Division of Revenue Bill; Drought Relief Adjustments Appropriation Bill: briefing & adoption; Financial & Fiscal Commission subm

Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES; JOINT BUDGET COMMITTEE: JOINT MEETING
20 February 2004
DIVISION OF REVENUE BILL; DROUGHT RELIEF ADJUSTMENTS APPROPRIATION BILL: BRIEFING AND ADOPTION; FINANCIAL & FISCAL COMMISSION SUBMISSION; BUDGET 2004 HEARINGS

Chairperson: Ms B Hogan (ANC)

Relevant Documents
Division of Revenue Bill [B4-2004]
Drought Relief Adjustment Appropriation Bill [B5-2004]
National Treasury presentation
Financial and Fiscal Commission (FFC) submission: Table of contents
Financial and Fiscal Commission (FFC) submission: Introduction
Financial and Fiscal Commission (FFC) submission: Annexure 1
Financial and Fiscal Commission (FFC) submission: Annexure 2
Financial and Fiscal Commission (FFC) submission: Annexure 3
Financial and Fiscal Commission (FFC) submission: Annexure 4
FFC Powerpoint presentation
Barnard, Jacobs Mellet submission
Investec South Africa submission
N King Conradie submission

SUMMARY
Treasury briefed the Committee on the Division of Revenue Bill and how the equitable share formula worked. The Committee was concerned at the lack of measurable objectives with regard to the disbursement of conditional grants. It said that it was important to set out pre-defined targets to enable Parliament to effectively play its oversight role.

The Financial and Fiscal Commission was commended for its submission on the Division of Revenue Bill though the Committee did ask that it not merely concentrate on the social services cluster while ignoring other key service delivery agents.

Both the Division of Revenue Bill and the Drought Relief Adjustment Appropriation Bill were adopted. The Committee did query why drought, a phenomenon that is known to hit the country every so often, was treated as a disaster. Due to its recurrent nature, farmers should in anticipation store enough fodder to mitigate losses.

Submissions on the macro-economic perspective of Budget 2004 were heard. Three experts provided comment. It was stated that the deficit would probably grow if expenditure remains where it was unless there was more privatisation. The taxation side of the budget was satisfactory despite the fact that one would have expected some changes. There was surprise that there was little foreign exchange control relaxation notwithstanding the strength of the Rand. It was agreed that the public works programme was a step in the right direction as a short term measure for alleviating poverty and unemployment and building skills.

MINUTES
Division of Revenue Bill: briefing
Mr I Momoniat, Deputy Director General Intergovernmental Relations, said that resource allocation to the three spheres of government is a critical step in the budget process. This is required before the National Government, the nine provinces and the 284 municipalities can determine their own budgets. The process for making this decision is at the heart of co-operative governance as envisaged in the Constitution. He explained the basis of the provincial equitable share and noted that the Constitution entitles provinces to a share of nationally raised revenue. This share is divided between provinces on the basis of the provincial equitable share formula. The provincial equitable share allocation funds the bulk of public services the provinces render. The equitable share amounts to R142, 4 billion in 2003/04, R155, 3 billion in 2004/05, and R167, 6 billion in 2005/06. The structure of the equitable share formula has been retained for the 2004 Budget. Updates on data are effected on an annual basis, depending on availability of official data.

Mr Momoniat explained the equitable share formula: it comprises seven components, or indices, of the relative demand for services between provinces. It also takes into account particular provincial circumstances. It considers, for example, infrastructure backlogs and poverty levels. He noted that although the formula has components for education, health and welfare, the share "allocations" are intended as broad indications of relative need and not earmarked allocations. Provincial Executive Committees have discretion regarding the provincial allocations for each function.

Mr Momoniat outlined the components comprising the provincial equitable share as follows:
· An education share (41%) based on the size of the school-age population(ages 6-17) and the average number of learners enrolled in ordinary public schools for 1998 to 2000
· A health share (19%) based on the proportion of the population with and without access to medical aid
· A welfare component (18%) based on the estimated number of people entitled to social security grants - the elderly, disabled and children - weighted by using a poverty index derived from the Income and Expenditure Survey
· A basic share (7%) derived from each province's share of the total population of the country
· A backlog component (3%) based on the distribution of capital needs as captured in the schools register of needs, the audit of hospital facilities and the distribution of the rural population
· An economic output component (7%) based on the distribution of total remuneration in the country
· An institutional component (5%) divided equally among the provinces

Mr Momoniat pointed out that the bulk of pro-poor spending is in provinces and in the local government sphere. This is meant to accelerate the rollout of constitutionally mandated basic services namely: water, electricity, sanitation, refuse removal. It would also finance municipal infrastructure development to facilitate the rollout of basic services. The programme is expected to contribute to job creation and capacity building grants to support the MIG implementation.

Discussion
Ms Taljaard (DA) sought more detail on the provisions that deal with the HIV/Aids roll-out issue and how it works out in practice. The current wording is far from convincing.

Mr Momoniat pointed out that this is one of the issues that was being addressed at the inter-governmental forum. He noted that the additional conditional grants indicate that stakeholders are relying more on "legislation than agreement". He revealed that the ground framework would be gazetted and assume the force of law noting that it was important that the HIV/AIDS sector desist from insisting on its own data but rather move toward improving what they already have. Another worrying feature is that the Auditor General did not audit these grants as comprehensively as one would have expected. He however promised that there was a deliberate move toward a "brutal review" of the entire conditional grant regime.

Ms Taljaard wanted to know whether the measurable objectives are based on a sound monitoring framework noting that one would have liked to see a bias towards a comprehensive rollout of anti-retrovirals.

The Chair made the point that the anti-retroviral rollout was just a part of the otherwise comprehensive programme targeting the HIV/AIDS pandemic. She added that the whole plan presupposes a holistic intervention and that in fact it has been noted that South Africa has the most comprehensive HIV/AIDS programme in the world.

Ms Taljaard expressed concern that the Department of Health has a wide discretionary power in the rollout programme.

The Chair pointed out that the Department of Health is the implementing authority and people will have to live with that status.

Mr Momoniat said the issue of how the implementing authority disbursed the allocated funds was very germane noting that there were currently too many implementing agencies that were not properly audited.

The Chair asked if the National Treasury has taken cognisance of and put in place appropriate systems to deal with the incidence of migration in provinces.

Mr Momoniat replied that his office has taken into account the 2001 census results to update some components of the Budget formula. He noted that until his office receives the impact of the population shift it would be difficult to sample the data. He acknowledged the fact that there were a range of problems to deal with in this respect.

Ms Taljaard said that it was difficult to determine whether the shifts in budgeting translate into real change noting that the dearth of information on the matter was most unhelpful.

Mr Momoniat agreed with Ms Taljaard's observation and noted that the issue of a budget review was severely hampered by want of capacity within municipal structures. The question of fiscal efficiency was not easy to determine given the absence of audited municipal accounts. This is unlike the provincial accounts, which are tightly audited and periodically assessed. The National Treasury is, however, trying to get tough on this aspect.

The Chair asked Mr Momoniat to expound on the dynamics of Clause 8 of the Bill

Mr Momoniat gave an example of Eskom, which provides free basic electricity for the Soweto Township. Eskom being a business entity would like to get value for their service. The government agrees that Eskom should be compensated for rendering this important service. That is why both the Equitable Share and the Division of Revenue Bill makes provision for this basic service that is rendered to communities. The government says that Eskom should, however, be compensated through municipalities who would have control over both the external provider and the end user. This scenario then calls into question the need for service level agreements. Various relevant ministries have already drawn up these agreements to facilitate this process. It would then be convenient for the municipal council to collect the electricity rates.

Ms Taljaard referred to Clause 12 of the Bill and wondered whether there is any legal provision in the legal system that identifies the primary bank for the province.

Mr Momoniat replied in the affirmative noting that indeed the Bill clearly defines what is the primary bank account noting that this scenario presents no problem since there were only nine such banks.

Dr Rabie (DA) sought clarity on what the legal position was when a public officer displaces public funds.

Mr Momoniat replied that it is a criminal offence for a public officer to deposit public funds where they should not be deposited. Public officials are expected to exercise control over funds entrusted to their care.

Ms Taljaard wanted to know if not depositing money in the primary bank was a criminal offence.

Mr Momoniat replied that were such an action to be done wilfully then it would attract criminal sanctions since it amounts to outright theft.

Mr Tar (ANC) wanted to know what happens to officials who apply conditional grants to projects to which such funds were not earmarked.

Mr Momoniat explained that under Clause 24 of the Bill the utilisation of an allocation set out in Schedules for purposes other than those set out in the Schedules concerned, constitutes a breach of the measures established in terms of Section 216(1) of the Constitution. He noted, however, that such a disbursement is excusable when the funds have achieved their purpose and there are savings which are then so applied.

Ms Taljaard referred to Clause 11 and questioned whether the National Treasury is satisfied that the funds set aside for this programme would also cover oversight costs to ensure that the implementation of public works programmes is achieved in an efficient manner.

Mr Momoniat replied that the National Treasury is in no position to prevent any sphere of government from presiding over white elephants. Whether or not the public works programmes are efficiently implemented would depend on the capacity of the relevant departments to put in place proper monitoring mechanisms and the relevant portfolio committees, which in turn need to be strict about their oversight role.

Mr Tar expressed concern over the lack of measurable objectives with regard to the disbursement of conditional grants. It was important to set out pre-defined targets to enable Parliament to effectively play its oversight role.

Mr Momoniat concurred with Mr Tar that indeed some of the measurable outputs are not very clear from the outset. He made the point that it was important for departments to put together convincing business plans, which should be presented to relevant parliamentary committees for review. Parliamentary Committees should be in a position to accept these measurable plans. The Auditor General has repeatedly complained that the biggest problem with regard to the utilisation of conditional grants was due to non-compliance with the Division of Revenue Act.

Financial and Fiscal Commission (FFC) submission on the Division of Revenue Bill
Dr Hildegarde Fast (FFC Manager: Parliamentary Office) said that the Commission had proposed that the efficacy and efficiency of both the existing HIV-AIDS conditional grant and the additional funding allocation through the Provincial Equitable Share (PES) mechanism be reviewed. Government welcomed such a review and noted the differential capacity and willingness by provinces to supplement conditional grant funding with their unconditional Equitable Share funds. The Commission noted that the Health Professional Training and Development Grant was incorrectly specified and over-costed and accepted that this could be reviewed next year. In respect of the education component of the PES formula, the Commission proposed that the double weighting of school age children relative to enrolment be ended because this penalised poorer provinces characterised by higher rates of "out of age" learners. Government is reviewing the use of unstable learner enrolment data in its PES review for the 2005 MTEF but concurred that the school-age cohort be extended to cover the reception year in PES allocations.

Mr Denver Kallis (FFC researcher) informed the Committee that fiscal policy is increasingly expansionary. This is in line with global trends and may reflect an attempt to stabilise the business cycle, but for which it is a crude instrument. The primary cost-drivers are income poverty alleviation measures, notably spending on social assistance grants. The People's Budget Coalition favour structural expansion over the medium-term by raising the tax to Gross Domestic Product (GDP) ratio. The newly formed Chambers of Commerce and Industry noted the increasing compliance costs of recent tax reforms. The debt-servicing costs constituted an average 19.18% of the national budget over the past 5 years and this has been declining throughout this period. The proportion is expected to decline to 13.59% over the medium-term in response to (a) declining proportions of government debt to GDP and (b) lower interest cost in anticipation of a sustainable 3 to 6% inflation target.

Mr Conrad van Gass (Manager: Budget Analysis) informed the Committee that provincial governments deliver the bulk of Constitutionally Mandated Basic Services (CMBS) that were listed in the Bill of Rights. These are the prime agents of income and poverty reduction. He noted that provincial budgets have increased in real terms by 4.13% over the past 5 years and enabled real spending growth in CMBS. He added that the primary cost-driver of provincial government spending is social security. Spending growth thereof gathers momentum from an average 5.18% over the past 5 years to a projected 10.5% over the medium-term. Spending on health and education also rise in real terms but at a declining rate over the medium-term. Expenditure on housing, while growing in real terms, continues to be volatile.

Discussion
The Chair questioned why the Commission in its investigation never gets beyond the Departments of Welfare, Health and Education yet the Constitutionally Mandated Services go beyond this cluster. Why exclude the justice cluster for instance?

Mr Kallis replied that the Commission focuses on these three because they are the main consumers of the provincial budget vote.

The Chair made the point that budget allocations go to both national and provincial departments and questioned the rationale for targeting the three national departments to the exclusion of other important service delivery agents.

Mr Kallis acknowledged the defect and promised that the Commission would look at its mandate afresh.

The Chair noted that the Constitutionally Mandated Basic Services are broad and clearly cut across the national and provincial service delivery spectrum. She observed, for instance, that the Department of Safety and Security affects the poor in a significant way in the provinces. She expressed frustration at the fact that she has raised this issue every financial year and yet no steps have been taken to correct this defect.

Mr Tar noted that the submission seems to suggest that the Department of Health is in no position to assess the progressive realisation of its objectives in terms of the number of clinics, personnel and patients that are registered under its mandate. He added that lack of official data is a serious matter. He expected the Commission to guide the Committee in this matter in order to equip it with the necessary material to be able to play its oversight role more effectively.

Mr Kallis pointed out that the Commission's submission shows some stagnation in growth in health services which means that data from hospitals is not reliable. The bigger problem is the capacity to gather this data. The Commission is currently holding discussions with Statistic South Africa with a view to use their expertise.

Dr Woods pointed out that the Commission's analysis is hugely useful. It had given him a concrete perspective on the budget equation. He however questioned how the Commission's role forms part of the Constitutional mandate on the provision of basic services. He also wanted to know whether budget co-ordination and monitoring has been strengthened in the new dispensation.

Dr Fast noted that the Constitution makes provision for the Minister to take into account the considerations raised in the Commission's submission. The submission provides guidelines for the Minister to intervene strategically and ensures that the allocative process is followed to the letter.

Ms Taljaard wanted to know the status of performance on the conditional grants. She noted that poverty levels are still very high and yet the uptake on the grants was still very low. She also sought to know the Commission's thinking around the question of social security and its interaction, if any, with departments.

Dr Fast noted that the question of social security has been raised at various fora and what impact it has on other social services. The Commission is in the process of compiling a report, which would be released later this year. The implication of social security to the budget formula is one thing but it is necessary to tie it to the whole notion of employment and poverty. The Commission had also made submissions on the issue of social security and the same could be made available to the Committee if need be.

Mr Nene (ANC) commended the Commission for an impressive submission. He however asked why the Human Rights Commission was not consulted for input in view of their central role on basic human needs.

Mr Kallis replied that the Commission co-ordinates its work with various stakeholders including the Human Rights Commission

The Chair pointed out that the poor are interested in a lot more than the area covered by the Commission.

Dr Fast said that the focus on the poor was a fraction of the Commission's mandate noting that its main constituency is to monitor how allocations are made for basic services as these are its first port of call.

The Chair argued that the Constitution makes no reference to basic rights noting that all rights are equivalent and wondered where the Commission got such terminology. The definition the Commission had assigned to the term "basic rights" was narrow and would exclude many critical issues at the centre of services to the poor. She gave the example of child abuse, which she said was an important human right issue that is overlooked in the Commission's purview.

Mr Momoniat came to the Commission's rescue and pointed out that the term "basic rights" stems from the allocation of the equitable share, which covers this narrow area.

The Chair thanked the Commission for its contribution which would tool the Committee to play a more incisive role in its oversight function.

Voting on the Division of Revenue Bill
The Committee moved a motion to adopt the Division of Revenue Bill. The motion was dully passed.

Drought Relief Adjustments Appropriation Bill
Mr Jaz Chaponda, Treasury Chief Director: Expenditure Planning, informed the Committee that the 2003 Adjusted Estimates set aside R250 million for emergency drought for disaster responses. The character and severity of the drought is, however, of such a nature that, additional to expenditure on current programmes by the relevant departments, a further amount of R250 million was required for immediate intervention during the current financial year. He added that based on field assessments, ministerial visits and consultations with national departments, provinces and municipalities, additional funds have been identified to effect measures in the 2003/04 financial year in response to the drought. He explained that such funds were not appropriated for the relevant departments' budgets during the Adjusted Estimates for 2003/04 and a special Adjustments Appropriation Bill was therefore required to provide this additional expenditure during 2003/04 financial year.

Discussion
Dr Rabie wanted to know whether the Drought Relief funds were for both subsistence and commercial farmers.

Mr Chaponda replied that the relief funds covered all categories of framers. This includes both emerging and established farmers. He noted that the Department of Agriculture had said it had saved R185 million in addition to the R20 million for the previous year. Added to this was the current R30 million.

Dr Rabie pointed out that the Department of Agriculture seemed to hold a different view all together. The Department has held that the relief funds did not cover commercial farmers.

Mr Chaponda replied that the Department of Agriculture would be able to explain the position but that as far as he was concerned the relief fund covers the farming community in general

Mr Hanekom (ANC) wondered why drought - a phenomenon that is known to hit the country every so often - is treated as a disaster case. Due to its recurrent nature, farmers should, in anticipation, store enough fodder to mitigate losses. He argued that if the intention is to mitigate real disaster to human beings then it should cover a whole spectrum of activities including crop failure. There was no point allocating money for an event that is not planned for when, in fact, it is expected.

Mr Chaponda replied that the disaster management framework is still being streamlined to deal with the question of when an occurrence should trigger intervention. Various stakeholders are being consulted to make input before a clear policy position emerges.

Mr Hanekom noted that there is substantial information in the White Paper on Disaster Management but it is not clear why, for instance, there is no assistance offered to people whose water holes have dried up.

Mr Tar claimed that the reality is that the incidence of disaster is made worse by lopsided planning such as gross overgrazing which means relief is made available to people who misuse resources.

Dr Rabie sought to know whether there is a criterion for people who seek food relief.

Mr Chaponda noted that other considerations are measured in pecuniary terms. He added that there would be further assessment for any other area not covered within the current financial year. The Department of Social Development prefers cash grants to food parcels. The distribution of such relief is mostly undertaken by NGOs with the assistance of Traditional Leaders who help to identify beneficiaries.

Mr Blaas (ACDP) wanted to know whether emergency relief is available to everybody including those in gainful employment.

Mr Chaponda replied that anyone negatively impacted by drought would be in need of food. The Department prioritises children, the elderly and women.

Mr Hanekom noted that R68m has been made available for relief grants and requested for information on where and how such funds had been utilised to facilitate parliamentary oversight work. The Chair noted that this was a valid request.

The Chair added that she saw a lot of merit in the fodder issue Mr Hanekom had raised. She asked Treasury to address the apparent inconsistency in the allocation of relief funds.

Voting on the Drought Relief Adjustments Appropriation Bill
The Committee adopted the Bill as tabled. The Democratic Alliance abstained as Ms Taljaard said that she did not have a mandate from her party on its voting position on this Bill.

Afternoon session
Barnard, Jacobs and Mellet submission
The submission was conducted by Mr. A Mazwai. It focused on the key assumptions and forecasts made by both his company and the Ministry of Finance. He sought to test the promises made by Minister T. Manuel with regard to what the budget would deliver in the next ten years. The intention was to see if the promises were likely to be fulfilled (see document for detail).

Mr. Mazwai said that he was impressed that it was only after the tabling of the budget that he had to ask himself if the Minister had delivered an 'election' budget. The budget was good in that it was expansionary without necessarily being a political tool.

Investec submission
The submission was conducted by Mr. A Roux who believed that South Africa has one of the best set of fiscal policies. He believe that although the budget is a difficult one it is at the same time a good budget. He expressed concerns over the strength of the Rand and the negative effect this has on growth.

Noelani King Conradie submission
Ms King Conradie felt that Minister Manuel had announced a well-balanced growth-oriented budget for 2004/05, but it was, with all due respect, probably the most unexciting budget in terms of the lack of surprises.

Discussion
Mr N Nene (ANC)asked Mr Mazwai what kind of measures he thought would assist in increasing the savings rate.

Mr Mazwai replied that there is always the reduction of taxation which he is opposed to. He would, however, not be surprised to see it coming through because in the short term it gives an impression that there is an increase in the savings rate. What had to happen was that one had to create a culture of savings. He referred to the listing of Telkom and what government had done with the Khulisa offer. Government had emphasised that the offer was designed to promote a culture of saving. The important question is whether people bought the shares and held on to them or sold them the next day. By investing, money can grow and such growth promotes a culture of savings.

The Chair asked Mr Mazwai how one inculcates a culture of savings in an environment where interest rates are low and there are not good returns for the savings and there is also a problem of access to savings accounts.

He conceded that he could not offer an answer. He indicated that Japan had the opposite problem. Its savings rate is too high and its government is encouraging a culture of spending a opposed to saving.

Ms R Taljaard (DA) said that the government had come up with the public works programme so as to solve the problem of unemployment. She asked Mr Mazwai if the public works programme was the best strategy to solve the problem and if he had an alternative solution to the problem. She also asked if the tertiary services could spur economic growth.

On economic growth, Mr Mazwai believed that the tertiary services could spur economic growth. For this to happen it was essential that there was a continued supply of skilled personnel.

He continued that the public works programme would go a long way in alleviating the problem of unemployment. As to whether it was the best policy, this was debatable. There was a school of thought that says that the programme creates inefficiencies in the market place. The reality was that one was trying to balance between short and long term goals. In the longer term one can paint a picture where there was no more labour market distortions . The participants in the public works programme would then be able participate fully in the labour market. If one was concerned with the longer term only, then the question that one needs to raise was what has to be done with the current generation. The balancing act would be to take some short term measures in the form of, for instance, the public works programme. Mr Mazwai said that there are other measures.

Mr M Tarr (ANC) pointed out that Mr Mazwai believed that state financial institutions should behave less like commercial banks and more like development finance institutions in order to facilitate job creation. He asked Mr Mazwai to specify what those institutions should do to have the envisaged mind frame. He also asked for his opinion on government's capacity to productively employ the thousands of people who are jobless.

Mr Mazwai believed that if one changes the mandates of the state financial institutions, one can have the desired mind frame that would facilitate job creation.

On government absorbing the large numbers of unemployed people, he said that it was not only government's responsibility to employ those people. Government's role should be viewed as getting the ball rolling. The private sector should get involved and the Joburg Blue IQ initiative is a good example.

Prof B Turok (ANC) asked if VAT and income tax contradict or support and reinforce each other. He noted that VAT operates retrogressively whereas income tax operates progressively.

Mr Roux replied that it is correct that VAT is retrogressive whilst income tax operates progressively.

In answer to whether the budget makes possible growth with regard to empowerment, Mr Mazwai said that one would argue that by allowing tax breaks for the issuing of shares to empowerment candidates one promotes growth with regard to empowerment. The problem with this is the assumption that people want to own shares. Given the opportunity, people are likely to take the cash and not shares.

The Chairperson indicated the need for a short term solution to the unemployment problem. She said that the public works programmes should not be seen as short term assignments since some of them continue for a long period of time. This provided people with the necessary skills required in the labour market. She asked the presenters if the public works programme is ideally placed to be the compromise needed in the short term to address poverty and unemployment.

Ms Conradie said that the public works programme is a step in the right direction in that it helps solve some of the problems the country is experiencing rather than encourage people to be dependant on social grants. The participation of the business sector and foreign investors should be encouraged. Mr Mazwai also agreed the programme is desirable as a short term measure.

Mr K Moloto (ANC) asked what would be the best measure for absorbing the large pool of unskilled job seekers. Was there likely to be any conflict between social grants and investment in community infrastructure as suggested by Mr Roux?

Ms Conradie replied that there was a need to balance between social spending and infrastructure spending. Social grants are a necessary part of any package. She warned against a culture of only receiving from government without contributing anything.

Ms Hogan noted that Ms Conradie agreed that the public work programme was a step in the right direction and asked if the programme was viable given the skills shortage.

Ms King Conradie replied that the skills problem could be addressed by the public works programme.

Members noted that the presenters believe that the currency was at present over-priced. They asked what would be the ideal level of the currency.

Mr Mazwai noted that if people were told that the Rand had moved by 40 cents, people would not be surprised but would want to know which way. Such was the volatility of the currency that it currently could move either way in big amounts. The problem was not finding a level deemed to be appropriate, but rather one had to reduce the level of volatility. Importers and exporters would always disagree on what the right level is but would agree on the need for certainty. One way of reducing the volatility would be direct intervention but South Africa does not have the muscle to do so. Some of the things that would assist would be increasing liquidity in the currency and transparency in the way the currency is traded. The inquiry into what happened to the currency in 2001 clearly indicated the need for transparency in the way the currency is traded. The current system makes it difficult to know what the price is.

Mr Roux agreed that the volatility of the currency is a problem. Some reserve accumulation might help in solving this problem.

Ms Conradie's comment that the budget was unexciting was referred to and she was asked if she ascribed this to there being more transparency in the budget process than before. The presenters were asked if they would prefer lower inflation and a stronger currency or a weak currency and high inflation. It would appear that they preferred lower inflation because it benefits poor people. Ms Conradie's comment that the fiscal deficit should not grow faster than economic growth was also noted and the experts were asked what they would do if they were in the Minster of Finance. They were also asked what they would do to encourage foreign investment.

Ms Conradie replied that the budget was unexciting in that every year it had always carried an element of surprise but this year's budget had none. The statement was not meant to be a criticism of the budget. She agreed that low inflation benefits poor people.

On the fiscal deficit not growing faster than economic growth, she replied that economic theory suggests that one could run into a debt trap if the deficit grows faster than economic growth. She added that markets do not always behave according to what theories say but one had to be careful.

On allaying the fears of foreign investors Ms Conradie replied that it is unfortunate that investors do not always have all the facts. The good news about the economy does not always get to the right places. Labour market inflexibility, AIDS and crime remain as some obstacles to foreign investment. South Africa needed a proper public relations officer who would properly show the progress the country had made.

Mr Roux added that one should not be that negative about investment in South Africa. Companies have realised that investing overseas is not as good as they had thought. There is a lot less appetite to invest overseas and investment in the country is picking up.

Mr Tarr asked if the foreign exchange controls and inflation rates were restrictive and therefore need to be changed.

Mr Roux replied that Treasury would prefer the currency to be lower than the present R6.50. There was a need to relax foreign exchange controls and this seemed to be a good opportunity for government to do so.

Mr Mazwai replied that the issue of foreign exchange controls relaxation is over-hyped and affected only a small percentage of the population. A promise had been made by the government and this is a good opportunity to placate those who want to hold government up to the promise they had made.

The presenters were thanked and the meeting was adjourned.