Medium Term Budget Policy Statement (MTBPS): hearings

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Finance Standing Committee

27 October 2005
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FINANCE AND JOINT BUDGET COMMITTEE
28 October 2005
MEDIUM TERM BUDGET POLICY STATEMENT (MTBPS): HEARINGS

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Presentation by NKC Independent Economists
Presentation by Merrill Lynch
Presentation by the Federation of Unions of South Africa (FEDUSA)
Presentation by Cecil Mlatsheni

SUMMARY
NKC Independent Economists said that there was general euphoria over the state of the domestic economy. Some weaknesses did however exist. The current boom was driven by strong consumer-led spending but production and export-led growth was lacking. There was enough room in the budget to cut taxes without cutting spending or driving deficit higher. It would enhance investment prospects and reduce the cost of doing business. More domestic drivers were needed, including more roads and power stations; better functioning ports and railways; more flexible labour markets; a reduced legislative cost burden on employers and a more skilful public sector.

Merrill Lynch said that there had been far stronger than expected revenue growth supported by robust economic growth. The treasury had reigned in unnecessary spending which contributed to the structural decline in interest rates. Government spending was also more evenly distributed with Social Welfare grant payments growing strongly in the last five years. There had been an increased commitment to infrastructure spending. Government spending would slow dramatically. South Africa did not have a lack of cash, but had a lack of ability to spend and South African tax rates were high in an emerging market context especially with the Secondary Tax on Companies. It was time for a combination of infrastructure and social spending and lower tax rates.

The Federation of Unions of South Africa (FEDUSA) said that that as an open economy, South Africa was affected by unexpected changes in the global economy. FEDUSA was convinced that the new economic environment of stable economic growth would made it possible to promote private sector investment more directly, without neglecting the other goals of economic policy. Employment creation was a problem that had to be tackled over a wide front. Empowering people through education was the only sustainable way to do this. Small and medium businesses had a role to play in job creation, but their main issue was the lack of access to capital. This year’s Medium Term Budget Policy Statement contained the boldest steps to step up infrastructure investment. Another crucial element in economic growth was promoting the ability of people to help themselves as well as their living conditions. In this regard, the Minister announced a shift in its priorities of social expenditure from income support to education and health.

Cecil Mlatsheni, a UCT economics lecturer, said that youth unemployment in South Africa was estimated to be between 47% and 60%, with significant racial disparities. Effort had to be directed at tackling the plight of marginalised youth because to an extent, it was society that was failing the youth. Distances and costs predominantly affected black youths. Networks were the most common method of finding employment, but these were often poor for the black youth. A possible policy intervention facilitating the dissemination of information about job opportunities and the promotion of awareness of programmes would be welcome. The role of aggregated demand was the chief influence on youth unemployment. The implications were that skills-training initiatives would not immediately succeed and may gain a stigma of failure. The youth had to be believed in, and their ideas developed. Mentor had to be allocated and successful entrepreneurs used as role models. Challenges they faced were access to capital, a poor attitude and interference from significant others as well as cultural expectations and conventions.

Members of the Committee asked if lower corporate taxes were linked to increased productivity and export-led growth. The enquired as to what inducements could be given to business to increase their investment in the economy.

MINUTES

Presentation by NKC Independent Economists
Ms N King Conradie, Executive: NKC Independent Economists, said that there was general euphoria over the state of the domestic economy. There had been a strong Gross Domestic Product (GDP) growth of 3.7% in 2004, interest rates were at record lows, the growth in sale of vehicles was at 30% per annum and the Johannesburg Stock Exchange was close to record highs. Some weaknesses did however exist. The current boom was driven by strong consumer-led spending but production and export-led growth was lacking. A 6% growth could not be achieved by consumer-led spending even if supplemented by State infrastructure spending. The increased spending on infrastructure development was positive, but what would happen after 2010?

The Medium Term Budget Policy Statement (MTBPS) indicated that corporate taxes would not be reduced. There was enough room in the budget to cut taxes without cutting spending or driving deficit higher. It would enhance investment prospects and reduce the cost of doing business. The Minister also gave no further incentives to stimulate SMEs. From a deficit perspective, the MTBPS was not expansionary. There were not enough worthy projects to fund, and this confirmed the lack of skills, capacity and managerial ability in key areas. This was South Africa’s biggest challenge.

More domestic drivers were needed, including more roads and power stations; better functioning ports and railways; more flexible labour markets; a reduced legislative cost burden on employers and a more skilful public sector.

Discussion
Mr T Ralane (ANC) asked why Ms King Conradie had expressed such pessimism about the state of the economy after 2010.

Ms King Conradie replied that the rise of the black middle class had done a lot to raise the growth rate to the level it was at now. Now, more had to be done to get the rate to 6% and keep it there.

Mr G Schneemann (ANC) asked if Ms King Conradie linked lower corporate taxes to increased productivity and export-led growth.

Ms King Conradie replied that they were linked. The focus had to shift from the services to the manufacturing side of the economy.

Mr I Davidson (DA) asked for the connectivity between low corporate taxes and investment. What inducements could be given to business to increase their investment in the economy?

Ms King Conradie replied that low corporate taxes did increase investment, but it needed other incentives such as labour market flexibility. Low corporate rates were only one factor that led to a favourable investment climate.

Presentation by Merrill Lynch
Ms N Moola, an economist at Merrill Lynch, said that from a peak of 10% of the GDP in the early 1990s, the deficit had come down sharply. In 1995, many were concerned about a debt trap but this was not a concern anymore. In 1999/2000, 22.2% of Government expenditure went to interest payments but this had fallen to 12.5%, and there had been far stronger than expected revenue growth supported by robust economic growth. The Treasury had reigned in unnecessary spending which contributed to the structural decline in interest rates. Government spending was also more evenly distributed with social welfare grant payments growing strongly in the last five years.

There had been an increased commitment to infrastructure spending with transport accounting for 15% of GDP in South Africa. This figure was only 9% in developed countries. The budget deficit fell sharply from February’s projection of 3.1% of GDP to 1%. As a result Government spending would slow dramatically. South Africa did not have a lack of cash, but had a lack of ability to spend and South African tax rates were high in an emerging market context especially with the Secondary Tax on Companies. It was time for a combination of infrastructure and social spending and lower tax rates. This would lower the cost of doing business and promote job creation. A catch-net would still be needed, so social spending was necessary, but job creation was more important in the long run.

Discussion
Mr B Mkhaliphi (ANC) asked if the removal of Regional Service Council (RSC) levies lessened the administrative burden on companies, and if this would not go some way to address Ms Moola’s concern that corporate tax rates were too high in South Africa.

Ms Moola replied that getting rid of the RSC levies was a good idea and was a step in the right direction but other parts of Government had to come aboard to assist National Treasury.

Mr Davidson asked for elaboration on her point calling for the out-sourcing of infrastructural spending.

Ms Moola replied that Government had to out-source a lot of its projects. It also had to start the administrative out-sourcing of some of its work to improve efficiency.

Mr T Vezi (IFP) how she proposed deregulating the labour market given the historical background on South Africa.

Ms Moola replied that the biggest problem related to how the labour laws had been implemented. They were being implemented in a way that was difficult for business to hire and fire people, for example. This pushed construction companies to rely on contract work only for instance.

Mr Schneemann asked if it was not time for people in business to help train people. There had to be more commitment from the private sector in training people, which would help job creation.

Ms Moola replied that if one company made the initial effort, the benefits of this would not be passed back to the company and would be spread out. That is why this had to be Government led. Businesses had notoriously been bad at training people.

Presentation by the Federation of Unions of South Africa (FEDUSA)
Ms R Ajam, Parliamentary Administrator: FEDUSA, said that as an open economy, South Africa was affected by unexpected changes in the global economy. The world economy growth rate was slowing in major countries and it did not need more hurricanes, and while the oil prices would decline, refinery problems would remain. The Reserve Bank saw inflation peaking in the second quarter of 2006, but perhaps this bleak projection was too negative. FEDUSA saw inflation remaining flat at a peak of 5.5% in February 2006. Oil prices would come down and the maize supply in South Africa’s silos was worth about three years supply. The Rand was the major question mark ,and though it had stabilised, it had to be closely monitored. Electricity prices would increase gradually more than the Consumer Price Index (CPIX).

Fiscal policy had focused on the promotion of economic growth. FEDUSA was convinced that the 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. It was essential that the conditional infrastructure grants and municipal grants were spent on infrastructure to propel the economy to reach the 6% growth rate while creating jobs in the process. An increase in tax revenue equalled lower budget deficits, less loans from the Government, more tax cuts for individuals and this would leave space for corporate tax rate cuts.

Employment creation was a problem that had to be tackled over a wide front. Empowering people through education was the only sustainable way to do this. Job growth was continuing in 2005 despite setbacks in mining and the clothing industries and there was an 8% growth in the registration of commercial employees. Decent sustainable jobs had to be created and administrative prices had to be lowered. Halving unemployment by 2014 was the point of departure but this should not be used as an excuse to switch attention from what needed to be done now. The ‘casualisation’ of labour was gaining momentum and this had the potential to erode existing labour rights and exploit vulnerable workers. Small and medium businesses had a role to play in job creation, but their main issue was the lack of access to capital. Government had to give the necessary tax incentives to make risking capital worthwhile.

This year’s MTBPS contained the boldest steps to step up infrastructure investment. FEDUSA saw this as playing a crucial role in promoting economic growth and a resultant increase in employment. Another crucial element in economic growth was promoting the ability of people to help themselves as well as their living conditions. In this regard, the Minister had announced a shift in priorities of social expenditure from income support to education and health. The Government had succeeded in increasing welfare and social services spending by large amounts while still maintaining fiscal discipline. This resulted in a lower deficit and large savings in the debt service cost. The fiscal policy shift to economic growth promotion was favourable but should be dealt with caution.

Discussion
Mr Mkhaliphi asked if FEDUSA had any skills development programs.

Ms Ajam replied that they linked skills development programs with infrastructure programs through learnerships.

Presentation by Cecil Mlatsheni
Mr C Mlatsheni, from the School of Economics and Southern Africa Labour and Development Research Unit at the University of Cape Town, said that youth unemployment in South Africa was estimated to be between 47% and 60%, with significant racial disparities. Effort had to be directed at tackling the plight of marginalised youth because to an extent, it was society that was failing the youth. Evidence throughout Africa was that the youth wanted to be involved in policies that concerned them. The perceptions of 14 – 22 year olds was gloomy in 2002, but had improved in 2004. These expectations had to be realised or else long-term unemployment would erode the psychological fibre of the youth.

Distances and costs predominantly affected black youths. Networks were the most common method of finding employment, but these were often poor for the black youth. A possible policy intervention facilitating the dissemination of information about job opportunities and the promotion of awareness of programmes would be welcome. Work experience affected employability at all age levels. Whites made a smoother transition from school to work than blacks and coloureds. The non-studying unemployed youth were the most marginalised and literacy experts highlighted the importance of language and numeracy.

The role of aggregated demand was the chief influence on youth unemployment. The implications were that skills-training initiatives would not immediately succeed and may gain a stigma of failure. But it was a complex issue in that increased business activity depended on appropriately skilled personnel. Besides the poor performance of primary school pupils, the matric exemption passes were a concern. In 2002, 69% of the pupils passed matric, but only 25% did do with matric endorsement. Official estimates were that 15 000 teachers per year were lost to the profession, compared to only 5 000 who entered.

The FET colleges were the most important providers of intermediate level technical and vocational skills but they were under-resourced and were not situated where they were most needed. Thus far, only 34% of their graduates in commerce and engineering found employment. Apprenticeships had declined and this impacted on the youth as they made up the bulk of the unemployed. A combination of work experience and vocational training produced the best results. Work programmes produced a deadweight effect and vocational programmes did not facilitate access to employers and job specific training. Closely targeted programmes were better designed to meet the needs of a specific group. Their implementation had to be at the local level so that they were more relevant to local needs. However, as standards may vary, monitoring had to occur at national level.

The youth had to be believed in, and their ideas developed. Mentors had to be allocated with successful entrepreneurs used as role models. Challenges they faced were access to capital, a poor attitude and interference from significant others as well as cultural expectations and conventions.


The meeting was adjourned.


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