Budget 2007: Comments by Business and Unions

FINANCE PORTFOLIO AND JOINT BUDGET COMMITTEES
02 March 2007
BUDGET 2007: COMMENTS BY BUSINESS AND UNIONS

Chairpersons: Mr N Nene (ANC)

Documents handed out:
Business Unity South Africa and Chambers of Commerce & Industry submission: Part1 and Part2
Federation of Unions of South Africa (FEDUSA) submission

SUMMARY
Business Unity South Africa and the Chambers of Commerce and Industry said that the 2007/08 budget was another example of Government's outstanding fiscal management. BUSA believed that the broad decisions in the budget embodied a realistic balance between the need to build on the already sound macro-economic foundation for growth, as well as displaying a high degree of fiscal responsibility.

Capacity constraints in key infrastructure and critical inputs was constraining investment and regulatory red tape continued to undermine investment. Skills shortages and crime presented more challenges.

The tax to Gross Domestic Product ratio had increased significantly from 22.8% in 1994/5 to 27.9 in 2006/7 and they urged that this level be brought closer to the unofficial target of 25% of Gross Domestic Product over time. The split between direct and indirect taxation was another macro issue that needed continual attention.

The Federation of Unions of South Africa said that the Government had to consider reviewing its policy of silent diplomacy in Zimbabwe as currently about 1.2 million Zimbabweans had employment in South Africa. In terms of the macro-economic perspective, if the focus of fiscal policy was too much on the redistributive side, this could hamper economic growth creation, while neglect of the redistribution aspect, could also have serious consequences.

FEDUSA fully supported the high priority given by Government to Housing over the next Medium Term Expenditure Framework period Although much had already being achieved, more houses had to be built and the rate of delivery was still slow. Low cost housing access was still difficult for the poorest and at least 500 000 houses had to be built in a single year. They were pleased to note that police, prisons and justice would receive relatively high increases in their allocation. However the fight against crime would not be easy. Recognition by Government that crime was out of control and drastic measures were neded, would be the first bold step.

MINUTES
Business Unity South Africa (BUSA) and Chambers of Commerce & Industry (CHAMSA) Presentation
Mr Roger Baxter, the Chairman of the BUSA Committee on Economic Policy, said that the 2007/08 budget was another example of Government's outstanding fiscal management. In it there were complementary fiscal and monetary policies, combined with trade liberalisation, allowing for the gradual re-entry of South Africa back into the world economy. This had created a sound macro-economic platform for growth.

The budget provided for a further progressive strengthening of investment, economic growth, employment growth, transformation and poverty alleviation. BUSA believed that the broad decisions in the budget embodied a realistic balance between the need to build on the already sound macro-economic foundation for growth, as well as displaying a high degree of fiscal responsibility.

The budget built on the key themes of reducing poverty and inequality and strengthening delivery by Government. It also strove to lower the costs of doing business, developing and promoting human capital, tackling bottlenecks (regulatory and infrastructural), which impeded investment and tackling crime.

Some of the trends in fixed investment and economic growth were that growth had gone from 5.4% over the past decade to 12.5% in 2006. Economic growth was 5% in 2006 and the economic growth rate was tracking the global rate. However, growth tended to be driven by the demand side (non-tradable sector), with the supply side remaining fairly muted. With gross domestic expenditure growing faster than gross domestic product (GDP), a large amount was being imported which was manifesting in a growing current account deficit.

Nevertheless, BUSA agreed that the micro-economic challenges were being confronted by the budget. These included the scarcity of local savings and the reliance on short-term capital flows to fund the current account deficit (by having a fiscal surplus, the elimination of retirement funds tax, and plans for a social security system) and the need to raise investment to 1'2.5% of GDP to sustain a high growth rate (by eliminating the Secondary Tax on Companies (STC), Government’s capital expenditure plans, greater macro stability).

Capacity constraints in key infrastructure and critical inputs were constraining investment and regulatory red tape continued to undermine investment. Skills shortages and crime presented more challenges.

The success of the Accelerated and Shared Growth Initiative (AsgiSA) and growth and development challenges outlined in the budget rested heavily on the continued co-operation between business, government and labour. BUSA was committed to doubling their efforts on engaging with government and labour on ASGISA as they tried to build on the solid platform for growth transformation, employment and poverty reduction.

Adv Abri Meiring, the BUSA legal advisor, then went through some of the taxation aspects of the budget. In terms of macro-taxation, BUSA noted that the tax to GDP ratio had increased significantly from 22.8% in 1994/5 to 27.9 in 2006/7 and urged that this level be brought closer to the unofficial target of 25% of GDP over time. The split between direct and indirect taxation was another macro issue that needed continual attention. Currently direct taxation made up about 57% of total tax revenue, with a particularly strong contribution from corporate tax this year. A tax system stood or fell by its ability to effectively administer and collect taxes due. SARS had a proud track record but there were significant challenges ahead.

The relative competitiveness of the overall corporate tax burden remained a key issue for foreign direct investment. BUSA noted the significant broadening of the corporate tax base in recent years and the notable narrowing of the gap between the headline and effective corporate income tax rates. The time has arrived for a robust reassessment of the headline corporate tax rate. The philosophy of a broader base leading to a lower rate was a sound one.

The lowering of the Secondary Tax on Companies (STC) rate from 12.5% to 10% and the resulting R 2 billion tax relief would further help to stimulate economic growth. The second phase of replacing STC with a withholding tax on dividends would bring South Africa in line with the international norm. This would remove a competitive disadvantage from a foreign direct investor perspective.

While this year there had not been any further relief for small businesses to build on previous years, it was understood that the small business tax amnesty was still work in progress. BUSA looked forward to further developments in this vital area of the economy. It was particularly important to reduce the compliance burden for small businesses to promote entrepreneurship.

BUSA welcomed the increase in the deductible contributions made by individuals and companies to Public Benefit Organisations (PBOs), and the doubling of the tax-free income threshold for the trading activities of PBOs. The role of PBOs was important in a developmental state.

It also welcomed the holistic treatment of social security savings and retirement reform. As a first concrete step, the abolition of the tax on retirement funds showed a firm commitment to create a more savings-friendly environment. However, the new social security dispensation would present enormous challenges, particularly on the administrative front.

Mr Jerry Vilakazi, Chief Executive Officer: BUSA, then made some concluding remarks.

Discussion
Mr B Mnguni (ANC) asked for two or three examples of regulatory constraints that hampered small businesses.

Adv Meiring replied that the issues small businesses worried about were, amongst others, compliance with UIF regulations, VAT, labour laws, municipal regulations and SARS tax administration.

Mr I Davidson (DA) asked how tax rates could stimulate the growth rate. What should the rate be and how did they decide that a rate of 25% was ideal?

Adv Meiring replied that the Minister indicated that he would want to see proof that a reduction of the tax rate led to immediate growth on the supply side. BUSA was busy looking for this evidence. Government had stated that 25% was a good figure to aim for therefore business was worried that it was now near the 28% mark. Ensuring the credibility of the system was the objective. Mr Baxter added that the 25% ratio was equated with growth rates of around 5%. A good ratio sustained a good growth rate.

Mr A Moloto (ANC) asked for a comment on the relaxation of exchange controls. What suggestions did BUSA have for local manufacturers and industry to help them reduce the import of capital goods, which adversely affected the current account?

Mr Baxter replied that with exchange controls, the important factors to consider included the building up of reserves and trying to attract foreign direct investment, and the goal should be trying to abolish them altogether. Many local manufacturers had underestimated the current demand, especially in electricity. A large part of the industry was hampered in the 1970s when there was no real reason to stay in the country so there was a lot of disinvestment. Government now had a role to play in encouraging local production.

Mr J Stevens (DA) asked how the budget could encourage more equality in the distribution of wealth. He really did not see this happening.

Mr Baxter replied that the country’s Gini co-efficient had fallen and the best way to improve it was by giving people meaningful employment to reduce poverty.

The Federation of Unions of South Africa (FEDUSA) presentation
Mr Jurie Van Tonder, an economist, said that there were certain issues affecting the budget that they wanted government to look at. Workers within South Africa should be protected in terms of immigration legislation and regulations. They needed greater effort by the South African government to indicate the numbers and types of skills of illegal immigrants that competed with South Africans for jobs.

FEDUSA did not want its members to work in a labour market where people were forced to accept lower wages due to desperate poverty. Government also had to consider reviewing its policy of silent diplomacy in Zimbabwe as it was estimated that currently about 1.2 million Zimbabweans had employment in South Africa. They also called on government to exercise caution on proposed bilateral trade agreements. Trade agreements should enhance the creation of local jobs and not result in massive job shedding.

In terms of the macro-economic perspective, if the focus of fiscal policy was too much on the redistributive side, this could hamper economic growth creation. While the neglect of the redistribution aspect, could also have serious consequences. FEDUSA believed that all parties had to recognise key policy directions aimed at creating growth and employment. The rate of job creation had been bolstered by the implementation of ASGISA. However the progress made is slow and the challenge in the policy lay with the process of implementation and the state's capacity to deliver as organ of delivery.

In terms of the macro-economic projections, FEDUSA was concerned that the high consumption expenditure, together with the higher level of investment by both government and the private sector, would result in a large current account deficit of our balance of payments. The level of the current account affected the exchange rate.

The relatively large current account was financed by capital inflows. Although this was normal and acceptable for developing countries, government should always be aware that the largest part of that capital inflow consisted of short-term investments. Although developing countries were no longer regarded to be all alike for investment purposes, the risk remained real that these funds may be withdrawn at short notice. The only viable policy options to avoid this risk, was to increase exports and to attract longer-term real investment. The Minister in this year's budget admitted this.

The relative large increases in the tax revenue made it possible for government to increase its expenditure from under 26% in 2004/05 to almost 28% in 2008/09. FEDUSA was not convinced that this high tax burden with the resultant budget surplus was the appropriate fiscal stance at this stage of South Africa's development. Although a budget surplus contributed to savings and lower debt service cost, a somewhat higher budget deficit and a lower tax burden could also affect the economy favorably. Lower tax rates would have favorable affects on the ability and propensity to work and save, and therefore on the economic growth. Comparing the two options could only be verified econometrically, and government was urged to undertake this exercise.

FEDUSA noted that public spending had increased by over 9.2% in real terms over the past three years and that it would increase by a further 7.7% over the next three years. Total infrastructure expenditure would increase by R415. 8 billion over the medium term. Those were large amounts, which together with private consumption and investment could put South Africa on the road to 6% growth.

FEDUSA had been urging government to increase its infrastructure expenditure for many years. It was noted with satisfaction that many infrastructure projects would be targeted to create jobs. The type of infrastructure projects that created jobs and opportunities were roads, housing, dams and forest plantations. Government was urged to implement these projects with speed and to involve as many workers as possible. A pre-requisite was that these infrastructure projects must also bring longer-term opportunities to get goods and services to markets, children to school and workers to places of study or work.

Ms Riefdah Ajam, the FEDUSA Parliamentary Administrator, added that FEDUSA fully supported the high priority given to housing over the next MTEF period Although much had already being achieved, more houses had to be built and the rate of delivery was still slow. Low cost housing access was still difficult for the poorest and at least 500 000 houses needed to be built in a single year. There could not be a repetition of the N2 Gateway housing project in 2006.

FEDUSA supported government's increased infrastructure spending as it not only created jobs but also brought long-term opportunities. The envisaged Public Service reform and the creation of a single public service should be a fully negotiated process. A dictated process by government would result in the possible collapse of service delivery. Service delivery in 2010 was dependent on public service and local government co-operation.

Currently the government agenda was driven by ASGISA, but education constraints and skills shortages needed to be removed and the focus should be directed towards accelerated policy and programme implementation. Increased policy directives to address the backlogs in education and skills advancement were required. The backlog between the “haves” and “have nots” was getting wider and the nation needed to be educated. The Sector Education and Training Authorities (SETAs) poor service delivery should be addressed and intervention by Cabinet on this policy direction was a matter of priority. The current skills development strategy did not produce enough people with the required skills to ensure the growth of the economy.

Health spending had been too low over the last two years. This had been rectified this financial year, with an additional provision of R4.6 billion to be phased in over the next three years. This would be used to step up the salaries and also to increase the number of health workers. However, in light of the very low life expectancy of South Africans, the lack of skilled medical personnel and the HIV and TB prevalence, FEDUSA suggested that serious government intervention was required. There was also an indication that the Department lacked competence and planning efficiency to deal with the economic impact of health issues.

They were pleased to note that police, prisons and justice would receive relatively high increases in their allocation. However the fight against crime would not be easy. Recognition by government that crime was out of control and that drastic measures were needed would be the first bold step. The recent spate of hijackings and violence the vulnerable needed a revised policy direction to deal with crime.

In terms of governance and administration, effective public sector administration and infrastructure were pre-requisites for faster economic growth and employment creation. FEDUSA wanted to commend government on the steps announced in this year's budget to improve public service delivery and capacity constraints in local government and home affairs.

With regards to the tax proposals, the tax relief to individuals was less than in past years. As promised by the Minister in his Medium Term Budget Policy Statement last year, the Minister used the surplus revenue to increase expenditure, especially in infrastructure, to provide tax relief and to improve savings. FEDUSA agreed with this approach.

FEDUSA would also support measures to stimulate savings. An important way to stimulate savings was to lower the maximum marginal income tax rate on individuals from the current 40% to a rate nearer to the company tax rate. With the phasing out of Secondary Tax on Companies, company tax effectively came down to about 29%. The large difference between company and personal income tax rates created an anomaly where funds could move between individuals companies.

With the extra taxes on vehicles and medical aids, the Minister had to give workers a better chance to save for retirement. In most countries, governments fund pensions, but in South Africa, government taxed retirement funds and workers were forced to save their own hard earned money. Government could not tax all of the social benefits of workers as these were included in the tax rate or were actually tax deductible in other countries.

The intention of government to introduce a social security tax for basic retirement savings, death, disability and unemployment benefits was welcomed. The system should however be the subject of an open and inclusive process involving all sectors of the society. The average developing level of poverty seemed to be deteriorating. Various studies indicated that almost 30% of the population was living in poverty. The impact of crime was increasing the number of orphans dependant on social assistance in one form or another on a daily basis.

Discussion
Ms B Dambuza (ANC) asked what exactly was wrong with the N2 Gateway Project.

Ms Ajam replied that there had been huge delays in the project caused by local departments. More consultation was needed among all the parties to rectify this.

Mr Y Bhamjee (ANC) said that it unrealistic for FEDUSA to want 500 000 houses built in a year. Did they have a plan for how this could be achieved?

Mr Moloto asked what FEDUSA did to ensure that the trustees of their pension funds were well trained.

Ms Ajam replied that training of their trustees was ongoing, and they were having workshops with the National Treasury to keep up to date with what was expected of them. They also had links with SETAs and learnerships had been established.

Ms Dambuza said that it seemed as though FEDUSA did not have much information about some of the concerns the Committee raised, and not all of the Committee’s questions were answered. Also, their presentation did not give the full picture of what was really going on.

The meeting was adjourned.