Draft report on Budget Hearings: discussion

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Finance Standing Committee

02 March 2000
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Meeting report

FINANCE PORFOLIO COMMITTEE
3 March 2000
DRAFT REPORT ON BUDGET HEARINGS

Relevant Document
Final Report on Budget Hearings, which appeared in A.T.C. of 6 March 2000 (see Appendix 1)

SUMMARY
The Committee met in order to put forward amendments to the report handed out. The chairperson raised the issue that the process in which hearings are followed up on needed to be changed. She felt that the committee should decided on certain important issues that were brought up at the hearings and discuss these issues in detail in order to give assurance to the parties making submissions, that that their issues were being dealt with by the committee.

Mr Feinstein (ANC) mentioned that the Finance Committee had no research support. He suggested that the committee should reflect in their reports that a hard copy of all the submissions made to the committee will be available to all interested parties.

The chairperson mentioned that there is a recognition in Parliament that the Finance Committee is under resourced.

Prof.Turok (ANC) suggested that all meetings end at 4pm in order to enable someone to type up and compile a report on the day's meeting, thereby making it easier to consolidate the da'ys events.

Dr Koornhof (UDM) said that critical inputs at the hearings were being lost and that at the end of the day, the report should reflect the agreements, consensus and differences reached. He also stated that the time factor should be addressed so that at the end of the day, the committee can produce a quality report.

The chairperson stated that the committee members should bear in mind the time constraint in which the report was produced, and also stated that they should recognize the fact that they could not cover all the range of issues discussed at the hearings. She mentioned that the members should not expect a comprehensive analysis of all the hearings that took place.

A suggestion was made by Dr Woods (IFP) that a list of all the people that attended the hearings and made submissions, be put at the end of the report.

The individual members of the committee then made amendment proposals to the report. It was decided that each of the parties put together a list of issues they wish to discuss with regards to the submissions made during the week. The meeting was then adjourned.

Appendix 1:
Report of the Portfolio Committee on Finance on the Appropriation Bill [B 7 - 2000] (National Assembly - sec 77), dated 3 March 2000:

The Portfolio Committee on Finance, having considered the Appropriation Bill [B 7 - 2000] (National Assembly - sec 77), referred to it and classified by the Joint Tagging Mechanism as a money Bill, reports as follows:

A. Introduction
1. The Committee held hearings on the Budget from 28 February 2000 to 2 March 2000, and wishes to express its appreciation to all participants for their contributions. Written presentations submitted form part of the records of the Committee Section. The Committee would also like to express its appreciation to the Minister of Finance, the Deputy Minister of Finance, the Director-General of Finance, the Acting Director-General of State Expenditure, the Commissioner of the South African Revenue Services, the Chairperson of the Financial and Fiscal Commission, and their staff, for their presence and contributions during the hearings. A list containing the names of those who made oral submissions is included in paragraph E of this Report.

2. The Budget tabled in Parliament by the Minister of Finance for the year 2000-2001 represents another significant step in the ongoing budgetary reforms initiated by the Ministry of Finance and enhances the macro-economic management of the economy in several very important ways.

For the first time in many years, the government has been able to table a budget that is strongly supportive of growth and which also introduces one of the most comprehensive sets of tax reforms ever undertaken, which, inter alia, affords significant tax relief to middle and lower income tax groups and to small business. By announcing a 3% to 6% inflationary target and achieving a lower than expected budget deficit, the government continues to demonstrate a progressive commitment to sound and prudent macro-economic management. Greatly improved revenue collection, lower interest on State debt and stronger economic growth have combined to enable the government to raise spending on public services by more than R8,3 billion per year. This increased expenditure in the medium term will go towards strengthening and modernising the justice system, consolidating provincial education, health and welfare services, maintaining public infrastructure and reinforcing safety standards on roads, public transport and public buildings, phasing in sectoral skills development programmes, responding to the challenges of HIV/Aids, and supporting rural development, poverty relief and employment creation.

The Budget as a whole continues to show a redistributive shift towards spending on social services such as education, health, welfare and housing, representing a total of R109 billion. Interestingly, the Budget also reflects a welcome upward shift in spending on economic services, including water, agriculture, fishing and forestry, transport and communications, thus demonstrating a commitment by the government to building and maintaining economic infrastructure. Protection services receive a total of R33 billion.

The issue of poverty reduction has received considerable attention. While the Budget Review indicated increased spending on poverty reduction, the rate of change was questioned in a presentation to the Committee. Further research is required to established real spending, and on a per capita basis, as well as the quality of delivery of social services. The Committee welcomes the innovation of expenditure incidence analysis, which will determine the proportion of services delivered to social categories.

The government has committed itself to moderating the level of government consumption spending relative to the GDP, including public service personnel expenditure. In line with improving efficiencies in service delivery, the Ministry of Finance will set up a unit that will assist other ministries and spheres of government in the setting up of public/private sector partnerships.

The Committee has had to draw up this Report under severe time constraints, and is thus unable to report in detail on all the relevant matters that arose during the four days of hearings. However the Committee intends earmarking some of the issues for further consideration. The matters mentioned below were some of the major issues that received attention during the hearings.

B. Taxation
The taxation proposals contained in the Budget arguably constitute the most comprehensive overhaul of the country's tax system in our recent history. The proposals are both redistributive in nature and pursue the principle of equity in the tax system.

Most popular of the tax changes is the relief granted to individual taxpayers, in the order of R9,9 billion. 41% of this relief will be to the benefit of those earning below R70 000 and 38% to those earning between R70 000 and R150 000. The Committee welcomes this relief, believing that it will have a positive impact on both savings and aggregate demand in the economy.

The Committee acknowledges the introduction of a Capital Gains Tax for the equity it will engender in the tax system and its "backstop" effect. We also welcome the one year's grace before the introduction of the tax, as it became clear in the hearings that a number of details remain to be resolved. These include the following:
1. The complexities created by the proposed procedures to exempt capital gains accrued prior to 1 April 2001.
2. Aspects relating to principal residences owned through private companies, close corporations or trusts.
3. The status of the tax in relation to new immigrants.
4. The tests for and definition of residence.
5. The complexities of and capacity for valuations of gains.
6. The potential double taxation of certain types of share options.

SARS and the Department of Finance have gone to considerable lengths to enable all interested organisations and individuals to comment on the proposed tax. We encourage all stakeholders to do so as this will greatly enhance the ability of SARS and Parliament to resolve these issues.

The shift from source-based to residence-based taxation is to be introduced on 1 January 2001. This shift will continue the process of aligning the South African tax regime with international best practice. The delay in implementation is to be welcomed, as a number of issues remain to be resolved. These include -

(1) the treatment of income from countries which have a similar tax regime to that of South Africa, but with whom we do not have a double tax agreement; and
(2) the criteria for and definitions of residence.

A critical issue for the Committee in relation to both these proposals is the capacity of SARS to implement these changes. The Commissioner stated before the Committee that the changes will impose a "formidable burden", but that SARS will be equal to it if given adequate resources. SARS indicated that they will require 770 extra staff to successfully manage the new demands. The Committee urges the Minister to ensure that the additional resources are made available. This investment is certain to bring greater returns.

The Committee welcomes the tax exemption proposed for certain non-profit organisations (NPOs). Consultation is required on the specific NPOs which will be eligible for income tax relief, and this will require ongoing review.
The Committee further welcomes the lower, graded levels of taxation for small and micro enterprises, which we believe will assist in stimulating the growth of this critical sector. We request the Ministry to assess whether the threshold for qualification should be raised in future budgets.

The Committee expresses its concern at what appears to be an ad hoc approach to the taxing of retirement and pension funds. When an additional tax was introduced in 1996, it was stated that this was to create greater equity between these and other instruments. It was further stated that consultation would take place and the issue of taxation of these funds would be comprehensively studied. It appears that this has not occurred. As a consequence, increased taxation of these instruments is perceived as undermining the development of an improved savings culture in the country. The Committee is of the opinion that a stable approach on this issue is essential, and therefore we request the Ministry to initiate the consultative process as a matter of some urgency and to present to us with a coherent view on the future tax status of these instruments.

The Committee welcomes the creation of the interministerial task group to improve the levels of savings in the South African economy. We look forward to receiving concrete proposals in this regard in the near future.

The Committee notes the concerns raised by organised agriculture with respect to the continuing exclusion of agriculture from the diesel rebate. We further note the Minister's desire to develop a viable system that meets this need but that is not open to the misuse that led to the withdrawal of the rebate in 1997.

C. Inflation targeting
The Committee welcomes the introduction of inflation targeting. We believe that it is a mechanism that will create greater certainty and stability in the economy and act as a solid foundation for sustainable growth. It further engenders greater accountability in respect of the way in which the South African Reserve Bank executes monetary policy.

As a means through which to improve the co-ordination of macro-economic policy, this framework will further enhance the credibility of the way in which the macro-economy is being managed. This is reflected by the announcement that South Africa has been granted an investment grade rating by Standard and Poors.

The issue of inflation targeting generated the most substantial debate of the hearings. The relationship between growth and stability was extensively discussed, with divided views on the impact that inflation targeting might have on growth performance. What is clear, is that South Africa must pursue job creating growth with minimal inflation to ensure its sustainability. Evidence was led that low inflation is compatible with sustainable growth.

No evidence on the advisability of the specific target band was led. The Committee is of the opinion that we do not have sufficient information at this point to engage in a meaningful debate on the range itself or the time period over which it will be implemented. Our preliminary, instinctive view is that the period of almost three years to achieve the target is probably practical and the band is reasonable. We welcome the fact that the target and the timing of its achievement will be assessed on an annual basis as part of the Medium-Term Budget Policy Statement.

The Committee noted that the targets specified were based on prelimenary modelling, and that this process will be concluded later this year. The Committee welcomes the invitation from the Governor of the Reserve Bank to engage meaningfully with the assumptions underlying the specific target and the timing of the introduction thereof.

Making this information broadly available will facilitate constructive public discussion on the issue and have the benefit of engendering broad consensus in our society around inflation expectations. International experience suggests that the key to the success of inflation targeting is that it is achieved in a transparent and accountable manner. The Governor of the Reserve Bank's endorsement of this view is to be welcomed. So too is his flexible approach to the manner in which he might deal with exogenous effects on the economy during any target period.

The Committee will not only deepen its knowledge of the issue but will also closely monitor the implementation of the target and its effects, both positive and negative, on economic sentiment and the real economy.

The Committee will also seek greater clarity on the institutional and operational arrangements between the Reserve Bank and the Department of Finance as they evolve over time.

D. Conclusion
In conclusion, the Committee wishes to commend the Ministry and the Department on a Budget that has been well received across a wide spectrum of local and international opinion. We urge all portfolio committees of Parliament to engage meaningfully with the Budget and especially the Medium-Term Expenditure Framework and the National Expenditure Survey. With the extent and quality of information provided, it should serve as the centre-piece of Parliament's oversight of the executive arm of government.

The Committee commits itself to identify key issues raised by organisations and interested parties during the hearings on the Budget, and take these up as part of its parliamentary programme during the course of the year.

E. Oral submissions
1. Mr N Barnardt, African Merchant Bank.
2. Prof I Abedian, Group Economist: Standard Bank.
3. Mr M Power, UCT.
4. Dr N Makgetla, Cosatu.
5. Mr M van Blerk, Chamber of Mines.
6. Mr B Gasa, Chamber of Mines.
7. Adv A Meiring, Chairperson of SACOB Parliamentary Panel.
8. Mr B Lacey, Economic Consultant.
9. Mr K Warren, Policy Executive: Parliament.
10. Mr G Bosch, Parliamentary Official: Agri SA.
11. Mr Y Waja, Black Business Council.
12. Mr L Mondi, Black Business Council.
13. Ms G Humpries, Fedusa.
14. Mr A van Zyl, Idasa.

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