Budget Hearing on Civil Society Perspective: BUSA, CHAMSA and FEDUSA

Meeting report

FINANCE PORTFOLIO COMMITTEE AND JOINT BUDGET COMMITTEE
4 March 2005
BUDGET HEARING ON CIVIL SOCIETY PERSPECTIVE: BUSA, CHAMSA AND FEDUSA

Chairperson

PowerPoint presentation by Business Unity South Africa
Submission by FEDUSA
Submission by CHAMSA

SUMMARY
The presentations outlined issues such as the background assessment of the economy; economic assumptions, and how the budget dealt with revenue and tax related issues. Economic assumptions looked reasonable or a little high due to optimism on export and import volumes. Revenue growth was expected to be good in the year ahead. The lack of movement in respect of exchange control relaxation was disappointing. The relaxation would help to normalise the exchange rate market, encourage foreign direct investment and local confidence. The Budget should be judged by long objectives of boosting savings, investment to over 20% of the gross domestic product and growth to over 6%, halving poverty and unemployment in 10 years. There was a need to accelerate growth to around 5% by 2009. The revenue burden should be contained, spread wider and reduced in order to improve the competitiveness of the economy.

The business community felt that government's priority should be scrapping secondary tax on companies' dividends rather than reducing the general tax rate. They also called for the removal of foreign-exchange controls as a show of confidence by government in the domestic economy.

During the discussion, the Committee sought clarity on, amongst others, the following major issues:
- why it was necessary to keep the budget deficit low;
-how to deal with the weakness of the dollar;
- why exchange controls should be abolished; and
-whether the secondary tax on companies should be abolished.

MINUTES
Submission by Business Unity South Africa (BUSA)
Mr D Dykes and Ms C Motshumi represented BUSA. Mr Dykes made the presentation (see document attached). He focused on economic assumptions, the general policy direction and the revenue and expenditure proposals. The economy had been moving nicely over the last year. There had be growth on spending on the back of low inflation, interest rate cuts and improved confidence on the economy. Growth was ahead of expectations but in line with the budget. This was despite the strong Rand, low savings and a growing current account deficit. Prospects for 2005/06 remained good but it was expected that there would be strong domestic spending and weak exports. The economy rebounded in 2004 helped by the fall in interest rates and strong import component. The global economy would be a key danger. Last year saw the strongest growth in a number of years but a number of imbalances occurred in the process in places like the United States of America. The situation was fairly vulnerable especially with oil prices hitting record highs.

The Budget should be judged by long objectives of boosting savings, investment to over 20% of the gross domestic product and growth to over 6%, halving poverty and unemployment in 10 years. There was need to accelerate growth to around 5% by 2009. The revenue burden should be contained, spread wider and reduced in order to improve the competitiveness of the economy.

The government 's expansionary stance continued. The budget appeared fiscally responsible although it was based on cyclical assumptions. The tax burden did not rise much. A long-term assessment revealed that the budget would not drastically alter investment, savings, growth and jobs reality. The lack of movement with regard to exchange control relaxation was disappointing. The relaxation of exchange controls would normalise the exchange rate market and also encourage foreign direct investment and local confidence in the market. It was morally perverse that dishonest people had more diversified portfolios than the honest.

Submission by the Federation of Unions of South Africa (FEDUSA)
Ms G Humphries (FEDUSA: Parliamentary Officer) presented the submission (see document attached). In terms of the multi-year budgetary process of Government followed during the last couple of years, there were actually far less surprises in the yearly budget than before. Multi-year budgeting improves planning by both the public and the private sector. As an open economy, the South African economy was affected by unexpected changes in the global economy. This naturally had positive or negative implications for fiscal policy.

The 2005/06 budget forecast for inflation for the 2005/06 fiscal year was somewhat lower than the 2004 MTEF or the 2004/05 budget figures. It was expected that inflation would again increase during the outer MTEF year. Economic growth was however expected to be higher during the MTEF period and this would have favourable effects on the economy and provide more scope for fiscal policy. In the outer years, it was expected that global economic growth would be lower and this would also affect our growth rate negatively. The forecasts seemed realistic, although there was always the possibility that a rise in the price of oil may lead to higher inflation. Currently the price of oil was in a rising trend, but was counter-acted by a strong Rand. A short-term capital outflow might cause the Rand to depreciate and this might result in rising inflation. FEDUSA agreed with the Minister that, South Africa's credit ratings and the relaxation of exchange controls over the last couple of years would lessen the chances that such an outflow would take place.

It would seem as if the South African economy would be in a higher stable growth path during the MTEF period. The higher growth path that the South African economy was entering could not only be attributed to global economic developments, but also to domestic economic policy. FEDUSA was convinced that this new economic environment of stable economic growth would make it possible to promote private sector investment more directly, without neglecting the other goals of economic policy, such as government’s income distribution goals.

Government was commended for the consistent and balanced way in which budget policy had been conducted over the last decade or so. Good progress had been made with its economic policy goals of higher stable economic growth, balance of payments equilibrium and income redistribution. The exception was that employment-creation remained at an unacceptable level.

Government was commended for two important steps taken in this year’s budget to promote business investment, namely, the lowering of the company tax and the steps to promote small business. In its previous comments on the budget, FEDUSA had stressed the importance of promoting small business. Although the lower level of interest rates contributed towards higher investment, Government was urged to consider further steps to promote private sector investment.

The savings rate of the South African was among the lowest in the world. Compared to the rest of Africa where the savings rate was low but increasing during the last few years, the savings rate in South Africa was declining. Household savings were a mere 2,5% since 2004. Up to 2004 government savings was about 0,2% of GDP. In the main budget projection, however, government will be dissaving again after succeeding to turn around its dissaving in recent years. This meant that government was again borrowing to buy its groceries. According to the Minister, the reason for this turn around was the large increase in welfare payments.

Against this background the increase in the interest and dividend exemption of R15000 for persons less than 65 years and R22000 for persons older than 65 was welcomed. This should contribute to higher personal savings. Personal income tax relief for individuals of R6.8 billion, including an increase in the rebates and the income tax threshold over a wide income range was also welcomed. However, tax relief to low income earners would only lead to an increase in consumption expenditure and not in savings. The taxation of retirement funds should be evaluated against the background of the very low level of savings in South Africa.

Submission by Chambers of Commerce and Industry South Africa (CHAMSA)
The following people represented CHAMSA: Mr D Fletcher, Mr C Luus, Mr D Kruger, Mr K Warren and Mr G Djolov. Mr Djolov made the submission. The announced tax changes were poised to support economic growth and employment in a sustainable manner by strengthening the economy structurally. The tax measures to bolster small and medium enterprises were to be welcomed. CHAMSA unequivocally supported tax policy and reform complementary to economic growth and development, concomitant to preserving the progressive nature of the tax system prevalent in the country. It also welcomed the lowering of the corporate tax rate from 305 to 29%. In the context of easing the tax burden, it welcomed the tax relief provisions designed to facilitate Broad Based Black Economic Empowerment initiatives. The provisions should enable more corporate restructuring to qualify for tax abatements as well as allowing companies to dispose of less than 30% of their shares in a restructuring exercise and still claim relief on the income accruing.

Recognising the imperatives of social delivery and welfare tied to a dedicated public works programme demanded the close observation of budget deficit neutrality to fulfil at least two counts. One was to hold off pressure on interest rates decisive in the making of investment and consumption decisions over time. The other was to contain expenditure pressure on public goods and services delivered solely by the State. The soundness of the budget was marred in the last two years by the increasing use of long-term loans to finance current State expenditure. Government dissaving has increased from 0.8% of GDP in 2002 to approximately 3% in the first three quarters of 2004, largely to finance the increased payment of social grants. Over the long term high rates of dissaving by government could put undue strain on the balance of payments, thereby putting pressure on the currency, inflation and by implication also interest rates.

DiscussionMr B Mnguni (ANC) asked why BUSA thought that the budget deficit should be lower than it was. He wondered what would be the risks should the deficit widen. Both BUSA and CHAMSA were concerned about exchange control regulations. The felt the government should have abolished the regulations. He felt that sequencing of exchange control regulations was much more important than wholesale abolition of regulations. There was a risk of running down the economy if there was a wholesale abolition of exchange control regulations. He asked what measures were in place that would support the total abolition of exchange control regulations.

Mr Gjolov replied that the government had to tax earnings in order to be able to provide services. Borrowing had to be watched. The current national debt was about 38% of the GDP. There would be heavy burdens on average people if the deficit was to widen. The deficit could not widen indefinitely.

Mr Dykes added that the budget deficit and debt were not particularly high from an international perspective. It was important for government to have a bit of money in the current account rather than a growing overdraft.

Mr Luus replied that the question was what was South Africa gaining by having the exchange controls. Presumably, the aim was to keep the capital within the borders of the country. He could not see a lot of individuals or companies clamouring to get funds of the country. The exchange controls introduced inefficiencies into the system because of the time and administrative costs associated with policing these controls. Evidence around the world showed that countries that did not have exchange control could effectively dealt with the problem of money laundering. Exchange controls effectively made a law-abiding citizen who wanted to take money offshore a criminal if he/she had exceeded amounts laid down or did not go through the channel.

Ms J Fubbs (ANC) noted that BUSA had said that the increase in consumption had a negative impact on savings. CHAMSA had seen the increase in consumption in a positive light. She asked for a comment on why the two institutions had different views. The presenters had raised the issues of the treatment of vehicle allowance and fuel tax. Last Year The Economist said that in comparison to Europe, South Africa had a much greater percentage of large cars. It would be helpful to encourage the usage of small vehicles so that the increase in fuel levies could be seen as an encouragement to moving down to a lower litre car. CHAMSA had supported a splintered tax arrangement for small enterprises but at the same time saw this a barrier to smaller enterprises graduating into large enterprises. She asked if the presenters could offer an alternative arrangement. FEDUSA had in the past said that a tax relief to low income earners would only lead to an increase in consumption expenditure and not in savings. It had also said that providing sufficient employment opportunities to new entrants to the labour market and to make provision for a large backlog of the unemployed was a socio-economic goal that was still out of reach. She asked if the federation had a proposal on how to close the gap between the high income and low income earners. She also asked if FEDUSA had a proposal on how to make the socio-economic goal referred to above in reach.

Ms Humphries replied that it was difficult to say how the gap between the low and high-income earners should be closed given the conflicting views on the matter. FEDUSA was saying that the social responsibility issue should be heightened within the corporate sector. There had been publications on the increase of salaries of chief executive officers. One should start looking at corporate governance and structures wherein top managers and top earners where held responsible for the performance of the company. This was important because workers did not get increases on their salaries if the company was not performing. A provision for minimum wages that would be able to support people should probably be made. The Federation did not believe in the Basic Income Grant (BIG). The grant would not reduce poverty but only promote reliance on the State. Various other measures like the infrastructure programme should be used.

With regard to the tax arrangements for small business, Mr Luus replied that a graduated tax was a good idea. The definition of small business should be expanded.

The Chairperson asked if the presenters were proposing that there should simply be no tax at all on dividend income. He asked if there was an alternative to the tax on dividends. He asked if one would have to raise the general corporate tax or tax on individuals if the revenue from the secondary tax on company (STC),a tax on dividends, was forgone. He wondered, if there was a choice to be made, if it was not better to reduce the general corporate tax rate as was done. He asked what were the real burdens to investors from the existing exchange control regime. He was of the opinion that the burden was light. He asked for a comment about having a complete laissez faire linked to the defence against money laundering and the preference to address the general tax burden on businesses with a focus on small business at the expense of particular incentive schemes. It was a case of trying to address the investment climate rather than providing incentives.

Mr Kruger agreed that secondary tax on companies brought in a significant amount of income and could not be abolished overnight. He called for a programme to phase it out overtime. Rather than having the 1% reduction in general corporate tax, one could have that money to reduce the STC. There would be significant tax relief if the STC was reduced. It was nice to say that there was a corporate tax rate of 29% but nobody was fooled by this. There was no evidence that STC was beneficial and encouraged companies to reinvest rather than distribute their funds. It was better to have a general reduction of the tax burden than having incentive schemes that skewed investment decisions. This was no meaning that there was no place for incentive schemes to encourage specific economic behaviour.

Mr Dykes added that the sequencing of exchange controls was exemplary and companies exchange controls were relaxed last year. There was still a burden in terms of administrative costs when it came to taking money out of the country for investment. Nevertheless, it was a big relaxation. The government had built up foreign reserves quite significantly and, very importantly, improved its sovereign risk rating and reputation in international financial markets. Foreign investors were likely to ask what has preventing the country from taking the final step and abolish exchange controls.

With regard to money laundering concerns, he said that these were addressed by the banking system in most countries. Money was laundered through the financial institution. There was legislation to deal with money laundering. On the issue of the STC he said that there earning were taxed once off if there was a corporate income tax. The corporate tax would remain even if the STC was abolished. The situation before the introduction of STC was that income on dividends was not taxed for the same reason that it had already been taxed. The situation was different given that the corporate tax was reduced quite significantly. Most business people would prefer to have STC abolished. This would take the corporate tax to around 37%. STC resulted in a very inefficient asset allocation situation because companies that might otherwise have retained funds retained them.

Mr T Vezi (IFP) said that there was a minority school of thought that had advocated for further increase in social spending in order to accelerate poverty reduction rather than further tax reduction s. He asked presenters to comment on this.

Mr Djolov replied that the business community supported measures poverty alleviation measures. This was especially the case if the programmes were targeted to help the poor and indigent. However, one had to be mindful of how the expenditure was accumulated.

Ms B Hogan (ANC) noted the call by FEDUSA on Treasury to allow a proper consultation process with stakeholders on proposed tax changes on small business. She asked if the federation thought that the proposed changes could have a huge impact on workers' financial position. It was said that the best way to tackle the unemployment level was skills training. South Africa was looking at massive roll out of expenditure in public enterprises like Transnet. Some members of Cosatu who were in the transport sector were concerned that government was not paying sufficient attention to the skilling of people to accompany the big roll out. She asked for FEDUSA's view on this matter.

Ms Humphries replied that the Federation was concerned about things that were happening in the small business market. There was a triangular contracting arrangement wherein there would be a labour broker getting an employee on behalf of an employer and nobody taking responsibility of the worker. It was difficult to know if the employee was covered for unemployment insurance, compensation for injuries and the Labour Relations Act. There should be certain provisions for small business and such should be discussed with labour movements and the business sector to ensure that workers' rights were respected.

With regard to the expenditure on public enterprises, she said that there was a new skills strategy. Skills transfer was not taking place particularly in public enterprises. There were problems of administrative capacity, bureaucracy, and inexperience. For instance, some of the train drivers underwent basic training 18 years and never had training since them. The services SETA had indicated that it had no capacity and hence the moratorium on the appointment of learners.

MR Dykes added that there was a huge shortage of skills and the massive roll out of expenditure would expose this.

Mr Y Bhamjee (ANC) asked for the presenters' views on provincial tax. He asked if they had any suggestions to ensure that national government would not absorb it. The business community had always said that South Africa would catch a cold or even pneumonia should the dollar sneeze. He asked how one could handle such a case should it happen.

Mr Kruger replied that provinces were empowered in terms of the Constitution to raise limited taxes. The Western Cape province had indicated that it would like to have their own source of revenue in order to achieve certain specified objectives. National Treasury had said that it would not penalise provinces that utilised powers granted to them in terms of the Constitution.

Mr Dykes added that it was undesirable to have a whole plethora of taxes and thereby increase the tax burden. It was also undesirable to have different provinces having significantly different tax burdens because this could distort investment decisions. The view would be that it was better to tax at central level and then distribute to provinces.

With regard to the dollar weakness, Mr Luus replied that companies would have to become more efficient. Lower interest rate would alleviate the burden should the dollar strengthen or weaken much more than was expected.

Mr Dykes added that the weakness of the dollar was a global concern. A lot of South Africa's clients in South East Asia and Europe were exposed and this made South Africa vulnerable. The structure of the economy was such that South Africa was still reliant on commodities and commodity benefitiated exports. There was little that one could do to get around this until an internal market was developed. The situation was not necessarily bad given that South Africa would, in the next decade, reap the tremendous benefits of the rising Chinese economy through high commodity prices.

Dr P Rabie (DA) said that taxation of retirement funds was an important source of revenue for government. He asked what would replace this if taxation of retirement funds was scrapped.

Mr Kruger replied that it was problematic to ask how on would make up for the revenue that would be lost following the scrapping of tax on retirement funds. Maybe it was time to say that individuals would not be give the significant tax relief that they had been given and start addressing other issues like tax on retirement funds. One was not advocating for an overnight solution but a phased abolition or reduction of the tax.

Mr Dykes added the fact that the taxation of retirement funds was a great source of revenue did not necessarily mean that it was a good source. The taxation of retirement funds affected the low-income earners. From a business and savings point of view, one would prefer to have an increase in indirect taxes.

The Committee adopted minutes of its previous meetings.

The meeting was adjourned.