1. Introduction

COSATU welcomes the opportunity to comment on the FFC Recommendations for the 2001-2004 MTEF cycle as well as on the MTEF figures for 2001/02. We have chosen to comment on the issues jointly given their inter-relatedness. COSATU broadly supports the thrust of the FFC’s approach, namely that fiscal policy needs to start with identifying acceptable norms and standards and thereafter quantifying the fiscal resources required to fund these. We argue that this logic needs to be extended and strengthened, and specifically in the context of today’s hearings that this approach needs to inform the budget allocations for next year. There is a stark contrast between the costed norms approach and the projected expenditure for next year, which could well see real cuts in various aspects of social and economic expenditure. A challenge to the Select Committee in its response to these issues is to bridge that gap in order to ensure that the budget presented at the beginning of next year does indeed meet people’s needs and aspirations.

Our understanding is that the 2001/02 projections under discussion today are draft figures formulated some time ago and currently under revision. It is in this spirit that COSATU is participating in these hearings, and in the hope that public and stakeholder comments made on the 2001/02 projections will be taken seriously in the revision of the figures for presentation in the forthcoming Medium Term Budget Policy Statement. We hope that these spaces opened up in the budget process reflect a real attempt at democratisation rather than a talkshop intended to give an illusion of participation. One measure of this will be the extent to which the revised figures to be published in the next stage of the process reflect the concerns and proposals raised by stakeholders and elected representatives in this stage.

In our submission today we will be dealing firstly with an overall assessment of the MTEF and the reform of the budget process; secondly with the recommendations which have been tabled by the FFC; and thirdly with the MTEF projections for next year. We will deal with the latter issue in terms of the projected macroeconomic parameters, the approach to intergovernmental fiscal relations in the Budget Review, and the specific projections on both the expenditure and revenue sides.

 

2. Budget process and the MTEF

The MTEF process has potential advantages in that it aims to cost major strategies and policies, to improve the public understanding of fiscal policy aims and allocations, and to give departments more stable allocations as an aid to medium-term planning. Unfortunately, the current MTEF system does not meet these aims adequately. Instead, at the departmental level it has degenerated into a projection of annual budgets, with little link to strategic decision-making. We believe that sources of this problem include the following factors:

• Departments have to draw up an MTEF for all line items on their budgets, which distracts managers from more strategic issues around resource allocation.
• The Department of Finance feels free to vary MTEF allocations every year, depending primarily on deficit targets, so that the hoped-for stability and predictability has not emerged.
• The Medium Term Budget Policy Statement is presented as a final document, leaving little scope for public input and critique.
• The conservative nature of the overall macroeconomic parameters has had a stifling effect on the potential of the MTEF as a budgetary tool.

To remedy the situation, an overhauling of the MTEF is required which retains the intended strengths but renders it more effective in meeting identified objectives. Projections should reflect careful and strategic planning of future spending, rather than just reflecting expectations of future spending along the lines of current trends. This reform could include the following elements:

• The MTEF should relate only to major projects and strategies, leaving other, routine activities to annual budgets.
• The MTEF (including the Medium Term Budget Policy Statement and other relevant documents) should be published as draft rather than final documents. On the basis of structured public engagement, with Parliament and Nedlac in particular, these should be reworked and finalised.
• The Department of Finance should commit to increasing overall real expenditure for the period of the MTEF and specifically for the strategies covered by it.

We note that some improvements have been effected in making the budget process more transparent and in opening up more opportunities for public comment in the course of the budget cycle. Notwithstanding this, it remains fundamentally flawed and COSATU has on numerous occasions critiqued the problems with the current process as well as presenting proposals for making it more democratic and participatory.

Key to this reform is the long-overdue passing of an adequate Money Bills Amendment Procedure Bill, as per constitutional requirements. It is a serious limitation of the democratic process that whatever commentary the public and stakeholders may make on the MTEF and the budget itself, and whatever the deliberations and views of parliament may be, these may have no effect on actual fiscal policy. As we have done since 1997, COSATU again urges the passing of a Bill, in terms of government’s constitutional obligations, which gives meaningful amendment powers to parliament. This needs to be combined with the overall reform of the budget process. Reform is required to ensure that parliament, Nedlac and civil society have opportunities at all stages of the process to have a meaningful input on the overall macroeconomic parameters as well as on expenditure and revenue priorities.

1. The FFC approach

The key policy recommendation emerging from the FFC report is for a shift to a costed norms approach. This is aptly summed up in the report as "a formula-base method for calculating the financial resources necessary for the provision of basic social service levels, given nationally mandated norms and standards." The FFC proposes a budgetary methodology whereby "the mandated basic level of service should be determined nationally and should be expressed in terms of norms and standards for each programme area"; and hence "against the norms and standards established, fiscal requirements should be determined by taking account of factors affecting provincial conditions." The FFC argues that this paradigm would hold various advantages, notably the promotion of more efficient resource allocation choices by provincial governments; the provision of an incentive to provincial governments to achieve output goals; increased transparency; improved incentives to gather data on government performance and costs; contributing to determining appropriate fiscal policy; and limiting the reallocation of grants by provinces in ways that are inconsistent with national objectives.

COSATU has in the past criticised a fiscal approach which takes macroeconomic parameters as a given and allocates these resources to various functions, irrespective of whether or not these resources are adequate to meet people’s needs or even sufficient to carry out stated government policy. This approach has had various negative ramifications. While some advances have been made in addressing social backlogs and constantly arising new needs, this has been at a slower pace than would have been the case with more expansionary and flexible macroeconomic parameters, notably with respect to the budget deficit.

This contractionary fiscal approach has also contributed directly to the problem of unfunded mandates, where lower organs of state are given various responsibilities without being allocated the necessary resources to carry these out. In the past we have heard provincial representatives in this committee speaking of cases where their budget allocations for particular departments are barely sufficient to cover their wage bill, leaving little or nothing for textbooks, medicines, and so on. Such a situation is an outcome of both poor planning and of the determination of allocations on the basis of macroeconomic objectives without adequate reference to actual resource requirements.

COSATU has instead motivated, including in front of this committee, for an approach to budgeting in which programmes inform budgets. The growing consensus across the developing world is that planning frameworks should guide budgets. This aims to ensure that the strategic objectives of governments are reached. Within this, there is a recognition that some limits will always be present. The shift in emphasis from reaching fiscal targets to linking plans to budgets ensures that outputs can be measured. We have proposed that the budgetary process should start by attempting to quantify the remaining social backlogs, calculating the resources needed to meet these backlogs, and from there develop short, medium, and long term strategies for financing the eventual elimination of backlogs. We thus strongly welcome the starting point of the costed norms approach, namely a commitment to meeting the state’s constitutional obligations in terms of service delivery, and the recognition that fiscal policy needs to be responsive to and accommodating of this.

A costed norms approach could also potentially improve the democratic and participatory nature of the budget process. Ideally, acceptable norms and standards should be determined not in an abstract, academic manner but on the basis of people’s needs. It would be an empowering experience for communities to be given the opportunity to define their own needs and priorities and for this to be fed into the process.

We believe that the costed norms approach will also be favourable in terms of equity issues and the distribution of resources in favour of poorer provinces. In particular, the acknowledgement there are differential costs between provinces which are beyond the influence of provincial authorities (for example, economic and social conditions in a province, which result in higher rates of disease, will increase health costs). Having this recognition built into the formula is likely to work in favour or poorer provinces.

As Gauteng and other stakeholders have pointed out, however, the costed norms approach is no "miracle instrument", but an integral part of an overall system. We also note that for a costed norms framework to be successful, it will need buy-in from all stakeholders and particularly all relevant organs of state, further refinements and concretisation if necessary, as well as an intensive effort towards the gathering and analysis of all required data. As the FFC has noted, the costed norms approach can add value immediately and then be improved on over time.

The nub of the issue in practice may arise in terms of the "iterative process". This is defined by the FFC report as "a part of the procedure for dividing national revenue suggested in [the FFC] report, in which policy makers alternate repeatedly between adjusting a costed norms scenario and adjusting macro-priorities set by the MTEF, until a solution is found that brings norms into alignment with the MTEF". Our concern is that in adjusting norms to fit the MTEF – rather than the other way around – the norms and standards identified may become lost in the course of the iterative process and budget allocations may end up not much different from what they might have been in the absence of a costed norms approach.

COSATU does acknowledge the need for some mechanism of reconciling the resources needed to meet social and economic needs with an overall macroeconomic policy. Without some way of adjusting the resources required to meet people’s needs, macroeconomic management would be very difficult and there would be potential for excessive fiscal expansionism and macroeconomic instability. So whilst we agree on the need for some type of iterative process, we are recommending some modifications of the FFC proposal.

The FFC proposes the establishment of basic social service levels, expressed in the form of norms and standards, for each programme area. There is obviously a level of subjectivity involved in defining these levels, and actual levels will be further determined through the iterative process. The FFC recommends that alternative national benchmarks are designed, from which national government could choose. These alternatives would offer a "menu of alternative realisation rates and policy parameters", both in terms of possible norms and standards and about different provincial shares in the vertical division, in order to make explicit the trade-off between the level of national norms and standards and other fiscal priorities of government.

What COSATU proposes with respect to this is that the FFC costs at least two levels of service delivery, as follows:

• Minimum Norms: the basic level of norms and standards which would have to be met in terms of the state’s constitutional and other obligations, and legislated policy objectives.
• Preferred Norms or Intended Norms: these could be one or more menus of service delivery above the standard of the minimum norms.

These different levels would be costed and the actual standards chosen (with their concomitant cost implications) would ultimately be a political decision. Whilst the actual level agreed upon may well fall in between the Minimum Norms and the Preferred Norms as proposed by the FFC, they should not fall below the floor of the minimum norms. This proposal of COSATU is intended to avoid a situation where, in the course of the iterative process, macroeconomic parameters squeeze the norms and standards to an excessively low level such that the costed norms approach is rendered meaningless.

Furthermore, for a costed norms approach to be effective, this paradigm would need to be extended to all spheres of government rather than just the social sector at the provincial level. If not, a situation of distortions and crowding out could potentially emerge to the prejudice of functions and spheres to which the costed norms approach is not applied, such as the crucial area of economic services. While such a recommendation may not be within the FFC’s terms of reference, we encourage the Select Committee to include in its recommendations a proposal for the extension of the costed norms approach to all functions and spheres.

The FFC has not taken the rationale of the costed norms approach to its logical conclusion: adjustment of macroeconomic parameters to fund identified norms and standards based on inter alia the state’s constitutional obligations to deliver services. Final decisions around economic policy are ultimately the prerogative of government. , We thus call on the Select Committee to embrace and extend the logic of the costed norms approach, and call for the requisite flexibility in macroeconomic policy to accommodate the meaningful implementation of this approach. This should also be applied to the MTEF figures for next year. Urgent analysis is required of the extent to which these projections (discussed below) are adequate to meet acceptable norms and standards. To the extent that they are not – which COSATU believes to be the case – adjustment of the projections and macroeconomic parameters must be effected.

1. The 2001/02 MTEF figures
1. Macroeconomic parameters

The projections for 2001/02 in terms of overall macroeconomic parameters continue the trend of fiscal austerity. Key macroeconomic projections for 2001/02 contained in the Budget Review include the following:

• The budget deficit:GDP ratio is intended to fall further to 2.5%. This comes on the back of continuous declines in the ratio at a faster rate and to a greater extent than even the GEAR projections. Not only has the budget deficit been slashed by over 2% since 1996, but the projections for the coming year are half a percent lower than the (already conservative) GEAR projection of 3%. The drastic cuts in the deficit:GDP ratio have had extremely negative effects in reducing the amount of resources available for service delivery. We are very disturbed that the Department of Finance intends on worsening the situation even further.
• In terms of a related parameter, the expenditure:GDP ratio is projected to fall further to 26.2%. Again, this follows an ongoing cutting of this ratio over the past few years and is a reflection of the fiscally conservative policies pursued by government.

• In terms of the revenue:GDP parameter, this is also projected to fall to 23.7% of GDP in 2001/02. COSATU believes that this ratio is inappropriate and is too low to finance the country’s developmental needs. Even comparing it to the conservative GEAR target of a 25% ratio, it means about R12 457 million of resources foregone which could have been channeled into building houses, training teachers, extending telecommunications, or other areas of need.

Ironically, these are among the few areas where the GEAR targets have actually been "surpassed". This is an indication of the government’s excessive zeal in pursuing the contractionary aspects of macroeconomic policy at the expense of economic growth, employment, and service delivery. In the face of the manifest failure of GEAR to meet its most basic targets of growth, employment and redistribution it is amazing that the Department of Finance is proposing more of the medicine which has worsened the patient’s condition.

The Declaration of the Presidential Jobs Summit, crafted on the basis of consensus between government, business, labour, and the community constituency, placed an emphasis on macroeconomic policy being appropriate. This appropriateness was conceptualised in terms of the elimination of poverty, reduction of inequality and a redistribution of resources; an increase in per capita GDP through higher levels of investment, growth and development; and the maximum potential net job creation within an employment generating growth path. COSATU believes that this consensus should feed into future macroeconomic policy, and we would have hoped that the MTEF would have reflected such priorities.

Given the difficulties in projecting precise growth rates for the next few years, particularly in the light of an unpredictable global economy, some certainty on future expenditure is required. It is for this reason that COSATU has proposed flexible bands for deficits and revenue. Spending should not just be the "soft" part of the equation, adjusted according to fixed deficit:GDP and revenue:GDP targets. Setting future expenditure targets and adjusting revenue and deficits within flexible annual bands would provide some delivery certainty.

1. Intergovernmental fiscal relations

COSATU objects to the arguments in the 2000/1 Budget Review that personnel spending crowds out other aspects of social spending, and that social spending itself crowds out the fulfilling of provinces’ other functions, articulated as follows:

Provincial budgets are dominated by social service expenditure; this limits provinces’ ability to address their other functions. These include the maintenance of roads and other infrastructure, rural and provincial industrial development and tourism. Within the social services, personnel spending has tended to crowd out other expenditures, such as maintenance of public facilities and the provision of textbooks, medicines and development programmes.

As COSATU has pointed out in the past, provinces are often faced with the difficult situation of having fixed allocations from national government, little flexibility in raising their own revenue, and much of their current expenditure fixed at a national level. In their attempts to "balance the books", they may well be forced to effect an adjustment in the budget items which are the most "flexible". This leads to the perverse squeezing of capital expenditure, not by current expenditure per se but by the particular combination of fixed and variable items of income and expenditure. It is thus disingenuous to single out personnel expenditure as the "culprit" to be blamed for insufficient capital expenditure and non-personnel current expenditure.

In the event, since 1997 the increase in personnel expenditure as a share of total spending reflects, not an increase in spending on the public service, but rather the fact that personnel costs cannot be cut as fast as other expenditure. In other words, it results from the rapid decline in real spending, not from excessive personnel spending. More rapid cuts could impose substantial costs, particularly if total expenditure starts to increase in the near future. It would be highly inefficient to fire skilled and experienced personnel, for instance in education and health, only then to have to rehire them (or less skilled substitutes) after a year or two.

The education and health sectors in particular are highly labour intensive, and as such personnel expenditure is not purely a cost but rather an investment. Furthermore, the building of strong public sector institutions will require an adequate mix of motivated staff, who have the required tools to teach or provide health care. The so-called "trade-off" between current and capital expenditure thus really skirts the question of how do we build a better public service and ensure effective delivery.

Interestingly, the FFC notes the significance of national wage-setting for provinces, and argues that "the cost-based approach is particularly useful in this respect, for national wage bargain agreements are immediately translated into provincial costs of service delivery. Consequently national governments must either increase the provincial equitable share, adjust its goals for the provision of social services, or raise national revenues."

 

2. Expenditure

We approach the MTEF expenditure projections for 2001/02 as compared to the preceding year, from three angles: firstly, looking at real per capita changes in projected spending on different functions; secondly, examining trends in proposed spending on different functions as a proportion of total estimated expenditure; and thirdly, considering key aspects in terms of the economic classification of consolidated expenditure.

The following table reflects real per capita changes in the allocation of expenditure from the medium-term estimates of 2000/01 to those of 2001/02. The spending categories are ordered from the highest percentage change to the lowest. Those functions which have a negative change over the period are intended to experience real cuts in spending. Two inflation figures are used in calculating the real change: firstly the projection for CPI-X in 2001/02 presented in this February’s Budget Review (5.3%) and secondly the most recently available CPI-X rate of 8%. Given that the Budget Review had projected CPI-X of 5.5% for the current year and so far it is running 2.5% above this, it is advisable to consider next year’s budget projections using different inflation projections. In reality next year’s actual CPI-X may turn out to be somewhere in between. For each of the inflation rates used, per capita figures are also given.

Secondly, looking at projected expenditure on different functions as a proportion of total expenditure, the following trends emerge:

• Functions for which proportionately more is projected to be spent in 2001/02 as compared to 2000/01 are defence and "other economic services".
• Functions for which proportionately less is projected to be spent in 2001/02 as compared to 2000/01 are police, education, health, welfare, water, and agriculture fishing and forestry. It is of particular concern to COSATU that spending on social services is intended to fall as a percentage of total estimated expenditure.
• Functions for which a constant proportion of total estimated expenditure is projected to be spent in the two years are prisons, justice, housing, "other social services", fuel and energy, mining manufacturing and construction, and transport and communication.

In terms of the economic classification of expenditure, we are concerned that the MTEF projections for 2001/02 envisage a real cut in remuneration of employees. This could only be achieved through either a cut in the public service, a real wage cut, or through downward variation in conditions of service. Given the vast social and infrastructural backlogs facing South Africa and the centrality of the public service in addressing these, COSATU believes that none of these options are appropriate. We thus propose an adjustment of the MTEF projections such that real expenditure on personnel is at the very least held constant in real (using CPI-X) terms.

Total capital expenditure is projected to rise substantially in real terms. On the face of it this is a positive development, and COSATU has for some time been calling from increased capital spending on economic and social infrastructure. Given the trends in the proportional allocation of spending discussed earlier, however, our fear is that the projected rise in total capital expenditure will be accounted for more by high defence spending than by badly needed infrastructure.

These projections need to be contextualised in terms of expenditure trends over the last few years. Over the period 1997 to 2000, a number of key functions – including welfare, education, transport and communication, mining manufacturing and construction, water, housing, and fuel and energy – experienced real average annual cuts in spending. These are the bulk of functions in social services and economic services, both absolutely critical areas.

There is a direct link between fiscal austerity and delivery problems both in terms of social services and economic spending. For example the recent Commission of Inquiry into Hospital Care Practices has reported that there is "lack of equipment, inappropriate facilities, lack of medical officers, lack of nursing staff, low staff morale, lack of managerial training, budgetary constraints, lack of decentralisation, lack of incentives, poor information systems and inadequate support services" as well as problems with "unreasonable waiting times, shortages of linen, conduct of professional and support staff, catering, forced reliance on family care, security and [patients] being turned away at pharmacies."

Over and above the inadequate resource allocation on the social services side, deficit reduction has severely squeezed spending on infrastructure and economic services. Reduced spending in these crucial categories has severely constrained our capacity to restructure the economy and to increase our productive capacity. The repercussions of this are likely to make themselves felt increasingly in future.

The most recent presentation of the Department of Trade and Industry’s MTEF budget in parliament highlighted how fiscal austerity is undermining government’s own flagship economic initiatives. The document notes cuts in programmes such as Investment Support, Industry Development and Promotion, Technology Enhancement, Small Business Promotion, Business Regulation and Consumer Services. The DTI notes consequences such as a lagging behind in Information Technology, a breach of contractual obligations in terms of investment support, a negative effect on foreign direct investment, a slowing down of local investment in manufacturing decreasing opportunities for job creation, monitoring of industrial development projects and quality of business plans will suffer, standards and conformance activities will cease to function effectively, a negative impact on technology development, limiting the ability to execute their mandate on SMME promotions, and serious delays in the development of better consumer and company law. How can we hope to build a strong economy with the government’s economic programmes being emasculated by fiscal austerity?

Given this background to the 2001/02 budget, what is needed is not just a maintaining of real per capita expenditure – let alone the projected cutting in some functions. It is imperative that real per capita increases in the key social and economic service functions are budgeted for at this stage in the budget cycle.

The scandal of large-scale rollovers in key delivery Departments is not simply a function of lack of capacity, but is a symptom of various underlying issues. Serious problems do indeed exist with the inherited state bureaucracy, and fiscal austerity may, instead of addressing these problems, actually be worsening them. Where there are indeed capacity constraints which have hindered the productive use of resources, funds are needed to address these capacity constraints themselves, for example through human resource development within the public service.

When the issue of "underspending" was discussed in the Portfolio Committee on Finance, members themselves pointed out that this has more to do with "overzealous fiscal austerity" in departments, which instituted cutbacks to comply with macroeconomic policy prescriptions based on the notion that squeezing resources will automatically lead to efficient governance. We thus find a strange scenario of provinces being congratulated for not spending their full allocations while in the very same provinces healthcare is in a serious condition, education is in a state of "crisis", and huge backlogs remain in almost all spheres of delivery.

The rollover problem is also partly an outcome of the crippling effect of a contractionary fiscal strategy which prevents government from channeling resources into areas which can immediately have a major impact on peoples lives, and where the failure to do this has nothing to do with ‘lack of capacity’. An obvious example of this would be implementation of a decision to substantially increase the size of the State Old Age Pension. This would require no extra capacity. It is generally agreed that the State Old Age Pension is a highly effective tool of redistribution, therefore there is no reason to continue cutting it back, as is currently happening. Budget cutbacks can actually lead to wasted spending. For example, about 150 clinics which have been built were according to the Department of Health not functioning due to inadequate funds for personnel and supplies.

There is a need for the implementation of appropriate policies, which allow for effective public sector spending in the areas of greatest need. This includes making the necessary staff available, as well as the required capital investments, to ensure that key areas of public delivery can take place. It also means revising inappropriate policies, such as housing and transport, which drastically reduce the ability of the state to target spending effectively on the poor;

Finally, political will and resources are needed to invest in building the required capacity where it does not exist. It is simply too convenient for those with a vested interest to argue that this can’t be done, and that where the state lacks capacity, this should be handed over to the private sector. Such blinkered thinking will result in short-termism which the country will pay for over many generations.

COSATU believes that the following approach should inform the expenditure side of the MTEF for next and future years:

• There should be appropriate increases in the deficit:GDP and expenditure:GDP ratios.
• There should be substantial real, per capita increases in overall expenditure and in particular in the social and economic services.
• Within this there should be a focus on funding of social and economic infrastructure. Given overall real increases in expenditure, this would not be at the expense of current expenditure.

1. Revenue

The MTEF projections for revenue collection in 2001/02 do not appear to differ drastically from those for 2000/01, based on the limited information available in the Budget Review. It would be desirable in terms of democratising the budget process for proposed changes in the rates and structure of taxes to be made available at this stage in the process to enable parliament, stakeholders and the public at large to comment on these. The only projections which we can comment on this stage are those for the overall composition of budget revenue and the revenue:GDP ratio.

Indications thusfar are that actual revenue collections are likely to again exceed projections for this fiscal year. This renders comparisons of projections for 2000/01 and 2001/02 somewhat questionable, as what may appear as, for example, a constant level of revenue would in reality be a cut if this year’s targets are indeed surpassed and next year’s targets are merely reached. Furthermore, while we welcome the additional resources being collected by SARS given the dire need for additional funds, we urge the Department of Finance and SARS to attempt to generate more accurate projections of revenue collection in future. It is disturbing that a consistent underestimation of revenue collections can contribute to excessively tight fiscal policy, as a portion of revenue is not budgeted for and hence is not spent, thus contributing to even more rapid deficit reduction rather than to the meeting of basic needs.

While the projected composition of tax revenue in 2001/02 is similar to that for 2000/01, the following points can be noted.

• As a percentage of total budget revenue, individual taxes fall marginally (from 41.7% to 40.9%), while direct corporate taxes (taxes on gold and other mines, company tax, and secondary tax on companies) increase marginally (from 12.7% to 13.2% of total budget revenue). Taxes on property, VAT, and taxes on international trade and transactions are all projected to stay constant as a proportion of total budget revenue.
• Total revenue is projected to rise by about 8% in nominal terms. This would translate into a 2.7% real increase should the lower inflation rate of 5.3% materialise, or a zero real increase if current inflation were to continue.

As in the analysis of expenditure, it is necessary to look at the context of next year’s revenue projections. We have seen an ongoing shift in the revenue burden away from the corporate sector onto individuals. For the revenue composition to stay more-or-less constant in 2001/02 would amount to entrenching the status quo. What is needed is a radical revision of various aspects of the taxation system, as discussed below.

In broad terms, COSATU favours an increasing of the revenue:GDP ratio and a shift in the overall composition of revenue in a way that shifts more of the burden onto the corporate sector.

More specifically, key proposals which have been tabled by COSATU are as follows:

• The introduction of multiple VAT rating.
• Increasing the number of basic goods which are VAT zero-rated.
• Subjective certain luxury goods to a higher rate of VAT.
• Agreement on a minimum proportion of total revenue which should be contributed by companies.
• Increasing the rates of company tax and STC.
• The principle of a minimum effective tax on companies.
• Eliminating tax avoidance and evasion.
• Implementation of the agreement on "top-ups" in pension/provident funds.
• Introduction of a capital gains tax.
• The introduction of a solidarity tax to finance development.
• The introduction of a land tax.

1. Conclusions

COSATU has dealt with the FFC report and the MTEF 2001/02 projections jointly as they are strongly interconnected. In terms of the FFC proposals, we have supported the progressive thrust of the costed norms approach and have proposed certain modifications. This rationale needs to be taken to its logical conclusion in terms of the flexibility of MTEF parameters to accommodate at the very least Minimum Norms. The FFC recommendations have a strong bearing on the MTEF figures for next year – despite the fact that the logic of the FFC approach is not reflected in the current projections. The fact that existing MTEF projections for 2001/02 envisage real cuts in several functions which are vital both in terms of the meeting of basic needs and in terms of South Africa’s economic development reflect the shortcoming both of current macroeconomic policy and current budgetary approaches.

We call on government to apply an approach to the forthcoming budget in which macroeconomic parameters accommodate the financing of acceptable norms and standards in delivery. Whilst the MTEF does not provide adequate detail on the revenue side of the budget, the revenue projections provided are problematic in terms of keeping the revenue burden disproportionately on individuals. COSATU has tabled various proposals in terms of reforming the tax system.

Finally, we trust that today’s hearings will form part of meaningful engagement of stakeholders in the course of the budget cycle. COSATU awaits the publication of the Medium Term Budget Policy Statement, which we hope will reflect some of the concerns raised by parliament and stakeholders in the course of this engagement.