Medium Term Budget Policy Statement: public comments & submissions

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Finance Standing Committee

23 October 2008
Chairperson: Mr N M Nene
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Meeting Summary

The Committee was briefed by Sanlam, Standard Bank, The Efficient Group, the Federation of Unions of South Africa (FEDUSA) and Business Unity South Africa (BUSA). Economists from each of these institutions provided comment on the Medium Term Budget Policy Statement (MTBPS)

The Sanlam presentation focused on the international crisis' impact on the financial system and the real economy. The Committee was given a brief summary of events that led to the global economic crisis and its precursors. Various indicators were examined, including the movements in Organisation for Economic Cooperation and Development, leading indicators, the current account, inflow of capital, the Rand seen against major currencies, Consumer Price Index inflation, household consumption, the yield on long term bonds and the government debt ratio. The conclusion reached was that a deep global recession with a reduction in international trade, and a prolonged period of much slower growth, were the current scenario for South Africa. There would be a global economic adjustment in the medium-term. The MTBPS was based on a more optimistic scenario however, the evidence suggests that the risk was to the downside.

Standard Bank followed much the same trend in its analysis of forecast risk, the collateral damage caused by the global economic crisis, resources friction, sectoral trends, the State's finances, South Africa's international ratings and fragile underlying fiscal health. Its economists reported that the balance of the problem resided in downside risk and the resulting slump would crunch South Africa's capacity to generate earnings. The crunch was likely to be protracted. It was a purging process the world needed to go through in order to correct for the market failures.

The Efficient Group presented a simplified picture of the operation of the economy as an introduction to an analysis of the way public finance had been conducted in South Africa in recent years. Its economists commented on the unintended consequences of keeping bankrupt companies alive and felt that government had many misplaced targets. Developments in key indicators were tracked and fiscal policy was examined according to revenue and expenditure trends.  “Revenue and Expenditure “Do's and Don’ts” were outlined. Redistributive tax policy was analysed. Certain key issues that had not been discussed in the 2008 MTBPS Speech were set out, and comment was given on social grant spending, State debt and interest payments, the budget balance, total State debt and real interest costs on State debt. The Efficient Group was of the opinion that no country could spend itself rich and therefore, it would be advisable to spend public funds more wisely.

Members solicited the views of the presenters on the inflation targeting stance as well as what alternatives there were to the South African Reserve Bank's actions. The dominance of South Africa's trade with the G7 countries was noted and a member wondered how South Africa could protect itself against losses in the global economic crisis. They enquired as to the opportunities for South Africa in the current environment and what would currently be a competitive exchange rate. The coincidence of the Rand's dramatic depreciation and the MTBPS speech of20 October 2008) was queried, as was the feasibility of achieving the Millennium Development Goals. Mr Dawie Roodt's comments on social grant policy elicited much attention and he was asked if he was suggesting a change to social policy and if he thought the grants did not contribute to poverty alleviation. The weighting used in determining the referenced ratings was queried. The presenters were asked to comment on whether the MTBPS was too optimistic.

The Federation of Unions of South Africa (FEDUSA) was supportive of the “business as usual” approach of the National Treasury in response to the slower global economic developments. They examined the economic assumptions for the 2008 MTBPS, the macroeconomic projections over the MTEF, economic policy challenges, specific budget allocations in the three-year spending priorities, budget prioritisation and their views on relevant tabled legislation.

Business Unity South Africa broadly supported the 2008 MTBPS and believed that prudent fiscal and monetary policy decisions had provided a solid foundation for South Africa to “weather the storm”.  It made particular mention of the structural budget balance and welcomed the reassurance given on the stability of the banking and financial sectors. BUSA accepted the downward revision of Gross Domestic Product forecasts and were encouraged by the allocations to primary health care and the stimulation at small enterprise level. It pointed out the slowdown in economic growth as an opportunity to make some adjustments to the pattern of economic development, and commented on the importance of human capital investment, the provision of financial resources and the supply side stimulation needed to balance to an otherwise demand driven economy.

The commentary on the tax policy aspects of the MTBPS 2008 covered macro tax policy issues under the headings of tax to GDP ratio, tax reform and tax competitiveness. The changes to the Revenue Laws, particularly to capital gains tax and secondary tax on companies would give rise to volatility, due to the cyclical nature of corporate tax in South Africa. BUSA called for a period of consolidation. Foreign Direct Investment tax policy, personal income tax and additional tax measures to encourage personal savings were all reviewed. The consistent stance on the list of items zero rated for VAT was welcomed. It commended the adjustments to social grants. Proposals covered the extension of the effective date for tax payments, the increase in the electricity levy and the tax incentives for the Industrial Policy Projects.

Members asked if the reforms made to competition policy had managed to unlock hindrances to foreign trade. They then requested comment on the wage subsidy proposed by the Harvard Report, what government could do to make South Africa attractive to investors, a depositor's insurance scheme and a review of the inflation target band. FEDUSA was asked what the trade unions were doing to assist the economy through the crisis and whether they were encouraging their members to be more productive.

Meeting report

Medium Term Budget Policy Statement (MTBPS): Public submissions
The Chairperson noted that the Committee had not initially intended to have deliberations on the Medium Term Budget Policy Statement (MTBPS) but had conceded to this meeting, as a chance to engage with the MTBPS, on the insistence of the Joint Budget Committee. He invited the economists representing various institutions to give their comment.

SANLAM (Jac Laubscher): The 2008 MTBPS: An exercise in the art of the possible
Mr Jac Laubscher, Group Economist, Sanlam, presented a document, entitled, The 2008 MTBPS: An exercise in the art of the possible, on behalf of Sanlam. He commented on the failure of the Lehman Brothers as the beginning of the fallout of the global economic crisis. The point at which the financial system would be stabilised was a systematic problem and a systematic solution needed to be put into place. There were tentative signs of stabilisation, which could be seen in the inter-bank lending market, now slowly starting to unfreeze. It was clear that the system needed to be reformed but normalisation would take some time. He cautioned against “throwing out the baby with the bath water” and urged Members to remember that the underlying cause was human failure. This could never be eliminated, as it was the failure of business people, regulators and politicians.

He quoted an article from the New York Times, dated 30 September 2008 and stated that the whole event could have been reasonably avoided. The world economy did not run into a brick wall unknowingly. This was a systematic banking crisis.

He said that the real economy impact would unfold next, and a recession was on its way. It was his opinion that this would be a long recession in terms of the financial adjustments but it was anybody's guess as to how deep the recession would go. Developed countries would experience a classical recession and the emerging market countries would experience a growth recession. There would be an international economic downturn. This view was echoed by the Organisation for  Economic Co-operation and Development' (OECD) leading growth indicator versus commodity prices. The current account, (seen as a percentage of Gross Domestic Product (GDP) , composition of current account, composition of capital inflow,  the actual inflow of capital and the position of the rand as against major currencies were also indicative of this downturn.

Mr Laubscher predicted that matters would worsen in the short term and it would be important for countries such as China to maintain high growth rates to support South African exports and support the current account deficit. The current account deficit posed a financing challenge. It was necessary to note that the trade account was not the current account. The two were often wrongly equated. There had recently been a big deterioration of the trade balance. The depreciation of the rand was likely to support exports by making them more profitable. The challenge here was how to balance them against net receipts and maintain the capital inflow to cover the current account deficit. Capital inflow had seen a big injection, with the Chinese buying into Standard Bank. The balance of payments item called “Other Investment” was very vague and posed a major risk similar to that of Unrecorded Transactions. It was difficult to see how an 8% current account deficit could be maintained in the current global economic crisis, the slowing inflow of capital and the pressure on the rand. South Africa was caught up in the global frenzy.

Standard and Poor's volatility index (VIX) was widely used as a gauge of risk aversion, and its recent performance against the rand had shown the general withdrawal from all risky assets, mainly in the emerging markets. Reuters reported that the global storm would affect all quarters. The finance sector did not know where the Rand would settle in relation to the inflationary risk, but there were the counterveiling forces of the declining food and fuel prices. The review of the Consumer Price Index (CPI) basket of goods weighting was set to reduce the inflation figure by 2%, but a weak rand still put pressure on inflation and the economy. The consensus had been reached in the previous week that inflation had peaked, but due to a volatile global market, there were now doubts about this. Inflation could remain at higher levels for longer than expected. The upshot for fiscal spending was that there might be a need to slow down the Infrastructure Development Programme, due to its need for foreign capital goods imports.

Household consumption was in recession, as was the comparative yield on South Africa's long-term bonds. The MTBPS tabled had two potential scenarios. Based on the latest forecasts, the macroeconomic projections were a bit optimistic. It was difficult to see how the current account deficit could be maintained when viewed from the perspective of the consolidated national government budget, the national budget tax revenue and the borrowing requirement. He felt that it was more likely that there would be a
deep global recession, a reduction in international trade and a prolonged period of much slower growth in South Africa. Real income and corporate profits being under pressure were the current scenario. There would only be a global economic adjustment in the um-term. The MTBPS was based on a more optimistic scenario, but the evidence suggested that the risk was to the downside.

Standard Bank (Goolam Balim): South Africa's Finances
Mr Goolam Balim, Chief Economist, Standard Bank, reported that the main theme of the Standard Bank presentation would be building with flexibility. There was enormous forecast risk both domestically and internationally in the financial markets as well as the real economy. The balance of the problem resided in downside risk. The collateral damage was set to morph into a powerful income and earnings crunch, which emanated from a profoundly protracted weakness and the resulting slump would crunch the capacity to generate earnings.

He commented on resources friction and sectoral trends with relation to revenue and employment risks. Standard Bank’s view was that State finances were credible and consistent. He added that this was the result of a journey of more than a decade that had  achieved stable public finances. The recent movements in South Africa's ratings by the ratings agencies Standard & and Fitch showed a favorable judgment, until recently, when ratings had started to decline. South Africa was going to have to reinvent its credibility and consistency to rehabilitate the ratings because its progression to an A rating had stopped, which would have resulted in lower financing costs. He examined the fragile underlying fiscal health. There had recently been a re-acceleration of public spending, which was way ahead of private sector spend. The multiplier thrust meant that investment would produce "the most bang for the public sector buck". He believed, in conclusion, that the crunch was likely to be protracted. It was a purging process the world needed to go through in order to correct the market failure.
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Efficient Group (Dawie Roodt): Fiscal Policy – The Folly & the Facts
Mr. Dawie Roodt, Chief Economist, Efficient Group, presented the submission of the Efficient Group on the 2008 MTBPS. He began by outlining a graphic example of the composition of the economy and its workings, highlighting the successive effects of investment, taxes, redistributed tax, imports and credit repayments on the overall consumption and earnings of a simplified economy. He then elaborated on some basic economic laws, with the main points being that money is not wealth, individuals always pay all taxes, people react to incentives and production and consumption always converge.

He detailed the unintended consequences of keeping bankrupt companies (like Denel and South African Airways) alive. He was of the opinion that government had many misplaced targets, related to the problems of unemployment, poverty and food prices. He believed that a proper response to these should be to concentrate on why there were too few entrepreneurs, wealth and food production.

The section on the “economy at a glance” tracked the developments in key indicators such as Gross Domestic Product (GDP), the current account (nominal and as a percentage of GDP), the rand/dollar exchange rate, the M3 money supply aggregate, the private sector credit extension (PSCE), the CPIX and the prime lending interest rate from 2006 to 2008.

He examined fiscal policy according to revenue and expenditure trends, fiscal revenue’s contribution to the fiscus as well as the 2008/09 revenue estimates. The key question that arose on this section was whether tax was crowding out savings, and this was illustrated by a comparison of the taxing of individuals, companies and VAT in South Africa.

He discussed decreasing company and personal income taxes as a “Revenue Do” and Zero-rating of more foodstuffs as “Revenue Don’t”.

He then examined fiscal expenditure was examined according to the expenditure trends from1980 – 2010, spending priorities and the 2008/09 expenditure estimates. His section on “Redistribution in Perspective” was aimed at analysing how redistributive tax policy had really affected low income households, relative to high income households. He reviewed past statements by the Minister of Finance in the 2008 MTBPS Speech and pointed out that certain key issues had not been discussed such as qualified audit opinions, education and social grants beneficiary numbers.

He discussed his “Expenditure Do’s & Don’ts” and commented on social grant spending, state debt and interest payments, the budget balance, total state debt and the real interest costs on state debt.  In conclusion, he stated that no country could spend itself rich and therefore, South Africa should rather spend more wisely.

Discussion
Mr K Moloto (ANC) referred to Mr Roodt's comments on the high inflation and the soft stance of the South African Reserve Bank (SARB). He commented that the European Central Bank had been missing its inflation target for the last eight years. The situation was similar with the Bank of England, and Turkey had even changed its target band in response to not being able to meet inflation targets. He asked if Mr Roodt was saying that the SARB should have increased interest rates more aggressively and what cost this would have for the economy.

Mr Roodt pointed out that if there was a comparison of the rate at which South Africa was  missing our inflation targets with that of other countries, South Africa’s rate was one of the highest. South Africa also had a comparatively high inflation target. The influence of high food and fuel prices had to be considered. Inflation was never an event but always a process. In his opinion, there was no short-term choice between inflation and economic growth. The criticism of the SARB's policy was a matter of degree. He felt that SARB had raised the repo rate by too much and had not started adjusting soon enough. They acted correctly overall, but the response could have been tighter.

Mr Moloto referred to Mr Balim's comments that decoupling could never work. The MTBPS data indicated that South Africa manufactured items were being exported predominantly to the G7 countries. He asked how South Africa could protect itself in the face of the current situation where this trade to the developed economy was going to be affected.

Mr Balim commented that the trade with the G7 countries amounted to about a third of South Africa exports and there was comparative weakness in export trade with the BRIC countries (Brazil, Russia, India and China). The question related to whether South Africa wanted to engage with the world or be insular. The general consensus was that South Africa had to have an open economy. Even though the emerging market countries would continue to grow faster, the emerging market was slowing up markedly, leading to inflationary risk. South Africa had to participate in the global economy in order to build up its defences. There had been a tendency by the SARB to build up buffer stocks in the form of reserves. The same logic had been applied on the part of the fiscus, which had seen the Treasury sustaining a surplus and contributing to national savings.

Dr D George (DA) agreed that the global economic crisis and its outcomes would be a process of creative destruction, and that there would be opportunities to emerge. He asked what the opportunities were for South Africa since it was not so firmly in the developed world.

Mr Roodt responded that in the last twenty years, the USA economy had driven the world economy by consuming massive amounts of everything. All the other countries in the world economy fed that consumption monster. As the USA was now in a downturn, the picture had altered. China could very well replace the consumption of the USA. This might be a saving grace for South Africa exports and investment, and was something South Africa could look into.

Mr B Mnguni (ANC) asked what the best way out would be, and what a competitive exchange rate would be.

Mr Roodt responded that the current exchange rate was now was very competitive in terms of the exports.

Mr M Mbili (ANC) remarked that in the past, the markets had responded favourably to the MTBPS announcement. The rand had dramatically depreciated after Tuesday's MTBPS speech. He wondered if something in the MTBPS could have triggered the rand's decline in value.

Mr Laubscher responded that there were other forces at play on the afternoon that the MTBPS speech was made, which were more important in pushing the rand down and which were not related to the MTBPS. It was important to note that (due to time differences) the USA markets only opened at 4pm South African time. The South African market usually weakened at that time because of the aggressive selling taking place on the New York Stock Exchange (NYSE). The only thing in the MTBPS that could possibly have contributed to the Rand depreciating was the comment on the widening of the current account deficit and the forecast that  it was unlikely to improve. This could have been a factor.

Mr Roodt agreed with Mr Laubscher's assessment of the reaction of the markets, and said that one contributing reason could have been the fiscal deficit forecast. Foreigners were generally taking money out of the markets and pumping those funds back into their own economies.

Mr Mbili asked about the Millennium Development Goals of halving unemployment at half its current rates by 2015. In the light of the global economic crisis, he asked how feasible that goal seemed now. He referred to the Alliance Summit and the fact that an ambitious plan had also arisen out of that, creating 5 million jobs). He requested some analysis of this.

Mr Laubscher responded that there was no plan yet on how to create the five million jobs. The problem was setting goals that were not feasible. The Growth, Employment and Redistrictuion Strategy (GEAR) was a good example of this. This created the impression of a failure when the reality was that the goal was unrealistic to begin with.

Mr Balim responded that the promise of halving unemployment and creating five million jobs was far-fetched. The reasoning behind the unlikelihood of the achievement of the goals was that the world trend was a return to oriented income growth

Mr G Schneemann (ANC) referred to Mr Roodt's comments on grants, noting his criticism that the grants were not necessarily proving helpful. He stated that if grants were removed, this would increase poverty, and he believed that such grants definitely played a role in sustaining people's lives. He asked Mr Roodt to clarify the statement.

Ms N Mokoto (ANC) asked if Mr Roodt was suggesting a change to social policy in South Africa. Studies had shown that social grants were effective. She asked if there was any suggested alternative to grants.

Mr Laubscher responded that there was research, from institutions such as the University of Pretoria, which indicated that grants had made a difference. He referred to some policies adopted at the ANC's Polokwane conference to the effect that the ANC did not want South Africa to be a welfare state, but would like to see people being able to escape from dependency on grants. The ways outlined to achieve this had been to improve the delivery of education, healthcare and infrastructure.

Mr Roodt commented that the grants had produced huge reductions in real poverty and he was very much in favour of the grant system, particularly the old age grants. However, he recounted his personal observations of the behaviour of some grant recipients, which brought him to the conclusion that some grants were not benefiting the intended recipients. He was in support of the child support grant but thought that there could be some other structure to ensure that the money was of direct benefit to the children. The grants had many unintended consequences such as abuse and creating disincentives for people to be productive.

As a counter to a comment made by Mr Roodt, Mr Balim expressed the opinion that South Africa was not poor, but rather the challenge was the redistribution of wealth, which was currently very disparate.

Mr Roodt responded that he thought Mr Balim was taking a snapshot of the situation.

Ms Mokoto pointed out that there were no clear comparisons with other countries as regards the ratings (Standard& Poor and Fitch) quoted by Mr Balim. She queried the weighting in the calculation of the ratings and wondered if these ratings were not perhaps speculative.

Mr Balim responded that the ratings were used by other countries to appraise South Africa for purposes of the extension of credit. The first question that was asked when foreigners considered whether to lend to South Africa was that of affordability. The second question related to the willingness to repay the debt. These ratings appraised the financial health of a country.

Ms J Fubbs (ANC) referred to the two scenarios of the MTBPS presented by Mr Laubscher and remarked that the inference was that the Minister of Finance was far too optimistic. Additionally, she noted the comments of public finance facing an under-delivery risk. She asked if the emerging markets would be under less pressure in the international crisis.

Mr Laubscher responded that this was not an inference, given the uncertainty of the forecasts. It was, however, probable that the advanced economies would experience a classical recession of negative growth rates, whereas the emerging markets would experience lower growth rates but still positive growth. The risk for South Africa was unfortunately on the downside. There was no leeway for a more optimistic budget. The current account deficit made it very easy to fall into a negative primary balance, leading to a case where South Africa would only be repaying interest on the deficit financing.

Federation of Unions of South Africa (FEDUSA) Submission
The Federation of Unions of South Africa (FEDUSA) submission on the 2008 MTBPS was presented by Ms Gretchen Humphries, Deputy General Secretary of FEDUSA. FEDUSA commended the Minister and Treasury on the concise policy statement and the estimates, which very clearly reflected both economic policy and budget priorities. The MTBPS 2008 brought some hope for the future, rather than immediate solutions to short term global problems. Considering that government faced serious challenges, FEDUSA was supportive of the “business as usual” approach of the National Treasury (NT) in response to pessimism that was expressed around the slower global economic development and the domestic electricity crisis. 

Ms Humphries examined the economic assumptions for the 2008 MTBPS as well as the macro economic projections over the Medium Term Expenditure Framework (MTEF), which covered the real GDP growth, the current account balance (percentage of GDP), final household consumption, the GDP deflator, CPIX Inflation, Headline CPI Inflation, and gross fixed capital formation.

In respect of  Economic policy challenges for the 2008 MTBPS, FEDUSA fully agreed that the declining foreign demand, weaker prices and potentially lower portfolio investment from abroad required that South Africa increase its economic growth rate.

She reviewed the fiscal policy, specific budget allocations in the three year spending priorities, budget prioritisation and the views of FEDUSA on the Finance Bill and the Adjusted Appropriations Bill. The Money Bills Amendment Procedure and Related Matters Bill was aimed at enhancing parliamentary oversight of the budget. FEDUSA supported a move to oversee the work of the Executive, provided the proper checks and balances were to be applied.

Ms Humphries concluded that the FEDUSA commended the Minister for the way the budget was harnessed to steer the country through the next few difficult years, and the sound and prudent footing on which government finance was built.

Business Unity South Africa (BUSA) Submission
Ms Simi Siwisa, Director: Economic Policy, Business Unity South Africa presented the submission of Business Unity South Africa (BUSA) on the MTBPS 2008. She recounted the statements made by the Minister of Finance, using a storm analogy to describe the global economic crisis. It was the view of BUSA that there was a need to focus on the stated policy objectives, a view echoed in the MTBPS. BUSA believed that prudent fiscal and monetary policy decisions taken by the government over the past decade had provided a solid foundation for South Africa to “weather the storm”.  She made particular mention of the structural budget balance, which adjusted for cyclical revenue patterns and the resultant smoothing of government expenditure. Such policies had created fiscal space for South Africa to expand investment in infrastructure and human capital, despite the current challenges.

BUSA welcomed the reassurances given relating to the stability of the banking and financial sectors. BUSA believed that an optimal regulatory regime must balance self-regulation with prudent government regulation. The current crisis was a painful reminder of the interconnectedness of the international financial markets, and efforts must be taken to minimise contagion and systemic risk in the financial sector.

She commented that the MTBPS continued on the established path and sought to inject some certainty and predictability into the fiscal policy environment. BUSA accepted the downward revision of GDP forecasts. It was now expected that GDP growth estimate for South Africa for the current year would be 3.7%, downward from the 4 % previously forecast. National Treasury had also forecasted GDP growth at 3% in 2009. It was their assessment that the level of global volatility might require some adjustments to forecasts over the next few months.

The slowdown in economic growth was also an opportunity to make some adjustments to South Africa’s pattern of economic development. BUSA was encouraged by the allocations to primary healthcare and the stimulation at Small, Medium and Micro-Enterprise (SMME) level and the addition of new players to the economy.

She cautioned that South Africa must not pursue an increase in GDP for its own sake. BUSA wished to highlight the importance of human capital investment, saying that the provision of financial resources was matched by the development of the necessary capacity micro-reform at the small and medium levels and an infrastructure investment programme, which would provide the necessary supply side stimulation to the economy for balance to an otherwise demand driven economy.

In BUSA’s view, the pursuit of economic growth was a necessary condition for halving poverty and unemployment.  Such growth must be complemented with the necessary micro-reforms to ensure that the benefits accrued to most South Africans.

Business Parliamentary Office (BPO) and BUSA Commentary on the Tax Policy aspects of MTBPS 2008
Adv Abri Meiring, Spokesperson, Business Parliamentary Office, presented the Commentary on the Tax Policy aspects of MTBPS 2008.
 
Adv Meiring reported that the submission was aimed at pointing out the issues in the tax environment that should be on the fiscal agenda. The institutions welcomed Chapter 4 of the MTBPS. He covered the macro tax policy issues under the headings of tax to GDP ratio, tax reform and tax competitiveness. He explained their particular interest in the tax to GDP ratio, the underlying forces and the resultant increase in the tax burden. They were looking forward to the stabilisation of tax policy. Some very important changes had been made in the amended Revenue Laws, particularly on capital gains tax (CGT) and secondary tax on companies (STC). The cyclical nature of corporate tax in South Africa gave rise to volatility. BUSA would like to see a period of consolidation here.

Of particular importance was the tax policy used where foreign direct investment (FDI) was likely to be at a premium. He suggested a commission of enquiry into South Africa's competitiveness. It was a source of concern that it was difficult for foreigners to deal in South Africa.

BUSA’s and BPO’s comment on the personal income tax (PIT) related to some of their sole proprietor members being directly affected. BUSA welcomed the commitment given in the MTBPS at page 41, and would also urge that additional tax measures to encourage personal savings be urgently considered. This adjustment for fiscal drag was one area where the tax system could contribute to addressing the low level of household savings. There was currently no compelling incentive for people to provide for retirement. This should be addressed as a matter of urgency. They welcomed the Treasury’s consistent stance on the list of items zero-rated for VAT and commended the Treasury on the adjustments to social grants.

The Implementation of the 2008 tax proposals covered the extension of the effective date for tax payments, the increase in the electricity levy and the tax incentives for the Industrial Policy Projects. Adv Meiring added that tax incentives were a very slippery slope and that the amount must be budgeted over a five year period and be subject to detailed annual reporting to Parliament.

Discussion
Mr Moloto noted BUSA's reference to the vision of the NT in terms of the structured balanced budget. He agreed with BPO's views on the tax incentives. Tax incentives must be well managed and, according to Parliament's detailed report on establishing the effectiveness of tax incentives, it was advisable to have lower taxes, rather than tax incentives.

Mr Moloto noted that the Harvard Report highlighted that part of South Africa's inability to grow lay in the structure of the economy, and not allowing competition. He asked if the reforms to competition policy had managed to unlock these hindrances.

Ms Siwisa responded that the BUSA had supported the Competition Amendment Bill throughout the process. The South African pattern of industrialisation reflected the size of its market. BUSA looked at the increase in productivity and competitiveness in the current environment as a long-term exercise. Despite the current challenges, there was a need still to ask where the South African economy should ideally be in ten years time, and to invest aggressively, based on that vision. Investment in human capital was key. The comments made by Mr Roodt around education must be taken seriously. Departments could not call for more allocations without the proper policies. It was important not to get confused by the turmoil.

Mr Moloto asked about the wage subsidy proposed by the Harvard Report. He asked if this would help in capping unemployment or whether it would challenge the security of workers.

Ms Humphries responded that, generally, FEDUSA supported the wage subsidy. They did have some concerns, but were engaged in bilateral talks with the Minister of Finance to address these concerns, which related to how the wage subsidy would be implemented, the practicalities and its likely impact. They were particularly concerned about the impact on the more vulnerable sectors of the economy.

Dr George stated that South Africa was in the eye of the economic storm and asked what the trade unions were doing to assist the economy through the crisis.

Ms Humphries replied that FEDUSA was involved with the Department of Labour in a joint skills training programme. They had trained 5 000 artisans who had been employed in many sectors of the economy. They were also running various learnerships in various sectors of the economy.

Mr Mnguni asked if FEDUSA was encouraging its members to be more productive.

Ms Humphries responded that they were definitely encouraging workers to be more productive, as they wanted their members to keep their jobs. They were also training people in what the rights of employees and employers were.

Dr George referred to the comments that South Africa was not attractive to foreign direct investment (FDI) and asked what government could do to make South Africa more attractive to investors.

Mr Mnguni asked BUSA what South Africa should ideally do, in order to stay on course. He specifically asked for comments on the tax to GDP ratio. He noted the South African Revenue Services (SARS) campaign to make companies more tax compliant, and asked why the BPO was so worried about the tax to GDP ratio.

Adv Meiring responded that BUSA was not worried about the tax to GDP ratio. It was very important to evaluate sentiments if the country was overtaxed. There was now a better tax administration and a broader tax base than ever before, and this meant the stabilisation of the tax administration. Looking at the tax environment and its impact on competitiveness, he commented that the Organisation for Economic Co-operation and Development (OECD) findings had shown that other issues were more important in determining competitiveness then taxation policy alone.

Mr M Johnson (ANC) recounted South Africa's own experience with failing banks such Saambou. Based on this, he asked what the presenters' attitudes were to a depositors’ insurance scheme.

Ms Siwisa responded that depositors' insurance was very important. Experience had shown that this had prevented bank runs. The question was how to finance such a scheme. This measure had to be viewed holistically.

Mr Johnson noted that there had been calls for a review of the inflation target band and asked for the presenters' views on this.

Ms Siwisa responded that South Africa's fiscal policy and monetary policy was prudent. Price stability was a necessary precursor to economic growth. BUSA remained supportive of inflation targeting and the prudent policy directives. It was important to invest in the necessary intellectual capital and South Africa should be careful of knee-jerk reactions.

The meeting was adjourned.

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