Fiscal Framework and Revenue Proposals: public hearings

Meeting report

South African Institute of Chartered Accountants (SAICA) submission
Mr Piet Nel, SAICA Director: Tax, commented that said that economists rather than chartered accountants are generally better suited to providing specialist input. He commended the Finance Minister and his National Treasury team for producing a balanced budget under very difficult economic circumstances and conditions.

Mr Nel said that in terms of estimates of all revenue, tax is a withdrawal from the economy to fund the country’s collective expense. This withdrawal should be properly balanced. The tax revenue collection as a percentage of GDP has increased over the past five years (tax-to-GDP ratio) from 24.4% to 26.1% for the 2013/14 fiscal year. The ideal tax-to-GDP ratio should be approximately 25%. There were only two variables i.e. the growth rate and revenue collections, that can be controlled.

In terms of the growth rate, the NDP is the country’s roadmap for collective investment into the future with the fiscal policy setting out the framework to fund this roadmap. South Africa will require growth rates in excess of 3%. These have been continually revised downwards. The 2015/16 budget proposals were now based on 2% for 2015/16.

In terms of revenue, the economic impact of the tax to-GDP ratio was underpinned by the various sources from which taxes were extracted: personal income taxes; corporate taxes and indirect taxes (the tax mix). This tax mix should ideally be fairly distributed across the tax sources. As they were already exceeding the ideal levels of tax extraction from the economy, this begs the question whether there should not be a review of the NDP goals to better reflect the South Africa’s ability to achieve these goals.

Mr Nel said that estimates of all revenue-proposed solutions noted that they should increase their ability to produce manufactured goods from raw materials. This can be done through: improving skills at both schooling and post-schooling levels; improving and enhancing our road, rail and port infrastructure; improved labour and business relations; creating an enabling environment for business and individuals to trade by reducing administrative and compliance burdens.

In terms of estimates of all expenditure, it was government’s prerogative to allocate budget spend to reach its strategic goals. To date the budgeting process has been very robust, transparent and as a result not subjected to much criticism. Infrastructure spend, on road they have spent at least the fuel levy collected. On port and rail, they have expanded investment to expand our railway network which forms the backbone to facilitate the movement of bulk goods in our economy. On social protection expenditure, they have conducted further research as to whether the cash payment model was the most efficient and beneficial. On education, academic education and employment without skills transfer will not uplift the current generation to support a production economy.

Mr Nel said that in terms of estimates of borrowing for the financial year, government generally has to resort to borrowing when it spends more than it collects by way of taxes. Their main concern was “that South Africa’s debt is expected to increase from the 39.7% (for 2013/14) to 41.9% in 2014/15. The key for stability is that our sovereign credit rating does not move downwards. The net loan debt (i.e. gross debt less cash balances) was expected to stabilise at 43.7% of GDP in 2017/18, about 2.6 percentage points lower than the 2014 MTBPS estimate. The total nominal gross debt stock is projected to grow from R1.8 trillion in 2014/15 to R2.3 trillion in 2017/18. When combined with redemptions, government’s gross borrowing requirement is R229 billion in 2014/15, growing to R247 billion in 2017/18. At the end of December 2014, total outstanding gross state debt amounted to R1.8 trillion, which is equal to about 47% of gross domestic product. This debt consists mostly of bonds but other instruments such as treasury bills and foreign loans are included.

Mr Nel said that government’s support for Eskom included a medium term funding allocation of R23 billion. Appropriations will be made to Eskom as funds from the disposal of non-core assets were realised, ensuring that there was no increase in government debt and no effect on the fiscal position. The sale of non-strategic assets, however defined, could be contested and could take time. However, some state owned entities need financial assistance more immediately. National Treasury will have to speedily finalise measures to separate the commercial and developmental aspects of the state-owned entities and other measures to assist the entities in ways that contributed to improving their financial position in the interim.

Mr Nel said that the debt-service costs continued to be the fastest growing component of main budget expenditure, increasing by 10.1% in nominal terms over the medium term. Over the next three years capital will be the fastest growing category of non-interest spending. Rising debt-service costs, which amount to R115 billion in 2014/15 alone, threaten the sustainability of social gains achieved over the past decade.

In terms of the contingency reserve in the 2013 budget review (27 February 2013), government reduced the unallocated portion of spending by trimming the contingency reserve. It was then set at R4 billion (2013/14) R6.5 billion (2014/15) and R10 billion over the three years of the MTEF. This was done because “unforeseen and unavoidable expenditure adjustments have, however, averaged just R4 billion in the last five years. They were not sure why the reserve is set to increase to R15 billion in the next fiscal year and to R45 billion in the year thereafter.

PricewaterhouseCoopers (PWC) submission
Mr Kyle Mandy, PWC Head: Tax Technical, said PWC recognised the tough conditions and difficult choices, applauded the commitment to fiscal consolidation. It believed more could be done to reduce expenditure and deficit. And they see significant risks to the revenue and expenditure estimates.

Mr Mandy said that it welcomed the tax relief for lower-income earners, retirement saving reforms, and closure of estate duty loopholes. For business, there is a micro-business relief. The company tax rate will be unchanged. The energy efficiency incentive will increase and broaden. There was the introduction of the transfer pricing documentation and the self-assessment system.

PWC concerns included SA’s tax burden which focussed on the main budget tax revenues of ± 26% of the Gross Domestic Product (GDP). This excluded the provincial, local and social security taxes. There will be an increasing trend in this regard. In terms of international comparisons, 2012 tax to GDP ratios (excluding social security taxes) SA has ninth highest tax to GDP ratio globally which is higher than world and Africa averages.

Mr Mandy said that the conclusions were that the fiscal policy is highly progressive. South Africa performs very well when compared with other middle income countries. Fiscal policy cannot do more to reduce inequality. Further poverty and inequality reductions required more inclusive economic growth. The tax burden needed to reduce over time in order to promote economic growth.

Mr Mandy said that in terms of tax to GDP ratios, the trend is towards increased reliance on corporate tax revenues. South Africa obtains approximately 35% of its tax revenues from personal income tax, 27% from VAT and 20% from corporate income. Compared to OECD countries, South Africa is heavily reliant on corporate income tax in particular for tax revenues. Over the same period, the contribution of personal income tax fell significantly while that of VAT remained fairly stable. The research conducted by the OECD and other bodies suggests that growth-friendly tax reform would shift the tax burden from taxes on income (corporate tax in particular) to consumption taxes, such as VAT. The OECD average for corporate tax revenues is 12% of tax revenues, personal income tax 33% of tax revenues and consumption taxes 28% of tax revenues.

Mr Mandy said that in terms of South Africa’s total tax rate South Africa’s total tax rate compares favourably with global and regional averages where it is ranked 40th out of 189 countries. South Africa’s total tax rate (a measure of all taxes a company must pay in relation to its commercial profit) of 28.8% ranks it 40th out of 189 countries. The global average total tax rate is 40.9%. But a comparison of the underlying taxes included within the total tax rate, suggests that South Africa has a relatively high rate of profit taxes at 22% compared to the global and regional averages of 16% and 18%. It ranks behind many of its regional neighbours such as Zambia, Namibia, Mauritius and Botswana.

South African Institute of Tax Professionals (SAIT) submission
Prof Keith Engel, Deputy Chief Executive Officer: SAIT, said that the Minister’s tax increase was widely accepted as the least “worst” alternative. Given the situation with the international credit agencies, the books need some form of balancing to show long-term credibility. All parts of society will share in the cost – middle and upper incomes will bear most of the personal income tax increase while the lower incomes will proportionately bear most of the fuel levy increases. It should be noted that some of the wealthier community would have preferred an increased VAT rate. In terms of the Big Issue – Expenditure! – the need for redistribution is accepted – but corruption and wasteful expenditure were not. The study by Institute of Internal auditors held that SA lost R700bn due to corruption over the last 20 years). Can we really manage an ever growing state (e.g. state-owned enterprises) and an ever increasing amount of regulatory red tape?

Prof Engel said that with regard to elusive growth, it is widely recognised (even by the National Treasury) that the only long-term answer to the SA economy is real economic growth. While post-2008 global growth has been lower than expected, SA has underperformed. Many foreign investors view SA as an increasingly low growth/high risk environment and are voting with their feet not to invest. Over the last 15+ years, it is clear that the fiscal policy cannot achieve growth by itself. Regulations can weigh down investment just as much as taxation. Uncertainty about property rights can equally deter investment (with new investors shying away and old investors de-risking their positions).

Prof Engel said that on small businesses, tax was a tool of limited effectiveness. He noted the recent history of incentives – Small Business Company Regime, Turnover Tax, Small Business Funding Entities, 4-Monthly VAT etc. Small Business is often a big contributor to the “Tax Gap” (for example, service companies, 2-sets of books, VAT fraud). The real problem – income tax has an impact only if a small business makes a profit and most small businesses fail this threshold. VAT should only have a temporary impact but delayed VAT refunds can be costly. Government efforts should be on the expenditure side (the 30-day Government payment rule is a good start). One-size fits all regulation has a disproportionate burden on smaller businesses – SARS and other help desks could be worth a try.

Prof Engel said that with regard to foreign base erosion the South African Response was through the Davis Tax Committee studies of OECD proposals. The Davis Tax Committee effort was mentioned as a Treasury priority. The OECD reports – Intangibles/royalties (probably not), Management Fees (possibly for some but other cross-border fees growing because global service centres are focused on low-labour cost locations – these locations are increasingly having skills), Documentation – should be useful but can be oppressive and expensive, and tax treaties – some overly generous but how can SA quickly reverse?

Prof Engel said that in terms of notable micro issues on retirement savings and estate planning, the proposal was that forced retirement withdrawals at a specified age will prevent avoidance. Retirement funds will be re-added to the taxpayer’s estate. Likely criticisms: Why should the tax system force the reduction of savings? While the re-inclusion of retirement funds represents sound policy, what about the effective date of pre-2015 transactions.  A larger policy issue is tightening estate duty – the estate duty redistributes wealth (equity). However, the richest are the most likely to emigrate, and estate duty is complex to enforce. Is the capital gains tax (CGT) instrument on death a better instrument?

In terms of the removal of the 6quin credit/international, foreign tax credits were mainly directed at foreign source activities, but this credit applies to foreign taxes (e.g. African taxes) on SA source activities even if the foreign country wrongly applies the law. This relief is theoretically questionable. However, this credit is important tool to eliminate double tax for South Africa service providers operating in the region. A more widely used tool for gateway status than the Headquarter Company regime.

On the share issue, SA is seeking to be a regional gateway. Special tax and Exchange control relief for Headquarter companies. Exchange control relief for SA Treasury operations. The misuse of tax-free share issues, SA allowed SA companies to issue shares tax-free in accordance with international principles. However, concerns existed that share issue rule was being misused to allow for tax-free corporate migrations from SA. The proposal was that in 2013, share issues became taxable to prevent migrations. In 2015, it is now proposed that the anti-avoidance rule should be narrowed because the anti-avoidance prevents the creation of most headquarter and gateway companies.

In terms of withholding taxes on cross border payments royalties were revised, dividends (also domestic withholding) (2012), interest (new), local SA services by foreign persons (pending), refinements, system changes? Can the local SA services withholding system be applied to reduce offshore leakages in terms of foreign technical fees without being unduly burdensome administratively?

Prof Engel concluded that in terms of proposals, there should be a self-assessment system for Income Tax similar to Value-Added Tax. SARS could have five years (currently three) to reopen assessments where there is no fraud, misrepresentation or non-disclosure of material facts. In theory, self-assessment should increase the speed of the tax process. However, SARS must have a strong risk engine to properly identify targets.

Discussion
Mr. F Shivambu (EFF) said that it should be noted that as part of the public hearings on the Fiscal Framework and Revenue Proposals there was a concrete proposal that the President of the Republic of South Africa should resign because he was in no position to take the country forward economically.

The Chairperson interjected that Mr Shivambu should put direct questions to the submissions that were presented in that meeting.

Mr Shivambu said that the PWC submission spoke about welcoming the commitment made by the Minister of Finance on transfer pricing documentation. He asked why they were welcoming this because there was no detail of what should be done with regard to illicit financial flows to transfer pricing, and it was a crisis level of tax avoidance by South Africa to date. He asked what the opinion of PWC was in that regard because PWC internationally has studied the introduction of the sixth transfer pricing method which departs from OECD proposals in terms of how there should be a response to transfer pricing.

Mr Shivambu said that the other submission spoke about foreign based erosion. He could not understand Prof. Engels about what should be the way forward because South Africa has been working more or less within the framework of OECD proposals but they have not been able to combat aggressive tax avoidance. It was a phenomenon that described South Africa currently, there was criminal activity and no one seems to do anything about it. The Committee could accept that chartered accountants were not economists and economists were best suited to comment on some of these issues.

It was very simplistic to think that manufacturing could be achieved through their proposals of just skills and infrastructure. There were far deeper policy issues and it was trade policy that inhibited South Africa to grow economically in terms of industry, manufacturing goods and services locally – due to the amount of goods and services constantly dumped onto the South African economy. The state was not imposing tariffs on many of these products and one would be shocked at the number of products coming into the country that had zero tariffs. The local producers and even those who wish to do something about it were not able to do so. Raw materials extraction was owned by multi-corporations who find it profitable to trade with themselves and sell those raw materials to different parts of the world, and when they sell those raw materials to South Africa they impose import parity prices.

Therefore, it was a far more complex question which the professor was dealing with but he understood that he was not an economist and could not deal with it in that format. There were much more covert interventions that needed to be made in terms of driving the program for local expansion of the manufacturing sector and industrialisation than the superficial aspects that were mentioned in the submission.

Mr D Van Rooyen (ANC) said that the PWC submission, as part of the proposals, did not welcome the relief that would be realised by employers and employees as far as the UIF intervention was concerned. He asked what might be the cause of that or was it something that has been looked as a significant intervention, and what the lessons were that had been learnt from this development in South Africa because they were striving as a Committee to understand what had caused that surplus, and what they were taking from that development as they were preparing for the future.

Mr Van Rooyen said that they have read a lot about the need to review the Southern African Customs Union (SACU) formula and was not sure whether at that stage they could hear clear proposals on how to deal with that particular aspect because they needed to review that formula. He asked what the aspects were when they deal with that formula.

Dr B Khoza (ANC) asked whether all presenters could comment on one scenario of corporate tax where in the 1970s and 1980s the portion of corporate tax to national revenue was 35% and personal income tax was around 20%. Currently they have got a completely reversed scenario and they were grumbling with that because on the one hand they were welcoming the tax relief for lower income earners, but at the same time the middle class was really up in arms because they saw themselves subsidising corporate tax in a way. She asked how they dealt with that scenario, what their take was on that trend because if it continued, the gap between personal income tax and corporate tax posed a problem.

Dr Khoza asked Prof Engel to explain in his own view how far they were from imposed austerity with regard to those they have borrowed money from in terms of their dictating new conditions. This could help the Committee to understand and be assisted going forward when they deliberate because the level of borrowing in the country was high and the economy was contracting.

Mr M Hoosen (DA) thanked Mr Shivambu for a very good question in terms of the manufacturing side. They were not economists but rather tax specialists. But where they wanted to go to was basically from a consumption economy to a production economy. He fully concurred that there were lot of complexities and dynamics in terms of tariffs and how they could control that from a policy point of view so they could move from consumption economy to production economy. The other point was that they needed skilled labour, people that could produce things which talked to skills and education both at the schooling level. But also they have got the current employable work force which needed those kinds of skills. It was all good and well to make the funds available but it was all dependent on the implementation of that in terms of how they get those with know-how to do that, to transfer the skills to those who need to know so that they can uplift the production economy.

Mr Hoosen said with regard to the tax mix that South Africa was not living in a disconnected society but was part of the global economy. It was always good to look at what was happening internationally, to look at their rates, their contribution, their taxes and how they get their balances right. But the other reason why South Africa could not disconnect itself from the global economy was that the moment they bond against global tax rates and collection rates they stifle investment in the country. Investors stop coming into the country; they go and invest somewhere else with better rates. The point was that they should get that tax mix right in terms of what the correct rate was that they should be applying for South Africa. It was not an easy answer and there was a lot of research in terms of what the correct tax to GDP extraction should be, whether it should be 25% or not, what the ideal number would be, and it was not yet known. Those answers and investigations needed to be known so that they could get that right. Once they get the tax waivers right, the money will flow. The quantum of money in terms of what they were getting out of the system will balance and get the money sorted out afterwards. Obviously, as the economy contracts it will hurt from short to medium term, but if it expands, those numbers will come right.

Mr Nel said that in terms of the UIF contributions last year the Minister said that they will consider including government employees in the UIF. This year they hear that the fund was sitting at a surplus of R72bn and that was why the announcement was made to reduce the contributions. They have not yet seen that being legislated or seen a draft law but it looked like employees will only pay R10 a month as compared to what was currently paid of R129 a month. Therefore, the intention was to use the surplus to reduce the contribution to people, and obviously the surplus arose because not many people were claiming employment benefits.

Mr Nel said that with regard to the tax mix, skilled people were very mobile. The moment they find that they face a high tax in one country, they can work in another country. Due to this, SA loses skilled labour since they are earning at the upper end and would likely move, which was a concern.

Prof Engel said that foreign base erosion was the same thing as transfer pricing where foreigners coming into the country taking value and not giving back the appropriate amount of tax for that value. They were taking more than they were giving in terms of that, and the question was why they were doing that? The real issue was that the OECD has a lot of targets. The problem was that the issues raised by the OECD and the European Union were not the same as the South African ones, they were different. The problem was to get a solution and the difficulty in getting the solution was that they did not know where that was happening. So, what happened was that they were using European models to solve South African problems without identifying exactly where the problems are. Typically, it was raised by the Davis Commission that there were some concerns about services. The difficulty was that some of the services were legitimate and the problem was that some were not, and to find the right ones it required not legal enquiry but factual enquiry. There were other issues regarding beneficiation which raised different things but the point was to weed out the bad guys without hurting the good guys because they wanted foreign investment from the good guys not the bad guys.

Prof Engel said that with regard to the SACU agreement the agreement has two purposes. One was to ensure they were regionally coordinated from a customs point of view. The idea was that when things go cross border within the various countries that were in the agreement that they were not blocking trade between each other, and therefore, they have one external tariff that they share. Most people understood the SACU agreement for that, but what they do not know was that the SACU agreement has an element of distribution as well were they can subsidise their neighbours. The concept was that if they subsidised their neighbours they will be stable, and this has been the policy for some time. The question was whether that was a good policy, did charity begin at home? It was the issue that the Committee should decide on, but the problem was that there was an implicit agreement and this was not fully stated to the public.

Federation of Unions of South Africa (FEDUSA) submission
Mr Dennis George, General Secretary: FEDUSA, said that the Minister of Finance argued that the 2015 Budget was inhibited by slower growth, rising debt, a weak global outlook and a number of domestic constraints to inclusive economic growth. Government debt has risen from R500 billion in 2008 to R1.6 trillion in 2015, whilst R126.4 billion is needed to service the total debt. Moreover, government intends to reduce expenditure by R25 billion in the next two years and it is necessary to introduce tax increases to support the falling revenue of government to raise an additional R16.8 billion in 2015/6. Unplanned load shedding and the shortage of supply of electricity for the next few years remains the foremost critical constraint, with the potential to further undermine economic growth and social cohesion.

Nevertheless, the post budget meeting between the Minister of Finance and the social partners in NEDLAC illustrated the lack of trust between government and organised labour. Labour argues that the Ministry of Finance talks “left” about social partnerships but walks “right” with regard to unilateralism and the lack of genuine consultation, information sharing and negotiations. Labour illustrates this argument based on the fact that the Finance Ministry has developed an approach of acting unilaterally. This is illustrated through the implementation of the Youth Employment Incentive Scheme, the submission of the social security protection proposals to NEDLAC, the Retirement Reform and in 2015 the Unemployment Insurance Fund reduction. Notwithstanding these concerns, FEDUSA will discuss this negative trend with the Leader of Government Business, the Deputy President, to ensure the principles of social partnership and collaboration with organised labour is respected and honoured.

Mr George said that in terms of growth priorities FEDUSA argues that the electricity constraint is the most pressing issue and unreliable levels of energy supply have the potential to undermine economic growth. The electricity constraint also has the ability to seriously affect investor confidence that could hinder investment in the country. It is therefore essential for the social partners to address the crosscutting constraint of electricity supply and introduce new measures to reduce the demand for electricity by at least 2500 megawatts. It is important for government to work together with labour and business through the participation in the war room interventions. FEDUSA welcomes the reduction of the price of electricity generated from wind – that has dropped from R11.43 per kilowatt hour (kWh) in the first round to R6.65/kWh in the third round. Government needs to do more other than just encouraging private sector investment as this segment is the driving force behind reducing poverty, which is our key development and economic objective. FEDUSA suggests that investment by the private sector in our townships requires market knowledge and the ability to manage risks.

Mr George said that on the issue of investing in township and cities the World Bank in its Jobs Report concluded that unemployment in South Africa emanates mostly from the fact the informal sector is relatively small in comparison with similar other countries. South Africa is also different from these countries in other ways, too. During the apartheid period, slum clearance, harsh licensing, and strict zoning regulations has rid our cities of black-dominated informal sector niches. FEDUSA recognises that two decades after the end of apartheid, spatial segregation remains, and investment in our townships is low. The legacy of separation also results in high transportation costs for the unemployed, who tend to live far from where the jobs are. Thus, South Africa’s job creation problems may stem primarily from urban issues.

FEDUSA supports the adding of value to domestic raw minerals through the implementation of the Industrial Policy Action Plan (IPAP), as it could encourage private sector investment and employment creation. However, it is also important for the labour relations task team in NEDLAC to complete its work to reduce workplace conflict. The introduction of the national minimum wage could assist the process where workers benefit from investment and this could improve convergence and social cohesion.

FEDUSA was aware of the mind-set of the private sector, and the experience of the past 20 years clearly illustrates a story of investment weakness in the productive sector. This is also the argument of Bhorat et al because South Africa has a curse of portfolio-high-margin-return and it is fairly easy for capital to flow in and out of the country without creating any new employment. FEDUSA calls on Government to convene a national dialogue under the auspices of NEDLAC to take the process forward and to support higher economic growth and employment creation.

Mr George said that in terms of the fiscal policy, FEDUSA supports the reduction in the main budget expenditure ceiling of about R25 billion over the next two years, compared with the 2014 Budget baseline. It is also imperative to revise spending plans across all governmental departments, designed to enhance greater efficiency, reduced waste, eradicate corruption and the improved alignment of spending. FEDUSA would like to recommend that the consolidation of government personnel numbers is important but in this regard, it essential to involve the trade unions in the process. Care should be taken that the appropriate number of teachers, nurses and police officers are employed to ensure quality service delivery.

Mr George concluded that the 2015 Budget is debated within the context where economic growth has declined, government debt has increased, electricity is considered as a major constraint and the prospects for the future are particularly bleak. In tough times it is imperative for the social partnership leadership to demonstrate courage and develop multiple solutions through social dialogue to provide decent work and a decent life for all. It is also important to implement the National Development Plan and through dialogue in NEDLAC while co-designing systematic resolutions to strengthen our young democracy to be shared more equitably.

Congress of South African Trade Union (COSATU) submission
Mr Matthew Parks, Parliamentary Officer: COSATU, said that in their expectations statement last week, COSATU set out clearly how they would measure the 2015 Budget, including whether it aggressively stimulated the economy and job creation, promoted economic transformation and redistribution, tackled poverty and inequality, and actively supported the agenda of industrialisation. COSATU will study the budget proposals in detail and issue a comprehensive response later, in relation to these and other objectives they set out in their statement. Their view is that on most of these scores, the budget falls far short, although they cannot claim to be surprised, given Treasury’s historical conservative fiscal stance, which has now given way to fully fledged austerity. As usual, the trade-offs made disproportionately favour business. It is a great relief that some of the more extreme proposals being floated in the business media, such as increasing VAT and rampant privatisation, have not found expression yet. Nevertheless this is small comfort for the millions of working poor and unemployed struggling to make ends meet.

Government’s objective of rebalancing fiscal policy to lend greater support towards investment and economic growth, in particular in such key sectors as agriculture, industry and cities, may look good, but the devil is in the detail, including understanding what is being cut back, and who is prejudiced as a result. Further, as Comrade Nene himself says: “Having a plan and a series of activities is not enough. Intensive effort has to go into the details of implementation.” Importantly in his Medium Term Budget Statement in October, Comrade Nene stated that “increased debt is not in itself a bad thing, if it finances investment in future productive capacity”.

As the Minister did state, they were also fully appreciative of the fact that the global economy is not recovering at a pace that will help the South African economy to grow faster to help to address the challenges of unemployment and poverty in particular. They were however of the view that that it is of critical importance that government should stimulate economic growth and job creation. This among others requires the government to spend and invest more, particularly in infrastructure development and in capacitating the public service and state institutions. This call runs counter to the fiscal stance taken by Treasury, which is one of austerity, or cutbacks in real terms.

Mr Parks said that in terms of general observations, the lowering of the budget expenditure ceiling reinforces the austerity framework of real cutbacks in spending contained in the MTEF. Treasury has attempted to disguise the extent of austerity by presenting increases in expenditure over the period to 2017, rather than for this fiscal year. This masks the pitiful increases in a number of areas. The budget speaks in code on a number of issues, such as consolidation of personnel numbers (freezing posts etc); and privatisation - talking rather about “offsetting support to SOEs through asset sales”. The speech makes a number of good statements which are not backed up by specific plans. The concrete plans are more driven by the austerity logic. Examples of hazy commitments relate to action to combat capital flight, profit shifting, and measures to eliminate corruption in procurement systems.

A comparative analysis is required to determine how the budget’s spending commitments and priorities compare with previous commitments made. But the sense is that commitments made in certain areas which have been identified as priority policies, such as industrialisation, have been allocated woefully inadequate amounts. The Budget reveals a reality of massive real spending cuts, after taking population growth into account. The massive reduction in the budget deficit from 4.1% in 2014 to 2.5% by 2017 is achieved through real spending cuts, which can only cause the economy to further stagnate.

Mr Parks said that in terms of strategic priorities for growth and development, COSATU welcomes the focus on the oceans economy and the investment of R9.6 billion in Saldhana Bay. This is key to creating growth and jobs on the West Coast. They welcome the commitment to including the mining sector in the Phakisa process and the development of a strategy towards its growth. However, COSATU remains concerned about the commitment of business. Gold and other mineral prices have enjoyed massive increases, yet mine workers have been retrenched in their thousands and continue to live in abysmal apartheid-like conditions. Business must be forced to honour commitments made in the Mining Charter.

They note the Minister’s inclusion of the public sector entities’ financial positions in the budget. However, while it is critical that these SOEs are made to account for their continual financial crises and lack of delivery of key developmental mandates, government must also take responsibility for ensuring that they are capacitated and that their funding model too is geared towards that mandate.

Mr Parks said that in terms of employment and enterprise development COSATU was strongly opposed to the Employment Tax Incentive. Despite promises to the contrary, Treasury cannot say how many of the subsidies are for new or existing jobs or how many older workers have been displaced by young workers. It should also be remembered that the incentive was intended for youth, Special Economic Zones and designated sectors, yet to date, only claims for youth have been provided.

The Department of Trade and Industry’s efforts to support manufacturing growth are welcomed, but they believe are not being supported on a large enough scale. Whilst appreciating government’s desire to offer work to the unemployed, COSATU remains deeply distressed by how the Expanded Public and Community Works Programmes were being abused by provincial departments and municipalities as a source of cheap labour in place of what should be permanent decent provincial and municipal jobs, such as street repairs and cleansing. The plan for the Department of Environmental Affairs to create 107 000 full-time jobs is welcomed but this should not become a source of cheap labour for municipalities.

Mr Parks said that on Health and Social Protection, Government should be strongly applauded for the fantastic achievements made with regards to the rolling out of ARVs and the reduction in child mortality and mother to child HIV/AIDS transmission rates. These are huge victories in a very short space of time. Other departments should learn from such decisive leadership. However, they remain deeply concerned at the continuing shortages and other crises at public health institutions. The state of the health services in provinces leaves much to be desired. There is a crisis, including shortages of staff, equipment and medicines, which does not inspire any confidence that the promised transformation is on track. They urgently need an efficient, well-resourced, well-staffed national health system which provides the best possible service to all South Africans.

They welcome the commitment to release the National Health Insurance White Paper and its funding proposals; this was long overdue and COSATU calls on government to treat this matter as urgent. In the same breath they welcome the announcement about the release of the long awaited comprehensive social security discussion paper, but retain concerns about Treasury’s role in these policy areas.

Mr Parks concluded that some of the aspects of the nine-point plan outlined by the State President during his State of the Nation Address have a link with the framework developed by COSATU’s 11th National Congress; but the devil is in the details and in the implementation. The current energy crisis which the plan prioritises cannot be an excuse for the privatisation of state owned assets. They expect the Minister to provide more resources to Eskom to enable it to execute its developmental mandate appropriately. The effectiveness of Eskom cannot be measured by the extent to which its balance sheet becomes more profitable but rather by the extent to which it can provide energy security to the country. They note that Eskom would be given R23bn assistance.

More resources should be channelled to renewable sources of energy. Funding of the renewable energy sector must take into account the importance of developing social forms of ownership, localisation, job creation and enhanced energy access to the working class. COSATU reiterates its opposition to expansion of nuclear energy generation based on costs and safety considerations in particular. It is concerned that government is steaming ahead with shale gas extraction and its concerns include water contamination, health effects, green house gas emissions and the destruction of the Karoo’s political economy.

Discussion   
Dr Khoza said that one of the things that came up very clearly was that the wage bill in particular in the public service is the main cost driver. And also there were issues around efficiencies and the FFC although it did not go into detail when proposing fiscal consolidation was beginning to say government could not go on spending as if there was a bottomless pit of money. They have got to start looking at the deficit side and look at how they were going to balance that. She asked the labour bodies to explain how they were going to address the revenue side of things and its sustainability.

Dr Khoza asked the FFC to explain what kind of recommendations they have that were tangible for them to start addressing the wage bill because it was coming up as one of the major areas of high risk.

Mr S Mohai (Free State, ANC) asked the FFC to explain what they considered to be the funding of the National Health Insurance (NHI). He asked whether they agree that the size of the public service required urgent attention.

He asked whether NUMSA support the current Micro-Economic Framework based on its submission of the 9 point plan it highlighted where two areas stood out in the 9 point plan, namely, on the financing of infrastructure and also the supportive capacity of industrialization.

Mr Van Rooyen asked FEDUSA to confirm their involvement in the determination of the UIF relief because it seems as if they were not consulted. What was the position of FEDUSA? Did they want to put the issue on hold as COSATU had already said so? He asked FEDUSA what the best options were to ensure that the private sector comes to the party with regard to government incentivising private sector investment and how optimistic was FEDUSA to ensure that was going to happen.

He asked NUMSA what were the gaps in government in terms of dealing with the profit shifting problem because that was what they needed to know as a Committee as they deliberate on those matters so that they were able to accommodate some constructive submissions.

Mr Van Rooyen said that the view of NUMSA on the rating agencies was very interesting and wished one day that rating agencies did not matter but the problem was that they were living in a globally connected economy, and their rating were very important in terms of borrowing money and to do other things. He asked what NUMSA’s option was in terms of the proposal they were presenting to the Committee in that regard.

He asked the presenters for a general comment with regard to the fiscal policy because the budget review was advancing a consolidated approach.

Mr M Ndlozi (EFF) said that they welcomed the critique NUMSA had made on the budget. He asked whether the export tax was not a backtrack on nationalisation instead of dealing with the question of local beneficiation because they could not beneficiate what they did not own. He asked NUMSA to comment on transfer pricing and base erosion with regard to tax avoidance because they have done much in that regard so that transgressors could be criminalised and punished.

Mr Ndlozi said that it seems COSATU was moving to the right in terms of its policies. He asked COSATU to explain what it meant by radical economic transformation which it mentioned at the end of its submission.

He asked NUMSA to explain in terms of the rating agencies what necessary things should happen for the political will to be created because there was no political will in the current government to pursue an aggressive economic change, since it always dances to the west.

Mr L Gaehler (Eastern Cape, UDM) asked FEDUSA to explain why its submission talked about township development but did not mention rural development, yet most of its members were from rural areas. He asked how they will address the economy in terms of the world tax

Mr D Ross (DA) asked Prof Rossouw what the negative impact was of the increase in the number of social grants recipients moving towards the fiscal cliff. He asked if the 3% economic growth rate was needed because the National Development Plan had indicated 5% economic growth. He asked for an explanation in terms of the uncertainty in the remuneration of civil servants. He asked to explain the structural reforms that would boost economic growth in the country.

The Chairperson said that due to time constraints, the presenters should respond in three minutes and the rest of the questions should be submitted in writing to the Committee Secretaries.

Mr Bongani Khumalo, Financial and Fiscal Commission (FFC) CEO, said that they had started working on the issue of the wage bill in 2010/11. By 2013 they made a submission that was based on their own assessment of the biggest portion of the wage bill which dealt with health and education. And they have made recommendations for the short to medium term. The longer term issue was not as simple as looking at the salaries but were actually dealt with in the terms of what the Presidential Remuneration Review Commission was busy with. They have presented some charts in terms of what was happening.

Mr Khumalo said that on the NHI it had been indicated that it was a very big reform and it required at some level a very direct and formal consultation with the FFC because there were intergovernmental fiscal dynamics in that. So, obviously they have not received any formal communication from Government in as far as NHI is concerned. Therefore, they have got no view as a commission at current moment.

Mr George replied that on page 10 of the submission it should be noted that National Treasury projected a growth path of 2% for 2015 and 3% for 2016/17. If Statistics South Africa announces by the end of this year that the economy has grown by 3% that changes the entire equation. It means they will get more revenue and whole lot of issues will change. It should be remembered that economics was not the market philosophy, but it was what South Africans will do together which will change the game.

Mr George said that with regard to the balance sheet of companies, companies invested money on the basis of another equation, and that equation is what the rate of return was on investment over the medium and long term. The certainty is what one does with the assets after 10 years. If that company could generate income from that investment over the medium and long term and after that it can still sell those assets, then clearly it will run to invest. Therefore, they can create that environment in the rural areas, in the townships, and in cities, but that will require new investments. And from their side they were confident it could be done in terms of radical transformation.

Mr George said that in terms of the inclusivity of economic growth the principle for them was very clear. Those that were better off than the poor should contribute more towards the national fiscus so that they could address the issue. For example, when East and West Germany came together and the Berlin Wall fell, the people of East Germany were worse off than the people of West Germany, so they introduced a solidarity tax to level the playing fields. The current German Chancellor, Ms Merkel, came from East Germany and even during the recent economic crisis the German economy created more jobs.

The Chairperson thanked all the presenters for their submissions and responses. He emphasized that questions that were not responded to should be handed to the Committee Secretaries in writing.

The meeting was adjourned.