Hearings on the 2001 Budget: Submissions by IDASA, FEDUSA, and NACTU

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Finance Standing Committee

01 March 2001
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FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
2 March 2001
HEARINGS ON THE 2001 BUDGET: SUBMISSIONS BY IDASA, FEDUSA, AND NACTU

Chairperson: Ms B Hogan

Documents handed out:
IDASA Presentation (See Appendix 1)
FEDUSA Presentation (Appendix 2)
NACTU Presentation (Appendix 3)
COSATU Letter (Appendix 4)

SUMMARY
In response to a letter from COSATU, the Committee decided to seek advice from the law advisor regarding amendments to money bills. The Committee would like to know whether a Bill to amend a money bill is itself a money bill. If the Amendment Bill is a money bill then only the Minister can table the Amendment Bill. If it is not a money bill, then the Committee itself can table the Amendment Bill in Parliament. If the Committee has the power to table the Bill then it is in a stronger position to put pressure on the Ministry to draft such a Bill.


IDASA: The 2001 budget proposes increased spending on human resource development, additional infrastructure spending, and the introduction of an employment creation subsidy. IDASA noted it is unlikely the funds designed for infrastructure spending will be spent promptly enough to reduce poverty in the current medium term expenditure framework (MTEF). Even if these funds are spent timeously they are still unlikely to reduce poverty over the medium term. For this reason, government should have increased the allocations of certain grants and programmes, such as the social grant, as this would provide poverty relief in the short term.

FEDUSA: They want greater consultation with government on the salaries of public service employees. Currently the budget process is a non-participatory, non-transparent procedure with limited or no scope for meaningful salary negotiations as the public service trade unions are excluded from the budgeting process which commences in April.

NACTU: They applaud the revenue and expenditure approach in the budget. They note simply that they would like to see increased spending on Health. They support the R43 billion expenditure for the arms procurement, stating that the South African Defence Force needs support not condemnation.

MINUTES
1) IDASA
Summary of presentation
Ms J Streak, Ms M Sadan, and Mr R Wildeman made the presentation. Ms Volscher was also present.

Despite government's attempts to create growth and employment, labour markets have not expanded enough to reduce poverty. The demand for skilled labour has increased while the demand for unskilled labour is either stagnant or decreasing.
Growth has not helped poverty and it has not created enough jobs. The demand for labour has increased less rapidly than the need for employment.

The public service sector is a big contributor to unemployment. It is expected that the public service will shed up to 150 000 jobs over the MTEF. This is after the public service contracted by 2% in 2000.

The 2001 Budget sets out micro-economic reforms to stimulate economic growth, job creation and poverty alleviation. It is all part of government's plan to reduce poverty in South Africa.

The budget proposes:
a) Increased spending on human resource development
In this regard IDASA said that human resource development must not only focus on formal skills development but it must also focus on ABET. Skills training must be targeted at employed and unemployed people.

b) Additional infrastructure spending
IDASA said that it is unlikely that these funds will be spent promptly enough to reduce poverty in the current MTEF. This is because the destination of funds (in terms of location and function) has not been finalised yet. There is also a problem with department underspending. It appears that the largest allocations have gone to the departments which have not been able to spend their budgets (example the Departments of Correctional Services and Justice). Even if the funds are spent timeously it is still unlikely to reduce poverty over the medium term.

c) Introducing an employment creation subsidy
In principle the concept sounds good. Details on this plan will only be available in October.

IDASA recommends:
- Government's capacity to deliver must be enhanced. IDASA is pleased with the additional infrastructure allocations. However it must be ensured that this money is spent. Skills are necessary for the implementation and monitoring of projects at all levels of government. Thus government should allocate money for the acquisition of skills in infrastructure development.

- Adult literacy and education currently has low levels of funding. These allocations could be increased. This will provide greater poverty relief in the short-term.

- Short-term poverty relief can be addressed by increasing allocations to the social grant, adult literacy, and adult education programmes. They urge government to spend differently. The spending ability of provincial departments must be strengthened. Additional funds must be spent. Government must spend on human resource development.

Discussion

Professor Turok (ANC) asked for the Treasury's response to the statistics IDASA presented. He referred particularly to Table 1(the statistics on the number of people who were employed, unemployed, and economically active between 1996 and 1999), Table 3 (the percentage of provincial and capital budgets spent by 31 December 2000), and Table 4 (the real growth of social security grants).
Ms Robinson (from the National Treasury) said that they would respond to this in writing.

Professor Turok then commented that the problem of capacity was complicated. It is a systemic problem rather than a skills issue. The problem must be looked at in a deeper way than it is looked at now.

Ms Robinson commented on some points made in IDASA's presentation.
The Child Support Grant is still being phased in and they did not want to increase the amount of the grant until after it had been phased in. It has been increased prior to the intended time.
Infrastructure spending takes a long time to plan and implement. They do not want fiscal dumping. They must ensure co-ordinated and coherent planning.

Ms Volscher responded to the latter point by saying that one cannot refrain from allocating funds because the capacity is not there. The PFMA is there for the Department to develop capacity. Given that infrastructure spending takes time it may be beneficial for poverty alleviation measures to get extra attention.

Building capacity is a systemic issue. There have to be incentives for people to do their job well. Capacity has been eroded because of the personnel spending pressure. The personnel with better skills have better opportunities outside the public service. They are the ones who leave. Personnel expenditure needs more attention (above capex) to build the skills.

Mr Andrew (DP) asked which inflation rate was used in the table 4 calculations.
Ms Streak replied that they used the CPI headline inflation and the inflation put forward in the Budget Review. They did not use the CPIX because they did not want to exclude mortgage.

Dr Rabie (NNP) asked how accurate the figures of unemployed people in Table 1 (5.8 billion) are. He said that in the line fishing industry, for example, there are periods of the year when the person is unemployed but there are also periods of the year when the person is employed. In light of this perhaps the figures are not accurate.

Ms Streak replied that the data in Table 1 is accepted data. It was made official by Stats SA from the 1999 October Household Survey. Employment in the formal, informal, agricultural, and domestic sectors were considered separately because of the reason raised by Dr Rabie. Stats SA says that each year the statistics are more accurate. If there is a problem with the statistics then it is more likely that the figures are too low because of undercounting. Stats SA is trying to improve how questions are asked and data is collected.
When they say 'unemployed', they use the expanded definition and not the official definition. The official definition only considers someone unemployed if the person looked actively for work for four weeks prior to being asked about it in the survey.

Mr Andrew asked the Treasury if they had any idea how many people would be employed as a result of the R600 million tax incentive.
He then asked IDASA for their opinion on also allowing tax deductions for domestic work employment within such a scheme. This could provide a large number of employment opportunities for grossly unskilled and uneducated people, especially for women in rural areas. These people are the most disadvantaged and the most difficult to employ. In this way the incentive could go beyond private sector business.

Mr Maselela (from the National Treasury) replied that the employment benefits have not been quantified. The concept must still be worked out between Finance, Department of Trade and Industry, and Labour. The current thinking is to put in place an instrument that will facilitate a higher level of absorption, looking mainly at small business and not at large enterprises. Thus the group which is targeted by this incentive and the Skills Development Levy are different groups. The Skills Development is aimed at large companies. The employment subsidy will focus on labour intensive processes.

Domestic workers/tax relief: Ms Streak said that this sounds like a good principle. The fear however is that this type of employment would act as a substitute for employment in the formal sector. There could be that trade-off. The funds to do this may be better used to create jobs in the formal sector.

Mr Andrew replied that this may create a certain distortion in the short-term but it would contribute to poverty alleviation.

Mr Feinstein (ANC) asked the Treasury how they looked at the expenditure on and the success of SETAs.
Ms Robinson replied that the Department of Labour does this. Treasury then collates the information.

The Chairperson commented:
- The reliability of statistics is a recurring problem.
- IDASA is one of the few organisations that looks at the impact of the budget on the poor. How must one monitor poverty alleviation and the impact of the budget on poverty alleviation?
- Jobs: the change in the labour market changes the skills needed for employment. Large numbers of people will be unemployable because of lack of skills. Government is looking at education. Is the Skills Development and ABET sufficient to overcome the human resources problem.
- The social grant is an important poverty alleviation measure. There has been discussion about a more general social grant. What is IDASAs comment on this and its implications on a constrained budget.

Mr Wildeman replied that the ABET programs are now more skills oriented. ABET could be linked to the National Qualifications Standard. However they have not really looked beyond this.
On the last question Ms Sadan replied that they have not made any calculations.

Mr Andrew commented that their presentation did not look at the impact of HIV/AIDS.
Ms Volscher replied that IDASA has a brief on their website which looks at the impact of HIV/AIDS. They are currently busy with research that looks at the future impact of HIV/AIDS. The focus of this presentation was on jobs and growth.
Ms Streak said that the focus is usually on the pension grant and the Child Support Grant. The numbers of people that are unemployed are growing and these people are not getting anything. They are not saying that there should be another grant but they were saying that there should be more of a focus on this category of people.

Mr Maselela referred to IDASA's comments that the interventions are medium-term and not short- term. He asked what short-term measures they recommend.
Ms Volscher replied that in the short-term the grants must be increased more than they have been.
Ms Robinson replied that the grants were not increased by inflation because the fear is that they will accelerate expectations on the economy. Can the fiscus sustain an excess of inflation each year? The way it was done allows more leeway to move in the medium-term.

2) FEDUSA
Summary of presentation
Ms G Humphries made the presentation.
- FEDUSA welcomes the intent to create jobs through setting up tax relief packages for companies. They suggest that the details of the job creation initiative be discussed at NEDLAC to ensure proper stakeholder participation. The more active role of Government in promoting investments is welcomed (example the increases in allocations for investment expenditure by national and provincial departments). In aggregate the proposed revenue and expenditure proposals will affect investment favourably. Through this economic growth and job creation will also be affected favourably.
Obstacles to investment are social instability and the pending introduction of Capital Gains Tax (CGT). FEDUSA believes that CGT will negatively affect investment and job creation.

- Infrastructure spending is not likely to be completed within the current medium term cycle. More attention should have been given to short term poverty relief. The low increase in grants threatens to erode the inroads made in terms of poverty alleviation.

- FEDUSA suggested a gradual phasing down of the tax on retirement funds. The current rate of 25% is seen as a contributing factor to low levels of domestic savings. Lowering the rate on retirement funds will increase domestic savings.

- There must be alignment between the budget process and the collective bargaining process (with the Public Service Co-ordinating Bargaining Council/PSCBC). The purpose of the PSCBC is to ensure that employers do not implement decisions unilaterally. The budget allocations make a mockery of the collective bargaining process.

Discussion
The Chairperson commented that there is a need for a democratic process. However the public service is the first demand on the government.

Ms Humphries replied that Treasury starts with the budget in April. They would like to be part of that process. They could discuss this at the NEDLAC forum. Public service is responsible for a large percentage of social delivery. There must be a co-ordinated process of engagement before the budget.

Mr Andrew asked about ghost workers. Up to two billion rand a year is spent on them. What is FEDUSA's view on the large numbers of people drawing from the taxpayers' money without any work to do.

Ms Humphries replied that some public service employees work very hard. Some employees are ghost workers, at the cost of an effective public service. Recently they had a public service conference that dealt with this. They need effective management in the public service. Public service may need to be cut in some areas. The problem in public service is management and this must be addressed. They are consulting with the Department of Public Services and the Ministry to deal with this. Sorting this out can take forever.

Mr Andrew asked if FEDUSA thought that ghost workers should be kept on the books. The Ministry would like them gone. Would this be a problem for trade unions? It is not acceptable that they collect money each month but do no work. Government could save R2 billion per year. Does FEDUSA have a problem with these people getting notice? Maybe it is partly a management problem but this is not entirely an acceptable answer.

Mr Nair (ANC) said if by management FEDUSA meant the Ministry. They can never control all the sectors of the public service. The unions have a responsibility to assist so that there is an efficient and honest public service. It should not be seen as something that belongs to management.

Ms Humphries said that they are not promoting ghost workers. They must get rid of these people. In terms of the definition of an employee, a employee is someone who produces work. They want a productive public service. Workers themselves also do not manage their work properly. FEDUSA wants them to be productive in what they are doing. In certain areas there are problems. There have been various public service initiatives to address this. They must try to ensure that this problem does not crop up.

Dr Rabie referred to FEDUSA's dissatisfaction with the tax on retirement funds. He asked what an acceptable level of tax would be (the current level is 25%).

Ms Humphries replied that a zero tax rate on retirement funds is acceptable. There should be a move away from taxation, it should be phased out gradually.

Mr Mofokeng (ANC) referred to the comment that they want to be a bigger part of the budget process. He asked if they wanted to ''hold government to ransom''.

Ms Humphries replied that they want input in the process. It is a process of consultation. They are not saying that government must negotiate with them. There is benefit in consultation.

Mr Nair (ANC) asked if they have taken this issue up with the Minister of Public Services.

Ms Humphries replied that they have tried to do this for the past four to five years. The result is that they ended up going to court. The budget might be a managerial prerogative but bargaining councils want consultation.

Ms Taljaard asked if the increased spending on social infrastructure would ameliorate the problem of delivery or if the emphasis on finances would create a different problem with the regulations of PPPs [public private partnerships].
Ms Humphries replied promptly that increasing the finances was one way to address the problem.

3) NACTU
Summary of presentation
Mr P Motlhamme made the presentation.
NACTU applauds the approach to the 2001 Budget. They welcome various revenue changes, including:
- the introduction of CGT
- the reductions in personal income tax
- the increase in the Skills Development Levy

On the expenditure side they noted disappointment that funds were not allocated to improving the state of public hospitals. There should be a balance between crime (a product of poverty and unemployment) fighting and poverty reduction programmes.

They support the R43 billion arms procurement deal as it is important to have a well-funded and equipped military to ensure a safe and secure environment.

Discussion
Ms Jumat (ANC) said that with the restructuring of state assets, jobs will be lost. She asked for a comment.
Mr Motlhamme said that government needs the money. It is the responsibility of government to do this. Job security is important. The problem is if restructuring leads to job losses without systems in place to deal with it.

Mr Nene (ANC) referred to the comment that there should have been a bigger focus on hospitals. Is it not better for the Ministry of Health to address this?
Mr Motlhamme replied that health care is a critical area to be focused on. To leave it to the Health Ministry alone is a bad idea.
+
The Chairperson commented that funding went to the refurbishment of hospitals through the conditional grants.
Ms Marshoff (ANC) added that R 5.7 billion went to the hospitals through conditional grants. There will also be improved allocations and through this better service delivery is expected.

Mr Motlhamme said that they were not aware of this.

Mr Andrew referred to NACTUs presentation (paragraph 2.1.6) which states that ideally the government should work toward a situation where no estate duty or donations tax is payable on estates of R1000 00 and less. He noted that the amount had already been set at R1 million. He asked NACTU to explain the ''R 1000 or less'' as ''[their] ideal was met and exceeded''.

Mr Motlhamme said that they were not aware of this.

Conclusion
Chair reads letter from COSATU into the record
COSATU sent a letter saying that they will not make a presentation on the budget as parliament does not have the power to amend the budget, rendering submissions meaningless.
They noted dissatisfaction with this as section 77 of the Constitution gives Parliament the power to amend money bills through enacting legislation.

Mr Andrew said that they made a good point. In terms of the Constitution Parliament can amend money bills. The question was who has the power to table the Amendment Bill in Parliament. As a first step the committee could approach the law advisor to interpret section 77(3)(2) of the Constitution. The Committee wants to know if the Bill which gives the power to amend money bills is itself a money bill. If so, then only the Minister can table the Amendment Bill in Parliament. If it is not a money bill then the committee can table the Bill in Parliament. The Committee can put pressure on the Ministry to draft the Amendment Bill. Consulting the law advisors on this issue was described as a first step.
The Chairperson agreed. She said that she would forward a letter to the Speaker to ask who is responsible for the introduction of such a Bill.

The meeting was adjourned.

Appendix 1
IDASA SUBMISSION
In the submission we argue that:

In addition to offering limited short-term relief to the poor, Budget 2001 proposes to increase the labour absorption of economic growth using three main fiscal tools. They are:
strategic infrastructure investment;
skills development, and;
an employment creation subsidy.
In response, the Budget Information Service offers two recommendations.
1. Strengthen government's capacity to deliver.
While the enforcement and reporting mechanisms of the Public Finance Management Act are welcomed, it is also necessary to spend additional funds strategically in order to prop up the eroded capacity of the public service. This could address delivery problems in infrastructure provision as well as human resource development.
Government would do well if in finalising the design of its infrastructure spending programmes particularly, it allocated sufficient money to allow for the acquisition of skills in infrastructure development, i.e. the planning, implementation and monitoring of projects at all levels of government.
2. Review the size of allocations for certain programmes in order to increase short-term poverty relief.
These allocations need to be reviewed to provide greater poverty relief over the short term and improve the chances of the poor benefiting directly from increased economic growth. In this context, social grants, adult literacy and adult education programs seem to be particularly neglected. We argue that sufficient money is available in the current fiscal envelope to increase the allocations to these programs.
Without these changes to Budget 2001, the measures proposed to stimulate employment levels are unlikely to achieve their goals in the near future. Stagnant employment levels will translate into increase poverty levels. Unless social grants are increased they will not alleviate the plight of the poor.

Idasa—Budget Information Service
Distributing the Sweet Fruit of Liberty March 2, 2001
Overview
Section I: Jobless and High-skilled Growth
Employment trends in the private sector
Employment trends in the public sector
Section II: Proposals to Alleviate Poverty Through Government Spending
Human Resource Development
Infrastructure
Employment Subsidy
Section III: Proposals to Alleviate Poverty Through Government Spending
Changes to real disposable income of a poor urban family
Recommendations

In his budget speech the Minister of Finance indicated that government intended to move beyond macroeconomic stabilization and place the economy on an expansionary path.

Besides expanding certain categories of social spending, Budget 2001 puts forward a set of micro-economic reforms intended to stimulate economic growth, job-creation and poverty alleviation.

Of these three goals, job creation is arguably the most important part of the government's plan for reducing poverty in South Africa. Since the introduction of GEAR, the logic has been that redistribution would be primarily driven by job-creation. However, experience shows that economic growth which does not redistribute directly by job-creation tends to widen the gap between the rich and poor. Therefore in terms of government's current policy framework, increased employment creation is South Africa's most pressing challenge, apart from economic growth.

In addition to offering limited short-term relief to the poor, Budget 2001 proposes to increase the labour absorption of economic growth using three main fiscal tools. They are:
strategic infrastructure investment;
skills development, and;
an employment creation subsidy.

In response, the Budget Information Service offers two recommendations.
1. Strengthen government's capacity to deliver.

While the enforcement and reporting mechanisms of the Public Finance Management Act are welcomed, it is also necessary to spend additional funds strategically in order to prop up the eroded capacity of the public service. This could address delivery problems in infrastructure provision as well as human resource development.

Government would do well if in finalising the design of its infrastructure spending programmes particularly, it allocated sufficient money to allow for the acquisition of skills in infrastructure development, i.e. the planning, implementation and monitoring of projects at all levels of government.

2. Review the size of allocations for certain programmes in order to increase short-term poverty relief.

These allocations need to be reviewed to provide greater poverty relief over the short term and improve the chances of the poor benefiting directly from increased economic growth. In this context, social grants, adult literacy and adult education programs seem to be particularly neglected. We argue that sufficient money is available in the current fiscal envelope to increase the allocations to these programs.

Without these changes to Budget 2001, the measures proposed to stimulate employment levels are unlikely to achieve their goals in the near future. Stagnant employment levels will translate into increase poverty levels. Unless social grants are increased they will not alleviate the plight of the poor.

Section 1 below will trace the dimensions of 'jobless growth'. We present evidence which suggests that labour markets have not expanded sufficiently and in the manner that ensures they help to reduce poverty. The employment created has primarily been in the 'skilled' category and thus does little to address the needs of poor unskilled workers.

In Section 2 we discuss and evaluate three of the 'micro-economic' reforms that have been proposed to increase the labour absorption of economic growth. We argue that these measures—skills development, infrastructure, and employment subsidy—are hampered by a range of problems that vary from insufficient budgetary allocations to a lack of implementation capacity. We conclude that they are unlikely to hold any immediate benefits to the poor, especially the unemployed.

If the analysis in Section 2 holds, then the likelihood of employment creation substantially reducing poverty in the short to medium term is quite slim. This potential failure will put extra pressure on the poverty alleviation instruments of the government.

Therefore in Section 3 we consider what impact the poverty alleviation measures announced in Budget 2001 will have on the income stream of the poor. We conclude that it is unlikely that measures announced in Budget 2001 could do more than maintain the income levels of the poor.

Section I : Jobless and High-skilled Growth
Employment trends in the Private Sector
The December 2000 Quarterly Report of the Reserve Bank (p13) states that 'the formal labour market continued to be characterised by employment declines in the first half of 2000… employment in the formal non-agriculture sectors of the economy declined by 3% or about 149 000 jobs in the year to June 2000."

Past labour market trends highlight the limited extent to which growth has been trickling down to the poor and highlight the need for poverty reduction and relief. Despite government's attempts to woo private sector investors into creating growth and employment, labour markets have not expanded sufficiently and in the manner that ensures they help to reduce poverty. Millions of people - approximately 5.8 million, but probably more - remained unemployed in South Africa in 1999. Due to their lack of skills and the kind and level of economic growth, they have little chance of finding employment and escaping poverty.

More importantly, while the demand for skilled labour has been increasing, the demand for unskilled labour was either stagnant or decreasing (research based on the October 1995 and October 1999 household surveys and Surveys of Total Earnings and Employment (STEE). Therefore, the new jobs that were created did not generally benefit the poor and unskilled.

Table 1 presents the most recent official data on trends in the labour market. It shows the estimates of the total number of unemployed, employed and economically active people for the years 1996-1999. Looking at the data, we see that:

The number of employed people increased between 1996 and 1999. Growth in employment was greatest between 1998 and 1999.

According to the expanded definition of unemployment, the number of unemployed people also increased between 1996 and 1998.

Although the demand for labour increased between 1996 and 1999, the increase was insufficient to keep up with labour supply. This is why there has been an increase in the total number of unemployed people between 1996 and 1999.

Employment expansion has been concentrated in the informal sector where incomes are on average lower than in the formal sector and offer less job security and insurance.

Table 1: Employment, unemployment and economically active, 1996-99

'000s of people

1996

1997

1998

1999

(a)Total employed

Employed in formal sector
Employed in formal sector (according to STEE)
Employed in formal sector in activities not
included in STEE

Employed in informal sector

Employed in agriculture

Employed in domestic service

9 287

6792
5242
1550


996

759

740

9 247

6726
5139
1587


1136

717

668

9 390

6390
4945
1445


1316

935

749

10 369

6564
4840
1724


907

1099

799

(b)Total unemployed

Official definition
Expanded definition



2 224
4 566



2 451
5 202



3 163
5 634



3 158
5 882

(a+b)Total economically active

Based on official definition of unemployed
(i.e. excluding discouraged work seekers)

Based on the expanded definition of
unemployed


11511


13853


11698


14449


12553


15024


13527


16251

Source: Statistics South Africa, results from the 1999 October Household Survey.

Employment trends in the Public Sector
According to the Reserve Bank's December 2000 Quarterly report, the public sector is one of the most important contributors to unemployment. The public sector at large shed 4.5% of employment in 2000.

Contributing to this trend, it is expected that the public service itself (only national and provincial government employees) will shed up to 150 000 jobs over the MTEF period—mostly in the unskilled category. This is after the public service contracted by 2% (or 22000 jobs) in 2000. The Personnel Expenditure Review (approved by Cabinet in December 1999) found that while the public service is not over-staffed at an aggregate level, the distribution is skewed towards the un- and low-skilled categories of employment. At the time of the Review, 212 000 public servants were classified as 'elementary' workers. Of these, approximately 60% worked on domestic jobs, such as cleaning or gardening, while the rest were mostly construction, forestry and agricultural workers. The Review targeted these services for outsourcing and other alternative service delivery mechanisms.

Retrenchment in the public service has been on the agenda ever since the voluntary severance packages failed to generate either sufficient or the right kind of contraction in public service employment. So far the absence of an affordable negotiated exit management tool has prevented employer-initiated retrenchments. The signing late in January 2001 of a framework agreement between the public service unions and government has made possible the negotiation of such a tool before June 2001 (in accordance with the 2000 wage agreement). While job losses through retrenchment or the implementation of alternative service delivery mechanisms may not occur in 2001, they will over the MTEF period.

Section II: Proposals to reduce poverty through growth
The government has proposed three main measures to address the two-headed monster of job-less and high-skilled growth:
Increased spending on human resource development;
Additional infrastructure spending, and;
The introduction of an employment creation subsidy.

The argument goes that these measures will encourage labor-intensive growth, which will in turn reduce/eradicate poverty.

1. Human Resource Development
Government's human resource development strategy has two main focuses: improving the skill level of the employed, and attacking illiteracy through enhanced investment in adult basic education. Given the high-skilled nature of recent economic growth, it is essential that we improve the general skill-level of our workforce. That is what this first set of measures proposes to do.

On balance, the much vaunted investment in Adult Basic Education Training (ABET) has not materialised and no significant progress has been made on reducing illiteracy. The entire human resource development strategy thus becomes heavily dependent on the success of the skills development component. In other words, this human resource development strategy shifts the focus back onto workers who are employed. This occurs at the expense of those who are poor, illiterate and unemployed - one of the groups that are supposed to be targeted by these measures.

Skills Development
The current skills development regime will largely benefit those who are already in formal employment. The Skills Development Levy, which is collected from employers other than government and from employers that have an annual payroll of more than R250 000, has increased from 0.5% of payroll in 2000 to 1% in 2001. Eighty per cent of such funding finances Sector Education and Training Authorities (SETAs), while the remaining 20% is allocated to the National Skills Fund (NSF) which will finance training for the unemployed. Given this policy bias towards the employed, basic education, especially for the illiterate, becomes decisive in the overall articulation of a human resource development strategy.

As a further problem, implementation of the Skills Development Levy has been slow. The Finance Minister reported that R430m of monies collected went unspent in 2000/01; learnerships will only be operational during the course of the year. Furthermore, the Minister's speech did not mention the Umsobomvu Fund, announced in 1998 and intended to target unemployed youth.

Table 2 provides a breakdown of projected expenditure on skills development in South Africa.

Table 2: Expenditure on skills development, 2000/01-2003/04


R million

2000/01
Budget


2001/02


2002/03


2003/04

Department of Labour
Human Resource development programme


212


121


117


117

Skills development Levy programme
SETAs funds


1040


2240


2400


2560

NSF

260

560

600

640

Government training expenditure
National departments


456


553


580


609

Provinces

319

677

718

756

Total

2287

4151

4415

4682

Source: Budget Review 2001.

Adult Basic Education
Provincial Departments of Education have not been able to make sufficient allocations to Adult Education programmes, and are in many instances dependent on donor funding. Less than 1% of provincial education budgets will be spent on ABET in the current MTEF cycle. The national department of Education has responded by allocating funds obtained from the Poverty Relief Programme to the nodal rural and urban points identified by the President. Amounts of R25 million, R40 million, and R50 million have been allocated for ABET programmes in the identified areas over the medium term. However, this support goes toward pilot programmes and is not intended to provide full coverage. It is thus insufficient as a long-term funding solution.

The South African National Literacy Agency was launched in March 2000. Its immediate brief was to target the 3 million illiterate people identified by the Department of Education. However Budget 2001 does not report on the progress of the Agency. As far as we could establish, the campaigns to target the whole country have been abandoned for the time being. Lack of capacity and uncertainties about funding appear to be the main reasons why this important campaign has not mobilized entire sections of civil society and business, as was envisaged at its launch.

2. Infrastructure
In the Budget Speech, the Minister argues that by setting aside resources for infrastructure investment and maintenance, government aims to:
broaden access to opportunities;
lower the costs of transport and communication, and;
improve standards of living in poor communities.

In implementing this investment programme, government will also contribute directly to the creation of jobs.

Budget 2001 allocated an extra R7.8 billion over the medium term to national and provincial departments for infrastructure development. However it seems to be unlikely that these funds will be spent promptly enough to reduce poverty in the current MTEF period. There are two reasons for this.

Incomplete planning. First, the destination of the funds in terms of location and function has not been finalised. The division of the funds between provinces still has to be decided and although Cabinet has agreed to indicative allocations, the allocations have not been determined.

Department underspending. Second, the national and provincial departments are already struggling to spend their existing capital expenditure allocations. According to a straight-line projection, by December 2000 departments in both spheres should have spent 75% of their capital allocations. However, national departments had spent only 51% and provincial departments 56% (National Treasury Monthly Press Release, Schedules 2 and 4). Even allowing for accelerated expenditure towards the end of the budget year, it does not bode well for the speed of poverty relief from infrastructure spending.

Furthermore, it appears that the largest allocations are going to departments which have not been able to spend their budgets. For example, at the national level, the largest single allocation of additional funds went to Police Services, Correctional Services and Justice, yet by December 2000 these departments had only spent 34% of their 2000 capital spending allocation. At the provincial level, education and health departments, which will be responsible for spending R2.1 billion and R0.5 billion of the additional R3.7 billion for non-flood reconstruction funds to provinces, had only spent 40% and 35% of their Budget 2000 capital spending allocation by December 2000.

Table 3: Percentage of provincial capital budgets spent by 31 December 2000

North West Province

33.8%

Eastern Cape

40.6%

KwaZulu-Natal

45.6%

Gauteng

48.8%

Mpumalanga

62.3%

Northern province

66.7%

Northern Cape

83.9%

Western Cape

94.0%

Free State

253.5%

Source: National Treasury Monthly Press Release, December 2000.

The important point is that even if the funds were spent timeously, they would be unlikely to reduce poverty over the medium term. Except through the direct provision of low-skilled jobs on the infrastructure projects themselves, infrastructure spending does not immediately provide trickle-down poverty relief. Given that only 20% (R1.8bn) of the additional funds are to be spent in the first year and almost half (R3.4bn )in the third, it is unlikely that much poverty relief will flow from these funds during the current MTEF period.

c. Employment subsidy
The third tool of micro-reform presented by the Minister is the proposal for a wage tax credit mechanism to encourage job creation and promote the further formalisation of employment. R600 million has been set aside in 2001/02 for a wage tax credit proposal. In the words of the Budget Review (2001:215): "The National Treasury and SARS are developing an administratively and economically efficient wage tax mechanism for encouraging job creation and promoting the further formalisation of employment."

Again, the time lag in implementation is a concern. Detail on this plan will only be available in October. It will take time to determine the percentage figure of the tax break, to implement the plan, and for firms to respond. Thus, it is unlikely that this instrument will produce substantial fruits in the short to medium term. Yet with little detail provided on this plan, it is difficult to provide more comment and analysis. It is also unclear how the size of the allocation was determined given that the wage tax credit is only in its early stages of development.

Section III: Proposals to alleviate poverty through government spending
If the analysis in Section II holds, the likelihood of reducing poverty through employment creation in the short to medium term is slim. This will put extra pressure on the poverty alleviation instruments of the government.

According to the Minister of Finance: "The largest single redistributive programme of government is the system of social grants delivered by provincial welfare departments." Table 4 indicates that the value of these grants only expands by a tiny margin in real terms, despite the increases announced in Budget 2001.

Table 4: Real Growth of Social Security Grants


Grant type


2000


2001(July)

Real Growth Rates (2000-2001)

Old age

540

570

0%

War veterans

558

588

-0.2%

Disability

540

570

0%

Grants in aid

100

100

-5%

Foster care

390

410

-0.45%

Care dependency

540

570

0%

Child support grant

100

110

4%

Source: Department of Social Development, 2001 and own calculations.

In addition to the social security grant increases, Budget 2001 contains a number of other allocations which add to the resources available to the poor. These include:
Poverty Alleviation and Job summit allocations
Integrated Nutrition Programme
Short-term poverty relief measures (including interventions in response to cholera outbreaks)
Funds for low-cost housing and the subsidisation of public transport
Financing of local government and pricing of basic services in order to provide municipal services to poor households free of charge

The poor will also benefit from changes in the tax regime. These include:
Reductions in personal income tax
The zero-rating of Illuminating paraffin
Below-inflation increases in the fuel levy and the Road Accident Fund

The overall impact of these changes on the poor is difficult to measure. However in Table 5 we have attempted to model the implications of Budget 2001 for a single extended family living in a poor urban area.

Its important to note that our hypothetical family earns sufficient income to require tax payment. Our family would therefore benefit from the tax adjustments in this year's budget, while families earning less than R23 000 a year will not.

Table 5 lays out the impact of Budget 2001 for this family. The family will receive a meager R2 more a month in disposable income as a result of this year's budget.

Table 5: Changes to real disposable income of a poor urban family


Source of Income/Expenditure/Saving


Changes proposed in Budget 2001

Annual income 2000

Annual income 2001

Change to disposable income

Yearly income of R23 000

Gained R340 from PIT cuts

22660

23000

340.00

Pension worth R540

Gained R30/month from increase

6120

6480

360.00

Child Support Grant (9months) As the child turns 7 in December, access to the grant is only valid for 9 months in 2000/01.

Gained R10/month from increase

1200

990

-210.00

Parrafin

25l/month for 12 months gaining 40c/litre from zero-rating

120.00

Lost from ciggarettes

20 packets a month for 12 months @ 32.8c extra/packet

-78.72

Lost from Alcohol

24 cans of malt beer per month for 12 months @ 2.3c extra per can

-6.62

Gained from Free Water

R100/month for 12 months

1200.00

Lost from increase in fuel levy and Road Accident Fund increases

80 litres per month @2c/litre for 12 months

-19.20

Soft Drinks

10 litres per month @ 2c/litre for 12 months

-2.40

Total gained from fiscal measures

1703.06

Loss in real income due to inflation (inflation effect on annual income plus effect on gains in disposable income)

1680.16

Annual real gains in disposable income

22.84

Monthly real gains in disposable income

1.90


This example of one hypothetical South African family clearly demonstrates that neither the medium term poverty reduction mechanisms nor the short-term poverty alleviation measures are therefore likely to improve the lot of the poor. In the next section we make recommendations for how to improve this situation.

The Budget Information Service presents two primary recommendations in response to Budget 2001.

First the capacity of the government to deliver must be enhanced. While the enforcement and reporting mechanisms of the Public Finance Management Act are welcomed, it is also necessary to spend additional funds strategically in order to prop up the eroded capacity of the public service. This could address delivery problems in infrastructure provision as well as human resource development.

Budget Review 2001 itself acknowledges that the capacity to plan and spend capital funds is lacking in the provinces (pg154). Generally government has struggled to spend targeted money on time. Frequently the reason cited for delays is lack of capacity. It is clear that constrained personnel budgets over the past three years, coupled with the lack of an affordable negotiated exit mechanism for the public service, have allowed little fiscal space for the development of human resource capacity.

Government would do well if in finalising the design of its infrastructure spending programmes, it allocated sufficient money to allow for the acquisition of skills particularly in infrastructure development, ie the planning, implementation and monitoring of projects at all levels of government.

Our second recommendation is that the size of certain allocations needs to be reviewed to provide greater poverty relief over the short term and improve the chances of the poor benefiting directly from increased economic growth. In this context, social grants, adult literacy and adult education programs seem to be particularly neglected.

The adult literacy and adult education allocations are key to the government's programme of action for 2001. For these two programmes, the existing allocations are so limited that doubling or tripling the current allocation would not substantially affect the fiscus. Allocations could easily be increased to adult literacy and education, given their current low levels of funding.

As the Minister of Finance argued in his budget speech, social grants are the most important poverty alleviation tool in the budget. Given the number of people that generally depend on one of these grants, they are a good instrument for distributing money to the poor. The fact that their value will barely keep up with inflation over the next three years shows that this budget can at best support the poor, not uplift them.

A more substantial increase to the social security grants would have been feasible in this budget. Our calculations show that the R30 per month increase to Old-Age pensions will cost the government approximately R725 million in 2001/02. In order to outstrip inflation, another R256 million would be needed in order to increase the pension by another R10 per month. This does not seem impossible if we take into account the additional R10 billion allocated in 2001 over the 2000 baseline amounts.

However, consideration of such a change would require a closer look at both the economic and functional breakdown of the additional R10 billion available. On the economic side, given the likelihood of delays in spending the additional funds for infrastructure development, it may have made sense to move money into grants, which count as recurrent spending. On the functional side (ie from which sector the money should come from) it is more difficult to be precise since a full functional breakdown of this R10 billion is not presented in Budget 2001.


Appendix 2
FEDUSA SUBMISSION ON THE 2001/2002 BUDGET TO THE PORTFOLIO COMMITTEE ON FINANCE

1 INTRODUCTION
One way to evaluate the budget is to determine whether it is in line with the aims and strategies that Government's has set for it. Government's budgetary policy since 1997 is based on its GEAR strategy published in June 1996. In evaluating it is therefore necessary to briefly refer back to the goals and elements contained therein as well as to GDP growth and economic development, the unemployment rate, balance of payments and the level of inflation. In following this root, it does not mean that FEDUSA agrees with all the elements contained in it.

The Budget displays ongoing commitment to maintaining good macro economic policy and fiscal discipline - whilst moving to address key social imperatives. After years of tightly controlled purse strings as Government aimed to bring the Budget deficit under control, it is now time to reap the benefits in the form of reduced taxes, greater social and infrastructure spending, and the buying back of debt.

The broad goals are summarized in the 1997 Budget Review as:
· A competitive fast growing economy, which creates sufficient jobs for all workseekers;
· A redistribution of income and better opportunities to the poor;
· A society in which sound health, education and other services are available to all; and
· An environment in which homes are secured and place of work is productive.

To attain these goals, an integrated strategy, involving national departments, is followed and a prominent role is to be played by the yearly budget of National Treasury. Key elements awarded to budgetary policy in the GEAR strategy are:

· reprioritising public service delivery to ensure a more equal access to services by all;
· fiscal deficit reduction by lowering current expenditure as percentage of GDP;
· industrial tax incentives;
· state asset restructuring;
· expanded infra-structural investment; and
· a strengthened system for financing training.

Since 1997 the reprioritizing of public service delivery and the reduction of the budget deficit ranked high on Governments priority list, while this year's Budget also gives attention to the rest of the elements.

According to the 1997 Budget Review a crucial element of this integrated strategy is that there should be a strong working relationship between government, the business sector, organised labour and other constituencies in which NEDLAC will play a vital role.

In this submission FEDUSA would firstly focus on the macroeconomic effects of the Budget, and secondly, attention will also be given to some other aspects such as the impact of the Budget on social delivery, health, HIV/Aids, the retirement fund industry as well as the implementation of capital gains tax.

2 MACROECONOMIC EFFECTS
2.1 CONSEQUENCES FOR ECONOMIC GROWTH AND DEVELOPMENT
Although the budget of the National Treasury affects many aspects of our society, both the economic environment and social environment, it will eventually have certain consequences for economic growth, income distribution and job creation. In the following sections, attention will be given to important tax, expenditure and deficit financing amendments that were proposed by the Minister for 2001/2002.

2.2 ECONOMIC GROWTH AND JOB CREATION
In its submission on the 2000 Budget, FEDUSA stressed the importance of job creation via higher investments by government, the private sector and the foreign sector. Government was also urged to make development and job creation its major focus.

FEDUSA welcomes the Governments intention of stimulating companies to create jobs by setting aside a tax relief package. FEDUSA would like to propose that the details of the job creation initiatives be discussed at NEDLAC to ensure a workable result with proper stakeholder participation.

There are different amendments in this year's budget that will have a positive influence on economic growth and job creation, and these steps are appreciated by FEDUSA. FEDUSA regards the change in Government's focus on micro-economics instead of macro-economics as an important milestone in economic policy making in South Africa. An important macroeconomic focus since 1994 was macro-economic stability. Together with monetary policy, fiscal policy played its role to reduce the inflation rate to current lower rate. Since 1994 the reduction of the budget deficit received high priority and the main budget deficit will be reduced from 5.1% in 1994/95 to an estimated 2.5% in 2001/2002.

The rationale behind the deficit reduction was that this would free savings for private investment. Private investments however did not increase as expected, which means total spending and therefore economic growth was negatively affected.

FEDUSA is of the opinion that there are certain pre-requisites for economic growth, from the demand side as well as the supply side. From the demand side, buoyant, (but not excessive) consumption expenditure is needed to induce businesses to step up their investment expenditure. From the supply side, factors that are important include access to savings at a reasonable interest rate, input costs, tax rates and also economic as well as social stability.

In the past a lack of consumer spending retarded economic growth. The lowering of personal income tax by an estimated R8 billion, largely going to the lower income group, would have a favorable effect on consumer spending and therefore on investment and job creation. This tax change will however not increase the level of the country's personal savings. Although interest exemptions will be increased with R1 000, it is doubtful whether this would increase the low level of personal savings. The R8.3 billion in extra cash to be made available to South Africans through the introduction of reduced personal taxes in the Budget opens the way to improve the country's disappointing personal savings ratio.

Lower and middle-income earners are bound to enjoy the financial relief they have been given. FEDUSA would also encourage them to seriously consider saving some of their additional income to further facilitate saving on their part. The Budget improves prospects for future growth and development. The focus is definitely on stimulating economic growth, investment, job creation and social delivery.

It is noted with interest that South Africa, for the first time since the early 1980's, is again turning to overseas borrowing, and that less will be borrowed on the domestic capital market. FEDUSA is of the opinion that this could strengthen the current movement to lower levels of interest rates in South Africa, and therefore also on future investments and job creation.

From the revenue as well as from the expenditure side of the Budget, there are other developments, which would have favorable consequences for investment and growth.

From the revenue side, the more favorable tax depreciation rules applicable to small businesses are welcomed by FEDUSA. In previous submissions FEDUSA stressed the importance of SMME's in investment and job creation, and want to commend Government on this step to promote SMME's.

The more active role of Government in promoting investments is welcomed. This does not only goes for the new proposed tax incentive for companies embarking on certain strategic industrial projects, but also for the substantial increases in allocations for investment expenditure by national and provincial departments.

All in all, the proposed revenue and expenditures proposals will probably have a favorable influence on investment and therefore on economic growth and employment creation. There are however two factors that could have severe negative effects on investments. The first factor is the lack of social stability, which was an important contributory factor for the lack of domestic and foreign investment in South Africa. For 2001/2002 some 43% of the additional allocations to national departments go to the justice and protection cluster with a possibility of getting more when the allocation for infrastructure money is made. While Government is commended for this higher priority given to justice and security, FEDUSA is not convinced that the problem will be solved. Government is urged to give special attention to this matter, and in a consultative way between business and labour try to come forward with an imaginative solution.

A second factor that could have a negative effect on investment, is the proposed capital gains tax that will be introduced on 1 October 2001. In our submission on the Taxation Laws
Amendment Bill, 2001 we argued strongly against the introduction thereof in South Africa, as
a developing country, on grounds that it would have a negative influence on investment and
job creation, especially for the smaller businesses and on venture capital.

Although, therefore, the Budget contains many favorable developments that bode well for investment and economic growth, FEDUSA is concerned that the lack of safety and security and the new tax on capital gains tax could be deterrents on investment.

2.3 REDISTRIBUTION OF INCOME
Since coming into power in 1994, Government has gone a long way in bringing about a more equal distribution of income and opportunities and the social uplifting of the poorer section of our population. In this year Budget, Government is taking further steps in promoting these goals. FEDUSA welcomes the steps taken from both the revenue and expenditure side. The larger tax decrease for lower income groups and the increase in the tax floor to R23000, larger expenditure on infra-structural investment in rural areas as well as the announced free government services to the poorer sections in rural areas will no doubt lead to a more equitable distribution of income.

In the final instance however the availability of job opportunities for the unemployed masses and for new entrants to the labour market is crucial for the upliftment of our people. The high unemployment level (36.4% of the economic active population according to latest figures of STATS SA) implies a worsening in South Africa's income distribution.

3 FOCUS ON OTHER ASPECTS OF THE 2001 BUDGET
3.1 SOCIAL AND INFRASTRUCTURE DELWERY
The Budget displays ongoing commitment to maintaining good macro-economic policy and fiscal discipline- whilst moving to address key social imperatives. After years of tightly controlled purse strings as Government aimed to bring the Budget deficit under control, it is now time to reap the benefits in the form of reduced taxes, greater social and infrastructure spending, and the buying back of debt. FEDUSA welcomes capital spending on infrastructural development, rural and urban programmes and support for small business development via accelerated depreciation allowances.

However, FEDUSA would like to raise our concerns regarding the amount of planning needed for infrastructure projects given the Government's lack of capacity for infrastructure planning, as acknowledged in the 2001 Budget Review as many of the proposed infrastructure projects may not even be completed by the end of the current medium term cycle.

The Programme of Action as announced by President Thabo Mbeki in his State of the Nation Address will deliver long-term growth and employment. FEDUSA's concern lies with the short term relief as announced in the 2001 Budget where increases such as the increase in the old age pensions, disability grants, and child support grants will be linked to inflation over the next three years. As methods of alleviating poverty the value of these increases must be protected against the effects of inflation. The reality of service delivery and the relatively low increase in grants to households threatens to erode the inroads made in terms of poverty alleviation. The Budget Review 2001 indicates that provinces are still under-spending on most of the poverty alleviation programmes due to problems relating to service delivery and administration.

3.2 PROMOTION OF HEALTH, EDUCATION AND OTHER SERVICES
From an economic point of view, investment in human capital is just as important as investment in physical capital. Although much attention was paid to health and education in the past in terms of restructuring our education and health system budgetary figures show that expenditure on these two categories, as well as other social services decreased in real terms from 1997 to 2000/2001. According to the latest Budget Review, expenditure on social services increased by 5.5% between these years, which is below the inflation rate. Government is commended on the higher priority that will be awarded to social services from 2001/2001 onwards, when it is estimated in the Budget Review that expenditure will increase by an average of 7.3%, which will mean a real increase.

3.3 HIV I AIDS AS ONE OF GOVERNMENTS POLICY CHOICES
FEDUSA supports the larger Budget Allocation towards fighting the HIV/Aids pandemic, but the increase to R313 million fell short of what is required. HIV/Aids, the disease undermining almost every aspect of life in South Africa, was allocated an additional R 613 million from fiscal 2001/ 02 for two years of countermeasures. It is estimated that about 4,3 million South Africans, or about one in every 10 people are infected with HIV/Aids was treated as a separate line item in the Budget. A significant linkage between WV and Aids was denoted, as they were written next to each other.

FEDUSA would like to raise concerns about how the money will be spent and whether systems are in place to ensure the countermeasures are properly targeted and carried through. According to the Budget Review R 16 billion was directed to spending on social services and upliftment, including Aids - related spending over three years. It appeared that only R1 billion of this was directed at Aids.

3.4 THE TAXATION ON RETIREMENT FUNDS REMAINED AN AREA OF GREAT CONCERN TO FEDUSA
Unfortunately, the measures taken in reducing and restructuring individual taxation did not extend to taxation on retirement funds. The current rate of 25% on gross interest and net rental income can be viewed as a contributing factor to the disappointingly low levels of domestic savings. It is widely accepted that a country's prospects for economic growth and prosperity depend largely on the economy's capacity to save. The tax on retirement funds is in effect a penalty that forward looking, hard-working citizens are made to pay. After all, if you want less of anything, you tax it! A gradual phase down of this tax is suggested. Therefor no mention of change to retirement taxation leaves taxpayers uncertain as to how their pensions and provident fund lump sums will be taxed at retirement.

FEDUSA strongly oppose the introduction of a capital gains tax which is going to impact very negatively on the retirement find industry. However, in the light of the proposed introduction of Capital Gains Tax, with effect of 1 October 2001, that will reduce the long - term retirement provision, tax payers would be well advised to channel more towards retirement. Retirement Funds, unit trusts and life insurance policyholder finds will incur the tax on their capital profits. Pensions and other retirement finds will be taxed on their capital gains from shares and other assets. This tax, besides being difficult to administer, will surely not encourage savings to increase.

FEDUSA believes that the time is right to increase domestic savings by lowering the rate of taxation on retirement finds. The future tax position of retirement finds creates a climate of uncertainty as it affects long - term planning and retirement incentives. The citizens of the country need to do their long - term planning in a climate of certainty. People should be given incentives to be able to provide for their own retirement that will bring relief to the already overburdened welfare pensions provided by Government. The taxation on the interest and rental income of retirement funds should be decreased and lowered to acceptable levels. The purpose of retirement provision is to provide for old age and not to cover the debts of costs incurred by Departments not being able to limit expenditure.

FEDUSA welcomes the indication on 27 February 2001 by the Finance Director -General that a comprehensive review of the taxation of the retirement fund industry will be undertaken. FEDUSA furthermore welcomes the exemption of capital gains of the retirement Fund Industry from taxation. We note with concern however that this is an interim measure and the issue of taxation of the retirement industry will be revisited over the next three years, as noted, in the Explanatory Memorandum to the Revenue Laws Amendment Act, 2000. FEDUSA would welcome the provision of further and more detailed submissions on these matters. We request that a system of continuous feedback of consultations and processes should be put in place involving all the relevant stakeholders as a matter of some urgency and to present to us with a coherent view on the future tax status of the Retirement Industry.

The application of the Taxation Laws Bill to the Retirement Funds is of grave concern to FEDUSA in the sense that although the explanatory memorandum to the Revenue Laws Amendment Act 2000, claims that retirement funds' capital gains will not be taxed ''at this stage", The wording of the Draft Taxation Laws Amendment Bill 2001, which introduces the Capital Gains Tax (CGT), does not seem to exempt retirement finds from the provisions of the Bill but simply excludes gains made on their assets.

3.5 CO-ORDINATION OF BUDGETARY AND COLLECTIVE BARGAINING PROCESSES
The 2000 wage dispute in the public service again focussed on the budgeting process and the alignment thereof to the collective bargaining process. The presentation of the 1999 I 2000 budget in Parliament introduced the budget available for wages thereby making a mockery out of the collective bargaining system. Once again in 2001 the same process has been repeated. The main focus of the Public Service Co-ordinating Bargaining Council is to ensure that employers do not unilaterally implement decisions. The end result of a non- participatory and non-transparent process is a budget that is a finalised budget with limited or no scope for meaningful and bona fide salary negotiations as the public service trade unions are excluded from the budgeting process which commences in April.

FEDUSA and our 560 000 members, believe that the budget cycle should continue after the collective bargaining process has been finalised. FEDUSA would also like to raise our concern that the Medium Term Budget Policy statement and the annual Budget should not undermine the Public Service Co-ordinating Bargaining Council Agreement. The introduction of the multi-year planning through the Medium Term Expenditure Framework is welcomed but still the budget process is still not a democratic process as the salary negotiations are entered into when the increase has already been budgeted for and therefor allowing no ''leeway" for salary negotiations.

What is of grave concern to the FEDUSA Public Sector trade unions once again, are the pre-emptingI pre-determination of the collective bargaining process by the Minister of Public Service and Finance. The budgetary allocation makes a mockery of any bona fide collective bargaining process in the Public Service Co-ordinating Bargaining council as it determines what the outcome of the collective bargaining process on wages and conditions of service would be, without any consultation of the parties to the Public Service Co-ordinating Bargaining Council of which FEDUSA represents the majority of employees.


Appendix 3
NACTU SUBMISSIONS TO THE PORTFOLIO COMMITTEE ON FINANCE
2001/2 BUDGET SPEECH
1. Introduction
The National Council of Trade Unions is making these representations to the Portfolio Committee on Finance on the 2001/2 Budget, with the following understanding:
· The budget is the main instrument of fiscal policy and economic intervention by the government.
· The budget is essentially a reflection of the macro-economic policy direction of the government. It reflects a range of political choices that the government has made on what to spend, how to spend and how to finance the expenditure.

It is a well-known fact that the 2001/2 budget is presented within the context of the macro-economic policy of GEAR. NACTU has stated that it while it agrees with the long-term vision of GEAR, it has problems with the policy instruments used to achieve that long-term goal we share with our government.

We also make these representations with the full knowledge that legally Parliament cannot amend money bills.

However, we continue to make our representations with the belief that this is a peoples' Parliament and that our views will be taken into account when the next budget is drawn. We believe that this Committee plays an important role and that it will continue to play that role of being the eyes and ears of the public and civil society.

Chairperson, having laid the foregoing basis for our representations, our comments on the budget will cover the following areas:
- Revenue
- Expenditure
- Economic policy directions contained in the Honourable Ministers budget speech.

Our comments are made, Chairperson, with the full political understanding that the budget of any country can never be the subject of horse trading between the government and various interest groups, and that nowhere in the world is the budget the subject of collective bargaining. By this we are not saying that government should be insensitive to the views of the public and civil society. In fact, this Committee exists precisely to ensure that future budgets take into account the views we will express here.

2. Revenue
Our view as NACTU, on the revenue side of the budget is that there is innovation and quite a number of positive developments that have come up in the Minister's speech. In this regard we will mention the following:

2.1 Taxation
2.1.1 The introduction of a capital gains tax (C GT) is welcomed by NACTU, as this will the ill-gotten gains of apartheid as well as the black elite. It will also ensure that the budget serves as an instrument of wealth redistribution.

2.1.2 Personal Taxation NACTU welcomes the tax reduction particularly for the low and middle income brackets.

2.1.3 Taxation for banks This is another welcome development to ensure equity and that banks pay proper tax. Nactu hopes that the investigation should not be prolonged so that banks may be brought on par with other companies as soon as possible.

2.1.4 Skills Development levy The increase in the Skills Development levy from 0.5% to 1% is a welcome development. We hope that the objective of 4% of payroll will eventually be realized, as is the international norm.

2.1.5 Tax consequences of unbundling transactions This review that will be carried out should also bring about tax equity. The unacceptable benefit that some companies get through unbundling should be dealt with i~ such a way that the practice of tax avoidance is discouraged.

2.1.6 Estate duty and donations tax - We believe the reduction of this form of tax from 25% to 20% is a good sign. However a mechanism should be sought that takes into account our cultural heritage. Ideally also we should work towards a situation where no estate duty or donations tax is payable on estates of R1000 00 and less.

2.1.7 Personal tax rates and tax brackets Marginal tax rates have remained unchanged, although adjustments have been made to deal with the bracket creep. This is welcome by NACTU.

2.1.8 Removal of VAT on paraffin - NACTU views this as a positive development, particularly for people in rural areas. However VAT on electricity and water is an area that government needs to seriously look into. Electricity and water for people in Orange Farm and Kayelitsha are not luxuries but basic necessities. NACTU trusts that this Committee will point out to the Ministry of Finance and the National Treasury the need to address this issue.

2.1.9 Income Tax Act - The amendment to section 24 C allowing for deductions for future expenditure is a welcome move, as it will ensure that abuses are stopped.

2.2 Exchange rate
NACTU is totally opposed to any system that allows for the ill-gotten gains of Apartheid to be stashed abroad. We do understand that the balance and correlation of international forces may have put pressure on our democratic government for this to happen. We welcome the proposals for increases in investments in the Continent. However the risk exists that certain unpatriotic elements will undermine and abuse such provisions.

While NACTU accepts that the Minister has dealt with the issue of asset swaps that economic terrorists used to undermine our economy, we believe that there is a strong need to put breaks on exchange liberalization, which leads to capital flight. The culprits are the likes of Old Mutual and Anglo through their foreign listings. The question to be asked here is whether this happens because a black government is in power. NACTU views these developments as undermining our democratic government.

2.3 Expenditure
The National Council of Trade Unions applauds the overall expenditure approach of the Ministry of Trade and Industry.

However, we are concerned by the fact that expenditure on defence remains at 1.4% of GDP as opposed to the international norm of 2.2%. NACTU supports the R43 billion expenditure for arms procurement. It is NACTU's view that those who cannot distinguish between national and political interests can hold their "ticky" debate. We subscribe to the view that we can only enjoy our new democracy in a safe and secure environment which only a well-funded and well-equipped military can provide. Our defense Force needs our support, not our condemnation.

Our submissions as NACTU to the expenditure side of the budget are as follows:

2.3.1 Education - We welcome the increase in education expenditure of RiO billion. We cannot agree more with Minister Asmal when he says that teachers must teach and learners must learn. We hope that when the Minister presents his budget he will come up with a management plan.

2.3.2 Health - We are disappointed that the Minister has little about the horrendous, unspeakable state of our public hospital, which sadly, are used by millions who unlike everyone in this house do not have access to medical aid. The Minister failed to deal adequately with the issue of hospital management.

2.3.3 Crime - NACTU believes that crime is largely a product of poverty and unemployment. We welcome the development of increasing crime-fighting capacity through the provision of more resources. However, we believe that there should be a balance between crime-fighting and poverty-reduction programmes.

2.3.4 Inflation targeting - NACTU is opposed to inflation targeting as it will undermine transformation in both the public and private sector in terms of bridging the Apartheid wage gap.

In conclusion NACTU would like to applaud the Minister on a job well done and wish the Ministry and the government a successful financial year that will culminate in maximum benefits for the masses of South Africa.

Appendix 4
Copy of a letter sent by Cosatu to Ms B.A. Hogan, Chairperson, Portfolio Committee on Finance - 2 March 2001

Dear Ms Hogan

Thank you for your invitation to the Budget Hearings of 2 March 2001.

As you are aware, COSATU has not made a submission on the budget since March 1997, when our then-Deputy General Secretary Zwelinzima Vavi explained to Parliament's Finance Portfolio Committee that:_"We are frustrated both by the nature of the budget process which renders meaningless both contributions from civil society and the deliberations of the elected people's representatives. For this reason we have, after some deliberation, decided that unless the budget process is fundamentally transformed to accommodate real public input and effective parliamentary oversight, this submission on the 1997/98 budget will be our last. We will only participate in future parliamentary budget hearings if meaningful participation is made possible through a reformed budget process."

As you are aware, the Constitution (at s77) requires the enactment of legislation which will empower parliament to amend money bills, such as the budget, instead of the current system of voting to accept or reject them. We are currently seeking legal advice in this regard about options open to ensure that provisions of the Constitution are accepted. Without such legislation the participation of parliament in respect of money bills is incomplete. Participation in parliamentary discussions after release of the budget, even if there is a process prior to finalisation of the budget, also becomes a futile exercise for organs of broader society, as no changes can be effected. It is for this reason that COSATU has not made formal submissions to parliamentary budget hearings for the last four years, although we have publicly released our detailed analysis of and position on the budget every year.

The ANC Elections Manifesto also contained a commitment to ensure that elected representatives in national, provincial and local spheres have the appropriate powers to shape budgets. COSATU calls on the Portfolio Committee on Finance to ensure the urgent tabling of an adequate Money Bills Amendment Procedure Bill. The Committee has in the past expressed support for such legislation, but were not satisfied with the draft tabled previously by the Department of Finance. The spirit and letter of the Constitution expressly states that an important aspect of South Africa's democracy is the transformation of the highly secretive and centralised budgetary process inherited from the apartheid regime into a more open and participatory process. Over and above the legislative challenges of democratising the budget process, there is a need for increased participation - of parliament, Nedlac, and society at large - to be involved in the budgetary process.

There are no developments which have given us cause to review our position since 1997. In fact, we are disturbed that for yet another year, the budget will be passed without elected representatives having any influence over it. We will as a result not be making a submission in this year's hearings. We are, however, finalising our own analysis of the budget which we will be pleased to share with you.

Yours faithfully

NEIL COLEMANHEAD OF COSATU PARLIAMENTARY OFFICE


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