Budget Hearings: Organised Business

Meeting report

FINANCE PORTFOLIO COMMITTEE
1 March 2001
HEARINGS ON BUDGET 2001: ORGANISED BUSINESS

Chairperson: Ms B Hogan

Relevant documents:
SACOB submission (See Appendix A)
SACOB economic analysis document (email [email protected] for document)
Black Business Council submission (Appendix B)
Afrikaanse Handelsinstituut submission (Appendix C)

SUMMARY
The South African Chamber of Business, the Black Business Council and the Afrikaner Handelsinstituut presented submissions. The idea of stimulating economic growth in South Africa was raised repeatedly. The issue of small black business development in townships was the focus on the Black Business Council. The Committee was eager to hear about the Black Business Council's strategies on black economic empowerment in the townships.

MINUTES
South African Chamber of Business (SACOB)
Mr Dennis Dykes gave the Committee an economic overview of the impact of the 2001 budget on our economy graphs and tables [email [email protected] for document]. Mr Des Kruger made a concise presentation to the Committee on SACOB's view of the budget. [See Appendix A].

Discussion
(Q) Mr K Andrew (DP) asked if it is possible for South Africa to have a sustainable growth rate of six per cent. What would be needed to achieve this?

(A) Mr D Dykes stated that cost competition has increased. He added that monetary discipline has brought inflation down and that fiscal discipline has improved. These, together with simplification of tax brackets and improved tax collection, could lead to increases in our growth rate. Mr Dykes however felt that a six per cent growth rate is a bit over ambitious.

(Q) Dr E Conroy (Gauteng, NNP) asked what suggestions could be made to increase the growth rate, from the expenditure side of government.

(A) Mr Dykes replied that expenditure is moving in the right direction. He did point out that the infrastructure has deteriorated over the last couple of years but that this trend is reversing itself. He also felt that not enough money was being spent on crime prevention. Huge revenues that could have been generated by tourism have been lost.

(Q) Dr Conroy asked if discussions had been held with the Financial Fiscal Commission on the issue of provincial taxation.

(A) Mr Des Kruger stated that they have had discussions.

(Q) Mr K Durr (Western Cape, ACDP) asked what was SACOB's view of corruption in government and the private sector.

(A) Mr Dykes found it difficult to comment on the topic of corruption. He did state that perceptions are important. He commented that the indices do have a negative impact on direct foreign investment. He felt that figures are high and need to be 'nipped in the bud'.

(Q) Prof B Turok (ANC) asked what SACOB's view was on demand. Is the business capacity being utilised in South Africa?

(A) Mr Dykes stated that South Africa is rising in a current asset deficit. Without capital inflows, economic growth would not take place. He added that the upside is that consumption demand and fixed investment are growing.

(Q) Ms R Joemat (ANC) asked whether SACOB is of the view that directors of companies should not pay 'Pay As You Earn' (PAYE). She asked why SACOB has the view that there should not be tax relief. How would people earning below the breadline, below R2 100, be supported.

(A) Mr Des Kruger disagreed it is SACOB's view that there should not be tax relief for individuals. Rather, SACOB suggests the incentives be looked at again. Additionally, SACOB is not adverse to the idea of PAYE applying to directors of companies. The problem that SACOB had with PAYE is that it disrupts business practices. Mr Kruger asserted that the South African Revenue Services (SARS) is trying to implement PAYE based on the previous year's income.

(Q) The Chair noted SACOB's comment that the current budget has some room for investment in expenditure by government. Does this mean that this room for investment is to allow for increases in capital infrastructure development?

(A) Mr Dykes agreed.

Black Business Council (BBC)
The presentation team comprised of Mr Fred Ahwireng-Obeng (Executive Director), Mr Younaid Waja (Treasurer) and Mr Lumkile Mondi (Macro-Economic Issues).
Mr Mondi gave a brief introduction after which Mr Ahwireng-Obeng gave the Committee an overview of the BBC's thoughts on the 2001 budget. Mr Waja concluded the presentation with taxation proposals. [For detail, See Appendix B].

Discussion
Mr Masemela (National Treasury) asked the following questions:
(i) The BBC states in its document that the public works programmes have not been successful. What recommendations does the BBC have to increase their success?
(ii) How is the BBC going to communicate to the public that paraffin has a zero-rating attached to it.
(iii) Why is the BBC not in favour of corporate tax being lowered?

The following responses were given:
(i) Mr Ahwireng-Obeng stated international experience has shown that it is difficult to pinpoint where public works programmes have failed. However, he felt that if the debate is brought up a solution could be found.
(ii) Mr Waja stated that SARS has been engaged in subtle public relations but the campaign needs to be intensified so as to inform the masses of the paraffin tax benefit.
(iii) Mr Waja stated that it is a well-known fact that the rates are competitive. He felt that tax relief should be stimulating and not rewarding.

Dr G Koornhof (UDM) asked the following questions:
(i) Would the BBC like to regulate the informal sector? How would it be done? What is your strategy on job creation?
(ii) What strategies would the BBC recommend to mobilise saving?
(iii) On the issue of land reform, would SARS be dealing with it in their rural development strategy?
(iv) The BBC is of the view that the restructuring of state assets has no fiscal competence. Could the BBC please comment on the statement?

The responses were:
(i) Mr Ahwireng-Obeng felt that the informal sector could not develop if it remains unregulated. No figures exist on how many people are employed in the informal sector.
The BBC suggests regulating the informal sector so that it could be used as a stepping stone to create long term employment.
(ii) Mr Mondi stated that household indebtedness has constrained saving in South Africa. The less the public sector borrows, the lower the interest rates fall. The challenge is whether South Africa can maintain interest rates below 10% for long term bonds.
The key is therefore to decrease household debt, so that a culture of saving can be encouraged. In order to decrease household debt, interest rates need to be lowered.
(iii) The BBC had no comment.
(iv) Mr Ahwireng-Obeng said it meant that black players would be pushed out.

Ms Joemat asked what problems are foreseen for black businesses if they play a role in the restructuring of state assets.

Mr Waja was insistent that South Africans move away from the perception that black businesses lack capacity. The Tender Board system allows for black businesses to participate via joint ventures. However, problems do arise where joint ventures with black businesses are formed merely as a 'window dressing' ploy. Mr Waja felt that joint ventures should genuinely give black businesses the opportunities they deserve.

Prof Turok asked what could be done to encourage micro-economic development in townships.

Mr Waja felt the focus should shift from big business to small business. The emphasis should be on developing small business from within townships. Big businesses should be encouraged to assist smaller businesses via joint ventures.

Mr M Lekgoro (ANC) asked whether the BBC views the budget as encouraging black economic empowerment.

Mr Mondi stated that the BBC does not see the budget as a vehicle for black economic empowerment. He did stress that working closely with various departments is a BBC priority. Mr Waja added that they do view the budget as encouraging or rather setting the trend for debate.

Mr N Nene (ANC) asked whether it is the BBC's view that investment incentives for black economic empowerment must be encouraged by strategic investment.

Mr Waja reacted that the BBC feels that incentives should be broadened to include small businesses. Small businesses are excluded, as they do not qualify for these incentives. The need exists for the small manufacturing sector to be developed but they suffer from capacity constraints ie old equipment. Mr Waja emphasised that these incentives should be extended to small businesses so as to allow them to recapitalise.

Ms Q Mahlangu (Gauteng, ANC) asked the BBC to conduct a study on developing small black businesses in townships.

Mr Mondi said that they would look into the matter.

Afrikaner Handels Instituut (AHI)
Mr Rudolph Gouws presented on the macro-economic perspective on the budget. He stated that they are in agreement with SACOB on most issues. Mr Willie Boonzaaier dealt with the tax perspective and highlighted some of their concerns. Mr Jac Laubscher, Mr Pieter Haasbroek and Mr Dawie Roodt made brief comments on the budget. [For detail, see Appendix C].

Discussion
Mr Andrew repeated his previous question as to whether it is possible to achieve a growth rate of six per cent in South Africa. What policy actions are required to achieve a six per cent growth rate?

Mr Gouws stated that inflation must be brought under control, trade tariffs must be decreased and so on. Government could also try to deliver services better so as to decrease crime levels and this in turn would stimulate tourism.

The Chair stated that not much has been said about the Skills Development Levy.
She emphasised that building up human resources is a priority in South Africa. She felt that there was a lack of interest by the presenters on the issue. She asked if people are afraid that it would not be implemented properly and, additionally, whether people felt that business should contribute to the levy.

Mr Gouws stated that the general feeling is that skills development has to take place in small to medium-sized businesses. The problem is that often after employees are trained in smaller businesses, they are lost to bigger businesses. Mr Gouws was concerned whether the program would be effective, as big businesses are more concerned with issues of globalisation.

The Chair noted his concerns.

The meeting was adjourned.

Appendix A:
SACOB
Memorandum of Comment on the Budget to Portfolio Committee on Finance

1. Introduction.
Through the affiliation of some seventy countrywide Chambers of commerce/industry/business to SACOB, it represents close to 40 000 businesses both large and small. SACOB welcomes the opportunity to participate in the public hearings on the Budget. This memorandum outlines the issues that will be addressed, which may be separated into the economic and the taxation components of the Budget.

2. Economic.
Although the Medium Term Budget Policy Statement (MTBPS) released in October 2000 gives an outline of the expenditure pattern envisaged over the next three years, there is no definitive indication as to how the MTBPS fits in to a macro-economic Framework or as to whether the GEAR policy framework is to endure. Despite the focus of the Budget on economic growth and job creation, the projections of growth at rates of between 3.3% and 3.7% over the next three years is modest and falls far short of the required + 5% growth, if appropriate employment objectives are to be realized. Unless and until a more determined effort is made to reduce the high costs of doing business in South Africa, the prospect of achieving the Budget's declared goals will remain illusory.

SACOB acknowledges the government's achievements in the conduct of its macro-economic strategy, of which the pursuit of a sound fiscal policy is an important element. SACOB welcomes the increased allocation to capital spending (30% per annum over the next three years) but believes that the apportionment to infrastructure creation could be greater. The functional allocation to certain economic sectors points to a greater level of discretionary or interventionist participation in the application of resources by the government. The market allocation of resources within a neutral tax environment would have been preferable to the discretionary use of tax incentives.

Proceeds from the sale of state assets in the fiscal year 2001/02 are set at R18 billion. This contrasts with a figure of R19 billion realized over the last four years. The bulk of this ambitious privatization exercise will come from the listing of Telkom later in the year. The success of that listing will to no small extent hinge on the telecommunications policy recommendations due to be released in March and the extent of the competition regime to faced by Telkom.

A matter of increasing concern to business is the manner in which local government is to be funded and more particularly the manner in which service backlogs/service equalization is to be addressed. Whilst business acknowledges that government has a legitimate income redistributive role to fulfill, it has for long contended that the responsibility for redressing service backlogs and disparities should be borne by the central fiscus. It is surely impractical to expect that role to be undertaken at local government level. In the current Budget the allocation of revenue to local government has been increased by a meagre R0.8 billion (0.1%). This implies that service backlogs and equalization

efforts will have to be financed through various rating and tariffing measures devised by local government structures. The proliferation of additional taxes and levies has reached extraordinary levels. The net burden that these imposts place on made to reduce the high costs of doing business in South Africa, the prospect of achieving the Budget's declared goals will remain illusory.

SACOB acknowledges the government's achievements in the conduct of its macro-economic strategy, of which the pursuit of a sound fiscal policy is an important element. SACOB welcomes the increased allocation to capital spending (30% per annum over the next three years) but believes that the apportionment to infrastructure creation could be greater. The functional allocation to certain economic sectors points to a greater level of discretionary or interventionist participation in the application of resources by the government. The market allocation of resources within a neutral tax environment would have been preferable to the discretionary use of tax incentives.

Proceeds from the sale of state assets in the fiscal year 2001/02 are set at R18 billion. This contrasts with a figure of R19 billion realized over the last four years. The bulk of this ambitious privatization exercise will come from the listing of Telkom later in the year. The success of that listing will to no small extent hinge on the telecommunications policy recommendations due to be released in March and the extent of the competition regime to faced by Telkom.

A matter of increasing concern to business is the manner in which local government is to be funded and more particularly the manner in which service backlogs/service equalization is to be addressed. Whilst business acknowledges that government has a legitimate income redistributive role to fulfill, it has for long contended that the responsibility for redressing service backlogs and disparities should be borne by the central fiscus. It is surely impractical to expect that role to be undertaken at local government level. In the current Budget the allocation of revenue to local government has been increased by a meagre R0.8 billion (0.1%). This implies that service backlogs and equalization

efforts will have to be financed through various rating and tariffing measures devised by local government structures. The proliferation of additional taxes and levies has reached extraordinary levels. The net burden that these imposts place on business has reached levels at which it would be prudent to take heed that there are limits to what can be further imposed upon business.

3. Taxation
In considering the revenue side of the Budget, a number of taxation issues arise which deserve comment and/or clarity. As a primary observation, it must be a matter for concern that there has been scant relief offered to the highly skilled (and highly mobile) segment of the population that currently constitutes a potential source of skills transfer and job creation. The level of taxation both apparent and hidden offers little inducement for such persons to remain in employment in the country.

3.1 Capital Gains Tax (CGT).
SACOB has already expressed its concerns over the adoption of this taxation instrument and remains unconvinced by the arguments (efficiency, equity, yield, alignment to many other tax jurisdictions) offered in support of CGT. A figure of R1 to R2 billion is surmised as the likely yield. Whether or not this takes into account the administrative complexities imposed on SARS and the public alike is unclear. SACOB welcomes the decision to defer the implementation of CGT until October. The decision that CGT will not apply to retirement funds (at this stage) is also welcome. SACOB will be making representations to the 'review body' investigating this issue.

3.2 Wage Incentive.
The details of this scheme have yet to be disclosed. It would be premature to offer a view on the proposal. Many people have misgivings as to whether taxation should be used as the instrument for providing incentives.

3.3 Investment incentives for strategic projects.
An amount of R3 billion is to be set aside for select (strategic) investment allowances over a period of four years. An adjudication committee is to determine the allocation of such incentives on the basis of 'quantitative and qualitative' criteria. Unless properly targeted and administered, preferential treatment of selected activities over others can prove cost-ineffective (in terms of investment attracted, relative to revenue forgone). Furthermore, in order to develop business confidence, such strategies must be sustainable.

3.4 Small Business development.
Amendments to the tax depreciation rules applicable to small businesses in the manufacturing sector are welcome. The strategy to foster small business must be considered holistically. Questions to be answered include, why such rules are to be confined to the manufacturing sector, given the fact that services appear to be overtaking manufacturing as the major contributor to GDP. There seems to be conflicting signals given towards small business development by the various arms of government. By way of example, consider how the amendments in respect of Personal Service Companies pose a very serious threat to their continued existence.

3.5 Company Directors and PAYE.
There is a need to engage with business on this proposed measure. It has been attempted in the past and was discontinued for various reasons.

3.6 Procedural Reforms.
Considerable emphasis has been given to 'closing loopholes' and instituting various 'procedural reforms' designed to limit delays, streamline penalty provisions, etc. Whilst these measures in themselves are praiseworthy from a tax administration point of view, there is an equally desirous need to speed up the delivery of assessments, rulings, and responses, which taxpayers justifiably deserve, from the tax administration. Timeous response from the SARS is surely as important as timeous submissions from taxpayers. Combined, the two requirements should generate confidence in the country's tax administration and foster a higher degree of tax morality. On the issue of tax morality, SACOB refutes the recent allegation made by the Minister of Finance that business has spurned efforts made by the taxation authorities to engage with them in seeking ways of promoting a higher level of tax morality in South Africa. SACOB stands ready to engage with SARS and assist in that regard.

3.7 Review of Tax on Banks.
The proposal to introduce a minimum tax on certain economic activities is a departure from the norm and suggests that an arbitrary means of tax collection may be adopted in circumstances where administrative shortcomings exist in SARS.

3.8 Secondary Tax on Companies (STC).
Originally conceived as a novel way reducing the nominal corporate tax rate and encouraging the retention of profits for reinvestment, the effectiveness of STC as an investment instrument is suspect. STC is payable at a rate of 12.5% on the dividends distributed to shareholders. The combined effect of the standard and secondary tax on companies is to raise the tax rate to 37.8% and undermine competitiveness of the investment. Furthermore, since the tax is not easily recognized as an income tax, it is difficult for non-resident companies to secure double tax treaty relief.

3.9 Taxation and Savings.
It is axiomatic that countries that pursue policies that result in higher savings rates perform better than those, which have failed to do so. There are a number of factors that motivate people to save, one of the most important being to provide for their retirement. By so doing they ensure that they do not become a burden on the state. The state should encourage people to save for their retirement via tax and other incentives. The taxation of savings creates an underlying uncertainty over the wisdom of such endeavours.

4. Free Basic Service Provision.
The Budget provides R2.6 billion to Local Government for infrastructure and for the 'provision of free basic services'. Acknowledging that this is part of the social objectives of the Budget, there is a need to at least quantify the extent of such subsidized services and to ensure that some mechanism is in place to see that such 'free' (though scarce resources) are utilized circumspectly. If nothing else, user charges do ensure that goods/services are utilized carefully.

Appendix C:
THE BLACK BUSINESS COUNCIL (BBC)

Introduction
This is a growth, economic development and job creation budget. It builds on the macroeconomic foundations laid in the past. It attempts to address some of the deficiencies of previous budgets particularly microeconomic issues, which are the heart of service delivery, employment generation and improving the quality of life of ordinary South Africans. It recognises developments in the global economy as well as government's commitment to African development as envisaged in the Millennium Africa Plan. The Black Business Council (BBC) will assess Budget 2001 in terms of the present economic framework of the SA government - the GEAR - and the President's recent state of the nation address which reiterates the government's core goals and objectives, and the means of achieving them. The search for consistency and synergy between GEAR, its subsequent refinements and fiscal policy as contained in budget 2001 underlines our evaluation criteria.

Effectiveness of Fiscal Policy
The major objectives of GEAR are to achieve sustainable economic growth with the creation of employment at a rate of 270,000 jobs by the year 2000. The original growth target of 6% by the year 2000 was revised to a real GDP growth rate of 3.4% in budget 2000. The strategies envisaged included reducing budget deficit to 2.2% of GDP by 2002. Fiscal policy was to concentrate on redistribution through tax reforms, privatisation through the sale of state assets, infrastructure investment growth at an average of 2.4% in 2000, a flexible labour market and skills development programme to encourage job creation. These strategies were emphasized in the President's speech at the opening of Parliament on 9 February 2001 together with renewed focus on achieving international competitiveness.

The results of these strategies have been mixed. Government have, so far, succeeded in opening the economy through tariff reduction and reform, trade agreements and regional economic cooperation. The fiscal characteristics of the country have been reformed in the following areas:

- the budget deficit as a percentage of the GDP and the debt ratio have been consistently declining reaching 2% and 48% respectively in 99/00;
- the public sector borrowing requirement as a % of GDP has declined from 4,7% in the first half of fiscal 99/00 to 3 % in first half of 2000/01;
- government dissaving has declined from -6 per cent in 1994 to 0 per cent in the first half of fiscal 2000/01.

However, fiscal policy has failed in terms of delivery at the micro level and the target for infrastructure investment has not yet achieved the expected levels, which consequently inhibited the attainment of economic growth and employment targets. On the other hand, there has been progress in respect of redistribution of income through government spending and taxation.

The BBC is of the view that the non-achievement of all GEAR targets is explained by government's inability to perform in upgrading human quality, creating the congenial environment and incentives for enterprise in the micro, small and medium sectors, enforcing sustainable, broad, black empowerment programmes on a wide scale, and above all, a lack of support from public policy. Indeed, the overall merit of Budget 2001 is contingent on its ability to address the structural deficiencies of insufficient foreign direct investment and domestic savings, crime, AIDS, unemployment, poverty and shortage of skilled personpower.

Observation on Budget 2001
Overview of the 2001 Budget
While the SA economy has adapted well to changes in the global economy it has, so far, failed to achieve sustainable international competitiveness based on reduced cost of doing business, technological learning and significant value additions to its exports. Reliance on the current real exchange rate of the rand is unsustainable.

Improving the quality of spending will depend on the success of ministerial clusters to coordinate the design and implementation of their policies with all spheres of government. Mere increases in the size of budget allocation have not in the past been matched with effective service deliveries.

The significant structural transformation that has taken place in the direction of the tertiary sector and advances in exports of specialised industries suggest that the country's competitive advantage be developed around these areas for rapid economic growth and employment generation.

The BBC would like to caution government about expectation for CPI to decline steadily in 2001, particularly as OPEC membership has strengthened with Venezuela's renewed commitment to the cartel. We are, however, optimistic that SA would be ready for an inflation-targeting framework in 2002. The BBC would like to reiterate the need to publish the letter from the National Treasury Minister to the Governor of the Reserve Bank indicating the conditions under which the target can be overshot and the length of the period of overshooting. Failure to do so will continue to create uncertainty and confusion should the target be overshot.

Government acknowledges informal sector activity as a source of employment, yet the budget is silent on this sector - there is no policy/allocation to formalize and regulate it. In view of the wide income gap and the extent of poverty, the range of poverty relief measures are welcome but inadequate to make any significant impact. The intended wage incentive for strategic investment project is also very encouraging. It is, however, suggested that the criteria for qualification for the incentive must not be confined to employment creation but also include the creation of opportunities for small business involvement.

The accelerated depreciation programme proposed for manufacturing small businesses will, no doubt, encourage small businesses to set up or invest in that sector. However, similar incentives to the tertiary sector will be consistent with the country's new-found competitive advantage. Therefore, the omission is a significant loss of opportunity to generate employment among SMEs in the fast-growing tertiary sector.

Economic Policy and Outlook
Economic policy has largely shifted from laying the fiscal framework proposed in GEAR to a greater emphasis on supply-side interventions in infrastructure investment in order to lower the cost of production, transportation and communication and to enhance competitiveness. This focus when well implemented, will generate jobs. However, delivery at the local level remains the biggest hurdle, and it is at this very level that private sector participation in sharing risk and providing expertise is most critical. Public works programmes in the past have not been successful and similar failures at this stage of the economy will erode the fiscal gains of the past few years. In that event, the envisaged 3.5% growth rate may not be realised.

The assumption that the tax breaks proposed in the budget will lead to more savings is unrealistic, making the need to attract foreign investment as strong as ever. A gross savings rate of 15% of GDP is not good enough for the economic growth rate required for job creation. The BBC believes that strategies for mobilizing saving should be investigated without resorting to cutting corporate tax.

The changing composition of merchandise exports is a positive development and more support and incentive measures will be required to sustain the trend. Therefore, there is need to consolidate the country's technological niches with the establishment of technology incubators such as the Gauteng Provincial Government/CSIR/ University of Pretoria Initiative, technological parks as well as rapid commercialisation of technological innovation from centres of learning. While this critical instrument of developing national competitiveness is omitted in the budget, BBC strongly suggests that the issue be given serious attention without further delay.

The poor performance of the labour market deserves comments on the characteristics of the unemployment situation. A recent report by Statistics South Africa indicates the prevalence of long-term unemployment; that is, once people are unemployed it is difficult to find a job. Secondly, the unemployed are primarily the unskilled. Therefore, investment in people is imperative in combating unemployment. Thirdly, perceived rigidity of the labour market arising from prohibitive regulations, excessive cost of hiring and dismissal and non wage costs associated with centralised wage bargaining procedures deserves urgent review. Therefore, the BBC will keenly engage in discussions on proposed changes to labour legislations expected from the Labour Minister.

The new approved direct investment limit of R500m for offshore, and R750m in the case of Africa is a very welcome measure that indicates government's seriousness about integrating SA with the global economy and Africa in particular. The BBC sees this as an opportunity for (black) small business to pursue strategic business alliances with the potential for mutually beneficial outcomes.

Fiscal Policy and the Budget Framework
The BBC is of the view that microeconomic reforms suggested for achieving national economic objective be placed at the centre-stage of national debate, research and analysis. This will generate relevant data and alternative approaches for fine-tuning subsequent national budgets. The BBC is particularly concerned that the issue of black economic empowerment which should be driving national socio-economic transformation is dwarfed in this budget.

The new incentive to small manufacturing businesses will benefit few blacks, most of whom operate in the services sector. Inadequacy of the poverty relief measures means that the high dependency ratios characterising black families will hardly decline. Whether the ½ % increase in the skills training levy is sufficient incentive to is uncertain since many employers are prepared to pay the penalty. Regrettably, the issue of land reform and development of black commercial farmers is obscured from the budget. And, the implications of the restructuring of state assets and expansion of new strategic industries for small business development and black economic empowerment appear to be of no fiscal importance. It is our submission that these omissions and contradictions be given serious consideration.

Taxation Proposals
Our comments focus on what we consider to be the significant taxation proposals. From a BBC perspective we would group the tax interventions into two broad categories viz. Poverty Relief Measures and Empowerment Measurers.

Poverty Relief Measures
Eliminating VAT on paraffin
By zero-rating, for VAT purposes, illuminating paraffin the poor will directly benefit to the extent of R 400 million which is not insignificant and it is hoped it will not translate into increased profits to the suppliers. The Consumer Council and other similar organizations should be encouraged to ensure that the benefit flows to the consumers.

Reduction in personal income taxes
The reduction in personal income taxes by a further R8,3 billion brings the total relief to individual taxpayers to R33.3 billion since 1995. This total cumulative relief translates to 3.4% of the estimated GDP for the 2001/02 year. It is hoped that this reduction will go towards reducing household debt and savings. Employee organizations should be encouraged to advocate such financial discipline among their members.

It is noted that the high-income earners would also benefit to the extent of approximately R 3 380 for the year or R 281 per month.

Interest and dividend income exemption.
By raising this exemption by a further R 1 000 would directly benefit low-income pensioners and should also encourage investment of the tax savings.

Empowerment Interventions
Tax incentives
We applaud and encourage targeted interventions through the tax system to unlock structural bottlenecks and encourage the growth and development of under-resourced sectors. We caution, however, that these incentives may be abused and urge vigilance through regular audits.

Wage incentive
The wage incentive should not only be viewed as alleviating poverty, albeit in the short term. Its growth and development objective should receive greater focus, such as skills development. Regular audits should be conducted to detect fictitious employees as well as ensuring compliance with the envisaged leadership programmes.

Investment incentives for small business development
The incentive to encourage small business in the manufacturing sector is another targeted strategic intervention, which is most welcome.

The significance of this incentive should not be simply judged by the relatively small revenue loss of R 40 million. The capital investment required to generate such a revenue loss would be, approximately R 267 million at the SME rate of 15%. The envisaged size of this sector is, therefore, relatively small and is in need of incentives to develop and grow. As the black community is totally under-represented in this sector, this incentive would have no impact unless it is accompanied by innovative financial assistance schemes and other support programs.

It would appear that this incentive is directed at small businesses with a turnover of less than R 1 million per annum. We would encourage that this incentive be made available to a broader small and medium enterprises sector that suffer capacity constraints as a result of aging and technologically obsolete equipment.

Graduated tax rates for small business
In our comments to the 2000 Budget we suggested that the turnover threshold to qualify for the 15% corporate rate should be increased to R 5 million. We believe that a broader SME sector should qualify for the graduated rate to stimulate growth from this sector. The assumption that the profit to turnover ratio for this sector is 10% is respectfully very optimistic and should be revisited from inputs from the relevant business organizations.

The skills development levy
This is a good example of a dedicated tax, dedicated to training and education programmes. The increase in the levy from 0.5% to 1% will increase collections from R1.3 billion to R2.8 billion, a significant amount indeed. We believe the beneficiaries of the levy should be the unskilled and the semi-skilled. We are, however, concerned that it might be abused and thereby detract from its intended objectives. Therefore, the greater challenge is to prevent its abuse. This levy together with the increased spending on education should provide the necessary building blocks to sustained growth and development.

Investment incentives for strategic projects
This is another specifically targeted tax intervention, which is encouraged. Black economic empowerment should be one of the requirements to qualify for this incentive.

Equity in the Tax System
The quest for equity in the tax system is being pursued with the vigour and determination we can only applaud and encourage. The Minister's announcement that the effective tax rate in the banking sector is to be brought in line is just another step in this direction.

We re-iterate our strongest support for the capital gains tax (CGT) even though wealth accumulated under apartheid will be exempt. We believe that the revenue generated by this tax should not only be utilized to lessen the income tax burden; in the short to medium term we would rather see a substantial portion of the CGT being utilized as investment in projects to redress the socio-economic inequalities in our nation.

We also support measures that will close loopholes and leakages and that will broaden the tax base.

Conclusion
In conclusion we congratulate the Minister of Finance and his team on their achievements to date and thank them for their sterling efforts. We agree that a solid macro-economic foundation has been laid which presents us with the enormous challenges to begin to deliver at the micro level.

We reiterate our view that the microeconomic reforms suggested for achieving national economic objective be placed at the centre-stage of national debate, research and analysis. This will generate relevant data and alternative approaches for fine-tuning subsequent national budgets. The BBC is particularly concerned that the issue of black economic empowerment, which should be driving national socio-economic transformation is dwarfed in this budget.

We are appealing for economic patriotism that will enable our nation to drive the national agenda towards economic growth and socio-economic transformation.

We thank you chairperson and your committee for this opportunity to make our submission and we wish you well in your deliberations.

For Enquiries [email protected] or [email protected]

Appendix D:
AFRIKAANSE HANDELSINSTITUUT (AHI)

Remarks by Jac Laubscher, Gensec Chief Economist, on behalf of the AHI, to a meeting of the Parliamentary Standing Committee on Finance 1 March 2001

1. The budget is no more than that - a budget of planned expenditure and forecast revenue for the year ahead. It is extremely important that the budget should be executed as set out for government to start making a positive contribution to economic growth. It is also imperative that the Telkom IPO should take place as planned in Q4 2001, even if that should mean accepting a less favourable price.

2. There is an apparent lack of policy co-ordination that leads to ad hoc measures being introduced. For example, the wage subsidy is aimed at lowering labour costs at the same time that the increase in the skills development levy will raise it. In fact, the skills levy will add an additional R1.5 billion to payroll cost, which exceeds the wage subsidy of R600 million by a wide margin. Care will also have to be taken that the investment incentives announced will not encourage capital intensive production processes, which will clash with the objective of encouraging job creation.

3. It appears as if there has been a shift in government's policy on exchange control relaxation towards a tighter approach. The ministers statement in his budget speech that the current limits on the foreign exposure if institutional funds are nearing prudential limits and that they will be retained as part of a general move to prudential regulation needs to  be clarified. An explicit statement will be welcome.

The 2001/2 Budget: a response
Dr Pieter Haasbroek, Barloworld, on behalf of the AHI
The primary impact of the budget on business - as it encapsulates a very large part of the government's economic policy - is on stability: it changes the political-economic environment wherein business operate.

Business needs to be certain about the tax dispensation, for example, as tax changes affect future returns. The expenditure side of fiscal policy, on the other hand, has demand implications, that may affect sales.

Government should be aware of these consequences of its budget. Unintended consequences can be harmful and should, as far as possible, be minimised by means of careful budget design.

Business, therefore, is concerned about the existence of quite a number of contradictions in government's fiscal policy. They emerge between elements in the budget and create considerable uncertainty. A few examples will suffice.
1. The objective of high tax compliance is undermined by the ever increasing complexity of the tax dispensation;
2. The skills levy (in addition to other interventions of the government in the labour market) will increase the cost of labour for many businesses. Their demand for labour will decline, contributing to unemployment. It is not very useful to then try to encourage employment by means of wage incentives (to solve the problem caused by government intervention in the first place!) It will be better if government strives to lower the cost of labour (by liberalising the labour market) and to direct its fiscal assistance to the process of on-the-job-training by SMMEs. A subsidy on the training of unskilled workers - previously unemployable - will be more effective than all the other measures combined;
3. Encouragement of direct investment in SADC countries conflicts with the discouraging effect of the institution of residence-based taxation (which diminishes the returns derived from previous investments in these countries.)

The reason why budgets harbour such contradictions is the tendency to overload every fiscal instrument with numerous politically desirable objectives. (A subsidy aimed at production increases are loaded with the encouragement of a clean environment, gender-equality, exports, etc.) Overload adds to complexity, while it reduces the efficiency of the fiscal instrument. The elements of the budget should be consistent with one another.We plead that the minister try to keep his budget simple and straightforward. Its fruits will then be even sweeter for the whole of SA.

RE-DISTRIBUTION BY GOVERNMENT
Remarks made by Dawie Roodt, Chief Economist of PLJ Financial Services
Government finances are and should be re-distributional. Government should take from the rich and give to the poor. Government does this through revenue and the expenditure side of the budget. The re-distributional impact differs from individual to individual. The calculations below illustrate the re-distributional impact of the fiscus on four families. A number of assumptions were necessary to do these calculations. These calculations show that Government finances are massively re-distributional in South Africa. South Africa lacks sufficient numbers of well qualified individuals and if the tax burden is too heavy, or the relationship between tax paid and benefits derived becomes too skewed, some of these individuals might decide to emigrate, or their incentive to take entrepreneurial risks may be blunted.

In these cases Government will loose a funding for educational, health services and other Government provided services for many poor individuals.

In the calculations below, it is shown that a poor family in our example receives nearly R8 for every R1 they contribute to Government while a rich family receives only 3 cents for every R1 they contribute to Government.

Furthermore, a rich family still has to "buy" certain services, which Government does not provide, or provides insufficiently to them, like education, health services, security services, pensions, etc. In many cases where such services are available to rich families, the costs are considerably higher than for poor families.

REDISTRIBUTIONAL EFFECT OF THE FISCUS