FEDUSA SUBMISSION ON THE
2008
BUDGET
FEDUSA Submission to
The Portfolio Committee on Finance
Presented by:
FEDUSA Parliamentary Office
29 February 2008
With specialist input by Dr Jurie van Tonder
FEDUSA COMMENTS ON THE
2008 / 09 BUDGET
1.
INTRODUCTION
FEDUSA want to commend the Minister and
Treasury on the concise policy statement used in this year’s Budget and
estimates which very clearly reflects both economic policy and budget
priorities. The budget 2008 brings hope
for the future, rather than immediate solutions to short term problems.
In the 2007 MTBPS and this year’s
budget, Government faced serious challenges from abroad and domestically. The
Minister is commended for the way he harnessed the budget to steer through
these daunting challenges and came out with flying colours. The slower global
economic development and the domestic electricity crisis resulted in pessimism
and some economists even predicted an increase in the budget deficit. The
Minister however proved that, given the sound and prudent footing on which
Government finances is built, it is “business as usual” FEDUSA can almost agree
with Hamlet that: “There is something in this more than natural, if philosophy
could find it out.”(Hamlet: Act 2, scene 2)
2.
ECONOMIC OUTLOOK
Since Government started with
multi-year budgeting, the annual budget holds fewer surprises. This is so
because Government’s expenditure and revenue plans are spelled out for the next
three fiscal years as well as its economic and fiscal policies. There however always remains an element of
surprise, as the actual economic outcome for a specific year may differ from
what was expected in the MTBPS.
This poses the well-known policy
choice faced by many countries in the past, including
Although not referring to GEAR
directly, the Minister expressed his conviction that the strategy adopted in
1996 (with later refinements thereof) contributed to our current position of
strength. He rightfully pointes out that the macroeconomic framework contained
in GEAR is of our own making and not dictated by multilateral institutions.
FEDUSA fully supports the elements of this strategy, which includes prudent
fiscal stance, building up our foreign exchange reserves, the system of
inflation targeting and a floating exchange rate system.
As a measure of prudent
fiscal stance, the Minister introduced the so-called cyclically adjusted or
structural budget, which helps Government get an idea of temporary revenue
gains. Estimates show that for the next MTEF period the structural budget will
actually be a deficit. This really means that Government must maintain a
surplus on its actual balance. Budgeting for an actual budget deficit would
mean that the structural balance would be a large deficit, or that we use
temporary or windfall revenue in such a way that it undermines sustainable
growth.
Over the short term fiscal policy
goals include containing inflation and increasing our electricity supply. Over
the medium to longer-term goals include: increasing economic growth and
development and employment; investing in productive capacity; raising exports
to bring down the current account deficit; reducing poverty and inequality; and
improving public service delivery.
In his MTBPS of October 2007 the
Minister expected that economic growth will be 4.5 per cent in 2008, down from
4.9 per cent in 2007, while inflation will peak in 2007 and start to fall
during 2008 and move within the target band of 3-6%. The actual outcome is
quite different. Economic growth will be lower than 4 per cent, while CPIX
inflation will be higher than the 5.4 per cent budgeted for. Economic growth
was 5 percent in year 2007, averaging out to 4.3 percent over the period under
review.
3.
INFLATION
After a few years of relative price
stability, CPIX inflation broke through the 3-6 per cent target range in April
2007 largely driven by food and oil price increases. Policymakers expect that
average CPIX inflation will average 7.1 per cent in 2008, where after it will
decline to 4.9 per cent, in other words within the target range of 3-6 per
cent, following interest rate hikes of 4 percentage points between June 2006
and December 2007 by the Reserve Bank. From the fiscal side, the budget surplus
will contribute to a moderation of domestic demand and will therefore
contribute to price stability. FEDUSA fully supports these steps by the
monetary and fiscal authorities to curb inflation,
The challenge to economic policy
over the next MTBPS is therefore to increase our economic growth rate and to
lower our inflation rate. The basic reasons for these differences can be
attributed to economic and financial problems in developed countries as well as
large increases in the oil prices. Currently, the effect of these factors is
exacerbated by the electricity crises.
Another reason for a possible
different outcome of the budget for this year is the fact that Government
committed itself to taking important steps to make progress with some of its
most serious socio-economic problems. The President in his State of the Nation
Address in no uncertain terms committed all spheres of Government to make
progress with its goals over the short period.
More specifically, the President
indicated Government’s seriousness with the implementation of its 24 Apex
Priorities and mentions that steps have being taken to ensure that the
necessary allocations will be made in the Annual Budget to implement the
priorities. Provision has however already being made for some of the priorities
in the MTEF. The programs include taking forward industrial policy for which
R2.3 billion has been budgeted and a further R5 billion in tax incentives over
three years, skills development, job-creation, fighting crime, improving
service delivery and taking on social responsibility.
FEDUSA welcomes these important
steps and is especially pleased with the fact that Government is not only
paying lip-service to these matters, but that the necessary fiscal measures
would be introduced to underpin Government’s plans.
The 2008 budget proposals are
generally aimed at intensifying measures of implementation to address the
challenges of underdevelopment, poverty and inequality. FEDUSA acknowledge the
need for the national budget to be balanced but still be able to grow the
economy and create more and better jobs. The economic surplus announced in the
budget indicates that Government is making provision for risks in the economic
environment largely because of the financial crises in developed markets, global
imbalances, high food and oil prices internationally and slower growth in the
US and other developed countries. FEDUSA believe that this the correct fiscal
approach considering inflationary outlook.
FEDUSA want to reiterate its
concerns expressed in our comments in 2007 on the budget. The high consumption
expenditure, together with the higher level of investment by both government
and the private sector, result in a large current account deficit of our
balance of payments. The level of the current account balance is such that it
affects the exchange rate. This development does not only affect production
price inflation but eventually also for consumer inflation. The relatively
large current account is financed by capital inflows. Although this is normal
and acceptable for developing countries, Government should always be mindful
that the largest part of that capital inflow consists of short-term
investments, sometimes also called “hot money. Although developing countries
are today no longer being regarded for investment purposes to be all alike, the
risk remains real that these funds nay be withdrawn on short notice. The only
viable policy options to avoid this risk, is to increase our exports and to
attract longer-term real investment. The Minister admits this and indicated
that the large current account deficit poses a risk to the South African
4.
DEALING WITH
OUR ELECTRICITY CRISIS
For the last few years FEDUSA in its
presentations to Portfolio Committee on Finance pointed out that a low rate of
infra-structural development by general government and the public corporations
could affect economic growth negatively. This proved to be true.
It is hinted in the Budget Review that there was a decline
in investment by general government and public corporations from a peak in the
mid-1970’s and that the present electricity supply shortfall is a timely
reminder of the importance of long-term planning and decision-making for
economic growth and development. In the Budget Review a graph is shown which
illustrates that after a peak in the mid-1970, investment by both general
government and public corporations declined. The Minister indicated that this
has been a major contributing factor to the capacity constraints that the
economy is experiencing today. The graph below based on data from the SA
Reserve Bank which illustrates real increases instead of percentages of GDP
gives a different picture. It shows that, whilst investment increased in real
terms for the general government since 1994, investment by the public corporations
for roads, bridges, dams, electricity and water supply decreased in 1990 and
remained low up to 2006. This graph confirms the Minister’s remarks that timely
planning is necessary to provide infrastructure to underpin economic
development.
In
the budget R60 billion is provided to support the financing of Eskom’s
investment programme. Minister made it clear that this will not be a grant. As
a demand-side measure to lower electricity shortages a new levy at a rate of 2
cents per KWh is proposed.
Source: SA Reserve Bank
FEDUSA welcomes the support for
Eskom and also the levy. This levy is in line with Eskom’s principle that users
should bear the cost of supply. As electricity tariffs are relatively low and
the fact that households and businesses have the option of lowering their
electricity usage to avoid paying more, FEDUSA would support the levy.
5.
INCREASING
ECONOMIC GROWTH AND EMPLOYMENT
As a trade
union federation, FEDUSA’s naturally focus on how the budget affects workers in
the widest sense. Important issues are therefore the effects on economic growth
and employment, how the budget contributes to empowering workers, and the
material well being of workers still at work but also after retirement.
Economic growth and development is a
many-faceted phenomenon and is affected by a diverse range of factors,
including the level of demand, savings and investment, the rate of interest and
price and social stability.
This year’s budget contains
important measures that affect all of these elements. Overall demand will be
lower because of lower private consumption and government expenditure, although
the tax relief of R7.2 billion to especially the lower income groups will boost
demand somewhat. Government will increase savings as it budgets for a small
surplus. From the private sector’s side, the increases in the tax-free
contributions to medical schemes will affect savings favourably.
FEDUSA want to iterate it concerns
with the high marginal personal income tax rate on individuals, and is convinced
that a lower rate would not only affect personal savings favourably, but would
also be a stimulus for people’s propensity to work and save. A lower marginal
tax rate would also bring it closer to the marginal rate of company taxes which
have been reduced in this budget from 28% to 27%.
From a macroeconomic perspective
FEDUSA applauds the supply-side measures to bolster growth and development,
especially the reduction in the headline corporate income tax from 29 per cent
to 28 per cent and the reform of the STC regime to switch this from a
company-level tax to a shareholder’s tax. This would bring this element of our
tax system in line with international best tax practice.
During the last few years FEDUSA has
urged Government to play a more active role in the economy, without actually
partaking in the production process but rather by initiating and supporting
worthwhile projects. FEDUSA is therefore pleased with the high priority given
to the Industrial Policy Plan. R2.3 billion is budgeted for the industrial
programme and the Government planned for R5 billion in tax initiatives over
three years to support this policy. Clearly, these measures should have
favourable consequences for employment, also because labour-intensive projects
will be favoured.
FEDUSA also welcomes the different
steps taken in the 2008 budget to increase employment by taking micro policies
further. This include budget support for labour-intensive projects under the
umbrella of the expanded public work programme, social services initiatives
such as early childhood education, and community- and home-based care. Funding
is provided for labour centres, which are increasingly serving to bridge
information gaps in the location of jobs and qualified people. Leanership and
internship schemes are extended through spending and taxation measures, with
special attention to technical areas. Small enterprises employ a large number
of workers and measures to support small businesses, including tax measures,
are proposed. The increased spending on education and skills development will
contribute to more rapid economic growth and therefore higher levels of
employment.
6.
REDUCING POVERTY AND
INEQUALITY
The only viable long-tem solution to
poverty remains high and stable labour-absorbing economic growth. Success with
our policies of taking our potential growth rate to higher sustainable levels
will go a long way to eradicate poverty and equality.
However, in the meantime it is
imperative that Government put in place measures to soften poverty.
Government’s initiatives rest on three legs: broadening social assistance,
creating jobs and enhancing the social wage. In this year’s budget the social
wage, in other words, free or subsidized services such as education, health and
public transport, housing, water, electricity and sanitation, is expanded
through further investment in basic services, expanding the school nutrition
programme and ensuring access to education for the poor. Rising public
transport subsidies also add to the social wage. Early learning opportunities
are being extended in poor communities, making success in later years in school
more likely.
Work on significant reform of the
social security system is under way with the focus on developing broad
consensus on the design of a contributory retirement and risk benefit system.
This could include a wage subsidy, which may have favourable consequences for
employment, as this would enable small businesses to employ more workers. The
Minister indicated that this year it would see an engagement within NEDLAC on
implementation challenges.
FEDUSA welcomes the increase of the
disability and old age grant in this year’s budget by R70 to R940. Also the
extension of the child support grant to children up to their 15th
birthday, given certain conditions such as school attendance.
The reduction of the qualifying age
for men for old age pension is reduced from 65 to 63 this year and to 60 by
2010 is more problematic. This goes against international developments where it
has become custom that workers, because of a better health environment live
longer and also prefer to work up to an older age. However, our unique
circumstances where older men are on average jobless and living in poverty,
adds a totally different dimension to this problem. FEDUSA would therefore support
this measure.
7.
RAISING NET
EXPORTS
Over the last few year’s, exports
remain a concern for Government, and is continuously too low to pay for our spiralling
imports. The result is that we have to rely on capital inflows to finance our
imports, which could be risky. Thus far we have succeeded in acquiring the
necessary capital inflows. The ideal and more acceptable solution is to promote
exports.
As export industries tend to be
comparatively labour-intensive, trade promotion could also lead to broadening
economic participation. FEDUSA welcomes the substantial spending allocations
and tax measures directed at industry and trade development included in this
year’s budge.
8.
INVESTING IN
PRODUCTIVE CAPACITY
Electricity shortages which
adversely affected our economy, pointed to the importance of long-term planning
and decision making for economic growth and development. FEDUSA note that
Eskom, Transnet, the Airports Company, water authorities and rail utilities are
all increasing investment to expand their capacity. After many years of little
or no investment and the awakening call of
9.
TAX POLICY
Over the
last decade, the Tax/GDP ratio has gradually increased to the current
relatively high 27.5 per cent over the next MTBPS. There is no definite
criterion to actually the determine the Tax/GDP ratio in a country as
conditions differ between countries. The Katz commission proposed 25 per cent.
It should however be remembered that taxes determine international
competitiveness and that too high taxes have distorting effects on economic
behaviour as they effects a person’s ability and propensity to work and save.
Today taxes are an important factor for businesses considering his foreign
investment.
FEDUSA would urge Government to
consider the lowering of marginal tax rates over the next few years as a
measure to increase foreign investment as well as domestic private investment.
10.
RETIREMENT SAVINGS
Taxation on retirement funds has
finally received considerable mention in the Minister’s speech. The right of
individuals to provide adequately for retirement is an important provision in
public policy. However, the taxation on the retirement funds have a direct
effect on the retirement capital of contributors and could add an additional
burden on the state coffers if pensioners cannot live off secure pensions. When
the tax on retirement funds was introduced in 1996, it was seen as a temporary
measure pending the review of the retirement industry as a whole. Despite
various suggestions from the Katz Commission, the review has been slow and very
frustrating. The South African economy needs a
robust inducement to boost domestic savings and the review and subsequent cut
of the taxation on retirement funds would be a step in the right
direction.
FEDUSA believes that pension funds
are finding it difficult to beat inflation in terms of performance and for the
state to dip into workers benefits to the magnitude it is presently doing, adds
insult to injury.
FEDUSA needs to caution Government
and specifically the National Treasury on any proposals that could be to the
detriment of individuals making provision for old age. Any proposals pertaining
to the legislative environment on withdrawals from retirement funds should be
subjected to consultation at NEDLAC where the social security reform is
currently being revised. Specifically the issue pertaining to the taxation of
retirement funds upon employee termination of service, even if that employee
fails to withdraw funds from the retirement system.[1]
11.
SPECIFIC FOCUS AREAS IN
THE BUDGET ALLOCATIONS THAT ARE WELCOMED BY FEDUSA ARE AS FOLLOWS:
11.1
Crime
Crime fighting will be strengthened
by additional allocations of R10-billion over three years, including expansion
of police numbers to reach 200 000 in 2010/11. Also on the cards are more
prosecutors, judges and magistrates, further investment in forensic science
laboratories, 40 new police stations and accommodation for 18 000 prisoners.
The Safety and Security Department's budget will increase to R49,3-billion by
2010/11, from R40-billion in 2008/09 and R36-billion in 2007/08.
The government intends reducing
contact crimes by 7% to 10% a year, including crimes against women and
children. The Correctional Services Department was building six new-generation
prisons by 2010/11, five of them through public-private partnerships. They will
accommodate 3 000 prisoners each. The department is also making efforts to improve
its rehabilitation of prisoners, to reduce the numbers of repeat offenders.
R15-billion will be allocated to correctional services in 2010/11, from
R10,7-billion in 2007/08.
FEDUSA is pleased to note that this
year’s Budget again include some steps to combat crime. This includes
additional allocations of R250 million for upgrading of equipment in police
forensic service laboratories, and R530 for the appointment of about 850 police
officials. This would bring the projected police numbers to by 201 000 by 2011.
Other measures include increasing prison space. Other measures include
enhancing court efficiency over the medium period.
11.2
Housing
About R2,2-billion will be spent on
upgrading informal settlements. According to the he Budget Review about 762 000
homes in these settlements will be upgraded over the next three years. The
Housing Department will receive a total of R10,5-billion[2]
in the coming 2008/09 financial year, increasing to R15,3-billion in 2010/11.
Alternative and cheaper building technologies will be used to complement the
bricks and mortar used in low-income housing.
The Budget Review indicates that a
further 2,4-million homes are needed to overcome the housing shortage. A total
of R35,8-billion has been allocated to housing needs over the medium term.
Efforts are being made to ensure closer scrutiny of housing delivery, and to
evaluate progress.
FEDUSA welcome the housing subsidy
programme will now allow households earning between R3 501 and R7 000 a month
to qualify for subsidies on mortgages from private-sector banks.[3]
11.3
Health
Additional funding over the next
three years could double the number of people on treatment for Aids, according
to the budget. The fight against multi- and extensively drug-resistant
tuberculosis (TB) will also be given priority.
The Budget Review states that
spending on dedicated HIV/Aids programmes by health, education and social
development departments will top R6,5-billion a year by 2010/11. Current
spending is just more than R2,2-billion.
An extra R2,1-billion had been
committed over the next three years to the provincial conditional grant for
fighting Aids. This will be used to expand the comprehensive treatment programme
already being offered at 316 sites.
According to the Budget Review
additional funding should allow 500 000 more people access to treatment in
addition to the 418 000 already on treatment, as well as increasing the numbers
of people tested, and expanding a range of prevention programmes. TB funding
support will be extended to hospitalisation and treatment.
The hospital revitalisation
programme will receive an additional R2,1-billion over the next three years to
help provinces equip and modernise hospitals. Spending on this programme will
rise to R9,6-billion over the next three years. In addition, provinces are
expected to step up their own hospital maintenance budgets. A total of 33
hospitals are currently under construction.
Improved remuneration and training
had contributed to an increase in health personnel of 39 600 over the past four
years. A further 25 000 posts will be filled by 2010. Spending on health
services, which now stands at R75,5-billion, will grow by over 10% a year over
the next three years.
FEDUSA would like to raise the
concern that there appears to be no evident link between health planning a
budgets. The budget process determines what health needs are met, rather than
health needs determining the budget. [4]
11.4
Transport
The price of petrol and diesel is to
increase by 11 cents a litre from April 2.
This includes an increase of six cents a litre in the general fuel levy,
and an increase of five cents a litre in the Road Accident Fund levy. [5]
The biodiesel fuel-tax concession is
raised from 40% to 50%. Bio-ethanol will remain outside the fuel-tax net, but
will still be subject to VAT at the standard rate.
The government's bio-fuel industrial
strategy -- approved by the Cabinet in December 2007 - aims to see bio-fuel
make up 2% (or 400-million litres a year) of the national liquid fuel supply
over the next five years.
11.5
Education: the largest
single category of spending in the budget.
Provinces are to spend more than
R18-billion on school infrastructure and equipment over the next three years.
FEDUSA and our education trade union Suid-Afrikaanse Onderwysers Unie (SAOU)
welcomes the expansion of early childhood education and the school nutrition
programme. However we would like to raise our concern as to whether the
Department has the capacity and the ability to utilise these allocations
efficiently and effectively. Underspending of budget allocations remain a major
concern.
Education in the coming year will
account for R121,1-billion. Early childhood education will be expanded to about
700 000 more children, which will put basic pre-school education within reach
of even the poorest of households. FEDUSA and the SAOU welcomes the school
nutrition programme which will grow by more than 30% next year
According to the Budget Review, the nutrition
programme is to get an extra R1,8-billion. Currently the programme provided
meals to six million learners in 18 000 schools targeting 7 million learners in
19000 schools by 2009 is a reasonable target.[6]
FEDUSA and the South African
Parastatal and Tertiary Trade Union
(SAPTU) welcome the additional allocations this year for higher
education and the National Student Financial Aid Scheme, and further education
and training (FET) colleges.
Revenue from the skills development
levy is projected to rise to more than R9-billion by 2010/11. The government is
exploring ways in which these funds can be used to support FET colleges.
11.6
Provinces and Government
Allocations to provinces will total
R238-billion in 2008/09, increasing by R46-billion over the next three years.
Most of this will go to improvements in education, health, welfare and housing.
According to Budget documents
tabled,
Over the next three years,
non-interest public spending is projected to grow by 6,1% in real terms.
CONCLUDING
REMARKS
FEDUSA want to commend the Minister
on the many positive steps take in this year’s Budget to improve the quality of
life of South African workers. FEDUSA is convinced that the measures will play a
crucial role to lift our economy to a higher level of sustainable growth and
development over the years to come.