2013 Budget (Fiscal Framework and Revenue Proposals) Public Hearings Day 2

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Finance Standing Committee

05 March 2013
Chairperson: Mr T Mufamadi (ANC), Mr C De Beer (ANC)
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Meeting Summary

The Select and Standing Committees on Finance continued with the second day of public hearings on the Fiscal Framework and Revenue Proposals.

PriceWaterhouseCoopers (PwC) commended the Minister of Finance but thought that some of the prioritisations in the budget were incorrect. It supported controlling expenditure rather than increasing taxes. It welcomed the personal income tax relief and further simplification on retirement fund contributions, although there were still concerns with the proposed monetary caps. It also welcomed the introduction of tax-preferred savings and investment accounts, as well as the proposed youth employment tax incentive, and the reduction in the tax rate for small business, but noted that red tape issues for small businesses still needed to be addressed. The VAT streamlined processes were welcomed. Special economic zone proposals could attract new business, but could not cure other shortcomings. It was important to replace the discretionary and subjective approval regime currently in place with clear and objective rules, and it would welcome further engagement with National Treasury. PwC was not clear what had motivated the proposals to scrap the conduit principle for trusts, said it would increase administrative costs, but not stimulate further revenue, and was therefore opposed to it. It believed that more debate was needed on carbon tax proposals. Finally, it suggested that the multiplicity of tax legislation over the last few years had not been helpful, that there had been a number of anomalies in view of short-staffing in the legislative unit and very short timeframes for comment, with insufficient knowledge of the laws by many practitioners, and proposed that there should be a moratorium on further changes for a while to allow for consolidation.

Manufacturing Circle noted the contributions by manufacturing and agriculture, in particular, to the country, and noted that manufacturing had the potential to provide jobs. At the moment, people tended not to buy, build or upgrade houses, and profitability of construction had decreased, Manufacturing outputs had declined in comparison to other sectors. The increase in vehicle sales was due to the special support given to this industry, as well as readily-available unsecured credit. Imports and exports had also decoupled since January 2012, because of rising imports and inability of local manufacturers to compete with other countries. This had led to loss of 300 000 manufacturing jobs over five years. It supported the counter-cyclical stance but was disappointed that the Budget failed to deal with spending on the productive side. The drags on investor sentiment were outlined, and Manufacturing Circle suggested that a tax review could not take place in isolation of the broader macro-economic policy. South Africa’s administered prices had grown 171.7% in the last ten years, whereas in other BRICS countries it had decreased. It suggested an industrial policy measure in the short term to off-set these increases, with fiscal review and consideration of municipalities’ financing in the long term. It felt that there no need to get rid of inflation targeting but that other policy tools had to be considered to help keep the currency at more competitive or stable levels. The manufacturing competitiveness enhancement programme was received very favourably.

South African Institute of Tax Practitioners (SAIT) felt that overall, the budget was good, but there were some concerns. It believed that the small business relief should have been at R50 million, which would be more in line with Department of Trade and Industry definitions, and commented on the need to align the responsibilities for small businesses, as they were currently split, perhaps even with appointment of a Minister for Small Businesses. Social business had to be recognised and treated differently, as they played a major role yet struggled to find capital. Whilst the tax relief to individuals was welcomed, it was less than inflation and the tax pressure on companies was a disincentive to investment. Employment incentives were welcomed but the net perhaps had to be widened. The administrative requirements had to be simplified, that the administrative requirements for the tax incentives must be simple and cost effective. SAIT felt that the trusts proposals were not appropriate, and that any perceived difficulties with trusts should be addressed through proper management and administration. The moves to streamline VAT were welcomed, but enforcement for foreign business could be problematic. There was a need for clearer definitions for withholding tax on service fees paid. Other tax proposals around shares and subsidiaries were welcomed. SAIT welcomed the attempts to encourage savings, but felt that the preservation fund proposals were problematic. Ring-fencing of the carbon tax was suggested. It was noted that nothing was said on the toll fees. More research was needed on the impact of the gambling tax. The social grants were necessary but their distribution must be more carefully monitored and government should be encouraging self-sufficiency. Exemptions for employer bursaries were also welcomed, but education was at a poor state and this should become the prime priority.

National Union of Metalworkers (NUMSA) welcomed the review of tax policy and hoped that the number of zero-rated items, and taxation of luxury goods, would be considered. It welcomed the anti-avoidance measures and the re-working of the equitable share formula. It also welcomed the increased funding for infrastructure, which would stimulate the manufacturing sector. It felt that more investigation was needed on the carbon tax, and that returns should be put to renewables. NUMSA felt that the National Development Plan was akin to a restatement of the failed Growth, Employment And Redistribution (GEAR) strategy, did not agree with the youth employment incentive, which it saw as an attempt to reinstate the youth wage subsidy and was not sure how the Accord would address unemployment. It regarded the increases in the social wage as “outrageous” and noted that since they did not match inflation they would result in deeper poverty. It was concerned about import of goods that South Africa should be manufacturing itself, and thought that the Minister should have addressed the use of consultants, and proposed concrete steps to curb the sustained looting of state resources. In addition, nothing was said of land and agrarian reform. Comparisons of South Africa to its other peers was not particularly useful as it failed to take specific development needs into account.

Members asked whether the “package” was seen as internationally competitive, whether exchange controls should be relaxed, and questioned the differing views on the youth employment incentives. They asked if the consumers may end up paying for the carbon tax costs, how practical a currency band established by the World Bank would be, and discussed administered prices. Questions were asked in relation to trusts, and whether tax practitioners were acting outside the law, and the call for a limitation on further amendments to the tax laws. They asked if the current spending on the social wage was sustainable and how the budget affected the steel industry.

Meeting report

2013 Budget (Fiscal Framework and Revenue Proposals) Public Hearings Day 2
PriceWaterhouseCoopers submission
Professor Osman Mollagee, Partner: Tax, PriceWaterhouseCoopers (PwC), said that PwC had hoped that this budget would have created more certainty. Unfortunately, the only certainty in 2013 was that the future was definitely uncertain. He added that PwC and other tax consultants normally waited for the specific tax proposals in the draft legislation to give comprehensive comments.

As a general overview, Professor Mollagee said that the Minister of Finance was doing an amazing job despite the hard times. However PwC felt that prioritisation was wrong, although what would be entirely correct was not an easy question. As a general rule, PwC supported the move to reduce the budget deficit through control of expenditure rather than by increasing taxes.

PwC welcomed the personal income tax relief of R7 billion granted to individuals and the further simplification of tax proposals for retirement fund contributions, although there were still concerns with the proposed monetary caps. It was pleased to see the introduction of tax-preferred savings and investment accounts, as well as the proposed youth employment tax incentive as a means to increasing youth employment. The reduction in the tax rate for small businesses was welcomed, but there were a few red tape concerns to be addressed to encourage small businesses.  He added that proposals for tax incentives for special economic zones were welcomed as they had the potential to act as significant attraction for the establishment of new business, but cautioned that these could never act as a cure for other shortcomings.

Professor Mollagee said that PwC welcomed the proposal to introduce legislation regulating the deduction of interest and that it was important to replace the discretionary and subjective approval regime currently in place with clear and objective rules. PwC was open to engaging with National Treasury on this proposal. The incentive to bring foreign subsidiaries back home to South Africa was also welcomed, but further engagements were still required with the National Treasury.

In relation to tax administration, Professor Mollagee said that the proposals to implement a single registration process and to streamline the VAT registration process were welcomed, as the registration process had become a significant impediment to starting business, and this had to be addressed as a priority to avoid stifling business.

PwC remained strongly opposed to any monetary caps being placed on deductions for contributions to retirement funds, as this would add unnecessary complexity into the tax system, would not have the effect of introducing more equity into the system, would not lead to an increase in savings levels but instead would reduce them. International comparisons were also important.

PwC was not clear on the policy or equity objective behind scrapping the conduit principle for trusts, and questioned what specific tax avoidance concern it was supposed to address. This would only increase administrative costs and would not bring in more revenue. In the absence of further information, PwC was opposed to this proposal.

In relation to carbon tax, Professor Mollagee said that PwC remained concerned about the appropriateness of a carbon tax for changing emissions behaviour in South Africa, particularly in highly regulated and monopolistic sectors such as electricity and oil. PwC remained of the view that a fuller debate of alternatives to the tax was still needed.

PwC was also concerned about the legislation drafting unit in National Treasury, owing to the huge amount of pressure this unit was under in addressing highly complex concepts. It was also obvious that the team was under-resourced. This resulted in sometimes inadvertent anomalies and errors creeping in. The problem was made more acute by the limited time available for tax advisors and taxpayers to consider and comment on the proposed legislation, and the small pool of such persons that actively participated in the development of the country’s tax legislation. Tax practitioners appealed that there should be a period of two to three years with no changes in the tax laws, to allow for consolidation, and to address the gap between people who knew about the existing tax laws and those that did, to allow for a narrowing-down, which was a principle of tax morality and compliance. He attributed most of the bad tax practices in the country to ignorance.  

Manufacturing Circle Submission
Mr Coenraad Bezuidenhout, Executive Director, Manufacturing Circle said that the three broad issues upon which Manufacturing Circle would focus were the current situation in manufacturing, the view on macro-economic policy and administered prices. He noted that a study was done by Pan African Investment and Research Services which demonstrated that manufacturing, mining and agriculture were generally the most significant multipliers, always ranking in the top three. In particular, manufacturing and agriculture ranked highly in terms of output, export, employment and the amount of money that accrued back to the national revenue.

Mr Bezuidenhout said that two trajectories had been outlined, calculating the contribution if manufacturing grew at 3.4% over a 10 year period, and at 10% over the same period (including a contribution of almost 500 000 jobs). South Africa had a high youth and adult employment ratio and that the manufacturing sector could provide the type of jobs needed. 

Mr Bezuidenhout outlined what was happening in the various sectors. In the housing sector, the growth in mortgages to households had dropped significantly, which was an indication that people were not building, buying or upgrading as they used to. This consequently had an effect on manufacturing goods. The same was seen in the construction sector, where the growth in profitability of construction businesses had dropped significantly due to penalties incurred over time, and tendering competition that had escalated rapidly, so overall there was less business.

People tended to equate what was happening in the vehicles sales industry to the state of the manufacturing sector. A comparison of mining and manufacturing production with motor vehicle sales indicated that in 2012, motor vehicles sales performed better. However, this was an indicator of the availability of unsecured credit, relatively low interest rates and the significant way in which government and labour was supporting the motor industry. Similar support was needed in the manufacturing sector.

Mr Bezuidenhout examined the growth of manufacturing output for the period 1970 to 2010. The period 1970 to 1991 was heavily impacted by South Africa’s seclusion from the rest of the world markets due to apartheid policies. There was significant expansion in the period 1998 t0 2005, due to democracy. From  2005 onwards the growth had significantly contracted, due to infrastructure bottlenecks, unfavourable macro-economic policies and the global financial crisis. Over these forty years, manufacturing in South Africa had declined significantly, having moved from more than 21% contribution to GDP in 1984, to just over 17% now. This was due to the relative expansion of other sectors. He added that since 1995 there had been a significant decoupling of employment from economic growth. Imports and exports had also decoupled since January 2012, because of rising imports. There was poor export performance, with the ratio of imports to GDP exceeding that of export, which was attributed to exports being unfairly incentivised in other countries compared to those in South Africa, and the absence of non-tariff barriers at the borders. Another reason for declining competition domestically was domestic policies that undermined the manufacturing sector’s ability to compete with other manufacturing countries.

Mr Bezuidenhout spoke on the entrenched trade balance deficit throughout 2012 that had reached a record high of over R20 billion in October 2012. In the BRICS context, manufacturing imports from a developed country trade partner like Germany had increased, and he explained that there was a reciprocal arrangement with a number of German countries who had investments in South Africa, and were also involved in export. The same relationship was lacking with countries like China, as South Africa was exporting to China a lot of raw materials and then importing manufactured goods. The imports from China had even exceeded those from Germany (R70 million in 1999 to over R1,7 billion in 2012) and this trend was expected to continue. Employment figures, as a result, in the manufacturing sector had dropped from around 2 million at the beginning of 2008 to around 1,7 million in 2012. 300 000 jobs had been lost in the manufacturing sector in the last five years. The manufacturing sector outlook had not been great, and the average three month purchasing managers index (PMI) was at its lowest in three years towards the end of 2012.

With regard to monetary policy, Manufacturing Circle supported the counter-cyclical stance that had been adopted by the National Treasury over the last decade. However it had concerns about the lower growth of the economy that had led to lower revenue, reducing South Africa’s ability to maintain its position. Manufacturing Circle was disappointed that the Budget made no mention of spending on the productive side.

Mr Bezuidenhout said that there were a number of drags on investor sentiment, such as low demand in traditional export markets, concerns about South Africa’s dwindling manufacturing competitiveness, lack of consensus on the economy, and poor policy co-ordination and coherence between the Budget and the National Development Plan. Savings, spending moderation, deficit reduction and debt stabilisation projections precautions were the other drags. He added that tax review could not take place in isolation from the broader macro-economic policy.

Mr Bezuidenhout said that reports of spending review noted in the media were welcomed, and that further reports would be welcomed that addressed the steep, bunched-up administered price increases, and targeting a turnaround in the financial position of local authorities, because this had an impact on small manufacturers and their ability to compete. He added that government should trigger monetary policy review to improve its support to the productive sectors of the economy.

The Rand was currently at its 2003 levels and had strengthened by 23% in the last 10 years. Costs (producer price index and electricity) had increased by between 81% and 231% over the same period.

Manufacturing Circle felt, in relation to the monetary policy, that there was no need to get rid of inflation targeting but that other policy tools had to be considered to help keep the currency at more competitive levels or keep it more stable. Most manufacturers preferred a rate of R8.50/$1 to R9.50/$1, and this was something that could be reviewed on a periodic basis.

Mr Bezuidenhout compared the growth rate of administered prices between 2000 and 2010 in the BRICS countries, noting that South Africa’s growth rate was 171.7%, compared to other countries where the rate had decreased. At the same time that Eskom had readied itself to motivate for further increases at nearly three times the inflation rate (19% for industrial customers) over the next five years, Brazil had cut industrial electricity rates by 28%, with effect from 2013. The National Energy Regulator of South Africa (NERSA) determination was a relief, but in effect the increases to manufacturing of 10% to 11% were still above inflation, and the high municipal mark-ups remained a challenge. Municipalities were struggling and were using electricity charges to try to make up for internal deficiencies. He believed that NERSA had done a good job. Eskom was operating within a certain policy environment and was trying to do the best it could. Manufacturing Circle proposed that an industrial policy measure to off-set steep, bunched-up electricity price increases should be considered as an interim measure, to assist manufacturers to adjust. In the longer term, it also supported the idea of a fiscal review and said that it had to be mentioned by name in every discussion where the budget was involved. This would ensure that the way in which public infrastructure provision was funded and financed, and the way in which the associated costs incurred were recouped, was done in the most efficient and competitive way.    

Reporting back on the incentives, Mr Bezuidenhout said that the manufacturing competitiveness enhancement programme was received very favourably amongst manufacturers and that the turnaround times promised had given confidence. Recent presentation on the jobs fund had been received by Genesis AnALYTICS, and Manufacturing Circle would be making further comments.

Discussion
Mr D Harris (DA) asked PwC if it saw the package of 15% income tax rate, youth wage subsidy and accelerated depreciation of capital as internationally competitive, in view of the successes of special economic zones elsewhere in driving investments in manufacturing.

Professor Mollagee said that there were many other tax issues that were bigger barriers, and that should be removed. These included requirements around registering for VAT in South Africa, which posed a significant barrier to business.

Mr Harris asked PwC what it felt would be the cost of total relaxation of exchange controls.

Prof Mollagee responded that the fundamental question for exchange controls was whether South Africa still needed them.

Mr Harris asked about the take of the business community, on allowing the rollover of donations to public benefit organisations beyond the 10% limit, as an incentive. 

Prof Mollagee responded that the donations to PBOs was very important.

Mr Harris noted that the Motor Industry Development Programme (MIDP) had cost the fiscus around R23 billion, and said that the expanding of MIDP-like benefits to other industries would at some point make some things unaffordable. He also Manufacturing Circle for clarity on the difference in opinion on some proposals in National Development Plan (NDP) between business and the Congress of South African Trade Unions (COSATU).

Mr Bezuidenhout clarified that his proposal was not that incentives were needed for every sector, but that there should be a common understanding between the different constituencies on what was needed to make that particular sector work.

Mr Harris suggested that the only way of having a weaker rand but retaining inflation targeting was through having a higher inflation target. If inflation were kept between 3% and 6%, this would not enable the rand to depreciate without risking inflation breaching the upper limit. He wondered if the inflation projected was within an acceptable target range.  

Mr D Ross (DA) said that the assumption, in the Budget, that trusts were established to avoid tax was unfounded and would affect investor confidence.

Professor Mollagee added that there was some historical evidence that in the past, in South Africa, trusts had been used for tax avoidance, However, National Treasury and SARS had over the last 15 years reduced the likelihood of this, and he agreed that changes in regard to trusts and trust succession were not appropriate at this time.

Mr Ross referred to the carbon tax and asked if the consumer might have to pay for the cost ultimately.

Professor Mollagee said that the biggest tax payer would be Eskom. He was still wondering how this was going to change behaviour.  

Mr Ross referred to administered prices, particularly electricity pricing, and noted that the 16% request had been revised by NERSA to 8%. Although this was still above inflation, it was a step in the right direction. He added that although Eskom was being applauded for the work it was doing on the new build programme, its price formula was inflated, including in relation to cost on the assets and return on investment.

Mr S Swart (ACDP) asked how practical an explicit currency band would be, if established by the Reserve Bank, and whether the Bank would be required to intervene in the market as it had done before, at a cost to the foreign reserves. He also asked if domestic investors were willing to invest further in the market due to the positive market sentiments. In terms of the administered prices, he expressed concern that local governments were charging industries 10% to 11% and asked how this would be addressed.

Mr Bezuidenhout responded said that domestic investors would be willing to invest if a reasonable profit was foreseen.

Mr N Koornhof (COPE) required more clarity on the double taxation proposals.

Professor Mollagee responded that there would not be any double taxation, due to the credit system, but his main concern was that this would not bring in a lot of money although it would be increasing administration costs.

Mr Koornhof said that South Africa should stick to targeting inflation to address volatility of currency.

Ms J Tshabalala (ANC) asked if South Africa could afford to weaken the rand for export purposes. She further asked if the manufacturing industry had capacity to manufacture. In relation to the plastic bags, she wanted to know whether there were companies making use of the opportunity in the increase in VAT.

Mr B Mashile (ANC – Mpumalanga) asked if there were some tax practitioners who were operating outside the law.

Professor Mollagee stressed that there was a difference between tax practitioners and tax payers. Tax practitioners knew what they were doing, and they were compliant. It was the complex tax legislation that created work for tax practitioners, who then had to explain it the tax payers, who were prone to making mistakes.
 
Mr Mashile wondered why there was no comment on the 2½ cents increase in the fuel levy.

Mr Bezuidenhout said that increased fuel prices would definitely have interim effects if the currency weakened, but at the moment inflation was driven by administered prices. He added that although some of the money from the fuel levy went to municipalities, the Road Accident Fund and the larger pool of the fiscus, there was no reason given in the budget speech for the increase.

Mr Mashile referred to the decoupling of employment, and wanted to know what could be done to reverse the trend.

Mr D Van Rooyen (ANC) wanted more clarification on why PwC was calling for a halt to the rate at which tax legislation was made.

Professor Mollagee responded that there had been so many changes in the tax legislation over the last decade that people still did not understand them. Slight changes, as opposed to major changes, would be more appropriate.
  
South African Institute of Tax Practitioners Submission
Dr Sharon Smulders, Head: Tax Policy & Research, South African Institute of Tax Practitioners, said that the Institute (SAIT) felt that the 2013 Budget was good overall, although there were a few concerns. It was felt that the relief provided for small businesses was not enough, specifically since these small businesses were the job creation engine of South Africa’s economy. SAIT felt that the relief should have been increased to R50 million, which would be better aligned with the proposed change to the definition of small business in the Department of Trade and Industry’s (dti) broad-based black economic empowerment policies. She also commented that at the moment, responsibility for matters relating to small businesses were spread between the Minister of Finance, Minister of Economic Affairs and Minister of Trade and Industry. The responsibilities should be aligned and centralised to get a more effective and co-ordinated approach. It was suggested that a specific appointment of a Minister for Small Businesses might solve the problem.

Dr Smulders said that a review of the small business incentives was commended, in that it would gauge if the incentives were accessible and if they were meeting the needs, and needed to be refined or replaced. There was a need for recognition of social businesses.

The private sector needed to assist government in terms of government spending and debt.

Dr Smulders said that the relief that was given to individuals, under the tax proposals, was welcome but that it was less than inflation. She added that one out of ten South Africans earned more than R10 000, with the rest earning below this limit. People earning R10 000 or more were contributing 90% of the tax revenue. Government was also putting immense pressure on companies to pay more tax, despite the complex tax laws and volatile labour markets, and this was a disincentive to investment in South Africa. She cited MTN as an example, which had only 30% of its investment in South Africa and the rest off-shore.

Speaking on the youth employment tax incentive and special economic zones, Dr Smulders said that the employment incentives were welcomed but that maybe there was a need to widen the net by extending it to internships as well, considering that there was 40% unemployment for individuals under the age of thirty. She added that the legislation that was coming through was not simple, and the administrative requirements on the incentives in new and existing legislation were really onerous. SAIT submitted that the administrative requirements for the tax incentives must be simple and cost effective, so that the economic benefits must be more than the tax losses.
 
Expounding on social businesses and non-profit organisations, Ms Smulders said that social businesses were those that addressed the social and development needs of the country, and could be for-profit or no-profit. They should be treated differently because they played a significant role in the health and wellbeing of South Africa’s economy and its people, relieved burdens falling on government and thereby saved on taxes. The problem currently was that although non-profit structures received grants and also qualified for certain tax concessions and donor tax incentives, they were prohibited from having shareholders, taking equity or distributing profits, and whilst the for-profit structures could access equity investments and make social objectives, they were required to pay tax on profits or turnover and specific social grants, and thus struggled to access appropriate capital.

Professor Jackie Arendse, Technical Advisor, SAIT, spoke to the trusts issues of the Budget. She thought that the perceived problems with the trusts could be solved through proper management and administration. There was no need to change the legislation nor to scrap the conduit principle.

Professor Arendse said that there was need to focus on VAT registration, and the move to streamline this process was welcomed as this had been a huge problem for businesses over a decade. One of the proposed ways of solving this was through an increase of the VAT threshold to R5 million from the current R1 million. However, enforcement of VAT registrations for foreign businesses would pose a challenge around who was to ensure that the correct amount of VAT had been paid.

In relation to withholding tax on service fees paid, Professor Arendse said that there was a need for a definition of ‘service fees’ and ‘services’, and to clarify whether ‘services’ was limited to management fees or covered other aspects.

Professor Arendse said that SAIT welcomed the cross issue of shares, in light of the fact that people would come up with schemes only for SARS to retaliate with more legislation to close them down where they were seen as avoidance. The treatment of a single local subsidiary as a non-resident company for Reserve Bank purposes was welcomed, as well as the use of foreign currency for tax calculations.

Prof Arendse said that there was a need to encourage savings, but the challenge in South Africa was that there was a limited percentage of the population who had sufficient discretionary income to choose to save or not. However, anything that would encourage savings would be welcomed. Retirement reforms, as a way of encouraging savings amongst South Africans, were also welcomed.  Compulsory transfer into a preservation fund when employers were changed was problematic, especially in cases of retrenchment or medical reasons.

With regard to the fuel and RAF levy proposals, Professor Arendse said that nothing was mentioned in the budget of the toll fees. She commented, in relation to the carbon tax, that ring fencing income from the carbon tax would be preferable, as this would promote direct handling of climate change concerns.

Dr Smulders noted that about 16 million people relied on the social grants, so they were necessary, but government needed to look at the way that these grants were distributed and to encourage self-sufficiency. No comment could be made on the National Health Insurance, due to the absence of a discussion document.

Dr Smulders said that although the gambling tax was in place, it was still unclear and so empirical research was needed, as to whether it would succeed in discouraging gambling and was effectively used.

The exemptions for employer bursaries were welcomed, if they would increase education levels in South Africa. She noted, however, that although South Africa’s public spend on education, as a percentage of GDP, was 5.1%, the Minister of Basic Education had noted that South Africa had the highest rate of school absenteeism within the SADC region, and the World Economic Forum Report of 2012 ranked South Africa’s education system at 140 out 144 countries, with even Lesotho and Swaziland having a higher quality of education. Education should be the country’s number one priority because it would lead to entrepreneurship, employment, self-sufficiency and a reduction in crime. 

National Union of Metalworkers (NUMSA) Submission on the 2013 Budget
Mr Woody Aroun, Parliamentary Officer, National Union of Metalworkers of South Africa, said that the Union (NUMSA) took note of the difficult and uncertain economic environment and the difficult task facing the Minister of Finance to carry out government’s five priorities, as restated in the 2013 State of the Nation Address.

NUMSA welcomed news of the tax policy review and its terms of reference. It was hoped that when the review was done, there would be consideration of areas such as expanding the number of zero tax rated goods, and tax on luxury goods.  The introduction of a financial transaction tax to limit short-term capital outflow was proposed, in order to ensure exchange rate stability. Government’s plans to root-out tax avoidance by multinational companies were welcomed.

NUMSA was also happy that the local governments equitable share formula was re-worked to allow for an even spread as rural areas were strongly disadvantaged in terms of revenue. This was estimated to benefit 59% of households.

NUMSA welcomed the infrastructure programme and the announcement that further funds, amounting to R827 billion, had been earmarked for the programme over the next three years. This would stimulate the manufacturing sector and give the economy a boost.

Progress towards the establishment of the Chief Procurement Office was welcomed, but NUMSA urged that this was not enough, and procurement officers needed to understand who they were dealing with. NUMSA was also happy with the establishment of the Parliamentary Budget Office and the increased funding for the Green Fund. On the proposed carbon tax, NUMSA said the tax had to be looked at in more detail, in light of the Conference of the Parties (COP) 17 commitments. Carbon emissions had to be reduced, with money going into renewables.

Mr Aroun noted that NUMSA also saw some negative points in the Budget. It considered the NDP an extension of the failed Growth, Employment And Redistribution (GEAR) strategy that the government had adopted in 1996. NUMSA was stunned by government’s attempt to reinstate the youth wage subsidy under the guise of a youth employment incentive. Details of the youth accord were yet to be disclosed to see how the strategy would addressing youth unemployment.

NUMSA thought that the meagre increases in the social wage were “outrageous”, and proposed that the increase in social assistance must at least match the inflation rate, to ensure that the poorest of the poor were not plunged into deeper poverty.  In terms of procurement, rolling stock and solar heaters, he pointed out that the purpose of local procurement and local content was to leverage and stimulate South Africa’s own industries, so that importing goods that South Africa was capable of manufacturing amounted in effect to exporting jobs.

The Minister had not mentioned the indiscriminate use of consultants by both national and provincial government departments, which had totalled R102 billion from 2008 to 2011. Given the tight financial situation, NUMSA thought that the Minister should have come up with concrete steps on how to curb the sustained looting of state resources. There was a need to develop internal research capacity of departments. The Minister had also not said anything on land reform and agrarian reform, and no allocation had been made for these items in the 2013 budget.

In terms of the public spending and the cut of R10.4 billion over the next three years, he noted that it was not so simple to compare South Africa with other peers, because the development needs of these peer countries could not be as pressing as those of South Africa. However, NUMSA was not suggesting that this was an invitation to spend and incur debt in a similar fashion to Spain and Greece.

Discussion
Mr Swart wanted more clarity from SAIT on the extension of the youth employment incentive to cover all possible employees.

Dr Smulders responded that South Africa was in an under skilled environment and that if these skills could be obtained, then a tax deduction would be appropriate. Hiring skilled persons, even they were not from South Africa, was still acquiring skills.

Mr Swart asked NUMSA to explain its objections to this incentive and the basis for the assertion that the ANC’s GEAR and macroeconomics had failed.

Mr Aroun said that the NDP was a matter of opinion. However, NUMSA noted that a number of past polities had failed as they had constraints. South Africa needed to look at other BRICS countries and to learn some lessons from them.

Mr Harris asked SAIT why it thought that the youth employment incentive was better than the youth subsidy.  He asked NUMSA what the likelihood of breaching the national labour laws was if the youth employment incentive was implemented.

Dr Smulders responded that the biggest difference she hoped to see was that youth employment incentive would be outcomes-driven, rather than a tax credit being given for just being employed.

Mr Aroun said that NUMSA’s biggest concern was that a youth of 15 years old should be in school, not encouraged to take up employment in a factory. It was the education system that needed to be addressed.

Mr Mashile asked if SAIT had held any discussions with National Treasury on the changes proposed on trusts.

Professor Arendse said that the key reasons for forming trusts were limiting liability, protecting assets and passing on assets to the next generation. Trust were beneficial when they were managed well, although some high profile individuals had mismanaged them. SAIT was in regular discussion with National Treasury and SARS on the specific concerns.

Mr Mashile asked, in relation to the comment on non-profit organisations, if there was any blurring with for-profit organisations.  

Dr Smulders responded said that the biggest problem that non-profit organisations faced was getting financing. No one was interested in financing them in the absence of an incentive.

Mr Mashile asked NUMSA if the current spending on the social wage was sustainable, and what could be done to NDP to make it a perfect vehicle.

Mr Aroun said that the social wage was looked at in light of unemployment, poverty and inequality. The amount allocated was compared to the cost of food, electricity and other costs, and it was calculated that this would not be of assistance to the poor. NUMSA was willing to engage with government to see how this could be addressed.

Ms J Tshabalala (ANC) asked how the budget affected manufacturing, particularly steel.

Mr Aroun said that the budget could not be separate from people’s lives so the question of industrial development, money allocated to take forward the industrial action plan and how the budget would stimulate this action plan were important questions.

The meeting was adjourned.

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