Budget 2001

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Finance Standing Committee

21 February 2001
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Meeting report

FINANCE PORTFOLIO COMMITTEE
22 February 2001
BUDGET 2001

Chairperson: Ms B Hogan

Documents handed out
Presentation by National Treasury on the 2001Budget (awaited)
Estimates of National Expenditure 2001
Budget Review 2001
Budget Speech 2001
These three documents are found on the
National Treasury website

SUMMARY
The Finance Director General, accompanied by the Minister, presented an overview of Budget 2001. The Budget aims to increase spending, whilst reducing taxes. There is a focus on economic development which can be seen through the increased spending on infrastructure, as well as on poverty alleviation, skills development, and ensuring safety and justice. The Budget is presented in a new format which provides more information on what goods and services Government delivers - contributing to increased accountability. The overview was followed by wide ranging discussion.

MINUTES
Presentation by Ms Ramos, Director General of the National Treasury
Some points made were:
- The 2001 National Budget is published in the new format which extends the scope and quality of information on national government's spending plans. It also improves accountability and control.
- Fiscal policy has shifted to improving the efficiency of spending, increased capital spending and ongoing tax reform.
- There will be R8.3 billion in personal income tax (PIT) relief.
- The estate duty donations tax is down from 25% to 20% from 1October 2001.
- In terms of industrial policy R3 billion of tax revenue over the next four years is foregone as investment allowances.
- There is a deep concern at low effective tax rates for banks. Government is to engage with the industry to address this with a view to making legislative changes.
- The economy is expected to grow by 3.5% each year for the next three years. Key industries such as communications and manufacturing will enjoy a high level of investment.
- Debt service costs decline to 4.4%. This releases over R10 billion for spending on services.
- From the restructuring process R18 billion is expected. This is mainly from M-Cell, Sasria, and Telkom.

Discussion
(Q) Mr Andrew (DP) commented that GEAR had a five year strategy which ended in the year 2000. It had good achievements. SA had been heading for a debt trap but it was avoided. However, SA did not come close to achieving the projected 6.1% growth and in the non-agricultural job sector there was no formal job growth.
- What were the main causes for not achieving these things and what lessons have been learnt?
- Could SA ever achieve a 6% growth rate?
- Who determines the measurables for the success of projects?

(A) The Minister, Mr T Manuel, replied that the environment has many different variables. In 1998 for example there was the South East Asia collapse. All these things have a profound impact and there is always such a risk in macroeconomic management. Some issues can be controlled better than others. In a globalised world (with all its factors) debt cannot always be handled in a textbook way. Financial stability is a global public good. Destabilisation impacts on exchange rates and interest rates. It creates uncertainty for decision makers as to whether they must invest or not.

High liquidity levels in SA firms is a possibility. It must talk to low levels of fixed capital formation. There is also a human capacity constraint. The establishment of SETAs (Sector Education and Training Authorities) has helped. Changing the composition of exports has also been useful. It distinguishes SA. SA needs to invest more in human capital formation. South Africa needs to spend more on skills development. The safe areas for investment is in people and in education. Otherwise one does not always know at what one is throwing the money.

On the issue of employment the problem is how one defines job categories. What is formal employment versus informal employment? For example, a journalist working freelance, is that formal or informal employment? Someone who runs a guesthouse, is this person employed or not? The Minister said that there is nothing worse than collecting statistics that are deficient in certain ways.

Another problem is that people high on the income scale do not want to participate in government surveys. It makes planning difficult because government has to make assumptions. It is important across party lines to ensure that SA gets a good census.

Ms Ramos responded to the question on measurables. She noted that measurable objectives are set through the Public Finance Management Act. There are questions to be asked, there are different kinds of programme indicators. In Housing for example one would ask: What is the quality of the house? What timeframe was the house built in? There is much work ahead of them during the next three years in developing this method and all the parliamentary committees have a role to play.

(Q) Mr Feinstein (ANC) asked the following:
- What impact does the Ministry expect from the tax changes (such as the increased deduction in Personal Income Tax) on the growth of the economy and savings and investment)?
- What will be the impact of the increase in the skills levy?
- The contingency reserve doubles each year. How is this figure determined?
- To what level will infrastructure development contribute to growth?
- What is the estimated projection of the cost of financing the arms deal?

(A) Ms Ramos replied that the R8.3 billion relief in PIT is aimed at giving the greatest benefit to the R80 000 pa income bracket. This will impact upon disposable income. Without disposable income one cannot stimulate savings and investment. Household indebtedness has decreased over the past few years. The Ministry hopes that people will make the decision to save as a result of the tax break. They also expect an impact upon growth. The tax cuts do not only relate to PIT. There is also a zero rate VAT on illuminating paraffin. This will go into the pockets of the poor because they are the consumers of this product.

The objective of the job incentive is to help create an environment for job creation. They hope that this impacts upon employment, the levels of demand, and that this impacts upon growth. They have budgeted that R600 million will cover the cost of the incentive for six months. They are working with SARS now on the administration aspect. They will need guidance from SARS on what can and cannot be implemented.

The increase in the skills levy is not a new concept. It was discussed in various forums including NEDLAC. The shift from half a percent to one percent of payroll was anticipated by all. It was only set at half a percent initially to get the administrative systems in place. A skills shortage limits growth. Companies who see this spend more than the 1% on skills training. The increase is not really a big issue.

Fuel levy: these levies should keep up with inflation. If it is not done each year then at some point there would have to be a big increase. It is better to increase it moderately than by a big adjustment.

Contingency reserve: they keep it under 1% of the GDP. It is there to give ''breathing space'' in case of external shocks or floods for example.

They have put aside a substantial amount for infrastructure spending. It is difficult to ensure that the spending is effective. They are phasing this in over a three year period. Provinces will make available infrastructure spending in addition to this. For example, government gives R 1 for every 50 cents that they put in. It will go to a combination of resources, mostly on roads and schools. This will in turn lead to job creation and the upgrading of communities. There is a substantial number of projects on the books. They hope it will gear up private sector investment.

The Minister noted that SCOPA would meet with Ministers on Monday 26 February about the arms deal and they would deal with this issue then.

(Q) Ms Taljaard (DP) asked:
- The target from the proceeds of the first privatisation (South African Airways) was not met. Now there is R18 billion expected from the restructuring process (mainly from M-Cell, Sasria, and Telkom). If the bulk of this comes from the Telkom Initial Public Offering (IPO), what if there is a problem in the telecommunictions sector, how will that impact on the R18 billion which is expected to come in? If there is a negative impact, what other projects are in place?

(A) Ms Ramos replied that they have had discussions with the Department of Public Enterprises and they are confident about the Telkom IPO. There are no risks. The question they must ask is whether they feel that the conditions in the market have changed so that they cannot go ahead. They are conscious of these points but they feel confident. The Minister added that the Telkom IPO is not necessarily the largest component of the R18 billion.

(Q) Ms Taljaard asked for a comment on the investment incentives project applicable to the Southern African Development Community (SADC).

(A) The Minister replied that they have examined the OECD practices and harmful tax practices in the SADC region in detail. By the end of March the Treasury, SARS, and Trade and Industry Department will come up with details on this.

(Q) Ms Taljaard asked what priorities local government departments have set for themselves in terms of local government restructuring.

(A) The Minister replied that some metros will be okay. Category C rural areas may have difficulty raising revenue in some parts because of the tenure system. Local authorities should be able to raise revenue themselves. Treasury does not want to create a hazard by saying that they have the resources to solve all the problems. The focus must be on capacity building too. Capacity must be in place for local governments to be able to do what is required of them in collecting revenue.

(Q) Ms Mahlangu (ANC, Mpumalanga) commented on the increase in the old age grant. She asked if they had considered the interest charges that accompany having to have a bank account. Has Treasury communicated with the banks on working out some mechanism to alleviate the pressure on the poor?

(A) The Minister replied that they are a ''humble Treasury''. Some things are better done by line functions. The problem with the amount of the grant is that different provinces can afford different amounts. They have to work around this. Treasury cannot take over a Schedule 5 competence. Further, provincial Welfare Departments have cash payment options. Treasury cannot get involved.

(Q) Dr Rabie (NNP) asked for clarity on the review of tax on banks.

(A) The Minister replied that they have had meetings with the banking sector. There are going to be tough negotiations. The principle of equity is very important in tax. One sector cannot bear less of a burden because of certain omissions.

(Q) Mr Durr (ACDP, Western Cape) asked if the Treasury had considered granting amnesty for a period of twelve months to give people who unlawfully hold assets abroad the opportunity to report the assets. Government could then tax these and a large amount of money can come into the tax system.

(A) The Minister replied that amnesty for small business was granted in 1996. If they do it for those assets held offshore then what will be done about the assets held within SA. The equity principle applies.

(Q) Ms Jumat (ANC) asked for a comment on the impact of the gambling industry on the savings of people.

(A) The Minister replied that this was not a big issue. In Australia, for example, many casinos closed down because of lack of interest. Gambling is a fashion statement. It is where people spend their time but the interest goes away. Provinces are only now looking at the revenue flows from their casinos.

(Q) Ms Taljaard asked if there was concern about the administrative burden being placed on SARS.

(A) The Minister replied that there is a concern. It is a complex issue. There is a shift from assessment to auditing. There has to be a realignment of systems. They need to take away the paper burden. They need to reskill people while the old skills are still in place. In the short term there will be administrative difficulties. The Commissioner "has a clear head about these things".

The meeting was adjourned.

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