Appropriation Bill: finalisation

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Finance Standing Committee

07 March 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
8 March 2002
APPROPRIATION BILL: FINALISATION

Chairperson:
Ms. B. Hogan

Documents handed out:
Committee Report of the Portfolio Committee on Finance on the Appropriation Bill [B4-2002]

SUMMARY

The Committee met to approve the report of the Portfolio Committee on Finance on the Appropriation Bill. The chair stated that the report is meant to reflect the proceedings of the committee, and is not the united committee's views on the Bill. She suggested that it reflected what was said in the committee for the benefit of fellow parliamentarians. It was noted that this is the second draft of the report, and that there were no massive changes made to this second draft. The report as adopted with amendments and published in the ATC dated 11 March 2002 is attached as Appendix A.

MINUTES

The chair opened up the floor for discussions and comments on the draft report.

Discussions
Mr. Andrews (DP) suggested that paragraph 1 (B), be amended to read " Overview of 2002-2003 Budget as presented in Budget Review". The committee agreed to this amendment.

Mr. Andrews (DP) pointed that that there was a spelling error in paragraph(C) (1)(d). "Moola" should be spelt with a double "l" and should read as "Moolla".

The chair referred to paragraph 3 (a), and suggested that Line 4 be amended to read "This constitutes an increase in the current threshold of 17.4%…" The committee agreed to this amendment.
She suggested that the last line of the same paragraph be deleted and substituted with "The highest marginal rate is cut by 2%". The committee agreed to this amendment.

Mr. Kannemeyer (ANC) referred the committee to paragraph (C) (1) (a) and suggested that the second paragraph be amended to read "While FEDUSA, as a voice of labour", rather than "the voice of labour". The committee agreed to this amendment.

The chair referred to paragraph (C) (1) (f), and suggested that Line 1 and 2 be amended by the inclusion of the words "a forecasted" and which would now read " The recent depreciation of the Rand has contributed to a forecasted inflation this year of 6,9%." The committee agreed to this amendment.

Mr. Andrews (DP) referred the committee to paragraph (C) (2) (b). He suggested that Line 2 should be amended by the removal of "will reach" and the inclusion of "is budgeted to reach". The line would now read "The child support grant for children seven years and younger is budgeted to reach a further 1,2 million children….." The committee agreed to this amendment.

Mr. Andrews (DP) referred to committee to paragraph (C) (2) (c). He suggested that the last line of the first paragraph be amended to read " However, the Minister pointed out several problems that would surround the introduction of a Basic Income Grant".
He suggested that the three paragraphs marked with an asterisk (*) be deleted, and in place thereof, the following words be substituted " Government is awaiting the publication of the Commission's Report advising government on a comprehensive system of social security".
The committee agreed to this amendment.

Mr. Andrews (DP) referred the committee to paragraph 4(a). He suggested that the last word of the paragraph be altered to read "practice", instead of "principles".

No further amendments were necessary to the document. The chairperson said that the researchers have done a remarkably professional job in compiling this document. The chair referred to the fact that Mr. Andrews was leaving the Committee, and thanked him for his invaluable contribution to the committee.

The meeting was adjourned.

Appendix A

COMMITTEE REPORTS:

National Assembly:

1. Report of the Portfolio Committee on Finance on the Appropriation Bill [B 4 - 2002] (National Assembly - sec 77), dated 8 March 2002:

The Portfolio Committee on Finance, having considered the Appropriation Bill [B 4 - 2002] (National Assembly - sec 77), referred to it and classified by the Joint Tagging Mechanism as a Money Bill, reports as follows:

A. Introduction

The Committee held hearings on the 2002-03 Budget from 21 February 2002 to 1 March 2002. The Committee wishes to express its appreciation to all participants for their contributions. Written presentations submitted form part of the records of the Committee Section. The Committee would also like to express its appreciation to the Minister of Finance, the Deputy Minister of Finance, the Director-General of Finance, the Commissioner of the South African Revenue Services, the Chairperson of the Financial and Fiscal Commission, and their respective staffs, for their presence and contributions during the hearings. A list containing the names of those who made oral submissions is included in part D of this Report.

B. Overview of 2002-03 Budget as presented in Budget Review

The Budget was presented within the context of growth recovery. Years of fiscal discipline provide the framework of the Budget, which now represents a significant expansionary fiscal policy over the medium term. The Budget offers considerable tax relief on the revenue side and strong growth in spending on the expenditure side. The central priorities outlined in the Budget include increasing infrastructure investment, broadening the social security net, fighting crime and increasing support to local government to extend access to basic services.

1. Macro-economic outlook

Despite the global slowdown and the recent sharp depreciation of the rand, South Africa's economic growth remains positive and is expected to recover within the medium term. Furthermore, South Africa is expected to benefit from the global recovery anticipated in the second half of 2002-03, due particularly to improved performance of the export sector.

(a) GDP growth

The assumption underlying the Budget is that South Africa will experience economic recovery. The National Treasury believes that economic growth will be positive over the medium term and projects growth to average 3,1% over the next three years. Underpinning the National Treasury's assumptions are the following characteristics of the South African economy:

* Healthy balance of payments

* Improved export performance as a result of the rand depreciation

* Real growth in government spending

* Improved productivity

* Increased infrastructure spending

Annual GDP Growth Rate

2001 2,2%
2002 2,3%
2003 3,3%
2004 3,6%

(b) Inflation

Due to the substantial depreciation of the rand that took place during the latter part of last year, CPI inflation is expected to fall marginally outside the Reserve Bank's target of 3-6% this year, returning to the target in 2002-03.

Expected Average CPI Inflation

2001 6,6%
2002 6,9%
2003 5,8%
2004 5,0%

(c) Other economic indicators

The National Treasury reported as follows:

(i) Depreciation of rand

The rand depreciated by 37,4% in nominal terms against the US dollar in 2001 and the real trade-weighted effective exchange rate declined by 6,5% from December 2000 to August 2001. The National Treasury maintains that the depreciation towards the end of last year was overdone since the underlying health of the South African balance of payments is not in question. There has been some recovery in the exchange rate in early 2002. The adverse movement in the exchange rate improves South Africa's international competitiveness and helps to strengthen the economy by creating a more export-oriented balance of payments.

(ii) Exports

While slower world exports have slowed South African exports, the underlying trend has been an increase in South African manufactured exports as a proportion of total exports. Manufactured exports increased from 9% in 1990 to 27% of total exports in 2001. Total real exports increased by 4,7% in the first three quarters of 2001 from a year earlier. The depreciation of the rand also caused substantial increases in the revenue from gold and platinum export production in the latter part of last year. The value of mineral and non-mineral exports have increased by 17,3% and 29%, respectively, in the year to November 2001.

(iii) Real merchandise imports

Total real imports increased by 0,4% in the first three quarters of 2001 from a year earlier due to weaker domestic conditions and the depreciation of the rand. Import volume was sluggish, increasing by 1,3% compared to the same period in 2000.

(iv) Current account and balance of payments

The current account and balance of payments remain strong. The current account deficit remained small in 2001 as a consequence of a healthy export sector. An increase in capital flows is expected as the world recovers.

(v) Net open forward position (NOFP)

The NOFP of the Reserve Bank has been reduced from US$4,8 billion in 2001 to US$3 billion in 2002. This is expected to be phased out by the end of 2003.

2. Projected Fiscal and Budget Framework


The fiscal stance of the Budget is expansionary, oriented towards growth and improved targeting of public spending. Government expenditure trends reflect the nation's broad social and economic objectives - economic growth, job creation, increased spending in poverty alleviation and infrastructure investment and improved social development. The primary outcome of the expansionary fiscal policy is significant tax relief and substantial increases in public expenditure. Resources for such expansionary policies are made available from increased revenue receipts and savings realised from a lower budget deficit and a reduction in the government debt burden. Main budget revenue translates into R15 billion more than the 2001 budget estimate. This increased revenue performance is largely due to improvement in company tax receipts.

(a) Increased expenditure

Real non-interest expenditure across the national and provincial governments is expected to grow at an annual average rate of 4,1% in real terms over the medium-term period.

Total National Expenditure over medium-term

2002-03 R287,9 billion
2003-04 R311,2 billion
2004-05 R334,6 billion

Highlights of increased spending over the 2002 medium-term:

* Capital spending growth is budgeted to grow by 18,1% per annum over the next three years

* Significant additional amounts of R1,5 billion in 2002-03, R2,3 billion in 2003-04 and R2,7 billion in 2004-05 have been allocated to the Department of Provincial and Local Government to assist the provincial and local spheres with development planning, capacity building, infrastructure and service delivery

- Provincial infrastructure grants amount to R6,7 billion in total

- Assistance for municipalities grows by 18% per year - this includes support for water and sanitation, electrification, free basic services and local economic development

- The Consolidated Municipal Infrastructure Programme (CMIP) will grow by 27,8%

* Over the next three years, increases in the real value of the grants will place more money in the hands of the poor

- Social services expenditure (education, health, welfare and other social services) make up about 57% of non-interest allocations in 2002-03, and is expected to grow steadily over the MTEF period.

- The child support grant for children of seven and younger will go to a further 1,2 million children by the end of the year and is increased by 18%

- The disability grant, care dependency grant and old-age pension have each been raised by R50 or 8,7%

* 16 000 additional police personnel are to be employed over the next three years - expenditure on safety and security has risen from R19,2 billion in 2002-03 to R22,9 billion in 2004-05 to fund the employment of additional police personnel

(b) Budget deficits

Increased expenditure is financed through revenue growth and a budget deficit of 2,1% of the GDP in 2002-03.

Expected Budget Deficit

2001-02 1,4% of GDP
2002-03 2,1% of GDP
2004-05 1,7% of GDP

(c) Debt service cost

Debt service costs are expected to fall within the medium-term framework, releasing R10 billion for spending on servicing.

Debt service cost

2001-02 4,8% of GDP
2002-03 4,4% of GDP
2004-05 4,1% of GDP

3. Revenue - lower taxes

The Budget proposes significant tax reductions in both direct and indirect taxes. This is largely comprised of substantial personal income tax relief to all taxpayers, skewed in favour of low- and middle-income taxpayers. Tax relief for small businesses is provided to encourage entrepreneurship and reform to corporate tax structures is undertaken in order to enhance the competitiveness of the South African economy. In his address to the Committee, the Minister highlighted the following significant tax reforms:

(a) Personal income tax

R15 billion in personal income tax relief is proposed. Individuals earning below R27 000 (R42 640 for taxpayers over 65) will not pay any personal income tax. This constitutes an increase in the current threshold of 17,4% (R4 000) for taxpayers below 65 and 8,9% (R3 486) for taxpayers over 65. Rates and brackets are adjusted to provide relief across the income spectrum. However, average rate cuts are skewed towards lower- and middle-income groups. The income bracket earning less than R150 000 gains 57% of the R15 billion. The highest marginal rate is cut by 2%.

(b) Domestic interest and dividend income

It is recommended that the domestic interest and dividend income exemption is raised from R4 000 to R6 000 for those under 65 and from R6 000 to R10 000 for people aged 65 and older. It is further proposed that foreign interest and dividends are only exempt up to R1 000 of the total exemption (estimated revenue loss - R163 million).

(c) Transfer duty

R300 million in transfer duty relief is proposed to ease the acquisition of property, To provide relief to low-income groups, certain residential property is exempt from transfer duty. A new rate structure is proposed, which cuts rates on all property value and where no duty payable on property with a value of less than R100 000.

(d) Taxation of deemed foreign income

This is an important part of the residence-based income tax structure introduced in January 2001. The proposal is to make deemed foreign income subject to income tax where a taxpayer does not account for foreign assets.

(e) Review of monetary thresholds

The following changes are proposed regarding several monetary thresholds:

* Bravery and long service award: exemption from income tax to rise from R2 000 to R5 000

* Donation tax causal: increase from R5 000 to R10 000

* Donations individuals: increase from R25 000 to R30 000

* Estate duty: basic deduction increase from R1 million to R1,5 million

* Medical aid deduction: elimination of the R1 000 threshold

* Bursaries and scholarships: increase in exemptions for bursaries and scholarships

(estimated revenue loss - R36 million)

(f) Administration improvements

The following reforms are proposed in order to improve the efficiency of tax administration:

* Single tax year (estimated revenue gain - R10 million)

* Increase in provisional tax registration threshold from R2 000 to R10 000 (estimated cost - R60 million)

* Review of SITE

(g) Company accelerated depreciation

As part of an investment boost to the economy to increase short-term stimulus and build long-term capacity, an accelerated depreciation scheme is proposed. Manufacturing assets acquired within three years will be depreciated at 40% of cost in the first year and at 20% per annum for the subsequent three years. It is also proposed that the immediate expensing threshold be increased to R2 000 (estimated cost - R295 million).

(h) Tax relief for small business

In order to enhance small business development, the following tax relief for small business is proposed:

* An increase in the threshold from R100 000 to R150 000 for the 15% tax rate

* An increase in the threshold from R1 million to R3 million turnover for small business relief

* Simplification and reduction of the tax administrative burden in order to reduce compliance costs

(estimated net revenue loss - R40 million)

(i) Indirect taxes

The Minister emphasised the decision not to increase the general fuel levy. Traditionally the fuel levy is adjusted to cater for inflation. This would help to contain the impact of inflation on transport and food cost, thereby helping the poor. The following indirect tax changes are proposed:

* A two-cents-a-liter increase in the Road and Accident Fund Levy (estimated to raise R310 million for the RAF)

* Environmentally-friendly diesel fuel subject to 70% of the general fuel levy

* Duties on alcoholic beverages raised by 8-10% (estimated revenue gain R355 million)

* Duties on tobacco products raised by 10,7 to 43,7% (estimated revenue gain - R443 million)

* Elimination of duties on soft drinks and mineral water (estimated revenue loss - R135 million)

(j) Southern African Customs Union (SACU)

The Minister highlighted that important negotiations are taking place regarding SACU. South Africa's outlays to SACU are anticipated to rise to R8,3 billion in 2002-03.

(k) Further individual tax changes

* Limit on employee deductions (estimated revenue gain - R85 million)

* Elimination of the R150-a-day expenditure provision (estimated revenue gain - R15 million)

* Elimination of the R500 occasional free service allowance (estimated revenue gain - R5 million)

(l) Other company and trust tax changes

* Expensing of intellectual property threshold raised to R5 000 (estimated revenue loss - R5 million)

* Flat 40% tax rate on certain trusts (estimated revenue gain - R90 million)

(m) Further tax reform programmes

* Taxation of the retirement industry

* Banking sector

4. Asset and liability management

Financial management and debt restructuring remain key priorities. Key developments include:

* The announcement of a credit-rating upgrade in November 2001

* Reduced domestic public sector borrowing

* Total government loan debt as a percentage of the GDP is projected to decline from 42,9% at the end of March 2002 to 37,4% by the end of 2004-05

* Foreign borrowing of R33,2 billion in 2001-02, with a further R16,3 billion planned for 2002-03

5. Provincial and local government finance

There have been strong increases in equitable share allocations to both provinces and municipalities. Provincial transfers grow by 7,9% and the equitable share to provinces is to grow at an annual average rate of 8,5%. Municipality allocations increase significantly by 18,3% a year over the MTEF. Other important reforms include:

* Extension of provincial taxation powers to take effect this year

* Three-year rolling budgets to be introduced at local government level

* Simplification of transfers to local government to increase certainty and greater flexibility for municipalities

* Further steps taken in restructuring and rationalising conditional grants to improve administrative efficiency

* Phasing out of the supplementary grant

* Housing grants increase by 10,3% a year, while grants to tackle HIV/AIDS increase sevenfold over the period

C. Main priorities of Budget

The main priorities that emerged from the hearings on the Budget were:

Economic growth, investment and job creation
Poverty alleviation
Tax concerns

1. Economic growth, investment and job creation

A central objective of the Budget is achieving sustainable economic growth, attracting investment and creating employment opportunities. The National Treasury recognises that, in addition to improving the lives of all South Africans, these factors play an important role in the alleviation of poverty among the most vulnerable. The Budget addresses the issues of economic growth through the following measures:

* Increased spending on infrastructure and capital

* Well-targeted tax incentives for individuals, small business and corporations

* Greater investment in education and skills development

Furthermore, the increasingly important role to be played by exports was highlighted and concern over inflation and South Africa's monetary policy was expressed. The following section highlights the salient points and themes in this regard:

(a) Increased infrastructure and capital investment

The Budget emphasised greater infrastructure investment as a central objective. This will assist in lowering production, transport and communication costs as well as in increasing job creation opportunities. The priorities of infrastructure spending outlined in the Budget include:

* Increased funding for construction, electrification, water, industrial development and road and rail services

* Improved provincial spending for social infrastructure, including schools, hospitals and housing

* Greater allocations directed towards municipal infrastructure financing

Capital expenditure by all three spheres of government increases from R20 billion in 1998-99 to R38,9 billion in 2004-05, representing an annual average growth rate of 11,7% per annum. This capital expenditure includes allocations specifically for infrastructure programmes through supplementary allocations in 2001-02 and 2002-03 and conditional grants to provincial and local governments. Consolidated national and provincial capital expenditure is projected to increase from R18 billion in 2001-02 to R29,6 billion in 2004-05, representing an average growth of 18,1% over the next three years. Provincial infrastructure grants amount to R6,7 billion over the 2002-03 medium-term expenditure period, an increase of 44% over the 2001 budget allocations. Funding for the CMIP is raised by R600 million to R1,7 billion in 2002-03, increasing to R2,5 billion in 2004-05. Other programmes targeted at resource service, including water and electrification, brings the total contribution to local infrastructure spending to R3,3 billion next year. Furthermore, direct expenditure by the government is complemented by investment programmes of public enterprises and public/private agreements.

Macro-economic experts, Mr Roux from Investec and Mr Ballim from Standard Bank, pointed out that capital expenditure by the government has been decreasing significantly, with the government's capital to current expenditure ratio falling. Consequently, the public sector has constrained investment. Thus, the increase in infrastructure spending over the medium term was welcomed. Furthermore, Mr Ballim highlighted that positive spin-offs could be expected from front-loaded investment spending, since this will create a higher base for expansion in subsequent years. Mr Roux suggested that government investment could be decisive and the Budget implies massive growth. The challenge is for the government to deliver. Mr Ballim warned that the government risks reputational damage of over-promising and under-delivering. Failure to deliver promised infrastructure spending will harm confidence and bring into question any future government commitments.

The business sector, represented by SACOB, also welcomed the increase in capital expenditure in the Budget. However, it was suggested that, while higher capital investment represents a shift in the right direction, it is insufficient to encourage the foreign direct investment that South Africa needs. SACOB pledged its support for further increases in capital expenditure on economic infrastructure.

While FEDUSA, as a voice of labour, expressed general approval of the Budget, it was highlighted that social capital is as important as capital expenditure. FEDUSA expressed concern regarding the role of the government in creating jobs, savings and achieving reasonable levels of growth. According to FEDUSA, the MTEF growth rates projections are still well below the rates that are required to provide relief for the millions of unemployed. Thus, it was FEDUSA's recommendation that the government draws its attention to introducing imaginative schemes to boost employment.

(b) Tax incentives

The proposed tax reforms contained within the Budget include well-targeted tax incentives, aimed at stimulating consumption demand, increasing savings, boosting small business and increasing investment. Such factors help contribute towards job creation and growth. The personal income tax relief, which is significantly skewed towards the poor, includes an increase in the primary threshold to R27 000 and cuts the top marginal bracket by 2%. According to the National Treasury, these measures would help stimulate consumption and saving as the lower-income groups have a greater propensity to consume while the upper-income bracket is likely to save more. Companies can expect to benefit from the R295 million set aside for an accelerated depreciation scheme and an increase in the immediate expensing threshold. The National Treasury has also focused on tax relief for small business to create incentives for entrepreneurship. Relief is extended to businesses with a turnover of R3 million and simplification to the tax regime governing small business has also been proposed.

Tax incentives, particularly to small business, were generally well received. (Greater detail regarding the discussion of tax issues is more completely dealt with under the subsequent poverty alleviation and tax sections). The extension of the threshold for small business tax rates was welcomed by tax experts as a positive incentive for new entrepreneurs. Tax expert Mr Clegg suggested that it would be useful to track the period it takes for a small business to expand to the threshold limit in order to establish whether the new threshold is at the right level. The accelerated depreciation allowance was also received positively. Mr Clegg welcomed the new manufacturing tax depreciation allowance as an improvement over the previous regime. Mr Clegg suggested that the three-year life be extended indefinitely.

Business welcomed both the personal and corporate tax incentives. SACOB pointed out that lowering of the marginal rate to 40% could serve to retain skills in the country and would enable the top bracket to contribute to the economic saving needed for growth. SACOB further welcomed the relief to small business as significant. In particular, the proposed simplification of the tax compliance administration procedure was strongly supported. This proposal for further simplification was echoed by tax expert, Adv Du Toit. However, SACOB pointed out that these measures in the Budget are focused at "non-service" sector, while the service sector is becoming increasingly important, having grown by 4,5% last year. Particularly, SACOB expressed concern at the manner in which personal service companies are treated under the tax system and highlighted the need to extend concessions to the service sector.

IDASA also agreed that tax incentives for businesses have the potential to reduce poverty through the impact they would have on investment and job creation.

(c) Education and skills development

Education remains a central priority in the Budget, and spending in this regard increases to R59 billion next year, or 24% of non-interest expenditure. Skills development forms part of this priority. Consequently, the Employment and Skills Development Programme has been allocated R157 million in 2002-03, with a projected allocation of R494 million. This represents real growth at an annual average of 2,44% over the medium term. The 1% skills levy on company payrolls, introduced in 2000-01, directs resources to SETAs and the National Skills Fund, which are responsible for addressing training needs. For 2002-03, projected revenue from this tax has been revised, from R2,8 billion to R2,75 billion. Implementation of a learnership incentive has also been proposed. This entails a tax allowance to employers that fund learnership for employees.

During discussions, a concern was expressed at the issues surrounding the Skills Development Fund. SACOB articulated some anxiety regarding the functioning of the SETAs. The National Treasury pointed out that the initial two years were used to set up the infrastructure and to develop SETA capacity. With the framework now in place, the pace of skills development can improve. However, the need to get a sense of the obstacles was expressed.

(d) Role of exports

Miss Moola, an economist with Merrill Lynch, pointed out that demand in the economy was very weak and was expected to slow down during the first six months of the year. It was suggested that the difficulty of getting higher growth from the domestic side could be overcome through improved export performance. South Africa's recent export performance, helped by the depreciation of the rand, has been reasonably strong, despite the slowdown in the global economy. This positive sentiment is reinforced by Mr Roux, who expects export volumes to rise as the global economy recovers and the effects of the rand depreciation take place. Mr Roux predicts relative growth in the value of exports to imports, which will have a positive effect on the trade balance as predicted by the National Treasury.

(e) Concern at lack of investment and investor confidence

A recurring theme throughout the hearings was the concern expressed at the lack of investment in South Africa. Mr Ballim explained that investment is affected by factors relating to profitability, which include investor confidence. It was suggested that a key contributing factor to the lack of investment is the lack of confidence in the South African economy. This is worrying, particularly since South Africa is a stable democracy which has been experiencing positive and sustainable growth based on sound macro-economic principles. Thus, the lack of confidence is seen as a major problem. Furthermore, Mr Ballim pointed out that higher inflation, the tightening of monetary policy, hesitant global economy and greater uncertainty may temper confidence and thus dampen consumer spending and private investment. While private sector investment will be encouraged by tax incentives, government infrastructure spending could also help off-set these negative factors and boost confidence if there is delivery.

It was suggested that, in order to increase confidence, South Africa needed to break from its relatively constrained growth of between 2% and 3% and achieve growth rates of between 5% and 6%.

(f) Inflation concerns

The recent depreciation of the rand has contributed to an anticipated inflation rate this year of 6,9%. Several concerns were expressed in this regard. According to Mr Roux, the major risk to inflation in 2002 are food price increases. This was a matter of deep concern for the Committee. Mr Ballim further expressed concern at the risk of wage spiral. If upward pressure in wages and prices affects future wage negotiations, this could translate into a wage spiral, which would exacerbate pressure on the market.

A concern was raised that the expansionary fiscal policy would exacerbate inflation. However, the National Treasury says South Africa has the capacity and this should not become a reason for strong concern.

(g) Monetary policy

The macro-economists agreed that there might be potential for a hike in interest rates, which may retard spending, reduce some of the stimulus of the fiscal injection and dampen domestic demand. Mr Ballim and Miss Moola agreed that a restrictive monetary policy might mean that tax relief is not as robust as suggested. However, Mr Roux pointed out that fiscal policy is a long-term tool, used to build a long-term framework, and should not be used in a cyclical fashion. Monetary policy is the instrument to use to manage the cycle. At times, the two policies may clash. However, according to Mr Roux, it was preferable to attempt to contain inflation through monetary policy, rather than by withholding tax cuts.

2. Poverty alleviation

Poverty alleviation remains a priority in the Budget process, and was a clear concern throughout the hearings. Specifically, the Budget aims to alleviate poverty directly through strong real growth in expenditure and targeted tax relief. A 6,9% real growth in government expenditure is proposed, with significant increases in spending on social services and an 18% nominal increase in infrastructure spending. The growth in real government expenditure averages at 4,1% over the 2002 medium-term. According to the Minister, on the expenditure side all services that impact on the lives of the poor in South Africa add up to R140 billion. These services include increased spending on social grants, education, health and improving municipal infrastructure in order to provide more free basic services. The Budget also addresses poverty indirectly through growth and job creation. The National Treasury believes the Budget will have a significant effect on consumer spending, which would boost economic growth.

(a) Increased social security expenditure

Over the next three years, spending on social services grows by an average of 8,7%. Allocation to national departments includes R1,5 billion in 2002-03 and in 2003-04 for poverty relief and income-generating projects targeted towards the rural poor, woman, youth and the disabled. The provincial equitable share increases to accommodate improvements in health services and welfare spending. Provinces receive R132,4 billion next year, which represents 56% of the national Budget. Assistance to municipalities increases by 18% per year, which includes support in respect of water, sanitation, electrification and free basic services. Significant increases and extensions of interventions and programmes that address HIV/AIDS are proposed, and spending on HIV/AIDS exceeds R1 billion over the medium term.

(b) Increased social grants

In order to relieve poverty, the Budget proposes to increase social grants. The child support grant for children seven years and younger is budgeted to reach a further 1,2 million children by the end of 2003, and increases by 18% from R110 to R130 per month. The disability grant, care dependency grant and old age pension have all been raised by R50 or 8,7%, from R570 to R620.

However, IDASA's budget Information Service Manager, Albert van Zyl, criticised the R15 billion in personal income tax relief as excessive, and argued that social security allocation was insufficient. While IDASA welcomed the real increases in the value of the grants, Mr Van Zyl pointed out that the limited reach of the present poverty relief system does little to help the poor. He argued that the challenge to poverty relief is to include poor households that do not currently qualify for grants. According to IDASA, only 4,3 million, or 15,9% of people in need of income support, received grants. No support is offered to the economically active population and their children older than six. Consequently, IDASA argued in favour of extending the child support grant to children aged seven to twelve. IDASA suggested that this could be funded either through a deficit of 2,6% or more income tax relief. According to the National Treasury, while the government considered extending the grant, the current system was ill-equipped to cope administratively with a number of recipients greater than that planned for.

(c) Basic Income Grant

During the hearings, the possibility of introducing a Basic Income Grant to alleviate poverty was brought up. IDASA agreed that introducing the proposed universal grant scheme would significantly boost the income of the poor. However, the Minister pointed out several problems that surround the introduction of a Basic Income Grant. The government is awaiting publication of the Commission's report, advising it on a comprehensive system of social security.

(d) Tax relief for low- and middle-income groups

The greatest proportion of the personal income tax relief was skewed towards low- and middle-income groups. The National Treasury felt that the significant tax relief measures, which increase the disposal income of these groups, would impact positively on consumption demand. Furthermore, it was pointed out that many poor people survived with support from the employed and therefore income tax cuts would indirectly increase support to them substantially.

However, IDASA criticised the personal income tax relief as not being a direct income support measure of the very poor, who are either unemployed or earning less than R27 000 per year. IDASA argued that the tax cuts were excessive and that more should have been spent on social security allocation. While IDASA's Mr Van Zyl agreed that families that are supported by employed people in this country would benefit, he maintained that there was still a significant gap between the employed and unemployed.

(e) Local government

Increased support of local government through greater appropriations in the Budget was welcomed. SACOB pointed out that much of service delivery takes place at local government level, and supported the Budget's initiative. However, SACOB warned that these increased transfer payments needed to be met with care, especially since problems in local government included lack of skills, non-spending of resources and service delivery. Co-operation with local businesses would be central to local government development.

(f) Food prices

Due to higher inflation this year, severe concern was expressed at its impact on food prices, in particular the price of maize, which forms part of the stable diet of many of the poor. IDASA highlighted its concern regarding the hike in food prices and the impact this would have on the income of the poor. IDASA predicted food inflation for 2002-03 to be between 12% and 15%. Particularly, the price of maize increased by between 17,5% and 20% in January and has increased by 66% since May last year. However, the National Treasury pointed out that, with the current changes in the global food market and food shortages, the world will be buying maize from South Africa, who could secure good maize prices. Ms Moola suggested that healthier maize harvests this year meant that prices should decrease. All members agreed that this was an important issue, which needed attention.

(g) Improved service delivery

Speakers expressed general concern at the lack of service delivery, particularly in local government, as this directly impacts on the poor. Mr Ballim warned that the government risks damaging investor confidence by promising and not delivering. SACOB also urges the government to ensure delivery and to hold public managers accountable for measurable delivery.

(h) Economic growth and job creation

The Minister pointed out that there is an important link between economic growth and poverty alleviation. In order to keep reducing poverty, it is vital that South Africa keeps growing.

3. Tax concerns

The present tax-to-GDP ratio is 25,1%, falling to 24,3% next year. The National Treasury and SARS target to keep this ratio between 24% and 25%. The Minister highlighted that on the revenue side the goal was consolidation and improved collection and efficiency. The previous years of discipline permit the significant proposed tax relief.

Adv Du Toit pointed out that the Budget focused on tax stabilisation, rather than on making any significant tax changes. This stance was welcomed by the tax experts. However, there remained some controversy over the tax cuts. Concern about taxing the retirement industry, the non-profit sector and the general tax regime was also expressed. Finally, positive comment was received about SARS's administration.

(a) Controversy over tax cuts

In response to the tax cuts, concern about relief to the unemployed was also expressed. In order to address these concerns, the Minister highlighted several reasons for the tax cuts:

* The need to eliminate fiscal drag, which is the effect of inflation on wages.

* The need to close the gap between the corporate rate and personal rate in order to assist taxpayers with compliance.

* The tax cuts have been focused on low-income groups, with an increase in the primary threshold raised to R27 000.

* The commitment to re-examine SITE, which has approximately three million contributors.

Thus the Minister stressed that examining the taxes has been a process, which continuously focused on examining the impact of tax on the lives of ordinary South Africans. The Minister also stressed that a further attempt to help the poor was the decision not to increase the fuel levy. This would limit increases in transportation and food costs.

The macro-economist perspective concurred that the tax cut was a welcome stimulus for dampened domestic demand, particularly for the low and middle-income groups. Merril Lynch calculated the tax cuts to be of equal benefit to consumers as a four-percentage point cut in interest rates. Mr Roux pointed out that the income tax cuts fully off-set the negative impact of rising inflation. Tax cuts would increase transfers to households' income, which would off-set the crunch.

SACOB expressed concern that no other tax relief for the corporate sector was a negative signal, which failed to bring South Africa in line with other emerging markets. Specifically, they pointed out that present corporate tax of 30% and STC of 12,5% resulted in an effective company tax rate that was not synchronised with South Africa's trading partners.

(b) Need to reassess tax on retirement funds

Adv Du Toit emphasised that the present tax regime on retirement funds represents a significant imbalance in the economy. This concern was echoed by SACOB. SACOB pointed out that the bearer of such taxes is not the insurance industry, but members of the retirement industry. At its present level of 25%, the tax on retirement funds is a disincentive to saving and especially harsh to lower- and middle-income workers whose personal tax rate is lower than 25%. In addition, people who receive pensions from these funds are penalised through severe erosion of their savings. They stressed that the tax on retirement funds is in dire need of drastic reform. The Budget reiterates a review of the retirement industry. However, the concern expressed by SACOB was that in the process of revamping the system, people continue to be penalised. Hence, they suggest that the problem needs to be addressed by an interim ad hoc relief measure. The interim measure suggested was to decrease the rate from 25% to the minimum personal income tax rate of 18%.

The Committee also expressed its concern regarding this issue, and agreed that it needed to be addressed with some urgency. The Committee expressed its desire to engage the National Treasury in this regard.

(c) Tax concerns of non-profit sector

According the voice of the non-profit community, the Non-Profit Partnership, the present tax regime is inadequate for non-profit organisations, particularly regarding changes in respect of income tax.

The Non-Profit Partnership welcomed the increase in thresholds for tax-deductible donations by individuals. However, they submitted that there was no justification for the differentiation between individuals and companies, and suggested that the issue of deduction limits be revisited. Concern was expressed that the new framework has been narrowed instead of extending the tax exemption and deductible donation benefits. They also urged that their proposal regarding a general category of public benefit activity be included in the list of public benefit activities.

(d) Concern over taxes

Adv Du Toit highlighted the need to revisit a group tax. According to Adv Du Toit, South Africa is not synchronised with the rest of world, because it has a residence-based tax system and a capital gains tax, but not a group tax regime. South Africa's present tax regime in this regard is fragmented and creates difficulties. A group tax will better reflect the economic reality of the corporate world. This concern at the lack of a group tax was echoed by SACOB, who pointed out that, when combined with the capital gains tax, this regime has a cascading effect.

Adv Du Toit also emphasised the importance of a robust tax regime, with a balanced degree of regulation.

Mr Clegg pointed out that the capital gains tax and residence-based taxation rules are complex. Therefore, he urged SARS not to introduce any substantive changes in these systems over the next two years, so as to enable taxpayers to become familiar with the new system. Concern was also expressed by SACOB for the need to simplify the tax system. They pointed out that tax simplification was urgent in the interest of tax certainty and tax morality. The Minister had expressed his commitment to simplify compliance procedure for small business.

(e) SARS administration

SARS' success in collection is commendable, with significant increases in efficiency. SACOB commended SARS on an efficient system regarding both enforcement and service.

4. Other issues

The following section highlights various issues raised by the groups in their submission to the Committee.

(a) Tax experts

In his address to the Committee, Adv P du Toit pointed to the need for a fundamental re-examination of the auditing profession, both in its scope and underlying principles. He highlighted the inadequacy of the auditing principles underlying generally accepted accounting practice (GAAP).

(b) Business

SACOB highlighted that interaction with small business in the consultation stage of the Budget would be useful. Ensuring interaction between business and labour at this level forms part of the cornerstones of South Africa's objective of a participatory democracy.

(c) Labour

FEDUSA articulated its concern about the arms procurement package. FEDUSA also expressed its concern regarding the Reserve Bank. While recognising the role of the Reserve Bank, FEDUSA suggested that the activities of the Bank were too narrowly focused on inflation targets. The Bank, according to FEDUSA, also has a responsibility to stimulate the economy.

(d) Non-profit sector

In its submission, the Non-Profit Partnership called for institutionalised dialogue between the National Treasury and its technical team of lawyers, on a three- to six-monthly consultation basis. They expressed a desire to form a regular relationship with the National Treasury that would take account of their views before the Budget is finalised. It was their opinion that Budget Proposals do not necessarily reflect the priorities of the sector in its overall aim of poverty relief and sustainable development.

D. Oral submissions

The following people made oral submissions before the Committee, some in their personal capacity. These submissions are available on request from the Committee Section of Parliament:

1. Mr M Morobe, Chairperson: Financial and Fiscal Commission
2. Mr J Josie, Deputy Chairperson: Financial and Fiscal Commission
3. Dr H Fast, Manager: Parliamentary Office
4. Mr I Momoniat, Deputy Director-General: Intergovernmental Fiscal Relations
5. Mr V Kahle, Chief Director: Legal Services, Intergovernmental Fiscal Relations
6. Ms M Ngqaleni, Director: Intergovernmental Fiscal Relations
7. Mr P du Toit, Tax Expert
8. Mr D Clegg, Tax Expert
9. Ms N Moola, Economist: Merrill Lynch
10. Mr A Roux, Economist: Investec
11. Mr G Ballim, Economist: Standard Corporate Merchant Bank
12. Adv A Meiring, SACOB
13. Mr R J Wood, SACOB
14. Adv K Warren, SACOB
15. Mr W Boonzaaier, Afrikaanse Handelsinstituut
16. Mr A van Zyl, IDASA
17. Ms G Humphries, FEDUSA
18. Mr E Saldanha, Non-Profit Partnership
19. Ms K Nelson, Non-Profit Partnership
20. Ms P Dlamini, Non-Profit Partnership

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