Points raised during Public hearings: discussion

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Finance Standing Committee

06 March 2000
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Meeting report

FINANCE PORTFOLIO COMMITTEE
7 March 2000
POINTS RAISED DURING HEARINGS ON BUDGET

 

Documents handed out
Summary of submissions on Budget 2000/2001 (attached to end of minutes)

 

SUMMARY
The committee decided to commission a report on the actual and the projected spending on health and education (at national and provincial levels) spanning the past seven years. Research for the purpose of this report is limited to a three month period.

The committee considers this report to be ''a first step'', and, after it has been received, they will decide whether they are going to take the issue a step further by looking at ''outcomes''.

The committee generally agreed that domestic savings is ''unsatisfactorily low'' and that the committee should look at ways of trying to improve it.

The committee also raised various issues on taxation.

 

MINUTES
The purpose of the meeting was twofold:

1) to respond to issues raised by civil society during the budget hearings. In this regard, the Chairperson said that they were going to look at the ''bite-size issues'' which had come before the committee; and,

2) to look at macro-economic issues.

Issues raised by civil society during the budget hearings

Professor Turok (ANC) said that, in his opinion, Idasa had done ''good research''. Here he referred specifically to their comment that ''labour was the asset of the poor'', and that this asset could best be improved by spending on health and education. Professor Turok suggested that there should be a longitudinal study, of the projected and the actual expenditure, on health and education (at both the national and the provincial levels), spanning the past seven-year period. This study would include an analysis of:
1) nominal spending,

2) real spending and,

3) per capita spending.

This would enable them to assess the impact of government spending on the poor. He emphasised that they would have to look at the projected spending, as well as what was actually spent.

Mr Andrew (DP) added that they should also obtain the figures for the amount spent in proportion to the GDP, both including and excluding the debt-service burden.

The Chairperson suggested that they engage with the Health Portfolio Committee in this regard, as that committee has an extensive research capacity.

Mr Andrew commented that, besides the fact that such a report would be interesting, what would be the point of the report? He asked if such a report would have some kind of ''output measure''. He added that such an endeavour could result in a lengthy thesis by the researchers.

Professor Turok responded that they should put some kind of time frame on the research such as three months to put together preliminary data. Fom there they could decide if they want to take the research further by looking at output measures.

The Chairperson said that she understood Mr Andrew's point, and that she agreed with him that the methodology they were proposing was lacking. She explained that, for example, if the report said that there was a 3,4% increase in spending in a particular area - what was the information really telling you? She wanted the committee to take a more ''pro-active stance''.

Professor Turok replied that the information would tell them that government has made a particular choice, for example, spending more on education means that education is considered a priority. After this, they can ''unpack'' the data by looking at outcomes. He noted the Minister's comment that the committee had not taken enough account of the MTEF, and that as a committee they must look at current trends and issues.

Mr Andrew said that if the figures show that government is spending more on education, then this is not necessarily a good thing if it means that government is spending less on something else. Repeating his earlier point, he said, ''beside gathering facts, what are you saying in this report?''

Mr Koornhof (UDM) said that the report would have policy implications.

The Chairperson said that she was not happy with the approach that says ''will increase by 2%'', and added that this was a simplistic approach to planning, and a limited approach to understanding strategic planning. ''But'', she continued, ''it is a first step''. Further, the committee does not want to tread on the toes of the other committees such as looking at outcomes of health which is for the health committee to do.

Dr Luyt (FA) said that he was in overall agreement with the report approach, but that liaison with the education and health committees was pivotal.

Macroeconomic issues and taxation

Mr Andrew commented that the level of domestic savings were unsatisfactorily low, and that government should look at things that they could do to increase the savings level of individuals.

The Chairperson said that the Minister and the governor of the Reserve Bank had announced that an inter-Ministerial task team would be set up to try and increase/enhance the savings of the people. She added that the committee needs to keep track of this inter-ministerial task team.

A committee member said that the Child Maintenance Grant and the Social Old Age Pension are important issues which the committee must consider.

Mr Chiba (ANC) said that the increase of tax relief for NGOs was important, and agreed with Mr Andrew that more had to be done to encourage savings.

A member added that the tax relief for NPOs should include income tax.

Regarding the fact that provision is made for taxation on retirement funds, a member noted that evidence was led that people who earn below R40 000, had no incentive to contribute to this type of retirement fund because the taxation on the fund was simply too high.

The committee agreed that the interim report on CGT (capital gains tax) should include a cost benefit analysis.

Mr Nene (ANC) said that SARS capacity, in relation to CGT, was an important consideration. The Chairperson agreed and added that the committee should be kept abreast of the SARS preparation process for implementing CGT and how far that process was. Mr Koornhof added that CGT was a volatile issue and if any uncertainty arose it should be addressed.

Mr Lekgoro (ANC) drew attention to the issue of the tools allowance in the context of rebates. Also on the issue of rebates, the Chairperson said that it was important to consider the categorisation of NGOs, as this would determine whether they would receive rebates on receipts and accruals.

Mr Nair (ANC) referred to the fact that the tax free amount on interest had been raised on income from R2000 to R3000, and indicated that he felt that the increase on the tax free amount was still too low.

Ms Joemat (ANC) raised a concern about the taxation of old age institutions. The Chairperson responded that they were covered by the donations tax. However, she said that it was still important to track the issue of relief for such institutions.

The Chairperson noted that businesses felt that the threshold for graduated company tax was too low.

Mr Andrew referred to the Smith report made by a national consultative retirement forum (which had held their last meeting in January 1997), and asked what the current status of the Smith report was. He also identified the pegging of welfare grants to inflation as being important.

The Chairperson was unclear on the status of the report and indicated that she did not want to get into the issue of old age pensions at that point.

Mr Koornhof reminded the committee that the Governor of the Reserve Bank had invited them to be observers at the Monetary Policy Forum, and he said that the committee had to consider what the role of that forum was. The Chairperson commented that there was a growing relationship between Parliament and the Reserve Bank, and that the relationship between Parliament and the Forum also had to be considered.

Ms Joemat said that while COSATU had not appeared at the hearing, the concerns raised in their press release should be addressed. The Chairperson said that those concerns could be looked at later and added that the Public Accounts Committee takes correspondence on issues. These issues, she said, could also be raised.

Appendix 1:

Summary of Submissions on Budget 2000/2001

A. Black Business Council

Supportive

· Best budget our country has seen

 

· addresses fiscal discipline, equity, growth and redistribution

 

· sets the scene for future economic growth and redistribution in an open competitive environment

Reservations

 

· Despite progress in bringing about better economic management, economic growth and employment remain elusive.

 

· Expectation of an average GDP growth rate of 3,4 - best economic performance since 1994. However various risks.

- interest rates in US likely to increase. Also EU Central Bank.

- US CPl 2,3% in December 1999 to 2,7% in January 2000

- November 1999 CPIX was 7.5%; January 2000 7.7%.

- Inflation target of 3 to 6 % by 2002 provides space for the development of an econometric model and the mechanics of targeting; this could lead to the achievement of low interest rates ensuring that the SMME sector thrive.

- Govt should be allowed to exceed target for up to 6 months in event of unexpected supply shocks.

- SARB must be transparent and accountable. Must publish quarterly inflation reports.

 

· SARS and liability management department congratulated for netting R7.5 billion giving rise to additional spending on public services.

 

· Welcome R855 million for the Umsobomvu Trust.

 

· Welcome government deficit of 2,4 % for 2000/01 is good news for capital market interest rates. A low budget deficit and an inflation targeting framework likely to lower borrowing cost of indexed linked bond to be issued by government.

 

· Personnel cost must be within inflation range as measured by the CPT; restructuring of public service necessary for efficient service delivery.

 

· Welcome delivery of some public services through public/private sector partnerships, also Public Private Partnerships Clients. Units should be based on at provincial levels.

Tax Proposals

· Reduction of Personal Income Taxes. In percentage terms the rate reduction is quite high in low and middle income bands the rand value of the reduction is not insignificant in higher income hands.

 

· Capital Gains Tax. Supportive as it pursues equity in the tax regime. However only payable on capital gains which accrue after effective date 1 April 2001. Wealth acquired during the apartheid years will not suffer this tax, whilst those who are yet to accumulate will not enjoy such a relief. CGT should be dedicated to alleviating unemployment and its hardships and investment in education.

 

· Residence Basis of Taxation. Necessary consequence of a liberal exchange control policy and on open and global economic system. Foreign sourced dividends will immediately become taxable; relief to be given for underlying foreign taxes paid thereby avoiding double taxation.

 

· Graduated rate structure for SMME's pleasant surprise.

Targeted group would be incorporated businesses with turnover less than R1million. Medium-sized enterprises are therefore excluded, as well as entrepreneurs who choose not to incorporate. The former have greater start up costs. With turnover just over R 1 million and taxable income of less than R100 000, the tax rate will double from 15% to 30%. Ideally the criteria or benchmark should exclude reference to turnover if not increased to R5 million. Graduated rate structures should also be examined in US and UK.

 

· Personal Employment Service Companies. The rate between the effective company rate and average personal rate has now been narrowed to reduce the rate advantages of corporatisation; cost-efficient to out-source; proposals punitively impact on SMME.

Encouragement of SMME

· Budget silent on other measures that are needed to remove the obstacles to growth of the sector. Recommendations:

- Khula not addressing the needs of SME. BBC and other stakeholders and govt need to find solutions to the funding obstacles.

- NAFCOC and FABCOS are best placed to allocate loans to their members whom they have screened

- Onerous requirements for the registration of companies, the licensing of businesses and registration with statutory bodies such as SARS; must be simplified and streamlined.

B. SACOB (Press Release)

· Budget is a partial shift towards improving economic conditions for growth by inducing productive investment.

 

· Concern over lack of certainty about inflation targeting; 3-6% range by 2002 but targets for this and next year available.

 

· Budget deficit still under control while capital expenditure received the required boost by stimulating infrastructure delivery.

 

· Reduction in personal and small business taxes is also a step in the right direction; enhances personal disposable income and adds additional impetus for small business; will also stem flow of skills from the country.

 

· Introduction of CGT not an incentive for investment

 

· The move from a source-based taxation to a resident -based taxation could inhibit investment trends.

 

· Disappointed that there was not a shift from personal and company tax to value-added tax; could have widened the tax net in addition to removing investment hurdles.

 

· If inflation targeting range is implemented immediately it will be an unrealistic attempt at incrementally chipping away at inflationary pressures. Should interest rates increase as a result of inflation targeting growth and investment will be encumbered. Real interest rates are still higher than our trading partners. The private sector therefore requires the targets for both 2000 and 2001 as soon as possible.

 

· Pity interest income was only marginally increased.

 

· Relaxation of exchange controls will further enhance foreign confidence levels

 

· References to privatisation and definite commitments will mark new era of for foreign direct investment matched by debt reduction and social development for the poor.

 

· Summary. Budget represents consistency in terms of the medium term plan but will be stifled by uncertainty relating to inflation targets. The key success factors are bound to be determined by expenditure outcomes and efficient management of delivery.

C. SACOB Submission

· Bold budget; enhances growth

 

· Inflation targeting part of GEAR strategy. Sustained growth and employment requires an environment of price stability. The actual levels and range not as important as the fluctuations. High inflation means business is less prepared to invest.

 

· Projected targets for next year (R5 billion) for privatisation is minuscule in relation to R200 billion total projections. Must be suitable regulatory mechanisms in place for consumer protection. If government is a shareholder need to control tariffs.

 

· Taxation proposals

- Tax relief welcomed; will add to personal savings.

- Appreciates stability in company rates.

- Thresholds too low for graduated company tax.

- If VAT is increased it should be directed towards direct poverty relief

- Welcomes the appointment of Inter-Ministerial Committee to look at measures to increase savings. The 25% taxation of savings in pension funds is in excess of marginal rate for lower income groups. The National Retirement Consultative Forum should look at the implications of the third report of the Katz Commission in this regard.

- Would want a serious re-consideration of a Capital Gains Tax. Recommend the appointment of a dedicated sub-committee of Katz SARS should undertake a full cost-benefit analysis; if CGT is implemented, do not tax gains to pension funds.

-Concerned that additional taxes and levies are proliferating; will submit a document to that effect.

D. FEDUSA

· Budget a welcome relief for the workers of South Africa

 

· However many challenges left unanswered with the most critical being unemployment.

1. Revenue Issues Tax Proposals

· Lowering of tax rate will act as powerful incentive for work effort, savings and entrepreneurship. Will boost consumer spending by raising household income. Exciting that largest percentage of tax relief to be enjoyed by the low to middle income groups- consistent with the attainment of equity objectives. Need to further reduce the gap between personal and corporate taxes.

 

· Request increase in tool allowance from R75 to R2000

 

· Current rate of 25% on gross interest and net rental income on retirement funds contributes to low savings. Need a gradual phase-down of this tax.

 

· Strongly opposed to Capital Gains Tax as it will reduce long term retirement provision

 

· Further taxation of certain fringe benefits will significantly reduce the benefits that employees have earned and won at the workplace.

2. Efficiency Gains and Public Service Personnel Expenditure

· MTBPS stated that govt is developing a remuneration policy in line with the growth patterns of inflation. The projected figures indicate a personnel growth of 5.4% per year in personnel expenditure.

 

· No indication that new policy will address salary imbalances. The Basic Conditions of Employment Act will become applicable in the public service during the course 2000/2001 financial year; the financial implications are considerable. DPSA has applied to the Dept of Labour for a postponement. This was done without consultation of the parties to the Public Service Co-ordinating Bargaining Council. There is no reference to BCEA in the budget. This will give rise to uncertainty.

 

· Personnel expenditure has risen from R57 891 billion in 95/96 to R96 933 billion in 2000/2001; this has been at a decreasing rate. It has not been shown that increases in personnel expenditure are closely related to poor service delivery

3. Job Creation

· Not much mention was made in the budget about job creation, although the budget did make tax concessions to the SME's and NPO's. SME's should enjoy tax holidays linked to the number of jobs they create. The trend of employment retention and creation is given a severe blow by the selling of state assets or shares to private investor.

4. The Budgetary Process

· The democratisation of the budget process needs to be treated with urgency. Meaningful input into the budgetary process is required to give effect to participatory budgeting.

 

5. Co-ordination of Budgetary and Collective Bargaining Processes.

 

· The budget cycle should continue after the collective bargaining process has been finalised. The Medium Term Budget policy Statement and the annual budget should not undermine the Public Service Co-ordinating Council Agreement.

6. Functioning of Parliamentary Portfolio Committee

· The portfolio committees have become the rubber-stamping mechanism of the Finance Department as far as the annual budget is concerned. Parliament should be a channel for improving the overall accountability of those who use state funds.

7. The Impact of the Budget on Access to Services such as Health Care, Education and Welfare Grants.

 

· In spite of tough fiscal approach by the government over the past couple of years Budget 2000/2001 has been able to increase expenditure by more than R8.3 billion above earlier projections. Spending on social services is set to increase by an average of 5.6% over the next 4 years.

 

· Increased spending on defence neglects other categories of social spending.

 

· The largest increases are in the health budget. Needs a considerable greater allocation to curb HIV/Aids epidemic.

 

· The estimated slower increases in welfare spending are a cause for concern particularly as privatisation will lead to shedding of jobs.

8. General Macro-Economic Prospects

· Budget is commendable but there are shortcomings as well. One is the encouragement of savings.

 

· The growth target for the year (3.5%) is much below the 7 to 8% that is required if jobs are to be created.

 

· The introduction of inflation targeting is questionable and FEDUSA will reserve right to comment until after thorough analysis. It is to be hoped that the target range of 3 to 6 % will not put a cap on wage increases.

E. AgriSA

· In 1997 the Minister of Finance announced the withdrawal of the rebate on diesel. It had consisted of 3,634c per litre in excise duty and 16,996c per litre in the fuel levy; totalling 20,6c per litre. The withdrawal was said to be necessary because of the abuse of the system and the high costs of maintaining rebate checks and balances.

 

· 78% of energy consumption in agriculture consists of liquid fuel; agriculture needs to maintain international competitiveness as some international competitors pay negligible (if any) tax on diesel fuel.

 

· The tax on diesel fuel constitutes approximately 40% of the wholesale price of diesel fuel and prices paid by local farmers are in excess of the average being paid in the OECD countries.

 

· The budget speech confirmed that a rebate of 89,4 c per litre would be granted to the fishing industry from 1 June 2000. The Minister mentioned that other nonroad users would be dealt with in due course. AgriSA requests government now to pay serious attention to this matter.

F. Idasa

· The national Department of Finance deserves praise for the improvement in transparency and information as evidenced by the tabling of the second National Expenditure Survey and the Budget Review.

 

· The curbing of expenditure, particularly in the Provinces, is also praiseworthy, and will lead to declining interest costs.

 

· Nevertheless, concerned about the impact of the Budget on certain categories of poor people. People are poor because:

- They lack income

- They have limited access to, and returns on, assets such as skilled labour, land and infrastructure

- They lack effective participation in government policy-making processes as it impacts on directing pro-poor spending.

1. Increasing Income Security of the Poor.

 

· All categories of Social Security payments are projected to decline in real terms.

 

· Expenditure on The National Public Works Programme is projected to decline in real terms by 14,1% over the MTEF period. The National Expenditure Survey (NES) highlights problems of rollovers of unspent funds in 1998/99 and 99/00.

 

· The adjustments in the income Tax proposals will benefit the rich disproportionately. This increases the gap between the rich and the poor.

 

· In developing countries there is a need to protect the income of the poor from the impact of national-level economic shocks; this translates into a need to co-ordinate government protection by using macro-economic indicators such as employment levels. For instance, the levels of social grants and employment should not be allowed to decline at the same time.

 

· Government should also help the poor to reduce the risk of sudden fluctuations in income. Microfinance programmes and Health insurance are examples of such programmes. The Medical Scheme Act of 1998 is a good example. It remains to be seen how effective this strategy will be.

 

· Just over R1 billion was allocated to Poverty Relief and Job Summit programmes in current budget. The bulk of it is still unallocated. The NES chronicles numerous problems of implementation.

2. Improving Access to and Returns on Human Assets.

 

· The greatest asset the poor have is their labour, which can be improved primarily by spending on health and education. Projected spending over the MTEF period will show small real increases. In addition, a series of targeted initiatives such as the Umsobomvu Trust will increase the human capital of the poor.

Conversely there is no good news for the neglected areas of Adult

Education and Literacy.

 

· The Skills Development Act requires that 80 % of the skills levy be paid to sectoral training authorities; this will improve the skills of the employed. The unemployed will be trained using the remaining 20% that will go to the National Skills Fund. The receipts of the National Skills levy will be roughly Rl.5 billion for 2000/01 and R3 billion for 2001/2.

 

· The 2000/01 budget does not give any indication of additional financial support for the Umsobomvu Fund. The Trust was financed from a R855 million charge resulting from the demutualisation of Sanlam and Old Mutual.

3. The Integrated Nutritional Programme.

 

· This has experienced massive problems with the spending of grant at provincial level and the rollovers amount to R241 .6 million. Spending is scheduled to decrease by a real amount of 10% over the MTEF period.

 

· Spending on HIV/Aids will receive an additional boost of R75 million in the 2000/2001 budget rising to R250 million in 2002/03. Donor tax exemptions will be granted for donations to organisations dealing with the MIV/Aids crisis.

4. Access to Physical Assets

· Land Affairs budget has increased substantially in real terms over the last four years with a projected growth from 96/97 to 2002/03 of 248,5 % over the whole period. This is largely due to increases in the restitution programme. The reforms of the restitution procedures has speeded up the process considerably.

 

· Housing grants are allocated from the SA Housing Fund. A real growth of 73,7% is projected from 96/97 to 2002/2003. Given the current construction rate, the 10-year target for eliminating the housing backlog will not be reached. The highest value grant which goes to the poorest households has lost substantial value since 1994.

5. Participation

· Parliamentary Committees represent the strongest and most appropriate potential avenue of intervention for the poor and civil society organisations that represent their interests. Unfortunately, Parliament is not yet empowered to play an effective role in the budget process. Enabling legislation has yet to be tabled. The absence of a budget research office compounds this problem.

6. Conclusion

· Results of the current budget for the poor are generally mixed. Major weakness is that it does not adequately support the income and income risks of the poor and unemployed.

 

· Government does significantly better in improving access of poor to programmes that increase the value of their labour and their access to physical assets

 

· Health and health spending projected to remain stable over the medium-term and a number of targeted Skills and Health improvement programmes are being initiated.

 

· Many of the projects that are designed to give access the poor access to physical resources are bedevilled by implementation problems and many conditional grants to provinces have to be rolled over.

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