and the ability of the DST to implement the incentives, and asked if there were alternative proposals.

Mr R Lees (DA, KwaZulu Natal) suggested that the quick answer to the R&D questions was to cut out the whole approval system, and allow it to work as it did as present. Otherwise, the cost would outweigh the R&D tax concessions.

Mr van Rooyen noted that some possible scenarios had been outlined for funding of the NHI, including increasing of VAT, increasing corporate tax or surcharges. He asked if SAICA had investigated these and had any comment.

Ms Tickle responded that, in respect of NHI, the Minister had been wise to put some options on the table. The issue of a possible VAT increase was thorny, although it would certainly be a good source of funding. She commented that Prof Mollajee had suggested that there needed to be further discussion on whether NHI was a good idea.

Professor Mollajee added that there was a dedication and earmarking of some revenue collections through levies, such as the fuel levy going to the Road Accident Fund, but when funding went into a large pool, its effectiveness could not be so easily judged. Both PWC and SAICA had received comments expressed concerns about systemic efficiencies.

Ms Tickle said that in relation to the R&D issues, SAICA suggested that, instead of insisting on DST involvement in advance, DST could be called in at audit stage, to indicate whether any disputed claims were valid. She responded to Mr Lees’ comment that at the moment SARS did not have the technical ability to review if the claims were proper, so involvement of DST would be necessary. Currently DST was only reporting back on amounts claimed, which were often inaccurate because the numbers had not been properly collated at that point.

Mr van Rooyen questioned the comment that the learnership allowance should be made permanent.

Mr Hassan responded that SAICA asserted this because of its own experience. An accountant had to complete three years articles, and within the profession the allowance was therefore widely used. SAICA also supported job creation initiatives, in alignment with the Youth Employment Subsidy.

Mr N Koornhof (COPE), and Dr D George (DA) concurred with the view that National Treasury was sending a confusing message on savings. Mr Koornhof asked if the cap on R200 000 would be regarded as a wealth tax.

Mr Hassan concurred that the R200 000 capping was a wealth tax. A person earning taxable income in excess of a certain amount may just as well put invest this in shares, which was not in line with savings initiatives by government.

Mr Colin Wolfsohn, Partner, Wolfsohn and Associates & Member of SAICA, added that the discussion by SAICA had focused more on the retirement funding approach, but he stressed that the tax exemption on savings interest was not meaningful. Mixed messages were being sent out, because there should be proper focus on developing a culture of savings.

Prof Mollajee also agreed that it was a wealth tax that effectively increased tax, based on the liabilities of the wealthier sector. 

Mr Koornhof asked if Prof Mollajee might prefer a flat rate on gambling across the board, rather than a threshold.

Dr George said that the gambling tax was an indication of the need to increase tax without making too many unpopular decisions.

Mr M Mbili (ANC, Gauteng) questioned the proposed tax on gambling earnings, since he had thought that the issue was to tap into the market. He was not sure about the link between the lottery and winner, and commented that he had thought that the threshold was perhaps too low

Mr Wolfsohn said that SAICA was not criticising the gambling tax on Lotto, but was concerned about the practicalities of implementing the gambling tax Horse racing would be materially affected, and there were other tax rules already applying, including taxes on sporting bodies.

Prof Mollajee said there was some question whether the threshold should apply all, and said that there were many loopholes in the system – for instance, a gambler not cashing in all the chips at once, or pretending that he had not played with the chips. He cautioned that if people could sidestep a tax easily, they would, and this could create a resurgence of the non-compliance culture. He also added that this tax went against the non-taxation of windfalls, wherever derived.

Dr George asked if the comments that were being made would be raised in discussing the structuring of tax. He noted that some of the issues did not amount to consumption tax but would fall into the category of “other” tax.

Dr George commented that there was a trade-off between regarding carbon tax as something aimed at changing behaviour, or revenue collection, and asked if some flaws in the assumptions had been identified.

Prof Mollajee said that a detailed submission had been made, which he would not repeat, but did want to emphasise that SAICA believed that any revenue raised through the tax must be put back into green initiatives, instead of being pooled with other funds. The plastic bag levy was accompanied by statements that the money raised would be used for specific purposes, but this did not appear to have happened. The amendment proposing a reward to taxpayers for reduction in emissions had never been put into effect. He reiterated that further reviews would need to be done.

Dr George noted that the public service was too big, and there were criticisms of overpaid people in unproductive jobs. That would not help developing tax laws appropriately, so he asked for suggested solutions.

Mr R Lees (DA, KwaZulu Natal) said that no comment had been given on the general impact of the whole tax burden, and said that surely SAICA or PWC represented clients who would be negatively affected by the whole tax regime.

Ms Tickle responded that the role of the SAICA Tax Committee was to comment only on the technical side of taxes. It could involve economists on the question of the general impact, although the Tax Committee itself could not comment.

Mr Lees noted the brief referral to Industrial Development Zones (IDZs) by PWC, and asked why PWC’s clients were not getting involved. The IDZs in East London and Richards Bay were not moving and he wondered what it was suggested that NT might need to do to get the projects to work.

Prof Mollajee said that incentives around IDZs, encouraging the establishment of businesses, had been recognised. However, as currently framed these were of benefit to very large projects, and there were not incentives to small businesses. Taxpayers would continue to lobby NT on these issues, but it must be remembered that incentives represented loss of revenue for NT. One of the reasons for slow uptake of IDZs was that they had missed the mark but this was being addressed.

Mr Lees referred to various calls recently received around the slowness and instability of the e-filing system of SARS, and asked if PWC and SAICE had received complaints as well.

Mr Wolfsohn said that SAICA was in constant communication with SARS on the e-filing system. SARS had been overwhelmed by the numbers opting for e-filing. 85% of all returns were done by tax practitioners. He said that over the last three days there had been a problem in the banking system, as two banks failed in a number of payments to SARS. SAICA did have concerns about the ability of the system to cope on tax deadline dates, and although it had not crashed, volumes caused it to become very slow.

Mr B Mashile (ANC, Mpumalanga) noted the comment that individual income tax was higher than corporate tax because of broadening of the tax base. He asked SAICA whether it had any activist links with National Treasury throughout the year, and whether NT would respond to it.

Mr Hassan responded that SAICA did work closely with NT, and would give detailed proposals and comment on a number of issues. Four specific submissions had been put forward prior to this budget, and were accepted and included in this budget.

Prof Mollajee added that although NT was supportive, and could attend to technical amendments and existing laws, it simply did not manage to get around to tax policy issues.

Mr Mashile noted the suggestion that a person opting to take a full payout from the Provident Fund would not necessarily squander it, but asked why this assumption was made.

Prof Mollajee said that if a person had taken a conscious decision, for sound reasons, to opt for a Provident Fund when starting to make contributions, that person should be entitled to reap the benefits of that conscious choice without the situation being changed.

Business Unity South Africa (BUSA) submission
The Chairperson noted that he had been informed by BUSA that it was assisting in organising a business summit to be held by the Presidency, on 10 March 2011, and that a labour summit would be held on 31 March.

Ms Lee Padayachee, Parliamentary Liaison Officer, BUSA, noted the apologies of the President of BUSA.

Mr Coenraad Bezuidenhout, Executive Director: Economic Policy, BUSA, noted that this organisation was the main business organisation through which business and government engaged in dialogue. He set out the membership categories and policy desks.

Mr Bezuidenhout said that the 2011 budget must be seen in the context of transition, risk and opportunity. He did not wish to go into the technical aspects but would focus on practicalities. BUSA believed that the budget had fulfilled the key functions of setting spending, taxation, and borrowing against economic objectives, allocating resources to political priorities and providing the necessary information to improve the quality and effectiveness of spending. BUSA thought the monetary policy was credible, and there was also sound fiscal policy to attract Foreign Direct Investment (FDI). The competitive exchange rate and currency stability were key objectives. BUSA also supported the relaxation of exchange controls and amassing of foreign reserves, although there were limits to what this could achieve. The inflation target was also supported

BUSA believed that counter-cyclical fiscal policies had proven their worth, and allowed for savings against the lean times. The deficit of 5.3% of Gross Domestic Product (GDP) was higher than expected, but BUSA thought it was acceptable, because of tenuous market expectations, the revenue lag, which was likely to recover, and the immediate resilience of the rand. There was still an overall downward trend in the deficit, but BUSA warned that there was a need to stick with the trajectory set out by NT and eliminate the primary deficit.

Independent research indicated that there was a 45% overshoot when compared to the private sector. It would not help the economy to pay civil servants more than their private sector counterparts, and urgent and comprehensive debate would be needed on this.

Mr Bezuidenhout noted the President’s remarks that while government would look to the private sector to help create most of the jobs, the government would play its part. This committed government to deliver, while recognising the importance of the private sector. The capacity of the State to execute the measures was a cause for concern, and that would need to be considered around budget and delivery. BUSA also noted that the Minister of Finance had implied that the degree to which decent jobs aspirations could be realised was linked to competitiveness of enterprises.

In relation to skills development, BUSA felt that quality Further Education and training (FET) colleges were vital in the quest for a skilled labour force. The allocation of R25 billion to Sector Education and Training Authorities (SETAs) and the National Skills Fund (NSF) was welcomed, but BUSA felt that more consistent delivery by SETAs was needed, that the private sector, as employer and funder, should have more influence on directing the SETAs, and that access to NSF funds must be promoted by easing the red tape

Mr Bezuidenhout said that in order to improve labour absorption there should be a focus on the Expanded Public Works Programme and employment subsidy. EPWP was regarded as appropriate during the cyclical downturn, that it was sensible to use community participation, but that monitoring and evaluation (M&E) were needed, and value comparisons with alternative programmes must be done. The New Economic Development and Labour Council (Nedlac) would be engaging on the Youth Employment Subsidy, which may have a positive impact on wage inflexibility and this may emerge as better than the EPWP.

Mr Bezuidenhout said BUSA supported the R9 billion jobs fund and R20 billion tax incentives, but noted much public speculation around, and therefore the necessity to prioritise, job creation in the private sector. BUSA wished to engage in a programme review around the R10 billion allocation to the Industrial Policy Action Plan (IPAP2) sectors. There was one suggestion that a broad based lowering of corporate tax might be preferable to promoting industrial development, and another that targeting sectors would be preferable, and the debate should continue. Access and implementation, publication of successes and shortening of turnaround times, were key concerns.

Mr Bezuidenhout summarised the allocations to small business and DFIs, and noted that BUSA supported them, and encouraged the DFI Council being used to leverage broader lending capacity in the right areas. For instance, agro-processing could significantly affect rural areas. It also believed that the entrepreneurial support though National Youth Development Agency (NYDA) should be subject to oversight by the DFI Council.

BUSA supported the infrastructure allocations, particularly the majority that went to energy. However, there were concerns around implementation. The costs per kilowatt for Medupi and Kusile were likely to exceed global norms, and the phased project management approach on construction was problematic, because of lack of coordination and an overview. BUSA noted that not all transport logistic challenges were addressed in the budget speech (see presentation for more details) and said that competition in ports must be enhanced, to address problems around cost and efficiency. Mr Bezuidenhout commented on the need for synergy. Public / private partnerships (PPPs) were well understood, but private sector capacity should be leveraged more proactively in pursuance of delivery. The targets for infrastructure spending had not been reached, and were low in comparison to other countries. He suggested that perhaps the capacity of the PPP Unit at NT might also need to be reviewed. He also said that the playing fields for public and private sectors must be levelled, and that the State should also be subject to feasibility studies.

BUSA was in favour of the allocation of R800 million for the green economy, which was an important indicator of government’s support for putting South Africa on a lower carbon path. It awaited details in the adjustment budget. International companies with a footprint in South Africa were making helpful input, but the costs and skills implications would take time to implement. It was necessary also to be realistic about job creation expectations. Some companies’ ability to reduce their carbon output would depend on what they must deliver – particularly the steel companies - so it was necessary to strike a balance. BUSA had made a submission to NT on the carbon tax, and commented that the focus at present seemed rather one-dimensional, focusing on generating revenue, rather than on modifying the behaviour of industry. A mature debate on the merits of different policy instruments was needed, since no other BRIC country or other growth market had chosen a carbon tax approach.

Similarly, BUSA was pleased with the frankness and commitment to a phased and consultative approach, to NHI, but cautioned that a firm financial foundation was required. BUSA would be engaging on the process around funding proposals, once the discussion papers were made available.
Mr Bezuidenhout noted that the regulatory review of tax policy had been mentioned before, but had not happened. He urged that this must now be done, as South Africa was not on par with comparable countries. BUSA suggested a number of factors that should be reviewed (see attached presentation).

Mr Mashile asked all presenters to indicate how their institutions engaged with National Treasury, and whether their engagement was positive, and proposals were received well.

Mr Bezuidenhout replied that BUSA would engage with NT on an ongoing basis, as well as when specifically requested, and also interacted through Nedlac and Parliament. There were also government initiatives like the Presidential Business Summit on 10 March, and the Labour Summit on 31 March.

Mr Mashile asked BUSA about the logistics of moving cargo from road to rail and asked if businesses were happy with time frames set out.

Mr Bezuidenhout responded that any progress in this direction was welcomed. A large coal company had recently commented that it could mine the raw product, but that there were major blockages in getting the product to the ports. As soon as capacity was increased, exports could also increase. BUSA was recommending expansion of PPPs and rolling out of infrastructure

Mr Mnguni asked how BUSA would recommend that overall stability of currency could be maintained.

Mr Bezuidenhout responded that this was encapsulated in how the monetary policy would be executed  by SARB, and included relaxation of exchange controls and amassing of foreign reserves. At this stage, BUSA did not think anything more should be done. The trajectory for the rand was quite clear and there was much being done to address investor sentiment.

Mr Mnguni asked BUSA and FEDUSA to comment on the private sector wage, and asked for comment on one suggestion to possibly cap private sector increases, to prevent excessive rises by the public sector in order to compete.

Mr Bezuidenhout said that independent research carried out by the Efficient Group suggested that in 2010 the civil service had overshot the private sector increases by 45%. He was happy to get further details on the research and give it to the Committee in writing. However, from anecdotal experience, he confirmed that fairly junior researchers were paid far more in government than in the private sector.

Mr Mnguni noted the comment that BUSA was willing to assist in raising the capacity of government, but asked how this would be done, given the shortage of skills.

Mr Bezuidenhout said that BUSA was a membership organisation, and its members were willing to make capacity available to discuss issues with government, and promote PPPs. It would also engage with Nedlac, where assistance was also offered.

Mr Mnguni asked BUSA whether BUSA saw the job subsidy for the youth as a change for labour flexibility, and how it intended to move forward.

Mr Bezuidenhout said that it was difficult to say whether this was a change in policy. However, it was in line with the overall objective to promote job-rich growth in order to absorb more labour into the formal economy. Inflexibility lower down in the market made it difficult to employ unskilled labour and remain competitive. BUSA would engage with the discussion paper and did not yet have a mandate to comment.

Mr Mnguni asked for comment on a view that suggested the need to create more jobs and grow faster, although the macro-economic situation might mitigate against that.

Mr Bezuidenhout agreed that the global situation was difficult. He said that BUSA was happy with NT’s projections, which tended to err on the conservative side. However, it was not satisfied that the budget would provide all the answers to the challenges. Competitiveness presented major challenges, which must be addressed and the views and comments of international industries should also be considered.

Mr Z Makhubela (COPE, Limpopo) asked for comment as to what the private sector was saying about supporting government in the growth of jobs.

Mr Bezuidenhout said that it must be borne in mind that jobs were a derivative of economic growth. A certain quality of growth could be sought, but in reality the State would only be able to grow its revenue from taxpayers when the private sector created jobs. Government could only keep jobs as long as it received revenue. If the State facilitated changes to the environment, such as the Youth Employment Subsidy, labour absorption would be potentially more sustainable than working opportunities under the EPWP. Both had their applications, and should be used together. He suggested that something should be seriously considered if there was a chance that it might work.

Ms Mashigo said that BUSA’s call for involvement of the private sector in the SETAs seemed to imply that a move to support higher education would affect the SETAs’ focus. To date, there had not been proper skills development, and she asked for more elaboration on the suggestions.

Mr Bezuidenhout answered that there was continual debate, with suggestions that communities might need to be represented, or that other components must be expanded. It was crucial to remember that employers were absorbing skills through the Skills Development Fund.

Ms Mashigo said that it was not desirable that businesses should develop in rural areas without there also being infrastructure development, and asked how this could be monitored. She thought that perhaps the targets for development were not linked to what was received from communities.

Mr Bezuidenhout said that businesses paid tax to local government and it was incumbent on them to speak to each other to try to leverage. He would provide further information on the Chambers’ initiatives in writing.

Ms Mashigo asked BUSA about the relationships with local government, where many SMEs and cooperatives were located.

Mr Bezuidenhout said that BUSA had a Memorandum of Understanding with the South African Local Government Association (SALGA) and there was interaction through local chambers. He would provide more information in writing.

Dr George noted that the Youth Employment Subsidy was only a proposal at this stage, with nothing concrete, and that the Congress of South African Trade Unions (COSATU) had indicated its opposition to this. He asked if BUSA thought it would be implemented.

Mr Bezuidenhout could only say that it stood as good a chance of implementation as everything else that started with a discussion paper.

Dr George noted that at some stage it had become obvious that the deficit would in fact exceed 5%, and when he had asked the Minister of Finance for comment, the Minister had said that he was not seeking an expansionary stance, but was aiming to pay for expenditure. He asked for BUSA’s opinion of the budget not driving growth, but meeting needs.

Mr Bezuidenhout said that a big part of the problem was lag in revenue.

Dr George noted the allocation of R20 billion to SETAs, asked if BUSA believed that funds allocated to SETAs in the past were wisely used and, if not, what there was to suggest that they would be used well now.

Mr Bezuidenhout said that if government gave an indication that it was recommitting to a process, and that the effort would be streamlined, then this must be taken in good faith.

Dr George asked whether BUSA had any views on the inflexibility of individual businesses in regard to wages and unskilled workers.

Mr Bezuidenhout thought that perhaps this was a discussion for another day. He did not have a mandate to make any pronouncement but could confirm that BUSA was in constant contact with the Minister of Labour.

Mr J Gelderblom (ANC) asked for BUSA’s views on the huge bonuses awarded to Chief Executive Officers, and what it was doing to address this problem.

Mr T Chaane (ANC, Northern Cape) asked BUSA what it was doing to help its members to be competitive, and what it suggested government needed to do to remove barriers. He also wanted to know what types of jobs BUSA would urge its members to create.

Co-Chairperson Mufamadi asked that BUSA should answer the last three questions in writing.

Industrial Development Corporation (IDC) submission
Mr Lumkile Mondi, Chief Economist, IDC, said that IDC had been encouraged by the results from a counter-cyclical fiscal policy, and this could counteract potential inflationary pressures.

IDC was concerned about the steep rise in government debt, pointing out that South Africa had followed this path before. It noted the promises that the budget would not impact negatively on future generations, but said that this was not supported by the fact that some of the previous benefits had been taken away. Issues around debt had to do with efficiency, and there was not a particularly good record of efficiency in South Africa. He noted that reliance on debt required a huge savings pool. However, gross savings were only 16.7% of GDP, which was very low seen against other comparable countries, who had 20% to 25%.  There were concerns that allegedly only 2% of the South African population was able to maintain a comfortable lifestyle, post-retirement. The retirement savings schemes proposals created a great disincentive. It would have been better, in IDC’s view, to tax luxury goods, rather than attacking retirement. In many countries, tax on luxury goods was effective also to counter excessive lifestyles.

Mr Mondi said that the world was experiencing an environment characterised by rapidly rising commodity prices. Ideally, South Africa should be ahead, given its rich endowment of natural resources.  However, the main pressures came from emerging markets, and situations in the Middle East were raising concerns about the inflationary outlook. Climatic disturbance was also having an impact. He also set out various slides on the impact of fuel costs.

Mr Mondi referred to some of the taxes discussed earlier in the meeting, noting that these could be classed as “stealth tax”, which was a form of revenue raising that was not necessarily recognised as tax. It referred to increasing costs through charges that should be covered by the State – such as toll roads. IDC was also concerned that there was no ringfencing of levies, in many instances. Stealth taxes could arguably also be extended to the need to use private security companies, private hospitals and private schools, as they effectively reduced the liability of the State towards its citizens. IDC had some suggestions as to how taxes could have been avoided, and set out their effects (see attached presentation for full details).

Mr Mondi said that IDC also had concerns around infrastructure, where South Africa needed huge investment. Growth needed to be above 7% to address challenges of inequality and poverty and IDC did not think the 4% projected growth rate would make any substantial inroads to the challenges. BUSA had indicated earlier that continued escalation costs of infrastructure projects was problematic. IDC urged the State and procurement policies to ensure maximisation of local content, which had not been a focus to date.

Mr Mondi addressed employment challenges briefly, and said that IDC was worried that there were too many matters on the table, and it was important to have a clear idea as to the sequencing. Linkages to small enterprises were needed.

IDC felt that the readiness of government to support sectoral development was refreshing, and IDC welcomed the focus on some sectors, including the motor industry. However, continuous monitoring of the impact of incentives was needed. It further welcomed the land reform programme, but capacity constraints had already proven a huge stumbling block.

IDC found the lack of support to small and medium enterprises (SMEs) disappointing, at only R912 million under IPAP2, and suggested that if government was serious about support to SMEs it must take bolder steps, and also that Khula must be monitored to ensure implementation of the programmes.

Mr Mondi noted that IDC had announced various initiatives to try to support the job strategy, and it would be putting an extra R10 billion, over the next 5 years, to a concessionary fund, which would help those creating jobs. This was an attempt to stimulate demand. However, all these initiatives would come to naught if the biggest constraints for growth remained in government hands. There were other niggling issues around registration of businesses, the requirements of the Companies and Intellectual Property Registration Office (CIPRO) and IDC urged that these constraints that were making business so difficult should be removed by the relevant ministries. IDC welcomed the establishment of a DFI Council, and said that coordination was needed in the green industries and efforts to augment job creation, as also access, through one point, for entrepreneurs, and better turnaround.

Mr Mashile asked all presenters to indicate how their institutions engaged with National Treasury, and whether their engagement was positive, and proposals were received well.

Mr Mashile asked IDC about the suggestion to tax luxury goods. He said that it was possible to generalise that luxury goods were bought by those who earned more, and that since those earning more were in a higher tax bracket, then it might amount to double taxation.

Mr Mondi thought that this would be a double tax, but it would aim to reduce excessive spending. The Minister had introduced a form of luxury tax in respect of vehicles, and IDC thought that should be expanded, rather than imposing taxes on savings. That would increase the savings pool.

Mr Mashile said that South Africa effectively had two economies and he asked how it would be possible to ensure that Buckbuckridge, for instance, received the water it desperately needed if all moneys collected from other initiatives, such as tollroads, were ringfenced rather than going to the common pool

Mr Mnguni asked IDC to comment on why it saw the period for countercyclical action to be too long, and what IDC thought a good period would be.

Mr Mondi said that government had responded quickly to the onset of recession, but IDC would like to see it return to the deficit levels of the late 1990s sooner rather than later, and possibly even to start moving before the end of this budgetary period.

Mr Mnguni asked about the focus on mining, and asked what IDC’s views were on increasing this. He also asked about the effect of rising oil prices.

Mr Mondi said that there were some fears that South Africa would “miss the boat” because of uncertainty in the mining sector, particularly since there was not enough investment because of discussions around nationalisation. He reiterated that there were problems in that, for instance, the best manganese in the world was mined in Northern Cape, but there was lack of capacity to move it from mines to ports, and also lack of capacity to beneficiate internally. He thought that a radical shift would be needed, including examination of certain commodities, and the PPP route.

Mr Mnguni thought that the Development Bank of Southern Africa (DBSA) suffered from too much red tape, and he asked how this could be overcome so that the DBSA could administer funding.

Mr Mondi said that this was a challenge, and it was one that also affected IDC itself, which was trying to reduce its own red tape to ensure faster turnarounds. NT was a good example of what a government department should be, and others needed to take stock of their work, and become more efficient.

Dr George commented that levies drove up inflation, to the detriment of the poor. He thought that imposition of levies was not a pro-poor stance to adopt. He asked for comment.

Mr Mondi said that the important point was how to create employment. Suggestions of more PPP involvement and the State investing in mineral resources were important. However, the biggest issue was that of education; if this were improve then it would go far to assisting people to help themselves.

Mr Makhubela asked for more detail on IDC’s proposals to set aside R10 billion for jobs, and asked how many this would create.

Mr Mondi responded that the R10 billion job scheme ran across all sectors and was in support of IDC’s continued commitment to work with the public and private sectors. It would be structured differently according to the individual circumstances, and there was some flexibility on the packages being offered. He urged that IDC saw land reform as a huge challenge, and without it lives would not be improved. It was imperative that government insist that incentives were boosting the economy.

Federation of Trade Unions in South Africa (FEDUSA) submission
Ms Gretchen Humphries, Deputy General Secretary, FEDUSA, said that she would focus on the views of workers.

She commented on the context of the budget and said that with hindsight it was clear that the global economic recession had affected South Africa more than was initially anticipated. The economy could only be expected to reach its pre-recession levels again by 2014. Jobs in fixed capital investment had fallen to minus 3.6%, and there was no growth in the job market, with more than one million job opportunities being lost, and still more retrenchments on the way.

She pointed out that employment creation always lagged behind recovery. FEDUSA urged government to take a more proactive stance to take account of the proper roles of government and the private sector. This budget was probably the first time that government was taking the lead in job creation, and this was commended.

FEDUSA also commented government and the South African Reserve Bank (SARB) for dovetailing the fiscal and monetary policies effectively. However, despite this, jobless growth, high unemployment with uneven income distribution and poverty were the most serious challenges. FEDUSA had made some recommendations, which were contained in the written submission to the Committee, and could also be found on the FEDUSA website, and these would also be submitted to Nedlac.

Ms Humphries said that social protection was a key factor. FEDUSA welcomed the increase of the social support grant, noting that social protection was a large part of the budget, because many citizens did not contribute to retirement or medical aid schemes, and many were not registered as active job seekers.

FEDUSA noted that R26.3 billion was required to cover the public sector wage agreement, and the wage adjustment was 2.4 points higher than the inflation rate. However, what had not been mentioned in the budget review was that civil service salary budgets were done on a three-year basis, and the figures also included provision for the expansion of the civil service, and the Organisation of Economic Cooperation and Development (OECD) agreements dating back to 1998. This was explained in more detail in the written submission. FEDUSA felt that the macro economic framework, and the allocation to current and capital spending, should achieve a proper balance with public service delivery, and this had been voiced as a recurrent concern. FEDUSA would like to meet with NT to discuss the calculations and the real state of the public service, but, despite request, no meetings had yet taken place.

FEDUSA was also concerned that borrowing to finance consumption created debt obligations for future generations, long after the funds were spent, and there were already concerns about the number of young people who were unemployed and unable to provide for their families. Over the last 30 years the pool of savings to financial investments had decreased, and scarce savings were being used to finance higher current expenditure of wages, interest and goods and services. The Minister of Finance had acknowledged that not enough was being saved. FEDUSA was, however, pleased with the assurance that borrowing to finance short-term needs would not be a permanent feature. The guidelines to sustainability were also welcomed.

FEDUSA wanted to highlight infrastructure spending and tax proposals, especially the Youth Employment Subsidy, which was aimed at increasing employment levels. The broad outline was announced, but the cost was huge. FEDUSA pointed out that effectively South Africa already had a wage subsidy, in that a R50 000 tax rebate was available to all employers who implemented apprenticeships, although it was concerned by suggestions that this would create a two-tier labour market open to misuse by employers. FEDUSA urged that the subsidy must be training based, should encourage and facilitate entry of young unemployed people into the labour market, and assist with reducing dependency on welfare benefits. It suggested that it should be available to unemployed graduates lacking workplace skills, and that it should only apply to tax-compliant companies, with special dispensations to non-government organisations (NGOs).

Ms Humphries commented that this year’s positive tax proposals were likely to be overshadowed by the Minister’s proposals around the financing of NHI. Too little was known as yet about the financing for FEDUSA to make an informed reaction, but it would be using the opportunity to comment through Nedlac. She suggested that it would be useful for the Finance Committees to engagement with Nedlac also.

NEDLAC welcomed proposals in regard to gambling tax.

FEDUSA was concerned about the treatment of retirement contributions as fringe benefits. The lower levels of savings in South Africa were already a serious problem and there should not be taxation on retirement funds. FEDUSA outlined how a person earning R450 000 per annum would be affected by the new tax treatment of contributions as fringe benefits, on pages 11 to 12 (see attached presentation). All forms of income should, in FEDUSA’s view, be brought under the same tax umbrella. Ms Humphries noted that Nedlac’s Tax Reform Task Team had not received any indication, before the budget speech, that this was likely to be brought into the system, nor that government intended to phase out provident funds. This would create much unhappiness, particularly in the mining sector, despite government’s assurance that there would be thorough consultation with trade unions and clauses to protect existing rights. The proposal was increasing the pressure on retirement members to retain all their retirement savings for retirement, which was positive as it aimed at avoiding dependency on the government, but up till now, nothing had been done other than tax the lump sum. Robust debate was needed on the retirement reform process.

Mr Mashile asked all presenters to indicate how their institutions engaged with National Treasury, and whether their engagement was positive, and proposals were received well.

Ms Humphries said that FEDUSA engaged in a similar way as BUSA, but also had direct links with the Minister of Finance and the Presidency, at Nedlac level, and with the SARB.

Mr Makhubela asked FEDUSA about the statistics on page 8, concerning the numbers of young people not employed, and asked if there were further demographic and population breakdowns available.

Ms Humphries said that FEDUSA thought it was not appropriate to provide any racial breakdowns, pointing out that this was setting out national education figures of FET Colleges and schools, of all learners. It was possible to get a provincial breakdown. These statistics were provided by the Department of Education and research by Economic Trends South Africa (ETSA).

Dr George asked if there was research to support the FEDUSA suggestion that the compulsory age for education should be raised to 18 years.

Ms Humphries said that this was one of the recommendations in response to the NGP. Detailed statistics by ETSA had been consolidated, and these were submitted to the Minister of Education. She would provide more details in writing.

Ms Humphries added comments to questions answered by other presenters. In relation to the public sector wage bill, she noted that OECD agreements had an impact on the agreement for a 7.5% increase after the last strike. The former Minister of Public Service and Administration had signed the OECD agreements, but no specific account was taken of the effect of the Occupation Specific Dispensation, which had inflated the position. It was not in fact the trade unions who were responsible.

Ms Humphries commented that FEDUSA would be looking at all subsidies and would also consider the overall objective, and macro-economic growth in relation to the Youth Employment Subsidy. She referred Members to comments on the FEDUSA website. 

People’s Budget Coalition (PBC) submissions:
Mr Keith Vermeulen, Parliamentary Officer, South African Council of Churches, Member of PBC, said that his organisation (SACC) saw the budget as a way to improve the lives of people. The present and past Ministers of Finance had suggested the need to deal differently with challenges and it was not sufficient to measure the country’s performance by looking at its surpluses. Latin American economists had led the way to narrow the gap between wealthy and poor. Even though a country might grow GDP significantly, growth could be eradicated by a high Gini co-efficient. High levels of a super-rich class could impoverish the middle classes, and feed off the poor. SACC believed that a more equal society was a happier society and that attempts at redistribution would contribute to more stability and less violence.

SACC set out its comments on the five prioritised areas of the vote, in its written submission (see attached presentation). In relation to education, including adult education, although it was recognised that vulnerability affected even the most effective learners, Early Childhood Development (ECD) had received only a cursory reference, despite the fact that it would be a good investment to spend more in this area. A Human Sciences Research Council Report Government-funded programmes and services for vulnerable children in South Africa indicated that despite legislation requiring children to attend schools, there still remained large numbers of children who did not, affecting those with HIV and disabilities in particular. 2 million children who were orphaned did not receive appropriate support to ensure that they were not further traumatised. Communication in education was problematic, with too few libraries, computers and laboratories, there were high student to educator ratios of 40: 1, overcrowding and lack of basic facilities of water, electricity and sanitation in thousands of schools. The People’s Budget Coalition (PBC) PBC called for immediate attention to this and set out some recommendations (see attached presentation), including that the no-school-fee policy should be not be determined by the level of the school, that school fee exemptions should be applied and the parents, particularly single mothers receiving social grants, should be advised of their rights, that grade R should qualify for non-fee policies and that the National School Nutrition Programme should be made available automatically to any poor learner, no matter what school he or she was attending. Mr Vermeulen outlined that there were stark contrasts between education offered, and he noted that disappointment was often directly linked to dysfunctionality.

Mr Vermeulen said that PBC was dismayed at the inability to transform a system of “patchwork” social grants to one with a holistic effect, and called on government to explain why it had not adopted recommendations on the report on the basic income grant. The Minister’s announcements on NHI were the first step in the right direction, as PBC had been urging government, over the last ten years, to address the disjuncture between public and private healthcare, medical aid costs, and unequal treatment. The phasing-in would require substantial reforms and expansion of professional training, and PBC hoped that it would be a flagship to universal health coverage, and must be given due public relations weight.

Mr Vermeulen referred to the aims for redistribution of land, and the announcement that in 2009, 15 million hectares had been distributed. It urged the need to enhance the impact and accelerate delivery, and said that the targets must be increased, even if they were not possible to achieve, to promote an aggressive and appropriate approach, including expropriation and greater attention to marginalised groups. This Committee should also be resourced to exercise oversight.

Mr Vermeulen said that PBC wanted to propose “tax justice” to ensure that there was revenue for poverty eradication. International and sister groups of the SACC had engaged with international research as to why some systems benefited large corporations, and why VAT was not advantageous. They were concerned how much revenue Africa lost through corruption, debt servicing, and tax initiatives. These organisations, working together, should be able to address further leakage of tax revenue. He pointed out that R1.7 billion was lost through incorrect pricing of exports to the European Union (EU) between 2005 and 2007. The PBC believed that “avoidance” had been imbued with respectability, and there was a need for tax justice, based on fairer and more transparent accountability, which would also yield substantial income, and suggested that a separate meeting be held between PBC, The Committee and National Treasury to explore the feasibility of such a system.

Ms Phelisa Nkomo, Advocacy Manager, Black Sash, Member of PBC, wanted to focus on social security. PBC continued to urge for a complete overhaul of the social security system. Whilst it welcomed the increased allocations, it was concerned that the increase of R20 in child support would not take immediate effect, and that there was a smaller percentage increase to foster care grants, which had higher uptake. PBC would prefer universal access to comprehensive social security.

PBC hoped that enough would be done to ensure that IPAP2 could be implemented, as without sufficient funding it would remain good on paper only. The manufacturing sector was the backbone of the economy and PBC called for alignment of expenditure to support the necessary sectors, as well as sustainable development enterprises that supported national priorities. Between 2007 and 2010 there had been some improvements in prioritising industrial policy but this seemed to be reversed over the medium term. She hoped to see increased expenditure on national programmes to address high levels of poverty and unemployment.

PBC believed that access to jobs was intrinsically linked to this; unemployment was the biggest threat to stability. She likened the unemployment to a time bomb, and said that PBC welcomed anything that would address this, particularly for the youth, but cautioned that the measures in the budget fell short and it seemed that government did not have the political will to address the structural unemployment crisis. The projected State employment gains of 2% a year would not be adequate. Youth unemployment was linked to the education crisis, regardless of wage subsidies and incentives. PBC was opposed to the Youth Employment Subsidy. Firstly, government lacked the capacity to enforce, and so it would be abused by unscrupulous employers who would keep jobs for older people, which would undermine the objectives. It was necessary for NT to furnish the basis for the assumptions, and to indicate where sectors might create them. It seemed to be based on the premise that government could predict and control employers’ behaviour. Learnerships were already treated as a cheap source of employment on a revolving door basis, and many were not employed after their learnerships ended, while migrant workers continued to work, under differential conditions. Secondly, the Subsidy assumed that young workers were being paid more than their productivity justified, and government had relied on instruments targeting costs of labour. Any experience would be dependent on employer discretion, and afforded access to a level of skills. A fundamental concern was that this also might provoke early exit from education in poor households. The proposals were still to be considered by Nedlac, and PBC urged that this should be excluded from the allocation for this year, otherwise the Nedlac process would be symbolic only. PBC believed that government must address shortcomings on EPWP to ensure economic and income mobility.

PBC welcomed incentives on investment and manufacturing, but remained wary about job creation, as it would require M&E, and had not been achieved in the past.
PBC was concerned that no level of government was paying sufficient attention to rural development, and this was resulting in increasing migration to cities, placing pressure on infrastructure, risk and security. It welcomed the reduction of corruption initiatives, but thought there should be more visible policies to reduce crime and improve skills of all investigating units. The transformation paper on the financial sector could stimulate the economy.
Mr Sydney Kgara, Head; Policy Unit, NEHAWU, said that the Estimates of National Expenditure noted that Parliament was to fund the establishment of a Parliamentary Budgetary Office (PBO). There were concerns that this would be drawn from the surplus account of Parliament, as opposed to being funded from National revenue, particularly since that surplus account was to be reduced by one third over the medium term. This raised concerns about adequacy of resources, and clarity was required on this.  

PBO was concerned with the possibility that part of the revenue to fund the NHI might be derived from VAT, which was regarded as an aggressive tax system that impacted substantially on the poor. He suggested that there was a range of other financing options, especially given South Africa’s high inequality.

PBO noted that the doubling of the public service salary bill had created the wrong impression, and the average salary of public servants had become part of the discussion. The PBO submission showed how different levels of public service workers had adjusted over the years, and he stressed that while the whole wage bill may have doubled, was a combination not only of wage increases, but also the expansion of the public service, the addition of new ministries and departments and inflation. There was a view that the public service was bloated, but it was necessary to define the role that the public service should have, based on what government should be doing. In reality the public service employed 200 000 less people than in 1994.
He also stressed that in 2010, when the public service strike was settled, it was agreed that government would consult with labour before finalising the budget, but that had not happened, and the increases were again likely to be a problem. Mandates from members were at variance with the stipulated figures. It was vital to factor in expected increases ahead of the budget. The announcement by the President that government must fill all vacant posts was long overdue, but PBC looked forward to seeing how this would be implemented.

Mr Zwelinzima Vavi, General Secretary, COSATU, apologised for his late arrival, which was not intended in any way to undermine the work of the Committees. He outlined that COSATU was in full support of the five-year programme and the priorities in SONA. Every aspect of intervention at policy level should bear in mind the persistent and high challenges. COSATU argued that over the last 17 years government had not adopted the correct economic policies or fiscal and monetary stance to address these challenges. Although everyone agreed that job creation was vital, that decent work would help to address inequality and poverty, that rural development was needed, and that health and education must be improved, appropriate tools had not yet been employed to address the legacies of apartheid. COSATU thought that the budget remained too cautious and pro-business. There had been much emphasis on the counter-cyclical policy framework, and that the economy was recovering, but there was a danger of ignoring the structural crisis.

The first aspect of this was the persistence, indeed the increase, of unemployment in South Africa. Poverty was high, and although no official poverty line was agreed, some studies estimated that 57% of people in South Africa lived below the poverty line in 2001 and 2006. Even using NT calculations of those living on less than R322 a month, the poverty rate was still 48%. That was a serious crisis. Redistribution of income had not occurred and inequalities increased. The top 10% of the wealthy accounted for 33 times the income earned by the bottom 10% in 2000, and that was likely to have worsened. 20% of Africans earned under R800 a month in 2002, the percentage increased in African female-headed households, and 59% had no income at all. 50% of the population lived on 8% of the national income. Income differed still along racial lines, with the means of production and power concentrated in white, capitalist hands, whilst the crucial sectors were dominated by conglomerates with cross-directorships. Health, life expectancy and quality of education were declining, with 60% of children never attaining Grade 12.

He reiterated that these challenges were not addressed in the budget. The Minister had failed to articulate the full extent of the crisis. However, COSATU was not advocating fiscal non-discipline. Government should not be reckless, but equally should not be applying the same methods used in other countries who did not share these challenges.

Mr Mnguni asked PBC to explain how it envisaged that a comprehensive social security system would work.

Ms Nkomo noted that currently there were two broadly vulnerable categories – the first being the unemployed and the second being those who, although employed, were not protected. This would include domestic workers injured in their workplace, and informal sector workers who did not receive maternity benefits or compensation for occupational injuries. It was therefore necessary to broaden the safety net.

Mr Vermeulen added that there was also a need to fill the gap for those between school and work. PBC had been calling for a rollout of the comprehensive social security system, but instead it was being implemented piecemeal. There was a need to deal with the legacy of welfare grants to the developmental state. This was now the second year in which mention had been made that this would happen. Short of looking at the distinction between a contributory and non-contributory system, PBC would like to see a redistributive use being made of the fiscus. PBC supported a basic income grant, but this should not be done at the expense of comprehensive social security. Brazil and Chile had effectively used an array of social security provisions, and this had brought down their Gini co-efficient. South Africa was looking at its needs first rather than production of a surplus. He said that the economy should be a moral choice, and that faith-based bodies had a role to play in creating a different mindset than debt-led consumerism. He said that economics was concerned with producing more harmonious human relationships than the current dysfunctional systems did.

Mr Mnguni asked how PBC would recommend that tax policy could be made more transparent. He further asked what PBC would consider reasonable funding for IPAP2.

Ms Nkomo said that the key issue was how to divert public resources into areas where they would stimulate public growth, and there were issues of developmental change also. Any international trade agreements signed should support South Africa’s own industrial development programme, including the functioning of systems. It was also necessary to ensure opportunities for new industries. South Africa, as a member of the G20, should be calling for a review of the rules; for instance it should call for a moratorium on the fact that countries were not supposed to protect their own industries with opportunities for growth, in order to allow the labour markets to recover from the recession

Dr George asked if COSATU proposed that VAT should be replaced in its entirety by another system.

Mr Kgara said that PBC held the stance that VAT was regressive, and disproportionately heavy on the poor, so trying to fill the gap of financing health insurance through VAT would impose more burdens. FEDUSA proposed a range of options aimed also at rationalising inequality, and this included taxing those in very high brackets, focusing on industries producing health hazards, including tobacco, alcohol and environmental polluters, who overly burdened the health system. Other proposals included levying imported luxury items, some of which could be produced in South Africa.

Mr Vavi added that the poor spent most of their income on food, shopping more frequently. The contribution of companies to tax was lessening.

Ms Z Dlamini-Dubazana (ANC) said that the Committee would have liked to see more detailed suggestions as to possible solutions to the structural crisis.

Mr C Frolick (ANC) was interested in the analysis and agreed with the setting out of structural constraints. However, he also thought it was necessary to move beyond the analysis and to ask what measures could be proposed to change the reliance on minerals and energy to something else.

Mr Mnguni noted the large figure for public debt, which reduced the amount available for spending, and asked how this could be contained.

Mr Frolick agreed that there was a problem with the deficit, and when South Africa was running public surpluses it was creating problems for itself, because the backlog of maintenance of infrastructure had got out of hand. He noted COSATU’s comment that it would support discipline in the budget, and asked for more detailed suggestions.

Mr Frolick agreed with the SACC’s comments on inequality, and asked what measures it suggested could be employed to continue to grow the economy whilst also achieving equality.

Mr Makhubela asked what alternative was being suggested if COSATU felt that government was not using the appropriate tools to achieve its goals. He also asked what would be the appropriate point at which government could say its budget had gone far enough.

Dr George agreed with the importance of stimulating economic activity, to generate revenue and create jobs, which was proposed in the DA’s alternative budget, and asked for COSATU’s proposals on how to stimulate activity.

Mr Vavi commented that COSATU had been frustrated at what it saw as not sufficient appreciation of the scale of the challenge. He appreciated the engagement on possible alternative models.

He said that both Ms Dlamini and Dr George were correct that there was a need to make assumptions and test models, not only in relation to the deficit, but also on systems that may not have worked anywhere else in the world. He proposed, firstly, that Parliament itself must work to develop its own capacity to engage with all those issues of deficit, inflation, fiscal and monetary policies, so that it was in a better position to hold the executive to account. These issues could not be addressed in a short time, and he hoped that COSATU could be called back to engage more fully on whether the current economic model was appropriate for South Africa’s developmental challenges, so he would not go into specifics now. He also indicated that COSATU did not confine itself to criticism, but that it had published proposals in The Growth Path for Full Employment in September 2010, around industrial policy, fiscal and monetary proposals.

He outlined that COSATU was suggesting that all government monetary policies and instruments should address the crisis of unemployment. The NGP proposed the creation of 5 million jobs in 10 years, or a drop of 15% in unemployment. Whether or not this was realistic, it was welcomed, and government should be encouraged to do everything possible to realise that. However, nowhere in the budget speech did government specify how it would do so, or set out targets year-on-year, other than broad statements as to intentions.

Secondly, COSATU held that monetary policy must support industrial development, and that exchange control should be used to support industrialisation and to give space to manufacturers to grow. Thirdly, foreign exchange control measures and management by SARB must be an essential part of the monetary policy. There was currently no public monitoring of buying of dollars, and everyone was accustomed to a fluctuating rand, which did not enable manufacturers to plan. He suggested that South Africa should check what China did to stop its currency fluctuating and stimulate manufacturing. He thought that South Africa was far too tolerant of international demands, and should not adopt the same strategies as Europe, because countries there did not share the same unemployment rates. COSATU wanted far tighter coordination between fiscal and monetary policies. Sustainability was sometimes modelled on historical facts. Instead, policies must be designed to ensure full employment. The fiscal policies must also therefore be redistributive. In South Africa the inequalities had grown and share of employees in GDP had declined. The new fiscal policy should focus on stabilising unemployment and finding the appropriate balance. That would answer the question as to the level at which the deficit could be tolerated, to avoid runaway inflation and related problems. Social and economic transformation was required.

Mr Frolick asked whether COSATU felt that the National Youth Development Agency (NYDA) was the right institution to receive funding for youth activities, and where COSATU would like to see the money being spent.

Mr Mnguni said that there was an ageing work force and he wondered if PBC was suggesting that government lay off older workers in favour of younger and inexperienced workers.

Dr George questioned COSATU on what its other proposals in preference to the Youth Employment Subsidy might be.

Mr Vavi responded that COSATU had not adopted a particular stance on the NYDA, but he cautioned that the worst manner of dealing with a crisis was to try to compartmentalise, and this seemed to be done with the allocation of R9 million to job creation. Unless all departments were instructed to act, the structural nature of the crisis would not be addressed. He personally thought that the NYDA was isolating the problem and hoping that it could solve it. It could certainly make a contribution but without an overarching and systematic structure no initiatives would succeed. COSATU was not happy that the NGP was an overarching plan that spoke consistently and in a unified way to the issues.

In regard to the proposals for a Youth Employment Subsidy, Mr Vavi said that South Africa differed from other countries in that most of the unemployed were below 35. Whilst COSATU welcomed using both a carrot and stick approach, he said that tax incentives to encourage companies to invest in employing people should have been given 17 years ago. There was concern that government did not have capacity to monitor its own programmes, and ascertain how many young people had been employed, how many should exit the scheme, and how many were permanently employed. He cautioned that unscrupulous companies would take advantage of that - firstly, to operate a revolving door to keep a group of young people in the wage subsidy level for ever, and secondly perhaps to replace permanent workers with those subsidised by taxpayers. No amount allocated to unemployment would address the realities unless it was recognised that unemployment must be addressed by structured programmes, including education, whose dire crisis state was not being addressed. No new subsidies would work as long as 60% of children did not pass Grade 12. The quality of education was poor, which was why so many migrants to the country were able to survive here, and South Africa was thus developing a dependency syndrome because of its inferior education, which must be improved. All political parties should be supporting campaigns aimed not at short-term political scoring and positioning, but at real improvement.

Mr Chaane asked for clarity on page 14 of the NEHAWU presentation. The first paragraph seemed to dispute the correctness of the figures around the doubling of the wage bill, although a later paragraph seemed to confirm that it had doubled.

Mr Kgara explained that although the wage bill overall had doubled, this did not mean that individuals’ salaries had doubled. He explained that the wage bill comprised a number of factors, outlined earlier, an that unfortunate misperceptions had been created. He then said that it was ironic to compare the rise in wages of Parliamentarians between 2007 and 2010.

Co-Chairperson Mufamadi asked what had happened to the Job Fund created in 1998 and what its impact had been.

Mr Vavi said that about R90 million was collected, and R30 million was spent on creating jobs. Around R120 million was still available, but following the suspension of and a dispute with the Chairperson, a new set of trust deeds had just been registered. A meeting of trustees of the Job Creation Trust was being convened, and it was targeting the ten biggest provident fund task teams and investment companies to question their contribution to the target of creating 5 million jobs. All acting together could make a significant contribution.

Co-Chairperson Mufamadi said that the presentations had raised some common concerns on the fiscal framework and budgets in general. The ability of government to monitor, and, by implication, the way in which Parliament exercised oversight, were important. He noted that much of what had been discussed were still proposals. He agreed that compartmentalising would realise the objectives. In this budget, the objectives of job creation were matched to resource allocations, and the Committee would have to bring together all ideas and assist in discussion and implementation of proposals. There was a challenge as to how the budget would support the priorities. The Committee would discuss the PBC’s view that macro-economics did not necessarily underpin the priorities. He agreed that there had not been sufficient time for full engagement, and commented that more public participation would have to be factored into the programming.

The meeting was adjourned.

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