2012/13 Fiscal Framework and Revenue Proposals: Public Hearings Day 2 – People's Budget Coalition, Financial & Fiscal Commission, FEDUSA, PricewaterhouseCoopers, SAIPA

Meeting report

Co-Chairperson De Beer welcomed delegates and Members to the second day of the hearings.

People's Budget Coalition Submission
Mr Matthew Parks, Deputy Parliamentary Coordinator, Congress of South African Trade Unions (COSATU), represented the People's Budget Coalition, whose analysis and critique of the budget was guided by how it would impact on South Africa's triple challenges of massive levels of unemployment, unsustainable poverty (a 'time-bomb ticking') and inequality - levels of inequality that now ranked South Africa as the most unequal society in the world. The Coalition was also guided by how the budget would capacitate Government to deliver upon the African National Congress 2009 election manifesto and in particular its five key priority areas. While the Coalition welcomed aspects of the budget, it was deeply concerned by worrying trends.

Contextual concerns
To achieve the key priorities, effective redistribute strategies were required to enable a context for growth to take place. Such strategies should find expression in a macro-economic policy framework that put decent work at its centre. There was ample evidence that policies to deal with high unemployment continued to fail. Many intervention tools had been inappropriate. Table 1 (submission document, page 4) showed the impact of the global crisis on the South African labour market. Most of South Africa's unemployment was of a structural nature, with job losses assuming a more or less permanent nature. The vast majority of the unemployed, an estimated 72%, were young people aged 15-36 years with 60% having minimal or no secondary education. Differences in consumption expenditures patterns between the richest and the poorest illustrated the start inequalities. Figure 1 (submission document, page 6) provided additional details on consumption expenditure patterns.

Budget framework
South Africa's economy remained fragile. The Coalition welcomed that Government expenditure would increase to 32% of gross domestic product (GDP). However, the Coalition remained concerned that overall capacity levels in national and provincial departments and district and local municipalities remained uneven and at times woefully inadequate. In particular, key problems had included inability to spend capital budgets to boost service delivery and assist towards the creation of decent work. A key failure was Government's inability to spend 32% of its capital budget in the past financial year.

Mr Parks noted especially the Coalition's disappointment that the budget deficit would decrease to 3% of the GDP by 2014. South Africa had sufficient space to increase its deficit levels. It was not in the same situation as Greece or Spain. South Africa' s situation with budget deficit was about a third of that to be found in Europe. Moreover, Europe did not have South Africa's massive crisis of unemployment, inequality and poverty levels, and the dire need for infrastructure expenditure. The unpredictability of the European economic crisis would, however, continue to impact negatively on South Africa, so it was therefore critical that government avoided decreasing the budget deficit over the Medium Term Expenditure Framework (MTEF) in order to prevent South Africa's economy from deteriorating from a second round recession.

Macro-economic policy
This budget continued on the same old path. Inflation was projected to be 5.4%. Nominal tax collections were said to have grown by 11.9%. Government spending was expected to grow by 2.6% in real terms up from 2.3% in the previous financial year. At the same time GDP growth was predicted to fall from 3% to 2.7% this year and remain in that range for the medium term. The deficit was targeted to be 4.6% this year and then to decline further to 3% by 2014. Thus the Coalition characterised the budget as a conservative, macro-economic framework predicated on a neo-liberal paradigm. This was because this spending did not prioritise job creation and retention when South Africa still suffered from more than one million job losses over the crisis period.

Mr Parks pointed out that South Africa should learn from China and make its currency more competitive to achieve high levels of exports. The exchange rate should also be stabilised. The current level of the exchange rate did not help to stimulate the economy so as to preserve jobs and enhance broad-based industrialisation. The Coalition set out interventions that it would have expected the budget to address (see submission document, paragraph 4, page 8). These interventions included the introduction of a tax on luxury items and on the super-rich, clear local procurement guidelines, encouraging productive Black Economic Empowerment (BEE), and the elimination of tenders and the strengthening of the public sector. South Africa had missed yet another opportunity to change course to a new growth path.

Creation of decent work
The Coalition welcomed the budget's proposed economic support measures as an important step towards growing South Africa's manufacturing and agricultural sectors. The Coalition believed in much grater financial support and an increased role for the state in the economy. While incentives were important, they had not always worked in attracting sufficient investment in key industrial sectors. While it was hoped that the existing and expanding Special Economic Zones would contribute to addressing this challenge, the state must also define a more strategic role for itself by investing in key and potential economic sectors. The Coalition continued to support measures to roll out public and community works programmes. Additional allocations to the Expanded Public Works Programme (EPWP) and Community Work Programme (CWP) were welcomed. Notwithstanding the budget's support for job creation and training, it did not mention the National Skills Development Strategy 3. It did not specify the role of macro-economic policy in supporting Industrial Policy Action Plan 2 (IPAP 2). The budget allowed for the unbridled operation of market forces in determining the exchange rate; it failed to produce measures to regulate the flow of credit to productive sectors; it did not put forward local procurement to support broad-based industrialisation. Whilst it mentioned preferential procurement, it did not mention the need to combat import-fronting. In short the budget did not provide concrete support for IPAP 2 or the New Growth Path (NGP).

Infrastructure
The Coalition welcomed the increased allocation towards infrastructure expenditure to the amount of R3.2 trillion over the MTEF. This was promising since it meant that infrastructure investment would grow above the growth rate of the economy in the very short term. This reflected a correct bias.

However, as Mr Parks emphasised, this must be accompanied to the need to increase the capacity of the state to spend appropriately the allocated amounts. There had been a failure to spend 32% of the infrastructure capital budget. This was at all levels of Government. Even the City of Cape Town, the most efficient municipality in the country, had a similar capacity failure – it could not spend its capital budget. At the same time, South Africa should be able to engage in more expenditure, on the basis of the good work of the South African Revenue Service (SARS) in revenue collection. The Coalition supported the proposed establishment of the Municipal Infrastructure Support Agency. With chronic under-spending by departments over the years, the Coalition was concerned that the state was not in a position to address infrastructure delivery mechanisms. The budget should have included further ways to build internal capacity to delivery key basic services and public infrastructure directly. Tenders should be cut out and the state itself incapacitated. The Coalition noted that beneficiation was the cornerstone to building industries downstream of mining, but was concerned that the Medium Term Budget Policy Statement (MTBPS) did not mention it. Infrastructure spending was not lined to local industrial development through interventions such as local procurement.

Education
Though spending on education by the South African Government was amongst the highest levels internationally, the minimal growth of education funding by 1% in real terms was worrying due to the long term education crises that South Africa faced. Out of 1.2 million children entering the education system in grad e1, only half a million reached metrics and less than half of those achieved university exemption. Backlogs in basic education included the fact that 93% of schools had no libraries or libraries without books. 42% of schools depended on boreholes or rainwater or had no water at all. 61% of schools had no means of disposing of sewage. 21% of schools had no toilets or had more than 50 learners per toilet. 62% of schools had a learner teacher ratio that exceeded 30. 81% of schools had no computers or more than 100 learners shred a computer. The re-opening of teacher colleges, nursing colleges, technical colleges and the building of new institutions, including the two new universities in the Northern Cape and Mpumalanga, needed to be expedited. A 1.6% real increase would make a difference in expanding the further education and training (FET) sector by 150% for example.

Health
The budget mentioned that health spending would increase by 1.5% in real terms. This was worrying given the massive crisis that South Africa faced in this area with staff shortages and non-availability of medicines. There were infrastructure backlogs, inadequate information and communications technology (ICT), insufficient management and administrative support, insufficient availability of equipment, and some provinces did not have equipment to treat certain conditions. Negative consequences were described (submission document, paragraph 8, page 12). The budget was supposed to clarify the financing mechanism of the NHI and make the necessary budgetary allocations to phase in the system. It should have begun to indicate how the health system would be transformed. The role of community care workers as part of the public health system could not be minimised. They needed to be integrated into the public service. The state should lead the process of training of nurses and doctors and resist the incursion of the profit motive into the process. The nurse to patient ratio must be increased to eight per 1 000 people and the ration of physicians must be increase to one per 1 000 people. The budget should have indicated how the increase in the number of physicians and associated professionals would be funded. The Coalition rejected the proposal to include an increase in Value Added Tax (VAT) to fund the NHI. The additional resources for the NHI should in the spirit of solidarity on which the NHI was premised be sourced from the wealthy. VAT was not a progressive tax: it was extremely regressive and hit the poorest sectors of society the hardest. A brief report on the setting up of a state pharmaceutical company to bring down the costs of medicines should have been provided.

Rural development, food security and land reform
The Coalition welcomed the strengthening of local government in rural communities and the prioritisation of water infrastructure and upgrading waste water treatment works in rural areas. The intention to support small scale farmers was welcomed. The alignment of programmes between the Departments of Rural Development and Land Reform, Agriculture, Forestry and Fisheries, and Water Affairs, was welcomed as bringing institutional coherence. The budget also mentioned the role of the Land Bank in supporting agriculture. The budget's observation on the need to address backlogs in public service delivery in rural municipalities was important because it addressed the question of the rural-urban divide and the focus on rural development should help to ease migration to the cities. The budget decried the rise in food prices, but, however, did not indicate that Government was going to do about it. The budget should have contained measures to limit speculation on essential food items in financial markets. The budget should have factored in cost drivers faced by farmers such as fertiliser, electricity, transport, and water tariffs. In this context the re-nationalisation of SASOL became important.

Crime and corruption
The Coalition submitted that the budget must address the resourcing of the South African Police Service, and ensure adequate support for institutions, especially community policing forums. It must provide conditions for the Criminal Justice Cluster to attract and retain highly skilled personnel. There should be stricter penalties to deter public servants from using state resources for their own interests. The creation of a naming and shaming list should be expedited. Dealing with corruption in the criminal justice system demanded improving the capacity of the Independent Complaints Directorate. However, the most powerful way to deal with corruption was to eliminate the use of tenders to deliver basic goods and services.

The Budget's call for public service wage restraint
The Quarterly Employment Statistics indicated that real wages had declined by 6% over the pt two and a half years. In the fourth quarter of 2010 the average monthly wage was R3 336; it was now R3 175. The average inflation rate faced by workers was 10%, but most wage settlements in the public sector were between 6% and 8%. This attack on public sector workers was therefore unwarranted.

Mr Parks pointed out that the public service wage bill was increasing because the public service was filling vacancies. A developmental state required additional personnel, including nurses, teachers, police officers, doctors, street cleaners, and others. 'There was nothing wrong with that, and it should increase.' Money should be saved rather by addressing fruitless and wasteful expenditure.

Parliamentary capacity to amend money bills
The Coalition continued to emphasise the need to strengthen the technical capacity of Parliament and to establish a Parliamentary Budget Office.

Ms Boniswa Ntshingila, National Research Officer, National Union of Metal-workers of South Africa (NUMSA), as part of the People's Budget Coalition's delegation, submitted that NUMSA welcomed some of the key interventions announced in this budget such as they tax credit for medical scheme contributions, the expanded financial support for housing development, the allocation for university infrastructure and allocations to kick-start the NHI pilot projects as well as the scaling up of the Community Works Programme.

However, NUMSA raised key concerns with regard to the 2012/13 budget. As to the fiscal framework it noted with dismay that Treasury had persisted with its plans to reduce the budget deficit to 3% in 2014/15. Cutting deficit spending while South Africa was confronted with the global economic crisis as well as the triple crisis of unemployment, inequality and poverty at home simply did not make sense.

NUMSA noted concerns with the infrastructure programme and asked if there had been a genuine paradigm shift in the State of the Nation Address (SONA) and the Budget Speech or if instead the 'infrastructure programme had become merely a mantra. The travesty of inefficient infrastructure investments reflected the neo-liberal centre of power in the Treasury with its bias to big business in the mineral, energy, financial and commercial sectors. NUMSA was worried that the Presidential Infrastructure Commission was maintaining the existing neo-liberal framework. This framework was too pro-corporate, too capital-intensive, too import-reliant, too extractive orientated, too vulnerable to volatile world markets, and too ecologically damaging. The pro-corporate bias was unwise at a time that both state-capacity building was required (especially in construction and operations and maintenance) and when so many unmet needs of ordinary poor and working class people were still being ignored. The capital intensive character of the investment was unwise given that labour intensity was required in a just transition to a more appropriate and balanced economy. The extractive-oriented character of the infrastructure announced was disturbing when there was so much criticism of the mining and smelting industries for not taking advantage of commodities booms to add value, jobs and beneficiation here in South Africa. There were also some serious environmental concerns about the infrastructure investments, such as insufficient water available in areas of Limpopo where vast coal-burning and mining activities were anticipated and the degradation of the water table across Gauteng, Limpopo and Mpumalanga. Already in such areas, when mega-projects and multinational corporations grabbed land and water it was poor people who suffered.

NUMSA called for halting the privatisation of South Africa's roads. NUMSA opposed the Gauteng e-tolling because it would present a severe financial drain for the working poor and other lower classes who could not afford the new tolls. These tolls were especially destructive to poor people because apartheid planning had placed the Gauteng townships at long distances from centrally located jobs, commerce and recreation. Post apartheid decentralisation and suburban sprawl had only worsened the apartheid geographical divide. Opposition to the Gautier highway tolls showed that Government had gone too far in privatizing and outsourcing South Africa's commons, beginning with Telkom's partial sale, and carrying through to Eskom's asset stripping and the disaster of municipal water privatisation, as well as the public airwaves controlled by a cellphone oligopoly that overcharged. Our society had learned not to trust privatisation. NUMSA called for state-owned, locally operated, labour intensive and sensitively priced public services. NUMSA called for decommodifying these basic needs – including public transport, not expanding the terrain of privatisation.

NUMSA was concerned that large foreign energy, power and technology companies, financiers and project developers would be the main beneficiaries of the renewable energy purchase programme, which was huge and involved billions of Rands. Large costs of the programme would feed through to the cost of electricity borne by users. The bidding approach made the whole exercise expensive. These costs would make renewable energy less competitive and hence curtain large scale roll-out required to mitigate climate change. It would also artificially make coal and other technologies more financially attractive and provide a sophisticated and further subsidy and support for fossil fuels and nuclear power.

NUMSA concluded that the Government had once again failed in providing a 'grand narrative' which would highlight in which direction the economy was being guided. Every year a budget was presented in a manner which painted a picture of progress with bigger spending on health, education and so on, but a the same time South Africa was faced with worsening conditions of poverty, inequality and unemployment. Cabinet as a whole and the economic cluster ministers in particular still needed to provide a concrete plan of how spending was going to be increased in a manner which would deal effectively with the triple crisis of poverty, inequality and unemployment. Until then the SONA and Budget Speech would remain rhetoric.
(Please see submission document, and presentation document, for full details)

Financial and Fiscal Commission (FFC) submission
Mr Bongani Khumalo, Acting Chairperson and Chief Executive Officer, Financial and Fiscal Commission (FFC), noted the uncertain and volatile global environment. Therefore the issues that were pertinent in 2008 and 2009 must still be taken into consideration. The FFC had recommended that addressing infrastructure backlogs and dilapidation should be seen as a way to accelerate the South African economy. However, the South African economy was exposed to adverse trends in the international economy. The risks remained. However, the budget remained consistent in its responses, and the FFC broadly supported the way Government was managing the economy, in particular fiscal policy. The FFC's submission was in terms of the Money Bills Procedure and Related Matters Act (No. 9 of 2009) which required parliamentary committees to consider any recommendations of the FFC in their deliberations on money bills. It was also made in terms of the FFC Act (No. 99 of 1997).

Brief description of the fiscal framework for 2012
Ms Marina Marinkov, FFC Researcher, reviewed the 2012 fiscal framework. Government tabled a total national budget of R1.1 trillion to be spend amongst the three spheres for the 2012 financial year, growing to R1.3 trillion in 214/15. A significant portion of this allocation was spent at national level (47.1%) and provincial level (44.5%) while local government received 8.4% of this allocation.

This year's fiscal framework saw expenditure rise by R55.9 billion relative to baseline over the medium term expenditure framework (MTEF). A total of R844.5 billion had been allocated to infrastructural investment, while some R6.2 billion had been added to spending plans for job creation over the next three years.

The allocations to provinces had been revised upwards with an additional R15 billion to the Provincial Equitable Share (PES) and R4.4 billion to conditional grants over the MTEF period. The local government sphere received an additional R2.2 billion to its equitable share and R3.1 billion to conditional grants. (Presentation, slide 3; submission, paragraphs 2.1 to 2.3, page 1).

Ms Marinkov emphasised that in the 2011 Medium Term Budget Policy Statement (MTBPS), Government had reiterated its commitment to promoting faster and more inclusive growth through shifting the composition of spending towards infrastructure spending. A precondition for this was a moderation of increases in the public sector wage bill and recurrent expenditure generally. The budget for 2012 reflected this resolve, through a considerable portion of the budget allocated to infrastructure, as well as through the moderate planned increases in the public sector wage bill (budgeted at 5% for 2012, below the projected inflation figures) and moderate decreases in state debt costs over the medium term. Differences between the 2011 MTBPS and the 2012 budget were explained (submission, paragraph 2.4, page 2).

Medium-term budget deficit projections
Medium-term budget deficit projections were illustrated (graph, presentation slide 4; see also submission, figure 1, page 2).

Macro-economic outlook and risks: economic growth
The South African economy was negatively affected by the uncertain global economic climate. Real economic growth had increased from 2.8% in 2010 to 3.1% in 2011 which was reflective of ongoing economic recovery. However, international as well as domestic organisations had recently revised South Africa's economic growth forecasts for 2011 downwards. (presentation, slide 5; submission, paragraph 3.1, pages 3-4).

Infrastructure was identified as a key driver for economic growth and job creation in South Africa. It was somewhat paradoxical that public sector infrastructure spending had been revised downwards since the 2011 MTBPS for the categories of economic services as well as justice and protection services (see submission, table 1, page 4). Infrastructure investment for financial service was largely unchanged but increased for social services. (presentation, slide 6; submission, paragraph 3.1, pages 3-4).

Macro-economic outlook and risks: job creation
This year's budget was unmistakably aimed at growth and job creation, with the expenditure and revenue proposals reflecting Government's pursuit of progressive developmental policies.

Public sector employment growth was, however, not a robust way to sustainable create jobs, particularly when considering that the public sector wage bill was already more than a third of all Government spending. In this year's budget, Government had announced its intention to shift the composition of spending from consumption towards capital investment and moderating growth in the public sector wage bill formed part of this strategy.

The key to realising sustained and inclusive economic growth was for Government to create high quality education systems (Presentation, slide 7; submission, paragraph 3.2, pages 4-5).

Macroeconomic outlook and risks: National Health Insurance (NHI)
In preparation for the NHI, steps would be taken over the MTEF to improve public health administration, accelerate the hospital revitalisation programme and pilot district-based primary health care services.

The FFC believed that the pilot route taken by Government was a sensible way of going about such a reform (Presentation, slide 8; submission, paragraph 3.3, pages 6-7).

Macroeconomic outlook and risks: oil price
The oil price had traditionally played an important role in the South African economy, often offsetting positive benefits of rising commodity prices and posing a risk to the fiscal framework.

There was clearly a need for the Government to explore alternative strategies and contingency financing to cater for possible oil shortages. Given that transport was a big contributor to Government strategy for rural development higher fuel costs might impact negatively on rural development. (Presentation, slide 9; submission, paragraph 3.4 (c), page7)

Macroeconomic outlook and risks: public debt
The FFC commended the National Treasury on debt management efforts in a volatile global environment. However, it was concerned about the projected increase in gross government debt beyond 40% of GDP. Ms Marinkov remarked that the financing of expenditure increases by debt was a possible risk (presentation, slide 10; submission, paragraph 3.5, pages 8-11).

Macroeconomic outlook and risks: public borrowing requirement
Ms Marinkov pointed out that there was a clear decrease in the borrowing requirement for provinces and social security funds. However, there was an increase in the borrowing requirement for public entities in the medium term. Consolidated Government borrowing showed a similar trend. (presentation, graph, slide 11; submission, figure 4, page 11).

Macroeconomic outlook and risks: administered prices
Dr Ramos Mabugu, Head: Research, FFC, noted that prices such as electricity, medical aid, education and municipal services continued to impact on resource allocation. (presentation, slide 12; submission, paragraph 3.6, page 12).

Revenue: changes since 2011 MTBPS
There was a modest personal income tax relief amounting to R9.5 billion. The tax burden on companies was revised upward. Taxes on international trade and transactions were revised downward. Revenue estimates were consistent. (presentation, slide 13; submission, table 3, page 13; submission, paragraph 4.1; table 4 and paragraph 4.2, pages 13-14).

Expenditure: changes since 2011 MTBPS
The FFC noted the downward revision of expenditure on housing, a governmental spending component that could contribute to economic growth Such could possible compromise Government's outcome on human settlement.

Welcome developments included the significant upward revisions for economic infrastructure as well as science and technology. Investment in science and technology was an important component for the creation of a knowledge economy. Expenditure estimates, similar to revenue forecasts, were consistent in the sense described in paragraph 5.2 (a). (presentation, slide 14; submission, table 5, page 15; submission, paragraph 5.1; table 6 and paragraph 5.2, pages 15-16).

Improving the fiscal framework: fiscal guidelines
Continued commitment by Government to consolidating the budget while adhering to the three principles of counter-cyclicality, long-term (LT) debt sustainability, and intergenerational equity could enhance Government's credibility.

An important issue for consideration in strengthening the fiscal framework was whether there should be legislative requirements for Government to run a balanced budget or whether this was implied in the Public Finance Management Act (No. 1 of 1999) and Municipal Finance Act (No. 56 of 2003). (presentation, slide 15; submission, paragraph 6.1, pages 17-18

Improving the fiscal framework: long term (LT) fiscal planning
The FFC was in favour of long-term fiscal reporting, as this was likely to further enhance the quality and transparency of public sector reporting and strengthen public confidence in public sector financial management. (presentation, slide 16; submission, paragraph 6.2, page 18).

Conclusion (Recommendations)
Ms Tania Ajam, FFC Commissioner, commended the Government for a well-crafted budget, firm commitment to fiscal consolidation, and consistent projections. However, the FFC cautioned that the rising price of oil and administered prices could dampen an otherwise positive economic outlook. The efficiency and effectiveness of resource use must receive more attention by way of performance based budgeting system and incentives. The FFC supported the strategic phase of budget making with a document such as the long-term fiscal report. Government needed to take a very clear policy position on the tolling of roads. (presentation, slide 17; submission, paragraph 7, pages 19-20; also paragraph 3.5(c) and (d), pages 10-11). It was important that such projects underwent rigorous processes including establishing upfront clear accountability frameworks.

Discussion
Co-Chairperson De Beer commented that the above observations would form part of the Committees' report.

Mr D van Rooyen (ANC) found it contradictory that NUMSA appreciated the commitment of funds for the two new universities, but that the umbrella body, the People's Budget Coalition (PBC, the Coalition) seemed not to agree.

Mr Van Rooyen said that it might be asked why one should incur a greater deficit when one apparently lacked the capacity to spend. He asked the PBC's views.

Mr Van Rooyen asked the FFC to what extent it would assist the economy not to have the potential destabilising effects of increasing electricity prices.

Mr Van Rooyen asked the FFC how possible 'regulation' of the budget might assist in achieving the noble objective of a stable fiscal framework.

Mr Van Rooyen said that he thought we had already achieved a performance-based budgeting system.

Mr D Ross (DA) asked the Coalition for clarity on escalating corruption vis-a-vis state capacity and for its views on preferential procurement. Was the R30 million apparently lost through corruption a yearly amount?

Mr Ross asked NUMSA whether it would give priority to energy supply rather than to renewable energy sources at the present time.

Mr Ross asked NUMSA for its recommendations on alleviation of the plight of the poor.

Mr Ross asked the FFC for more information on the NHI's funding challenge in particular the R6 billion needed as early as 2014/15 for the pilot projects. What effect would it have on the borrowing requirements and the budget deficit?

Mr Ross noted the FFC's research on administered prices, especially in the electricity sector. When would the FFC brief Members on this, and did the FFC share Mr Ross's views that electricity prices should be inflation-related. Moreover, certainty in electricity prices was required. He referred to a recent article in the Cape Times.

Dr Z Luyenge (ANC) appreciated the clear and elaborate presentations. He thought it unfair that after 18 years one was still crying 'foul' that one lacked capacity. It had to be asked how some individuals managed to earn 'billions'. Were they not afraid of the 'millions' that they were owning as members of the community? This scourge of lack of capacity cut across the public service, business and the community. He cited abuse of child support grants.

Dr Luyenge said that the Parliamentary Budget Office was a constitutional obligation. There was a law in force. As public representatives, Members of Parliament were not doing enough, while ordinary members of the community were establishing structures that were actually doing what Members of Parliament were supposed to do. These non-governmental organisations (NGOs) and community-based organisations (CBOs) were there because Members of Parliament were not operating as they should. This was a disservice to members of the public and to the African National Congress (ANC). Members of Parliament should justify the salaries and benefits that they earned to ensure that the State of the Nation Address (SONA) and budget speech were not regarded as mere rhetoric.

Dr Luyenge suggested that under-expenditure and returning of funds to the National Treasury was not unintentional. Members of Parliament must hold those concerned accountable without fear or favour.

Co-Chairperson De Beer accepted Dr Luynege's words as remarks which could be accommodated in the next week's debate.

Mr B Mashile (Mpumalanga, ANC) understood that the PBC was totally opposed to e-tolling, and asked what the alternative was. How would the PBC propose handling the debt that had been incurred?

Mr Mashile asked the FFC what informed its statement that a high quality education system was required. How did its statement relate to the current education system? How did it affect the funding?

Ms Z Dlamini-Dubazana (ANC) asked the PBC which model it proposed for the special economic zones which were good for the empowerment of the citizens.

Ms Dlamini-Dubazana asked the FFC what it meant when it said that there was no commitment by the Treasury to inter-generational equity. What did the FFC expect?

Mr T Harris (DA) asked the Co-Chairpersons to update the Members on the Committees' official positions on the Parliamentary Budget Office.

Mr Harris asked if the FFC could substitute for the Parliamentary Budget Office until it was established.

Mr Harris referred to the graph on page 92 of the Budget Review, which summarised the last 50 years of public and private sector capital investment. From 1995 to 2005 there was significant under-achievement. This was due considerably to a drop in public investment. This indicated the paradox of infrastructure spending slowing down in the short term. On the other hand, there should be an increase in infrastructure spending in the short term, but lack of capacity was a constraint. He asked the FFC if the raft of measures that the Minister had announced largely on page 12 of his Budget Speech to try to improve the quality of project implementation was sufficient. If they were fully implemented, would the FFC be satisfied?

Mr Harris wondered if the Minister had read the very latest reports that a credit rating agency was still worried about South Africa's long term fiscal sustainability, mainly because of concerns around the quality of spending on account of debt levels, including the public sector wage bill which the agency did not think South Africa could sustain, and over-ambitious projections for revenue collections. Mr Harris was surprised to see this analysis. What was the FFC's position? Were such agencies being overly pessimistic?

Mr Harris asked the FFC about its analysis of public debt and the public sector borrowing requirement (slides 10 and 11). He referred to page 71 of the Budget Review, from which one could see that debt as a proportion of GDP rose throughout the medium-term, peaking in 2014 at 42%. However, the Minister, on page 9 of his Budget Speech, had said that the public borrowing requirement would decline towards 2014, before rising rapidly again as the infrastructure programme of Government accelerated. One could understand why the agencies were worried.

Mr Harris asked the FFC's views on the international experience of requiring, by law, a balanced budget. 

Responses
Mr Parks welcomed the Members' questions and largely agreed with them. PBC's concern was when the two new universities would be established. The time frame was the cause of the PBC's frustration with many governmental issues. The PBC was concerned at fiscal dumping. There was need to kick-start the economy, which had been stationary too long.

There had been considerable discussion in NEDLAC on procurement policies, with focus on local suppliers. The PBC was especially concerned about Government's recourse to tenders. An example was the reconstruction and development programme (RDP) houses; a small sum of money became smaller because companies to whom the work had been outsourced must make a profit. The cost of police stations escalated from R100 million to R300 million, for no justifiable reason. Even then the quality of the police stations was suspect. So tenders must be done away with. The state used to have capacity, and capacity should be restored.

The PBC wanted the Government to succeed. At the same time it did not want to hear excuses. Moreover, one could not talk about reducing the wage bill when there was lavish expenditure. He gave the example of banquets costing millions of rands. The travel allowances of ministers were exorbitant. Especially when social grant recipients were told that they could have only a R60 increase. So many constituents struggled to survive on a daily basis.

The PBC was totally against e-tolling, was not happy with the lack of consultation, was displeased with consultation after companies had been appointed, had seen the same kind of thing with the Durban to Johannesburg high speed train project, and with commitments to a nuclear plant for R300 billion. One could not simply outsource the funding for these projects, including the NHI, to an already impoverished public.

The PBC supported the Special Economic Zones (SEZs) and was happy that Government was not going to relax on labour rights as often as was done internationally. One could learn from China's SEZs, which specialised. Moreover, one must not create another Atlantis.

Mr Woody Aroun, Parliamentary Officer, NUMSA, said that the Union was developing a more consolidated position on energy. NUMSA wanted to see a cleaner environment and decent work. However, NUMSA was worried about the bid process and the overall outsourcing of renewable energy to private companies. There was no over-arching skills development programme. Only 30% of the present bid process was towards localisation, and mainly confined to the site preparation and construction phase, while 70% of the bid process was towards price.

Mr Khumalo requested permission to submit written responses to Mr Harris' questions.

Mr Khumalo replied that electricity was an infrastructure-intensive industry. Discussions now focused on whether three-year budgeting for infrastructure was a good thing, since these projects took a long time.

Mr Khumalo replied that FFC's recommendation was that it was not necessary to regulate the budgetary process, since the existing system was sufficient.

Mr Khumalo said that Germany had been cited as a country which required a balanced budget by law, but it had some flexibility around that rule. The United States of America (USA) had tried to experiment in this direction also. The FFC would not wish to see this kind of legislation, since there was already a legal framework and guidelines.

Mr Khumalo replied that Government would be tabling very soon the proposed guidelines for NHI financing. The FFC had been doing work in response to the Green Paper, which did not specify the financing arrangements. The FFC did not know from where the R6 billion would come, since it was waiting for Government to table its proposal for the alternative funding mechanism.

Ms Ajam said that the FFC had submitted a discussion paper to Parliament on the possible relationship of the FFC to the Parliamentary Budget Office.

Ms Ajam thought that a start had been made to performance-based budgeting, but, as reflected in the Auditor-General's audit opinions, such budgeting was not in evidence in many departments and municipalities, and there was as yet little understanding of unit costs of service delivery.

Ms Ajam said that quality of education was critical. She quoted recent statistics.

Ms Ajam thought that the credit rating agencies had been unfair. South Africa's position on fiscal management compared favourably to Europe's, and to the USA's, which was 'deplorable'. South Africa did not merit a downgrade at this time.

Mr Khumalo drew Mr Harris' attention to details in the FFC's submission document.

Co-Chairperson De Beer valued Dr Luyenge's remark: it was important to explain the budget to constituents. Members of Parliament must lead by example.

Co-Chairperson Mufamadi opened the second part of the meeting.

Federation of Unions of South Africa (FEDUSA) Presentation
Ms Gretchen Humphries, Deputy General Secretary, Federation of Unions of South Africa (FEDUSA), noted that the focus in the budget speech was on need to establish a new growth path with a key focus on infrastructure delivery, not only to sustain economic recovery but also to meet the unique challenges of the South African economy. The spirit of Ubuntu and active citizenry encapsulated in the budget, extending to all South Africans to play a role in macro-economic change, stability and sustainability was positive and heartening. The Budget on a whole remained steadfast in addressing the challenges of creating jobs, reducing poverty, building infrastructure and expanding the economy. (Slide 2)

Economic outlook : global and economic developments
According to the World Economic Outlook (WEO) of January 2012 of the International Monetary Fund (IMF), South Africa was more affected by the recession than other countries in Southern-Sahara. This was because of South Africa’s larger exposure to countries where the crisis originated. South Africa was however geared to face the problem. (Slide 3)

Global impact of recession
The WEO report was also more pessimistic about global growth and had revised its estimates of growth down by 3.25% percent. The expected growth in emerging and developing economies was to slow down because of the worsening external environment and a weakening of internal demand. (Slide 4)

Outlook on employment & inflation
It was therefore understandable that Government forecast that economic growth would slow from 3.1% in 2011 to 2.7% in 2012. Thereafter it was expected to increase to 4.2% by 2014. There was agreement that a much higher growth rate of 6 per cent or more was necessary to bring down the unemployment rate. It could therefore be expected that unemployment would remain high during the next few years, if something drastically was not done to bring it down.

Government forecast that consumer price inflation was to rise from average of 5% in 2011 to 6.2% in 2012, declining to 5.1% in 2014. Given however the current rise in the international price of oil taken together with the proposed increase in fuel levies, FEDUSA believed that the inflation rate could probably be higher and remain longer outside the inflation target of 3% - 6%. (Slide 5)

2012 Budget Focus: Infrastructure
Jobless growth, high unemployment with the resultant unequal income distribution and poverty remained South Africa’s most serious socio-economic challenge. Job creation was the central theme in the New Growth Path (NGP) and also formed a central part in the Report of the National Planning Commission (NPC). Where the Budget concentrated on job creation last year, this year’s Budget took a broader approach with infrastructure development as the core. (Slide 6)

The National Development Plan analysed South Africa's socio-economic problems in a more systematic and pragmatic way than previous monitoring programs. The Commission identified unemployment, income inequality, poor-quality education, poorly located and insufficient infrastructure, the resource intensity of exports and skewed spatial patterns as the main challenges facing the economy.

FEDUSA met with the Chairperson of the National Planning Commission during November 2011 and would make formal proposals during March 2012.

In a mixed economy such as South Africa, there was a role for both the private sector and Government. If each of the social partners did what they “can do best” within the economy this would lead to higher growth and employment. FEDUSA noted that in this year’s Budget the proper roles of the social partners were acknowledged. (Slide 7)

The next three years would focus on infrastructure investment. FEDUSA fully agreed with this shift in expenditure. International experience demonstrated that higher levels of public and private investment in economic and social infrastructure promoted more rapid GDP growth, rising employment and per capita incomes, and a broadening of economic activity.

FEDUSA would require further details from the Minister in spelling out clearly how the increased infrastructure would be financed and the roles of the different institutions that would provide the finance.

FEDUSA also noted with satisfaction that consultation on the Budget took place within the National Economic Development and Labour Council (NEDLAC) involving all the social partners.

FEDUSA agreed with this all-inclusive approach to solving South Africa's serious socio-economic problems and would urge Government to make all efforts to convert these plans into action. The budget emphasised the importance of the private sector investment in building economic sustainability. (Slide 8)

Budget expenditure measures
Targeted job-creation programmes were in place for increasing employment in the budget’s expenditure framework.

FEDUSA welcomed further steps to increase jobs.
Further steps in job creation, such as an additional R4.8 million for the Expanded Public Works Programme, R3.5 million for the community works programmes; Working for Water and Working on Fire receiving an additional R1.1 billion; and the National Rural Youth Service Corps receiving an additional R200 million were indicative of more jobs.

Social protection
In a recession the poor were those who suffered most. FEDUSA welcomed the increase in the grants for the poor. In last year’s Budget the Minister stressed that the basic reason for the high dependency rate was that these citizens did not belong to a retirement or medical scheme. The starting point was therefore to bring more people to provide for their old age retirement in terms of pensions and medical insurances. (Slide 9)

Tax proposals as contained in the 2012 budget
FEDUSA welcomed the personal income tax relief of R9.5 billion. The bulk of this benefit would go to lower income earners. The primary rebate for people over the ages of 65 and 75 had also increased, which meant that these tax payers would have a little extra money in their pockets.

⚫FEDUSA would have liked to see a stronger correlation here with the thrust in the budget to create a savings culture to prevent the major dependency on old age pensions. (Slide 10).

Tax treatment of medical expenses
As from 1 March 2012 the tax credit for contributions to medical schemes would be introduced, at a rate of R230 a month for the first two beneficiaries and R154 each for additional beneficiaries.

The change from medical deductions to tax credits meant that everyone got the same tax relief, and it meant that higher income earners would not benefit more from the same medical expenses.

⚫Taxpayers 65 years and older and people with disabilities would be included in the second phase of this reform, which would be implemented in 2014. According to Treasury these reforms would significantly improve the fairness of the personal income tax system.

⚫FEDUSA would like to raise the concern that many tax payers were dependent on the current tax treatment of medical expenses and did their planning on this basis. For many these would actually imply a tax increase.

A discussion document on these credits would be published by the end of March 2011 and FEDUSA reserved the right to comment with the publication of the discussion document. (Slide 11)

Retirement funding and savings
The long overdue reform of the tax treatment of contributions to retirement funds was envisaged from 2014. For the past three years FEDUSA had been calling for a discussion document to contextualise further retirement reform to encourage voluntary savings. Consideration was being given to the introduction of tax-exempt short and medium-term savings products.

⚫FEDUSA would welcome this opportunity to increase voluntary savings but believed it should be subjected to a thorough consultative process within NEDLAC by all social partners.

Many South Africans leave saving for retirement too late and this additional amount would assist South Africans to make up the shortfall. These deductions would, however, be limited to a maximum annual deduction of R250 000 for people younger than 45 and R300 000 for people older than 45.

There were further proposals in the budget speech around retirement reform to assist individuals to be able to receive an adequate income in retirement; however these proposals still needed to be finalised.

A major retirement fund issue addressed in the budget speech centred on funds preservation. Minister Gordhan suggested that social partners consider ways to limit people's ability to withdraw money from their retirement savings.

⚫FEDUSA applauded the Minister for clear direction but would favour achieving a tax-free retirement in future.

Sanlam 2011 Benchmark survey showed that 20% of people indicated that they withdrew their retirement savings when they left a job and moved to another employer. The concern here was that, in this context, 72% of people used their retirement savings to settle debt and 29% used it to provide for living expenses.

A key policy challenge facing South Africa was the lack of adequate retirement benefits for all.

⚫FEDUSA would see the move to restrict lump sum withdrawals to 1/3 of accumulated savings as a step in the right direction to ensure savings for retirements. There were different views however amongst various affiliates in specific sectors and thorough consultation was still needed once there was a proper discussion document tabled.

Partnership was a strong theme of the 2012 budget and the Minister made the point repeatedly that, in order for South Africa to effectively address inequality and poverty, a partnership between Government and the private sector was critical. None so important as within the Retirement reform process. FEDUSA concurred with the view of the IRF that this will encourage a new generation of savings products. This would encourage employees and the society in general to save for their retirement and would in the long run, alleviate poverty.

FEDUSA noted that the budget contained no concrete solutions to enhancing and monitoring governance of pension funds. In light of a series of fraud and corruption cases last year alone, the Minister did allude to the reforming of the retirement industry discussion papers that would be released this year to address good governance as a fundamental to pension provisioning.

Trustee Education and communication within the pension sector did not receive a mention in this budget. FEDUSA had identified one of the most critical issues needing to be addressed given the changes in economic landscape as the need for tight governance and proper accountability.

⚫To encourage South Africans to save for retirement, contributions by employees and employers to pension, provident and retirement annuity funds were tax deductible. (Slides 12-13)

Dividends tax
FEDUSA welcomed the provision that with effect on 1 April 2012 Dividend Withholding Tax would come into effect. This provision would ensure a more equitable taxation in the economy. (Slide 14)

Capital Gains Tax (CGT)
Although FEDUSA agreed that for tax fairness all incomes should be included under the tax umbrella, the increase in the CGT inclusion rate at this stage came at a very unfortunate time where the ordinary citizen found it difficult to survive. Although there were measures to mitigate the effect on middle-income earners this would not be enough to mitigate the whole effect thereof.

Changes in Capital Gains Tax would also affect the allure of South Africans to save their money by investing in capital interest. The increase in Capital Gains Tax inclusion rate from 25% to 33% contradicted the 'saver friendly' context of the budget to the detriment of asset owners. As inflation eroded the value of any asset, it must grow and taxing this inflation protection became a disincentive to hold assets. (Slide 15)

Relief for small businesses
FEDUSA welcomed more favourable tax treatment for small and micro-businesses. (Slide 16).

Levy on electricity
According to the Minister there should be little overall impact on electricity tariffs. FEDUSA would monitor this and warn of any concerns as soon as they arose. (Slide 17).

The general fuel levy on petrol and diesel
The increase by 20c with effect from 4 April 2012, and the Road Accident Fund levy by 8c to 88c/l would have serious consequences for the ordinary citizen at a time where inflation was starting to rise and would without doubt affect it negatively. The increase in the petrol price would be felt in all spheres of the economy and have a direct impact on all South Africans.

⚫ Regarding tax amendments there were therefore some good and some bad news. The good news would probably be overshadowed by announcement of the increase in the fuel levy. (Slide 18)

Sin taxes (alcohol, gambling and tobacco)
The innovative measure of the gambling tax to broaden the tax base was welcomed and this budget simplified the tax to a 1% levy on gross gambling revenue effective from 1 April 2013 which would include the national lottery.

However, FEDUSA would like to raise its concern with the agricultural sector and specifically wine industry to prevent South African products from becoming too expensive for the international market when South Africa was competing with major global players. (Slide 19)

Tolling of roads and the e- toll system implementation
Government noted the outcry over the tolling of roads in Gauteng and the Minister made reference to lower tolls for public transport (no tolls for taxis) and frequent users, as well as a monthly cap for frequent users. The announcement by Finance Minister Pravin Gordhan in his budget speech that e-tolling would be going ahead in Gauteng at a rate of 30c/km was lower than the rate expected by consumers.

However, motorists were under pressure already and the prospect of sizeable petrol price increases in the coming months could have a crippling effect on the workers of South Africa. A lot of the people who used these toll roads to commute daily were not the highest income people. They were commuting towards the higher-income areas. A lot of commuting was towards the northern part of Johannesburg, from the West Rand, from the East Rand and from Pretoria. So it was a slightly lower income motorist who often lived out in those areas because the properties were cheaper.

FEDUSA would recommend a much more phased-in approach over a good number of years, rather than the sudden shock treatment of increasing the costs quite dramatically, because the whole property market needed to adjust and it would take time.

FEDUSA had therefore filed its Section 77 toll-road protest action at NEDLAC to deliberate on the matter.

The issue of toll-fees must be seen holistically as it started with Eskom already ramping up tariffs, and the municipalities' water and sewage infrastructure was probably coming under pressure, so FEDUSA expected some significant increases there too.

FEDUSA would ask the Minister of Finance to meet to find a amicable solution. (Slide 20)

Encouraging household savings
FEDUSA had been calling for years for household savings to be increased. A discussion document to be published in May 2012 would provide more details on creating a savings culture. South Africans were not good at saving.

To encourage greater savings among South Africans, tax-preferred savings and investment accounts were proposed as alternatives to the current tax-free interest-income caps. This would encourage a new generation of savings products.

Government proposed to introduce these tax-preferred savings and investment vehicles by April 2014. (Slide 21)

National Health Insurance
FEDUSA and affiliates applauded the additional allocations to be spent on nursing colleges and the rebuilding of five tertiary training hospitals.

FEDUSA was concerned about the apparent lack of consultation on the NHI process between the Department of Health and relevant stakeholders. The Budget Review 2012 contained no new information relating to NHI funding, and the expectation therefore remained that this would be funded from an increase in VAT, payroll taxes of employers or additional tax on individuals, or a combination of these.

FEDUSA believed that the matter should be subjected to thorough discussion at NEDLAC by all relevant stakeholders. As an organisation representing workers in South Africa FEDUSA would like to be part of the process of aligning the social funding options for national health insurance. (Slide 22)

2012 Government priorities and budget votes
FEDUSA for the purposes of this presentation focused only on some of the Budget Votes.

Vote 3: Cooperative Governance and Traditional Affairs:
Community Works Programme (CWP)
FEDUSA appreciated commitment to expansion of the CWP as an Innovative solution to temporarily curbing unemployment, while providing essential social development services, but cautioned against the programme becoming a charitable cause rather than developing individuals.

Government should ensure that there was a measurable transfer of employable skills, and opportunity to engage in meaningful employment.

FEDUSA suggested extending the programme from an interim solution to a step on a career path into more permanent meaningful employment, thus maximising on work-based training. (Slide 24)

Vote 8: Women, Children and People with Disabilities:
Women, Empowerment and Gender Equality
Ms Lauren Uppink, Social Policy Officer: FEDUSA, noted that the Commission for Gender Equality amounted to 65% of Department's budget. FEDUSA acknowledged the Commission's completion of a significant number of reviews, complaints and campaigns in 2011/12 attributed to investment in
human capital development.

FEDUSA was concerned however about the high number of vacancies in the Commission, transferal of knowledge, and consistency in delivery.

FEDUSA was pleased to note core objective to adapt international and regional instruments on women empowerment and gender equality into existing national gender initiatives.

Children’s Rights and Responsibilities
FEDUSA appreciated the plans to lead consultation with other departments regarding training of officials in mainstreaming children’s considerations

Rights of People with Disabilities
The increased participation of those with disabilities in the Expanded Public Works Programme was appreciated, but it had to be asked if their incorporation would lead to sustainable measurable skills acquisition, and relevant career paths, or was merely compensation for unskilled labour. (Slides 26-29)

Vote 17: Higher Education and Training
FEDUSA had resolved to lobby with Government to incentivise universities to produce enough appropriately skilled and qualified people central to the needs of industry.

The proposed differentiated Government subsidy system, made courses delivering scarce skills inexpensive, and those delivering skills in abundance more expensive.

FEDUSA noted the enrolment planning exercise to be conducted at all universities to expand enrolment in key scarce skills such as health, education and technology.

The Skills Development Programme aimed at increasing the numbers of artisan learners registered from 30 000 to 33 000. FEDUSA did not believe that this was an adequate target considering the skills shortage the country faced.

Vote 19: Social Assistance
FEDUSA was concerned with growing number of grant recipients annually, and expressed concern that South Africa was becoming a welfare state.

FEDUSA suggested constructive research into a conditional cash transfer system employed in other world economies such as the Bolsa Familia in Brazil.

FEDUSA appreciated the 11.4% reduction in disability grant beneficiaries due to an improved assessment process. Similar processes regarding foster care and old age grants would be encouraged.

Similarly FEDUSA welcomed the implementation of the Inspectorate of Social Security as a vehicle to monitor and oversee grant payments

Vote 19: Social Assistance: Social Welfare
FEDUSA was pleased to see commitment to Early Childhood Development (ECD), but expressed concern regarding heightened registration standards resulting in shutting down of day-care centres in the Western Cape.

R24.4 million was allocated to audit all ECD centres across the country, FEDUSA suggested that thought was given to interim solutions for providing services to children while upgrading services and teacher qualifications

Mismanagement could lead to many women left jobless and children left without day-care services, as is the case in Cape Town metropolitan.

FEDUSA welcomed the Isibindi Programme as an innovative programme that yet again combined alleviation of unemployment with the provision of social services. More interventions such as these were to be encouraged. (Slides 30-33)

Public Service and Administration: Vote 12
Ms Humphries commented on FEDUSA's concerns about collective bargaining and the need for a fair framework for negotiations in the public sector; the filling of vacant posts; reducing the wage bill; the working conditions of employees; medical assistance, home ownership, minimum service agreement, and all outstanding matters.

It was unfortunate that it was only the Public Servants who were focused on when it came to state saving on the wage bill, especially members who were between salary levels 1-12. (See slides 34-36 for full details)

Vote 18: Labour
It would seem, when perusing the budget provisions, as if the programmes were operating in silos and did not address the aim in a coherent fashion.

FEDUSA also believed that a strengthened National Economic Development and Labour Council (NEDLAC) might assist in faster and better outcomes. (Slide 37)

Conclusion
FEDUSA felt that the most important aspect was probably the incorporation of the report of the National Planning Commission and the reprioritising of expenditure towards infrastructure to steer the economy on a growth and employment creation path. FEDUSA also felt more comfortable with the Minister's wanting to steer public finance towards a more sustainable basis. (Slide 38)

PricewaterhouseCoopers Creating Opportunities in Tough Times Budget 2012 Presentation
Prof Osman Mollagee, Director: Tax Technical, PricewaterhouseCoopers (PWC), noted that his firm strongly supported proposals such as the alignment of the tax regime for contributions to retirement funds, interest deductions for share acquisitions, and tax relief for special economic zones. However, it strongly opposed some proposals such as the caps on deductible retirement fund contributions, the increase in the dividends tax rate, and the shortened period for the utilisation of Secondary Tax on Companies (STC) credits against dividend tax.

Tax collection review: who would pay?
Prof Mollagee illustrated the projected sources of revenue for 2012/13 (pie-chart, slide 3).

Who was paying?
The contribution of personal, corporate, value added tax, and other sources of taxation were compared over the years 2008/13 (graph, slide 4).

Proposals welcomed (individuals)
⚫ Retirement reforms
⚫ Tax-preferred savings and investment accounts
⚫ Increase in Capital Gains Tax (CGT) exemption thresholds
(slide 6; paragraphs 5-10 of the PWC submission).

Areas of concern (individuals)
⚫ personal income tax rates
⚫ disincentives to savings
⚫conversion of medical deductions to tax credits
(slide 7; paragraphs 19-36 of the PWC submission)

Proposals welcomed (business)
⚫ relief for small business
⚫ deductions for interest on acquiring shares
⚫ property loan stock companies
⚫special economic zones
⚫ reduction of tax rate for foreign companies
⚫ mark-to-market taxation of financial instruments
⚫equity loans to foreign subsidiaries
(slide 9; paragraphs 11-18 of the PWC submission)

Areas of concern (business)
⚫ rate of withholding tax on interest and royalties
⚫shortened period for STC credit
⚫ uniformity of taxing passive income and gains
(slide 10; paragraphs 37-40 of the PWC submission)

Indirect taxation: areas of concern
⚫ carbon tax
⚫ electricity levy increase
⚫ Road Accident Fund (RAF) levy
(slide 10; paragraphs 41-46 of the PWC submission)

Legislation drafting: concerns at under-resourcing
PWC commended the legislation drafters at the National Treasury but noted that the team was under-resourced, with some resultant errors and anomalies (slide 12; paragraphs 47-48 of the PWC submission).

PWC pointed out a number of proposals likely to be significantly complex as regards drafting into legislation (paragraph 49), and requested a period of consolidation (slide 12; paragraph 50). PWC noted that important policy projects were being delayed because the team was overburdened by the day-to-day workload (slide 12; paragraph 51); a case in point was the Income Tax Act re-write proposal (paragraph 52)
(For full details please refer to the submission document)
 
South African Institute of Professional Accountants (SAIPA) Comments Presentation
Mr Ettiene Retief, Chairperson, National Tax Committee, South African Institute of Professional Accountants, said that SAIPA was generally pleased with the budget as a whole, the reduction in the budget deficit, and the proposed infrastructure development.

Voluntary savings and interest income
SAIPA feared that the proposed tax-preferred savings and investment accounts to encourage savings which would replace the current annual tax-free interest caps would fail to yield significantly greater savings without a drop in the unemployment rate, availability to disposable income, security of funds, and consistent inflation beating returns.

The proposed limits and the scrapping of the tax free interest caps could see investors placing their funds with non-interest bearing accounts and reduce the access of these funds to banks that in turn used them for lending and financing. (Slide 3).

Small business corporations
SAIPA was pleased with the proposed revised tax table and rates, with the increased capital gains exclusion for disposal of small business assets, and with the reduction in submissions to twice a year. (Slide 4).

Concerns: exclusion of the personal services
The small business corporation dispensation was still very limited due to exclusion of 'personal services' (Slide 5). SAIPA requested that this exclusion be reconsidered and the benefits of the small business corporation dispensation be made available to all small businesses registered as a company or close corporation with an annual turnover of less than R14 million. (Slide 6)

Capital Gains Tax
SAIPA requested consideration of a phased increase in the inclusion rate for capital gains tax over a couple of years at least (Slide 7).

Estate duty
SAIPA requested scrapping of estate duties. (Slide 8).

Provisional tax
This was not addressed in the national budget documentation, despite various issues identified (Slide 9).

No regard was given to the quantum of taxes paid during the year of assessment. This resulted in penalties being imposed when the taxpayer had in fact paid sufficient taxes during the year of assessment.

SAIPA requested that the Commissioner of the South African Revenue Service (SARS) be allowed to waive penalties when the taxpayer had paid sufficient taxes during the year of assessment. (Slide 10)

Fuel levy
The increase would have a negative affect on economic growth and the fight against unemployment. SAIPA requested that the increase be revised downwards considering the effect a high fuel rate had on inflation. (Slide 11).

Conclusion
SAIPA commended the National Treasury for a well-balanced budget. (Slide 12).
 
Discussion
Mr B Mashile (Mpumalanga, ANC) asked FEDUSA if it agreed with the Minister's projections for economic growth.

Mr Mashile asked FEDUSA if it agreed with FFC on the need to establish a quality education system to sustain economic growth and how quickly did it expect results.

Mr Mashile asked how the economy could be rejuvenated.

Mr Mashile asked if FEDUSA agreed with the difference of R25 in old age pensions between the amount paid to those over 65 and to those paid to those over 75.

Mr Mashile asked FEDUSA if South Africa had bench-marked its proposals for the Dividend Withholding Tax against other countries.

Mr Mashile asked FEDUSA if it agreed with e-tolling when it asked for a gradual introduction.

Mr Mashile asked FEDUSA how practical it was to give incentives to universities.

Mr Mashile asked FEDUSA for its views on reviewing the organograms of inspectorates.

Mr Mashile asked PWC if it thought that the Personal Income Tax (PIT) at 35.3% was high. What level would PWC prefer?

Mr Mashile observed that chief executive officers earned as much as 20 times that of the lowest employees in the organisation. Why was PWC surprised that only 4.5% of taxpayers paid 38%. Did PWC's complaint talk to the reality?

Mr Mashile thought that PWC advocated that the haves should have more and the have-nots nothing.

Mr Mashile asked PWC and SAIPA together if their members were paying their taxes.

Mr Mashile asked PWC asked if had thought of putting forward legislative proposals that the Committee could consider, rather than just complain about National Treasury's legislative drafting.

Mr Mashile asked SAIPA why it complained about penalties from SARS for under-estimating turnover revenue for provisional tax. Surely SAIPA's members had sufficient information, skills, and equipment at their disposal to estimate turnover correctly? Should not accountants do their clients' books on a monthly basis?

Mr Harris asked FEDUSA for its document on combating youth unemployment. He could not find it on the website. He understood that FEDUSA sought a training-based element for a youth wage subsidy. Why was there an apparent refusal to discuss the matter at NEDLAC.

Mr Harris asked FEDUSA about its comments on the wage bill. Surely FEDUSA must accept that recent shifts in spending from capital to current expenditure had been driven to a greater or lesser extent by increases in the public service wage bill. Did FEDUSA concede these realities and accept the Budget's shift towards greater infrastructure expenditure?

Mr Harris asked PWC if it supported the shift from Secondary Tax on Companies to the Dividend Withholding Tax. It sounded a good idea to him.

Mr Harris asked PWC about its alarming allegation that SARS might be operating illegally because the 10% rate on Dividends Withholding Tax was legislated, but the rate was being increased to 15%. Where was the 10% legislated?

Mr Harris asked SAIPA about personal services. That exemption did not apply if one employed three or more staff members. How many personal services companies achieved that target of three employees? To employ three full time staff members seemed to be a reasonable target in return for the tax breaks.

Mr Harris said SAIPA had to understand that the Minister had to obtain additional funds. Hence the increase in the fuel levy, which raised R4.5 billion. No one could find fault with the Minister's success in reducing the deficit from a level that was becoming alarming. Where else would one find R4.5 billion.

Mr Ross asked FEDUSA if the level of social grants were leveling off and thus the dependency level could be contained to a certain extent.

Mr Ross asked about the tax treatment of medical expenses, especially for those aged 65 and over. FEDUSA was right to say that urgent clarification was needed on this.

Mr T Chaane (North West, ANC) asked FEDUSA what the challenges, with reference to NEDLAC, to the job creation fund were. It had been reported that the implementation had been stalled at NEDLAC.

Mr Chaane was aware of a number of laws that regulated collective bargaining agreements. If those agreements existed, what did unions find difficult in enforcing those agreements through the courts if employers were uncooperative?

Mr Chaane asked if FEDUSA's problem with the public service was the 5% budgeted for wage increases or if the problem was transparency.

Mr Chaane asked SAIPA to elaborate on the tax penalties as compared with the final taxable income. Those who could not employ tax accountants could not benefit from professional knowledge of how to perhaps mitigate the risk of penalties.

Co-Chairperson Mufamadi noted that presenters had all appreciated the Minister's interventions on small, medium and micro enterprises (SMMEs) but noted concerns that not enough had been done to engender entrepreneur development and hence job creation. He asked if it was a matter of the thresholds in terms of the money that the Minister had indicted. Would organisations want to make a concrete proposal? Perhaps one should look at the number employed rather than the turnover, or both at the same time? Job creation remained a sore point for the South African society? SMMEs were key to alleviating unemployment.

Responses
Ms Humphries replied that FEDUSA agreed with the Minister's projections for economic growth. However, FEDUSA wanted faster growth to generate enough jobs for the country. It was necessary to look at innovative ways of growing the economy. Inflation, to which South Africa was vulnerable, might reduce growth.

Ms Humphries said that South Africa was a developmental state and not a welfare state. Social grants might have to be increased for a time, but should not be increased on a long-term basis. The dependency rate was a concern. There must be restrictions on applicants for grants, such as undergoing skills training. There was also concern about ghost people on the grant system.

Many of the pensioners were taking the brunt of increased expenditure. They were especially vulnerable to increases in medical expenses.

Ms Humphries replied that Dividend Withholding Tax was not something new. However, it was necessary to look at countries that were experiencing the same kind of economic situation as South Africa. So it would be appropriate to review the experience of the Brazil, Russia, India, China and South Africa (BRICS) group of countries and ask how South Africa was comparing with them in that developmental arena.

Ms Humphries replied that if FEDUSA had its way there would be no toll-roads. Implementation of the e-tolling should be over at least six months to one year so that people could adjust their budgets. FEDUSA was concerned at the high expense of building toll-collecting stations

Ms Humphries referred to FEDUSA's building blocks document on its website which highlighted a skills mismatch in the production of graduates. This concern was raised also in the National Development Plan from the National Planning Commission.

Ms Humphries referred to Department of Labour: Vote 8 and professionalising the inspectorate. There were inspectors who could hardly complete a form. It was necessary to examine the basics before professionalisation. One had to see the problem holistically and ensure that the right people were appointed.

Ms Humphries replied that information on the youth unemployment subsidy was to be found under the Congress 2011 resolutions. It was a training based subsidy. There needed to be some rebate for employers who implemented apprenticeships.

Ms Uppink replied that the NEDLAC process was an ongoing engagement. The Department of Economic Development had presented its proposal for combating youth unemployment in January 2012. The Youth Wage Subsidy did not exist in a silo but alongside many other proposals around the Community Works Programme and the Expanded Public Works Programme. Some of the main concerns from labor’s side that that had been tabled were that the proposals were not explicit as to budget and targets, so more information was required. There was concern that the private sector might abuse the subsidies to increase its bottom line. FEDUSA had a concern about displacement of older workers. At present there was not enough information for a decision to be taken.

Co-Chairperson Mufamadi apologised for curtailing Ms Uppink's response because of time constraints. He welcomed written responses to questions which had not yet been answered.

Prof Mollagee replied that Personal Income Tax (PIT) at 35.3% was the biggest contributer to South Africa tax revenue: this was simply a fact. It was to be expected that the contribution of individuals by way of PIT would increase as salaries and wages increased.

Prof Mollagee replied that the Dividends Withholding Tax was now a tax mainly on individuals, on natural persons, rather than on companies. It became part of personal income tax to a degree. He was not saying whether it was a good thing or a bad thing.

The shift from Secondary Tax on Companies to Dividends Withholding Tax reflected international best practice, but Prof Mollagee was not sure that it would be useful to make a comparison with the BRICS countries. The USA had a Withholding Tax of 30%; the United Kingdom had a Withholding Tax of 0%.

The loss to the fiscus was lessened by the increase in Dividends Withholding Tax to 15%.

Prof Mollagee referred to Section 64E of the Income Tax Act. The rate, as legislated, was 10%, but SARS would be applying the 15% rate.

Prof Mollagee denied that PricewaterhouseCoopers advocated being softer towards rich people. Everyone accepted that higher earners should pay disproportionately more tax.

SARS incredible success over the past decade and a half had been its ability to bring more people into the tax net. This meant that more people needed to earn. At the same time enough people were not being employed.

Prof Mollagee wanted to see more registered and compliant tax payers.

SARS had initiated a process of regulation of tax practitioners by way of the Regulation of Tax Practitioners Bill. PWC supported this.

PWC was happy to contribute to the development of legislation. Moreover, National Treasury was active in holding workshops and PWC was a regular and active participant. Prof Mollalgee's point was that National Treasury had a huge workload.

From a tax perspective, Prof Mollagee thought that much had been achieved in interventions to help SMMEs. Little more could be done as regards tax interventions. It had to be understood that tax was a limited instrument. Skills development was very important.

Mr Retief responded at length as to why estimations for provisional tax would be so incorrect. One was asked to estimate one's taxable income before year end. If one dealt with a small company, one had limited resources. If one were dealing with a big company, one would deal with complexities, such as after year end adjustments. There were currently strong penalty provisions for under-estimation.

The majority of service businesses were family businesses. Secondly, when starting such a business, one would not have the funds to employ three unconnected full-time qualified people. So, from a tax perspective, there was no encouragement for such a business to start. SAIPA wanted stimulation for such start-up businesses because they helped to develop essential skills, and ultimately helped to widen the tax basis.

Even the smallest businesses faced a complex array of laws. Much professional advice was needed to reduce the risk of non-compliance.

The impact in the 100% increase in the fuel levy would have a knock-on effect on inflation.

The Tax Administration Bill was expected to lead to more administrative penalties.

Mr Retief took personal offence at the Minister's remarks about tax practitioners. He himself had overpaid his provisional tax to be free of penalties. However, non-compliance by a practitioner did not necessarily affect his or her competence to give advice. However, SARS knew who the defaulters were, so could pursue them. Also 18 000 outstanding returns did not equate to 18 000 non-compliant practitioners. The Regulation of Tax Practitioners Bill was pending.

Ms Faith Ngwenya, Technical Executive, SAIPA, said that tax practitioners had urged regulation of their profession.

Mr Mashile said that it was a matter of the integrity of the tax practitioners' profession. It was in the tax practitioners' hands to make sure that their profession was clean.

Co-Chairperson Mufamadi said that the tax practitioners needed some assistance to eliminate back-yard practitioners. Self-regulation might not be enough. He adjourned the meeting until Thursday, 01 March 2012 when Members were to consider their report on the hearings. The report was to be tabled in the National Assembly the following week.

[Note: Apologies were received from Mr N Singh (IFP) and Mr S Swart (ACDP).]