Budget 2006 hearings: IDASA; FEDUSA; Business Unity South Africa

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Finance Standing Committee

09 March 2006
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Meeting report

FINANCE PORTFOLIO AND SELECT COMITTEES
10 March 2006
BUDGET 2006 HEARINGS: IDASA; FEDUSA; BUSINESS UNITY SOUTH AFRICA

Chairpersons:
Mr N Nene (ANC) and Mr B Mkhaliphi (ANC, Mpumalanga)

Documents handed out
Budget 2006: Deficits and Resources — IDASA (B8 – 06)
FEDUSA Submission on the 2006 Budget (B7 – 06)
BUSA/SACOB Taxation Committee/CHAMSA: 2006/07 Budget – Input to the Parliamentary Portfolio and Select Committees on Finance and the Joint Budget Committee (B6B – 06)
BUSA input to Parliament on the 2006/07 National Budget (B6A – 06)
[please email
docs@pmg.org.za for documents]

SUMMARY
Members heard submissions on the 2006 Budget from the Institute for a Democratic Alternative for South Africa, the Federation of Unions of South Africa (FEDUSA) and a delegation lead by Business Unity South Africa. IDASAs submission centred on the extent to which the proposed budget deficits were too austere, given the developmental needs of the country. FEDUSA’s submission focussed on tax relief for workers. Both FEDUSA and Business Unity South Africa called for the complete abolition of taxes on retirement funds. In its presentation, Business Unity called for a critical review of the corporate tax structure and greater emphasis on public-private partnerships in government’s capital expenditure programme.

MINUTES
Submission by Institute for a Democratic Alternative for South Africa (IDASA)
Mr L Verwey (Researcher: IDASA) pointed out that in the previous two years, smaller deficits had been the result of larger than expected growth; that administrative gains in tax collection had taken place; and that debt costs had been lower than was budgeted for. Fiscal prudence and short-term flexibility were further hallmarks. Generally, revenue gains enabled real spending increases whilst proposing fairly austere deficits.

Though IDASA saw the 2006 Budget as a successful ‘middle-ground’ budget, it warned against the diminished credibility of the governments budget forecasting. The points were also made that good fiscal governance needed close alignment between the voted budget and actual spending, and that funds were not systematically integrated into the budget process. While stating that the smaller deficits proposed in the new Medium Term Expenditure Framework (MTEF) needed to be obtained, IDASA highlighted the ongoing question of the distinction between due prudence and excessive caution in planning.

Challenges in budgeting for physical resources included the capacity to identify end efficiently implement public investment projects, getting the balance right between the provision of economic and social infrastructure and labour absorption and the multiplier effects of infrastructure projects. There had been successes in that poverty and inequality measures had been significantly improved due to increased access to basic services, while social spending had also been greatly improved.

Mr Verwey stated that fiscal conservatism was currently the norm. He deemed 2.5% of gross domestic product (GDP) to be an appropriate deficit benchmark, but conceded that even a 3.1% deficit — as it had been in the last two fiscal years — seemed acceptable, as that was what was accepted in the 2006 Budget Proposal. Regardless of whether it was due to revenue overruns, Mr Verwey felt that the deficit outcome was more austere than it needed to be. Though he viewed comparisons with developed economies as inappropriate, he pointed out that even within the context of the European Union a 3% deficit was seen as prudent.

Discussion
Mr N Nene asked for an explanation of the statement contained in the IDASA submission that increased growth rates may halve the absolute number of unemployed, but was unlikely to halve the unemployment rate in the medium-term.

Mr Verwey stated that in order to halve the employment rate, growth needed to happen at a substantially faster rate to compensate for new entrants into the labour market. There were three measures by which a budget may be judged as conservative or more expansionary: whether there was a real increase in spending, whether there was an increase in the share of public spending as a percentage of total spending and total spending as a percentage of GDP. He told the Committees that against these measures, the 2006 Budget may rightly be described as expansionary, and it may be for this reason that the relatively austere achieved deficit for 2005/06 (0.5 percent) and the proposed deficits (1.5 percent and less for 2006/07 onwards) drew so little scrutiny.

Submission by Federation of Unions of South Africa (FEDUSA)
Ms G Humphries (FEDUSA Parliamentary Office) stated that, while noting the many advances made by the South African economy, the 2005 FEDUSA congress had identified high unemployment as the biggest social evil in South Africa. To this end, FEDUSA advocated infrastructure spending targeted at job creation. While agreeing with the spending budgeted for 2006/07, FEDUSA felt that more generous tax cuts were now in order. FEDUSA estimated revenue overrun from workers’ taxes and VAT of R9.7 billion and R8.7 billion respectively.

FEDUSA pointed out that the increased threshold for deductibility of medical expenses and the selective treatment of medical treatments paid for by employers as tax-free benefits meant a reduction in employers’ contributions to medical schemes, leaving employees with greater taxable salaries. Given the state of public healthcare, FEDUSA suggested medical scheme allowances of up to R700 per family member, or to give much greater tax relief. Similarly, given the state of public transport in the country, FEDUSA thought the increase in car allowance tax unwise.

FEDUSA believed that personal income tax could be cut by up to R18 billion or more, since the resulting loss in revenue would be partially offset by increased revenue from VAT and excise duties. It further suggested increasing raising tax rebates from R6300 to R7560 for all workers and from R10 800 to R12 600 for people over 65. Mrs Humphries pointed out that since tax on workers’ retirement funds contributed only R5 billion to revenue, there was room to do away with it completely. FEDUSA further supported tax-free retrenchment payouts, lowering tax rates for employers who created sustainable long-term jobs, lower taxes for small businesses and lowering domestic real interest rates.

Discussion
Mr J Bici (UDM) asked what FEDUSA had meant when it said that education transfers should be used more effectively.

Ms Humphries explained that inefficiency in education transfers manifested in the late arrival of books and furniture at school, and the regular confusion that reigned at the beginning and end of every year. She ascribed it to a lack of efficient management systems.

Mr S Asiya (ANC) asked for specific examples.

Ms Humphries mentioned Rosewood Primary in Bonteheuwel.

Mr I Davidson (DA) asked Ms Humphries to explain FEDUSA’s position on the view that excessive tax breaks for individuals could exacerbate South Africa’s low savings rate and fuel the consumption-led nature of the economy. Mr Davidson expressed his support for strategies that reduce the cost of capital and gave tax credits to businesses that used labour intensive methods. He asked Ms Humphries how FEDUSA envisaged the utilisation of such tax credits if they were implemented.

Ms Humphries stated that FEDUSA would like to see workers pay less tax. She stated that reducing tax on retirement funds was one way in which this could be done. She affirmed FEDUSAs support for the promotion of labour intensive projects and mentioned Federation’s involvement with government in bridge building projects in Limpopo and Mpumalanga. She remarked on FEDUSAs participation in the Growth and Development Summit where it put the labour intensive bias at the centre of growth strategy formulation. Ms Humphries stated that the utilisation of tax credits awarded to businesses for using labour intensive methods needed to be prioritised and broader social dialogue should be reviewed prior to the Budget and be discussed with Treasury.

Mr B Mnguni (ANC) asked Ms Humphries to explain FEDUSA’s position on the view that revenue overruns should be used to improve public facilities and services rather than cutting taxes.

Ms Humphries replied that FEDUSA believed that a portion of the revenue overruns needed to be returned to workers in the form of some of the tax relief suggestions forwarded in its submission.

Mr S Dithebe (ANC) was not convinced by Ms Humphries’ assertion that the majority of employees utilised private transport and would therefore benefit from decreased tax on car allowances. He questioned the wisdom of favouring such tax cuts above a radical revamp of the public transport system, especially given current broader public opinion trends in this regard.

Ms Humphries explained that private transport included minibus taxis. She stated that while FEDUSA was in favour of taxes penalties on luxury vehicles, there were many workers that were affected adversely by taxes on car allowances and the matter needed to be addressed. Train and bus services were unsafe and unreliable. The specifics thereof were addressed by FEDUSA in bi-laterals with, amongst other, Transnet.

Mr Dithebe stated that both the taxi recapitalisation programme and the tax amnesties, which began with the taxis, meant that minibus taxis could not be separated from public transport for individual income tax purposes.

Ms Humphries stated that FEDUSA was part of the taxi recapitalisation programme. She explained that there were people who used their private vehicles as taxis and because workers were already taxed to quite a severe extent, these issues needed to be brought to the table.

Mr T Ralane (ANC, Free State) stated that trends suggested that the boom in large-scale private construction projects meant decreased interest in government contracts by construction companies. He asked Ms Humphries to explain FEDUSA’s view in this regard. He also made mention of the supply-side constraints that were holding back infrastructure development in, especially, the Limpopo and the extra strain put on existing infrastructure by the expanding service demands of growth-driven developments. Finally, Mr Ralane asked what role FEDUSA was playing in assisting informally trained artisans to receive accreditation for their skills and to acquire new skills.

Mr Humphries conceded that she did not have specific knowledge about supply-side constraints in the building industry, but ventured that material shortages should be addressed with the aim of job creation in mind. She also stated that FEDUSAs Secretary-General served as the chairperson for the National Skills Authority and the Federation made direct inputs into skills strategies in South Africa.

In closing the discussion session with FEDUSA, Mr Nene mentioned that COSATU had also been invited, but had declined on account of the fact that the Budget had already been tabled. FEDUSA also mentioned their desire to be involved earlier on in the actual formulation of the budget.

Submission by Business Unity South Africa / South African Chamber of Business Taxation Committee / Chamber Movement of South Africa
Prof R Parsons (Economic Consultant) stated that improved investment from the private sector, projects in preparation for the 2010 Soccer World Cup and the R372 billion government investment programme covering the current MTEF period signalled increased opportunity for economic growth and job creation. BUSA did harbour some concern over government’s ability to deliver on its capital expenditure programmes given that of these programmes, 22%had been allocated to municipalities, and a mere 3.3% to public-private partnerships (PPPs).

Adv A Meiring (Tax Consultant) pointed out that business believed that the time had come for a critical evaluation of the appropriateness of secondary tax on companies (STC). Business also felt that relief measures on the tax treatment / compliance obligations imposed on small businesses under the rules applicable to Labour Brokers and Personal Services Companies would lighten a real burden on small businesses wishing to operate in the service sector. The tax amnesty for small businesses was welcomed and it was suggested that it should be extended to everyone who was currently operating outside of the tax net. Business welcomed the reduction of tax on retirement funds, but would argue for its complete abolition if given the chance.

Busa, in particular, expressed its support for the Mid Term Budget Policy Statement numbers but encouraged government to keep revenue as a percentage of GDP as close to 25% as possible.

Discussion
Mr K Moloto (ANC) was concerned that the tax base would be significantly stripped should business’ requests for a 25% company tax rate, the abolition of STC and the extension of research and development (R&D) incentives to market research be granted in addition to the accelerated depreciation allowance that was currently in place. Mr Moloto mentioned that with the current measures in place, some businesses were already said to enjoy an effective tax rate of only 15%.

Adv Meiring stated that business was not calling for the abolition of the STC, but want a review thereof. The BUSA-lead delegation also did not subscribe to the view that because some other countries had a corporate tax rate of 25% and South Africa did not, there was necessarily a problem. Business’ disappointment with the fact that there was no reduction in the corporate tax rate in the 2006 Budget stemmed from the expectation that the one percentage point reduction in 2005 was the incremental first step towards a more competitive rate. The issue was one of clarity, competitiveness, certainty and predictability in terms of corporate taxation and tax structures.

Mr Moloto asked the BUSA-lead delegation for its view on the management of external shocks or capital outflows in the absence of extensive exchange control measures.

Prof Parsons explained that BUSA would like to see the foreign exchange market progressively normalised. The first important element included sufficient reserve levels to reduce the volatility of the currency. While South Africa’s reserves were being steadily built, it still fell short of the global norm of being equal in value to half of the country’s annual imports. The second element was exchange control. Prof Parsons stated that circumstances had been improving to the extent that gate-keeping could be kept to a minimum.

Mr M Johnson (ANC) asked whether the country was on target with its Millennium Development Goals from business’ point of view. Mr Johnson also asked for further elaboration on the diversification of capital expenditure allocation, vis-à-vis an increased allocation to PPPs. Mr Johnson finally asked for business’ views on getting, especially, small businesses who were operating outside of the tax net on board.

Prof Parsons stated that at the current growth rate South Africa would not be able to reach the Millennium Development Goals. The necessary instrument of the Accelerated Shared Growth Initiative for South Africa (ASGI-SA) was meant to address this situation.

Adv Meiring said that business was encouraged by the tax amnesty for small businesses operating outside of the tax net and termed it a significant base-broadening exercise. A memorandum of understanding had been signed by CHAMSA and the Small Enterprise Development Agency (SEDA) to provide on the ground structures to assist small businesses in their affairs, which included tax matters.

Ms Mashego (ANC) asked for an indication of the level of involvement that business would like to have enjoyed in government’s capital expenditure programme, given that government had a clear agenda involving the specific use of parastatals as vehicles of economic growth.

Mr Dithebe (ANC) noted that business seemed to be disputing the R7 billion figure which the saving as a result of the abolition of Regional Services Council (RSC) levies was estimated at. He asked that this be explained. Mr Dithebe also asked whether business deemed it correct to compare South Africa’s corporate tax rates with that of developing countries’.

Mr D Kruger (BUSA Tax Advisor) explained that business got income tax deductions for the payment of RSC levies equal to 29 percent of the levies paid. The R7 billion was therefore not an absolute saving to business. The effective figure was closer to R5 billion. Mr Kruger further explained that in countries where company tax was lower than ours, their personal income tax was in all likelihood higher. He stated that it was a controversial point, but that essentially it was people who paid tax and not companies.

Ms B Dambuza (ANC) asked for an indication of the areas in which business would like to become involved insofar as the capital expenditure programme was involved. She also asked what developmental role BUSA was playing at the local government level.

Mr Jerry Vilakazi (BUSA CEO) stated that BUSA welcomed initiatives from government such as Project Consolidate and other interventions that sought to build capacity, particularly at local government level. He expressed BUSA’s awareness of the urgency with which government’s capital expenditure programme needed to be executed. He stated that business would like to be involved in the building of capacity, as well as in the determination of the implementation models of the various projects. Skills development was a particular area identified by the Deputy President. BUSA was involved in determining the skills demands that the various short-term and medium-term interventions would place on the country. Mr Vilakazi explained that BUSA was involved at local level through its CHAMSA affiliate.

The meeting was adjourned.

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