2018 Budget: public hearings

2018 Budget: public hearings

Finance Standing Committee

28 February 2018

Chairperson: Mr Y Carrim (ANC) and Mr C De Beer (ANC)

Audio:

2018 Budget: public hearings am

2018 Budget: public hearings pm

Meeting Summary

The Standing Committee of Finance and the Select Committee on Finance held public hearings on the 2018 Budget (Fiscal Framework and Revenue Proposals).

The South African Institute of Chartered Accountants (SAICA) acknowledged that during the 2018 Budget presentation, the Minister had reinforced the message of the President in that this was a budget of hope. Stakeholders needed to busy themselves with finding solutions and not being discouraged by the challenges but rather looking forward to the joy when they are conquered. SAICA commended National Treasury for taking such bold steps and making even bolder acknowledgements in a time when, politically, many of these would not be expedient and they did so knowing that it would attract great political criticism. However, the context was that many of the current challenges which the country faces had been self-inflicted. In fact, many of the decisions which have the deepest consequences for the poorest in society were as a result of decisions taken in the recent past. To this extent, it should be acknowledged that especially the increase in the VAT rate, which National Treasury had resisted for the last few years, was an unfortunate consequence of such decisions that created a situation where there was no other way to fund the fiscus. The acknowledgement that even ‘flogging the dead horse of PAYE’ had not yielded the expected results, with substantial under budget recoveries in the last two years for the first time in decades, notwithstanding a marginal tax rate increase to 45% last year, prompted the need for a broader based solution to the budget deficit crisis. The current fiscal policy contributed to uncertainty, together with funding uncertainty, and continues to contribute to a lack of economic growth. Foreign and local business do not have sufficient confidence in the economy, which still seems to have contradictory fiscal policy versus funding and implementation plans. SAICA proposed that government should introduce transparency measures and actively engage the private sector in discussions on proposed implementation plans around all these taxes.

The South African Institute of Tax Practitioners (SAIT) believed a reasonable balance was struck between: tax increases; public expenditure cuts; budget deficit/ government borrowing; and funding fee-free higher education and training for poor and working-class students. Nonetheless, taxes were too high and not sustainable – very high as a percentage of GDP and compared to other countries, hence the current trajectory effectively squeezes out the private sector. On the balance between tax instruments, SAIT submitted that a VAT increase was unavoidable. Personal income tax collections for 2017/2018 was expected to undershoot the target by R21.1 billion. Corporate income tax rate was high in comparison and the global trend was that they decrease competitiveness whereas VAT rate is relatively low compared to Africa and the world. VAT rate increase from 14% to 15% had the least detrimental effect. Broad-based and efficient tax collections immediately should bring in a significant amount of revenue of R22.9 billion. The increase in VAT from 14% to 15% was a 0.88% increase on standard rated goods and services consumed. A VAT increase will affect the poor and the rich roughly proportionally but there was need to mitigate the effect of the VAT increase on the poor. SAIT proposed the review of the list of zero-rated basic food items as many essential food items consumed by the poor are not zero-rated; many other essential items are subject to VAT at 15%; and many zero-rated food items benefit the rich.

PricewaterhouseCoopers (PwC) welcomed the reduction in deficit over the medium term budget policy statement (MTBPS). However, rate of deficit reduction was of concern, and expenditure was the primary problem, not revenues. Revenues were at record levels and the government wage bill was the primary cause of increased expenditure. On tax proposals, PwC submitted that the R7.5 billion PIT increase may be viewed as unjustifiable by taxpayers. There was concern that further PIT tax increases would not be effective as increased revenues did not materialise in 2017 and there was risk that 2018 increased revenues may also not materialize. PIT as a source of additional revenues had been exhausted as tax burden was well above OECD average, +-2.5 times higher than developing country averages, and 80% of PIT was paid by 25% of taxpayers liable for PIT. There was no choice but to increase VAT to raise tax revenues sought. VAT is regressive but progressivity should be measured taking into account all tax instruments as well as expenditure. Notably, zero-rating would benefit the higher-income brackets. PwC was happy to engage on other options which could be explored.

The Fiscal Cliff Group gave a background on the notion of a “fiscal cliff”. This was the point where social assistance payments, civil service remuneration and debt-service costs will absorb all government revenue. The Group noted that compensation of employees, social assistance payments and debt-service costs 70.4% of tax revenue in 2018/19. This ratio was 55.0% in 2007/08. Underperforming government revenue was an additional concern, moving the fiscal cliff closer. South Africa’s economic growth potential had contracted to 2.5%. This potential growth rate was the upper cap that should be used in policy planning scenarios. Near-term growth expectations were much lower and uncertain. A deficit before borrowing, which was above 2.5% in any tax year, implied that the financial burden of the South African government on South African taxpayers will continue to increase in the long run. Budgeted deficit for the next three fiscal years were around 3.6% of GDP. However, fiscal cliff danger had been somewhat alleviated since 2014. The Group recommended that: deficit before borrowing must be contained; bonus payments for executives at SOEs and government institutions must be abandoned; government expenditure must be reprioritised, for example: official cars; smaller Cabinet; and moratorium on civil service employment. Expenditure cuts in Budget Review must be specified with detailed time lines to ensure monitoring of progress.

COSATU rejected and condemned the VAT and fuel hikes in the strongest possible terms and called for Parliament to defend workers and reverse them. Whilst government had been bold in taxing workers, it had avoided increasing taxes on the rich, company tax or significantly increasing luxury goods and imports taxes. What the country has was a situation where politicians and their friends have looted the state and now nurses, teachers, police officers and other lowly paid workers are forced to foot the bill. COSATU condemned government’s through-the-back-door effective income tax hike upon working and middle class families by minimising inflation adjustments for tax brackets at below inflation levels. This was the third year in a row that Treasury is raising income taxes upon the working and middle classes through this back door. It believed that government can significantly increase revenue and thus providing more resources in support of economic stimulus, job creation and developmental objectives by: fast tracking the SARS Commission of Enquiry; immediately removing the compromised leadership of SARS; fast tracking the engagement on and implementation of progressive tax proposals from the Judge Davis Tax Commission; cancelling the VAT tax hike to 15%; increasing company taxes to 30% or 32% which should generate an additional R13 to R26 billion in revenues; increasing the estate and inheritance taxes; increasing income tax for incomes above R1 million to 45% which should generate an additional R5 billion; introduction of progressive tax system, with an introduction of a tax category for the super-rich; imposition of a land tax to aid the process of land redistribution; zero-rating of medicines, water, domestic electricity and public education; taxation of firms that pay below the statutory minimum wage, and the distribution of such tax proceeds back to the workers concerned; among other proposals. Overall the 2018 Budget had been very disappointing for workers. COSATU was disappointed that instead of explaining how it will stop wasteful expenditure and looting or how it will recover stolen funds; government had rushed to punish workers by raising VAT, fuel levies and adjusting income tax brackets at below inflation levels. It called upon Parliament to reject these taxes upon the working and middle classes.

The National Union of Metalworkers of South Africa (NUMSA) expressed concern that the proposed tax increases were coming at a time when citizens were still trying to cope with the unacceptable 5% increase in Eskom tariffs. The progressive social grant increase of old age grant by R90 in April and R10 October will do very little to cover the harm that would be caused by the hike in VAT. Similarly with the Child support grant increase of R400 (April) and R410 (October). NUMSA could not continue to celebrate the fact that about 11 million people are on social grants. This simply showed that the government had decimally failed to transform the lives of the poor. Given the rising costs from all sides: taxes, goods, levies, transport, electricity and other tariffs, it was hard to understand why does the National Treasury puts so much faith in the household consumption increases and in the GDP real growth. This meant that ordinary citizens would be paying more taxes than big corporates. In a country like South Africa with extreme poverty, as it is [social grants recipients] struggle to make ends meet. Many were already vulnerable to money lenders and take out loans. On what was to be done, government must be prepared to build an active developmental state that will introduce strategic nationalization in order to access the resources so desperately needed for free education, free health care, industrialization, and an infrastructure that meets the needs of our people. The Freedom Charter should be adopted and the commanding heights of the economy should be nationalised so that the bottom 50% people can benefit. SARS should decisively deal with tax avoidance by big corporates. There should be clear legislation that deals with sophisticated crimes done by White Monopoly capital to avoid illicit financial outflows, base erosion and profit shifting. In light of this national crisis of a jobless society, there can be no justification whatsoever to increase taxes that affect the poor such as VAT.

Amandla.mobi made a submission on behalf of over 47 000 people who submitted a petition to completely reject the proposed VAT increase. It called on Members, as elected leaders, to scrap the VAT increase for the 2018/2019. Amandla.mobi joined the call with 35 civil society organisations rejecting the VAT increase, and advocating for other ways of raising revenue including increasing personal income tax on high income earners, increasing the corporate tax and implementing a carbon tax. Increasing, sin and sugar taxes should also be considered. All of this should make it possible to relieve the burden on the poor, and get rid of regressive tax policies in opposition to mainstream economists who are calling for VAT increases. Citizens who will be deeply hard-hit by the proposed VAT hike. Although the free education proposal was welcome, the marginal increase in grants would not help the poor. This regressive VAT increase would not be for the greater good. He deplored the very short timeframes allocated for public participation.

Organisation of Undoing Tax Abuse (OUTA) strongly urged government to commit to zero tax increases in the next financial year. Increased VAT was not sustainable and can be replaced by other forms of fiscal consolidation going forward. Deeper econometric analysis of the potential impacts of proposed quantitative adjustments would require more time than was allotted for public participation in Committee hearings. Large scale, centralized social welfare initiatives such as National Health Insurance, fee free higher education among other increases the burden on taxpayers; that was in the context of poor financial performance of SOEs and other organs of state. Care must be taken to ensure that these welfare policies are not mismanaged or exploited as in the SASSA / social grants debacle. OUTA supported the role of the Standing and Select Committees on Finance and Appropriations in overseeing and managing the executive and its entities’ financial conduct. Listed oversight priorities include appointing effective board members, ensuring that boards appoint competent managers, tackling wastage and corruption, and, crucially, acting against entities that are not performing. Other recommendations included: improving supervision of revenue collection; optimising government’s borrowing strategy; preserving the expenditure ceiling; satisfying the demands of key ratings agencies; increasing penalties for wasteful expenditure.

Parliament Watch commented mainly on the Committee consultation processes. Parliament Watch was concerned about the short time-frames for public input, the lack of access to comprehensive information, and the time to comprehend, communicate, consult and develop positions on the proposals. The failure to advertise the opportunity for public input within adequate timeframes and on a range of appropriate platforms, to provide accessible information to the public, and to allow for timeframes in which the public can engage with the information undermines the overall transparency and accessibility of the process. Parliament Watch appreciated that resolving these challenges within the timeframes between the annual Budget Speech and the time in which the proposals must be finalised by Parliament is a challenge, and that in some respects it is a challenge that is not surmountable at this stage of the 2018 process. Nonetheless, the effect was that the majority of people affected by the proposals and decisions – those living in poverty and working class people, as well as the organisations seeking to represent the interests of those parts of society are unable to ‘meaningfully’ engage in the process.

The Civil Society Coalition submitted concerns about the proposed Budget with specific attention to revenue raising, proposed tax measures, and the increase to VAT. The Coalition was alarmed at the regressive taxation measures proposed in the 2018 Budget Speech, particularly the proposed VAT and fuel levy increases. While it recognised the need to raise additional revenue for the national fiscus, the proposals made to Parliament by the Minister of Finance made the tax regime more regressive and stood to exacerbate already unacceptably high levels of poverty and inequality and retard job creation and economic growth. The Coalition was concerned that the negative effects this will have on the poor, had not been adequately considered. Treasury’s claim that VAT is “least detrimental to growth” was questionable given that such a conclusion was based on a statistical model used that can only show negative growth impact from rising taxes; distributional issues (within the main macro model) are ignored; and international evidence was ignored. A government budget was not the “same as a household budget”. Therefore, civil society organisations called on Parliament to: withhold approval of the tax proposals, in particular the increases to indirect taxes, including keeping VAT at its current level of 14%; institute a proper process of public engagement regarding the optimal revenue raising mechanisms; to review the processes of public participation – its timeframes, format, and implementation – which presently limit public participation in the budget process. The Coalition asked National Treasury to: make available, in full, the evidence upon which it based its claim that raising direct taxes (such as PIT and CIT) is more harmful to economic growth, including the assumptions and models upon which these are based; provide its analysis of the distributional effects of its proposals; and provide evidence of its reasoning on the proposal level and rate of contraction in borrowing in relation to the need to boost economic growth.

Quaker Peace Centre (QPC) was concerned that, while engagement with the Budget had been sought, this was difficult due to an absence of detailed information on just how the measures proposed were going to be implemented. The time-frames were also too short to allow for the necessary level of public engagement. The proposed increase in VAT will have a significant impact on the large numbers of poor people in South Africa. Despite the exemptions on certain basic goods, research had consistently proved that the poor pay a higher share of their income in VAT than the rich. This is due to the Marginal Propensity to Consume (poor people spend a higher proportion of their income, while rich people save a higher proportion). Increasing VAT was a regressive step. The increase in the fuel levy would have the greatest negative impact on the poor, in increased public transport costs and food prices as the result of increases in transport costs. The increase in VAT and the fuel levy would erode the already inadequate increases in social grants, leaving grant recipients with less money than before. QPC believed that the issue of VAT increases should be preceded by a period within which civil society can engage with government and seek creative solutions to minimise the negative impact on the poorest South Africans.

Mr Guy Harris emphasised the need to transform for inclusive growth. The South African economy was currently an unstable, teetering, elegant thin stem, top heavy wine glass with large, overly concentrated industries dominated by a few big companies, supported by big government and big labour, in the bowl of the glass. The fragile thin stem was of SME businesses and an economically small (but large population) base of 70% of South African households surviving on less than R6000 per month. Thus there was need to transform into a much more robust tumbler: concentrated bowl transformed to be more competitive through supply chain inclusion; a substantially expanded and strong SME stem; and a capacitated base that has pathways out of poverty into formal business sector via jobs and entrepreneurship via scalable rather than poverty alleviation micro businesses. Education is the key driver for reducing inequality sustainably but needs a much stronger Early Childhood Development base that is well funded and has clarity of where responsibility lies (Province, Municipal or Basic Education) – Free Tertiary was populous and too late. To fund the above without negatively impacting on government ratios and tempting further downgrade, there was need to use selected, targeted commercialisation and additional sin taxes for areas with high social costs such as substance abuse, import surcharges where locally manufactured substitute products are available. Medium sized business that accelerate from 10-50 and scale from 50-500 employees were the remaining hope.

Manufacturing Circle recommended that government had to: align fiscal policy with industrial objectives; apply an Inclusive approach that includes incentives, infrastructure upgrades, improved labour relations and addressing high cost, low skill labour; reduce tax burden on the industry; increase manufacturing allowances in line with the mining sector; and review and direct tax incentives towards the manufacturing sector Black Industrialist incentive was welcomed and supported as a key driver for economic transformation, and greater involvement was planned by the Manufacturing Circle in engaging industry to identify commercially viable, bankable opportunities. Extension of the window period for the Section 12I tax incentive to 31 December was also welcomed. Manufacturing Circle however noted that no additional allowance to top up the initial R20 billion budget was announced. To date, the full budget allocation for this incentive has been committed.
National Treasury said it was quite willing to hear stakeholders’ input and, if necessary, review its positions. Evidence-based proposals were useful. The key point was that the country was facing challenging times and there had been brutal cuts on the non-wage sides of government expenditure. Treasury had to find the R36 billion shortfall and would provide the information and models used to reach decisions on its proposals. The VAT increase was thoroughly considered by Cabinet, not Treasury alone- it was quite an extensive process. However, a lot of consultations on tax policy were usually made after the announcement due to their sensitivity. There were consequences in deferring VAT revenue collection beyond the start of the financial year as it would mean that the deficit would go up. He noted that the fuel levy was adjusted for inflation yearly and expressed frustration in that Treasury had to finance claims from the Road Accident Fund (RAF). Treasury has been waiting on legislation for more than a decade to limit payments made to the Fund. The deficit was massive and bulk of the price increase in fuel was going towards the RAF. Also, any tax increase was unpalatable but was unavoidable in this instance. It was not correct to say corporates were not being subjected to any tax increases. There were real difficulties in raising revenue.

Members acknowledged the frustrations and opposition against the proposed VAT increase. What interventions were suggested to cushion the poor due to the VAT increase? There were formidable arguments in support of the increase on the basis that it was not as regressive as it was being put out. There were compelling arguments from both sides. They expressed concern that huge sums of money were being spent on education every year but there seemed to be no dividends in terms of economic growth and development. They commented on proposals which implied that taxing few people in the high income tax bracket was unsustainable. South Africa was dealing with a complex matter and redressing inequality originating from the injustices of the past was crucial. The country should come together and come up with solutions.

The Co-Chairperson indicated that the Joint Committee would allow public submissions up to the day before Members vote on the Bill. Committee staff would also engage endlessly telephonically and via email with participants. This was the first tranche of exchanges between now and November 2018. He urged Treasury to meet with the participants before the Joint Committee votes on the Bill to iron out the issues as was being presented. Most Members deeply regretted that there was going to be a VAT increase but, in the same vein, recognised it may be something which was unavoidable. This was the most challenging Budget and in particular this was the first VAT increase. This was new territory and the Joint Committee would do what it could in the face of the various constraints.

Meeting report

Mr De Beer welcomed everyone and appreciated that many stakeholders availed themselves to give inputs on the 2018 fiscal framework and revenue proposals.

South African Institute of Chartered Accountants (SAICA) submission
Mr Pieter Faber, Senior Executive, SAICA, acknowledged that during the 2018 Budget presentation, the Minister had reinforced the message of the President in that this was a budget of hope. Stakeholders needed to busy themselves with finding solutions and not be discouraged by the challenges but rather looki forward to the joy when they are conquered. SAICA commended National Treasury for taking such bold steps and making even bolder acknowledgements in a time when, politically, many of these would not be expedient and it did so knowing that it would attract great political criticism. However, the context is that many of the current challenges which the country faces had been self-inflicted. In fact, many of the decisions which have the deepest consequences for the poorest in society were as a result of decisions taken in the recent past. To this extent, it should be acknowledged that especially the increase in the VAT rate, which National Treasury had resisted for the last few years, was an unfortunate consequence of such decisions that created a situation where there was no other way to fund the fiscus. The acknowledgement that even ‘flogging the dead horse of PAYE’ had not yielded the expected results, with substantial under budget recoveries in the last two years for the first time in decades, notwithstanding a marginal tax rate increase to 45% last year, prompted the need for a broader based solution to the budget deficit crisis.

In seeking to achieve tangible and urgent change, SAICA set out the matters it believed should be addressed. The Minister had rightfully concluded that the current debt path was unsustainable and that more will have to be done to avoid the country going further down this slippery debt slope. SAICA was in complete agreement with the Minister in that the answer cannot just be more taxes and welcomed the acknowledgement that South Africa has become a high tax country in so many aspects. For those who avoid their lawful tax obligations, SAICA welcomed proposals to address these to the fullest extent of the law, but cautioned that the answer does not lie in further burdening the compliant taxpayers. Debt has been used by government in the last decade to enhance and subsidise its spending plans and there was need to consider the impact of this decision and why it may not be the ideal to bring about real economic change and growth.
A further symptom of economic problems was that employment is favoured over own-business ownership, notwithstanding government priority for SME’s, which in itself leads to market concentration, with the existence of small businesses becoming less. In this regard, SAICA welcomed the President’s initiative of a jobs summit. However, it remained cautiously optimistic that if there can really be a ‘meeting of minds’, rather than ‘shop talk’ between government, business, organised labour and society, real change will occur leading to prosperity for the country. However, the challenge was greater than just talk and promises, as there are known conflicting ideologies which need to be addressed for the country to really have a productive engagement and a meeting of minds.

SAICA submitted that economic growth is not like a widget which you manufacture, but rather like a village in which a child grows i.e. there was need to create the stable environment for it to grow and continually nurture it. The characteristics of the economy, like the child, will reflect the village it grows in. On debt levels, SAICA noted that the country had taken the easy road and developed a bad habit of financing its wants and needs with other people’s money. This will not lead to economic growth, just a constant need for unsustainable tax revenue and salary increases.

On tax morality and tax avoidance, the acknowledgement by the Minister that tax morality on the expenditure side is as critical as the revenue side was most welcome as it had remained an ongoing concern of SAICA. To increase levels of tax morality and tax compliance in a country, the relevant government department needs to enforce better spending fiscal morality and the tax administration must inspire trust and confidence within the taxpaying public. Taxpayers want to see their taxes put to good use or they may feel that there is no point in contributing. SAICA welcomed the establishment of the Commission of Inquiry though cautioned that its mandate should target wide consultation and inclusion from all stakeholders with a single view of making SARS more effective and efficient. Furthermore, any supervisory board should contain representatives from non-governmental stakeholders such as taxpayer bodies, professional bodies and tax practitioners.

SAICA submitted that the importance of fundamental and basic education should remain a focus of government. However, it was not just money, but rather lack of and inappropriate school administration, labour inefficiency and lack of proper understanding that had resulted in poor results notwithstanding government’s significant monetary investment. Therefore, the key focus should be providing individuals with the opportunity to enrol for Technical and Vocational Educational Training (TVET) to ensure that the economy has access to a wide variety of skills, especially in the priority areas identified by government of manufacturing.

In conclusion, the current fiscal policy contributed to uncertainty, together with funding uncertainty, and continues to contribute to a lack of economic growth. Foreign and local business do not have sufficient confidence in the economy, which still seems to have contradictory fiscal policy versus funding and implementation plans. SAICA proposed that government should introduce transparency measures and actively engage the private sector in discussions on proposed implementation plans around all these taxes.

South African Institute of Tax Practitioners (SAIT) submission
Ms Erika de Villiers, Head of Tax Policy, SAIT, believed a reasonable balance was struck between: tax increases; public expenditure cuts; budget deficit/ government borrowing; and funding fee-free higher education and training for poor and working-class students. Nonetheless, taxes were too high and not sustainable – very high as a percentage of GDP and compared to other countries, hence the current trajectory effectively squeezes out the private sector. Steps should be taken to shrink the government in line with the President’s State of the Nation Address (SONA) in order to get public spending and government borrowing under control. Corruption and fruitless and wasteful expenditure must be curtailed, and there was need for economic growth. SAIT asked if these proposed taxes would be collected, and what would happen in 2018/2019 given the shortfalls reported by the South African Revenue Service (SARS) in the previous reporting season. It also asked if a tax buoyancy of 1.51 was realistic given the recent years’ record, and whether the gross tax revenue budget would be achieved in 2018/2019.

SAIT identified the need for balancing SARS tax collections and taxpayer rights, and increasing pressure on SARS to collect tax. Many competent SARS officials were very successful but some SARS officials substitute aggression for skills. Many taxpayers feel that they do not have rights. Hence, there was a need for a Taxpayer Bill of Rights as recommended by the Davis Tax Committee: to guarantee taxpayers rights in their interaction with SARS; to make SARS responsible in its dealings with taxpayers; and to regulate the interactions and expectations of the relationship between SARS and taxpayers.

It was acknowledged in the Budget that corruption and wasteful expenditure in the public sector have eroded taxpayer morality in recent years. The lack of an effective government response to allegations of corruption and poor governance has undermined the social contract between taxpayers and the state. SAIT welcomed the following measures which have been announced to strengthen tax morality: the overall emphasis by the new President to curb corruption and waste; the establishment of a commission of inquiry into the functioning and governance of SARS; and steps to improve the governance and accountability of SARS and to strengthen the operational independence of the Tax Ombud, following the recommendations of the Davis Tax Committee.

On the balance between tax instruments, SAIT submitted that a VAT increase was unavoidable. Personal income tax collections for 2017/2018 was expected to undershoot the target by R21.1 billion. Corporate income tax rate was high in comparison and the global trend was that they decrease competitiveness whereas VAT rate is relatively low compared to Africa and the world. The VAT rate increase from 14% to 15% had the least detrimental effect. Broad-based and efficient tax collections immediately should bring in a significant amount of revenue of R22.9 billion. The increase in VAT was a 0.88% increase on standard rated goods and services consumed. A VAT increase will affect the poor and the rich roughly proportionally but there was need to mitigate the effect of the VAT increase on the poor. SAIT proposed the review of the list of zero-rated basic food items as many essential food items consumed by the poor are not zero-rated; many other essential items are subject to VAT at 15%; and many zero-rated food items benefit the rich.
SAIT acknowledged technical proposals and administrative adjustments as follows: amendments resulting from the application of debt relief rules; further amendments to be made to address unintended consequences; and refining anti-avoidance rules dealing with share buybacks and dividend stripping.
In conclusion, SAIT looked forward to further engagement on all the tax proposals during the legislative cycle.

PricewaterhouseCoopers (PwC) submission
Mr Kyle Mandy, Director: Tax Policy Leader, PwC, welcomed the reduction in deficit over the medium term budget policy statement (MTBPS). However, the rate of deficit reduction was of concern, and expenditure was the primary problem, not revenues. Revenues were at record levels and the government wage bill was the primary cause of increased expenditure. The wage bill increase from 9% of GDP to 11.7%, mostly due to higher salaries. It was concerning that it continued to increase at 7.3% over the medium term. He also noted that capital spending had reduced.

On the tax increase proposals, PwC submitted that the tax increase of R36 billion will hurt economic growth, but would be less damaging than a credit rating downgrade. Taxpayer trust had eroded and was evident from slippage in tax compliance. Revenues from tax increases were not materialising.

South Africa’s tax burden was increasing unsustainably. Gross tax revenues sat at +- 28.5% of GDP in 2018/19 and was projected to increase to 29% in 2020/21. This was crowding out other policy initiatives. Compared with other countries, South Africa had the 8th highest tax to GDP ratio globally- higher than world and Africa averages. The country has relatively high reliance on direct tax and low reliance on indirect tax and the system was strongly progressive but relatively economically inefficient. A small pool of taxpayers pay bulk of personal income tax (PIT).

On tax proposals, PwC submitted that the R7.5 billion PIT increase may be viewed as unjustifiable by taxpayers. There was concern that further PIT tax increases would not be effective as increased revenues did not materialise in 2017 and there was risk that 2018 increased revenues may also not materialise. PIT as a source of additional revenues had been exhausted as tax burden was well above OECD average, +-2.5 times higher than developing country averages, and 80% of PIT was paid by 25% of taxpayers liable for PIT. There was no choice but to increase VAT to raise tax revenues sought. VAT is regressive but progressivity should be measured taking into account all tax instruments as well as expenditure. Notably, zero-rating would benefit the higher-income brackets. PwC was happy to engage on other options which could be explored.

Fiscal Cliff Group submission
Dr Jannie Rossouw, Fiscal Cliff Group, gave a background on the notion of a “fiscal cliff”. This was the point where social assistance payments, civil service remuneration and debt-service costs will absorb all government revenue. He noted that compensation of employees, social assistance payments and debt-service costs 70.4% of tax revenue in 2018/19. This ratio was 55.0% in 2007/08. Underperforming government revenue was an additional concern, moving the fiscal cliff closer. South Africa’s economic growth potential had contracted to 2.5%. This potential growth rate was the upper cap that should be used in policy planning scenarios. Near-term growth expectations were much lower and uncertain. A deficit before borrowing, which was above 2.5% in any tax year, implied that the financial burden of the South African government on South African taxpayers will continue to increase in the long run. Budgeted deficit for the next three fiscal years were around 3.6% of GDP. However, fiscal cliff danger had been somewhat alleviated since 2014.

The 2018 Budget provided welcoming stagnation in trend over the medium term, but it would be imperative that government sticks to these budgeted figures as South Africa was running out of capacity to tax. He made reference to the Irish fiscal cliff. The reduction in government expenditure included a reduction in civil service employment and remuneration. Civil service employment was reduced by 10%. Following the Irish example to reduce government expenditure, government had to: reduce the size of the executive (smaller Cabinet; on average each Ministry costs between R30 million and R50 million per annum); purchase only vehicles manufactured in South Africa for the government’s vehicle fleet; abandon the nuclear power plan as South Africa cannot afford such expenditure; reduce the size of the civil service through an employment moratorium; and reduce civil service remuneration increases by including the cost of annual notch increases in the cost of general adjustments and limit overall adjustment to the rate of inflation. More information on drivers of civil service remuneration was required.

Dr Rossouw recommended that: deficit before borrowing must be contained; bonus payments for executives at SOEs and government institutions must be abandoned; government expenditure must be reprioritised, for example: official cars; smaller Cabinet; and moratorium on civil service employment. Expenditure cuts in Budget Review must be specified with detailed time lines to ensure monitoring of progress. Also, more disclosure was necessary in respect of annual increases in civil service remuneration: structural remuneration changes; notch adjustments; promotions; seniority increases; performance bonuses (if any); and annual general adjustments (cost-of-living).

In conclusion, a picture of a continued tight fiscal position emerged, and this was linked to subdued economic growth. Should no corrective measure(s) be taken, the fiscal cliff will materialise. More concerning was the crowding-out effect that these identified items were already exerting on other expenditure items. For example, the impact on infrastructure projects expected due to the unavoidable reduction plans over the medium term.

Discussion
Mr A Lees (DA) asked why SAICA was cautious about having the commission of inquiry on tax related issues. He noted that legislated deadlines set on tax collections agency were simply being ignored by SARS and it seemed unlikely that revenue targets would be achieved. Such shortcomings had to be dealt with. He asked for an opinion as to whether the economic growth targets set out in the 2018 Budget would be achievable.

Ms T Tobias (ANC) asked SAIT for probable reasons why SARS recorded revenue shortfalls in the previous financial year. Some stakeholders believed it was due to a shrinking tax base. Did SAIT have a specific list of zero-rated items which could be considered and included in the current list? She asked PwC what it meant by that the zero-rated regime was poorly targeted.

Mr O Terblanche (DA) expressed concern that huge sums of money were being spent on education every year but there seemed to be no dividends in terms of economic growth and development. He felt the current debate on land expropriation without compensation would impact on policy certainty and investor confidence.

Ms P Mabe (ANC) asked the Fiscal Cliff Group if there was any rationale in comparing Ireland and South Africa during its presentation.

 Mr M Monakedi (ANC) asked if the experts believed the zero-rated list should be reviewed. He noted concerns over environmental tax increases. He asked if stakeholders felt it should not be increased. Will the reduction of the public service being advocated not lead to higher unemployment rates?

Mr Carrim acknowledged the frustrations and opposition against the proposed VAT increase. What interventions were suggested to cushion the poor due to the VAT increase? There were formidable arguments in support of the increase on the basis that it was not as regressive as it was being put out. There were compelling arguments from both sides. He noted the Fiscal Cliff Group case for need for ministers to purchase vehicles locally. It was valid thus the Committee would write to the President about it. His response would be forwarded to the Fiscal Cliff Group.

Mr Faber, SAICA, replied it was cautious about instituting a commission of inquiry on SARS matters because the proposal was not being brought forth for the first time. Commissions had proven to be ineffective. SAICA would only welcome such an inquiry if its mandate and frames of reference are clarified. He indicated that there were certain structural problems within the education sector and that was why the expected yield was not being realised.

Ms Tracy Brophy, Chairperson: National Tax Committee, SAICA, said immediate fixes were really difficult and expanding the zero-rated list of items could only go half way. It was a complex proposition and future VAT increases could not be ruled out under the prevailing circumstances. The immediate and medium to long term focus would be how to cushion the poor. Also, the longer the list, the more difficult to administer the tax and multi-rating would give incentives for avoidance. It was a composite challenge.

Ms de Villiers said a review on the basket of zero-rated items was necessary. However, this did not detract from the fact that every income bracket would benefit from it. There was need for circumspection.

Mr Carrim said the VAT issue was very contentious. The experts also did not seem to have convincing arguments.

Mr Mandy replied that the challenge was that zero-rating was poorly targeted and would benefit the wealthy. PwC believed there was need for more targeted measures to cushion the poor. PwC currently did not have a viable instrument to provide relief to the poor but food stamps had to be looked into as a viable mechanism. Immediate issues needed to be dealt with in restoring trust in the tax payment system. Restoring business, investor and consumer confidence would bring about economic growth.

Dr Rossouw clarified that the Group was arguing for natural attrition within the public service, not firing personnel. South Africa was highly bureaucratised. The Group was not advocating the removal of zero-rating but argued that having a longer zero-rated list of items would reduce the amount of revenue generated. He said the comparison between Ireland and South Africa was specifically asked for by the Committee during a previous submission and was meant to point out how another country recovered from a fiscal cliff. He expressed concern about the achievability of economic growth targets.

Mr F Essack (DA) asked about the cost to the fiscus due to the withholding of tax refunds by SARS. He asked the experts to undertake some studies and get back to Members.

Dr Rossouw replied that it was exceptionally difficult to get information from SARS but the Fiscal Cliff Group would nevertheless try to undertake the research.

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy,  National Treasury, clarified the VAT increase. The ultimate price increase to the consumer would be 0.87% as a result of the one percentage point VAT increase. The 7% being touted was an academic point about how much the VAT rate had increased by. He emphasised the need to look at the tax system holistically, its progressivity or lack thereof.

COSATU presentation
Mr Matthew Parks, Parliamentary Coordinator, COSATU, said COSATU was disappointed by the government’s underwhelming 2018/9 Budget. The budget was supposed to put flesh, set targets and clear time frames in support of the progressive job creating and corruption defeating vision articulated by SONA but it failed. It offered no concrete strategies to help create alternatives to the neoliberal development strategy that has left many workers and poor people mired in poverty. COSATU was deeply concerned that the budget reflects government’s lack of a coherent integrated and targeted job protection and creation plan that would ensure that all South Africans are employed. There was need to create at least 100 000 jobs per month. Increasingly the jobs being offered to South Africans, especially low skilled workers are temporary, low wage and through labour brokers.

COSATU has continued to argue that there was need to move towards a people driven and people centred development since the neo-liberal policies of the last two decades that have leaned on “market forces” have seen more and more people sliding into poverty and unemployment. There was need for an alternative development strategy because pursuing economic growth for its own sake was not enough. Economic growth was only a means to an end and in itself; it was not enough to solve the triple crisis of unemployment, deepening poverty and inequality. However it remained deeply disappointed that government’s job creation programmes seem to be left to these badly under resourced departments. Job creation is at the heart of all of South Africa’s socio-economic crises. Its solutions lie in eradicating it. The budget allocated to industrialisation and the Department of Trade and Industry (DTI) is woefully insufficient if government wants to reindustrialise the economy, boost manufacturing and exports and create jobs. COSATU was worried that government is distracted by its programme to create a 100 industrial billionaires and not the real challenge which is to reindustrialise the economy.

The President was inspirationally bold on the need to crush corruption. The country has been told that the Hawks have identified R50 billion in stolen assets. The Auditor General has also confirmed that R64 billion was wasted last year. Yet the budget was largely silent on what government will do to stop this. The budget spoke of holding officials to account for delays in payments to service providers but did not say how it will recover the stolen funds and plug the holes of wasteful expenditure. Unless these crises were dealt with, the country will not make any progress in stabilising state finances and ensuring service delivery to a struggling public.

COSATU proposals were as follows: prohibit public representatives and senior public service and parastatal executives and their immediate families from doing business with the state; require public representatives and senior public service and parastatal executives to undergo life style audits conducted by the Auditor General; require public representatives or at least members of national, provincial and municipal executives and senior public service and parastatal executives to publicly declare their taxes; Parliament to quickly pass the Auditor General Amendment Bill; and fast track the passing of the Public Investment Corporation Amendment Bill by Parliament in 2018.

On revenue, COSATU was sympathetic with government on the need to stabilise and fix its budget crisis. It was keenly aware that rising debt costs will squeeze service delivery and a collapse in the state or an IMF bailout will hit the workers and the poor the hardest. However it was deeply disappointed that government was doing this upon the backs of the struggling working and middle classes. Government’s response to its budget problems was to take money from workers through VAT and below inflation income tax bracket hikes. This will hurt workers and their families by taking money from their pockets and making basic food and other living expenses more expensive. COSATU would have at least expected government to announce an increase in the number of basic foods that would now be VAT exempt as a gesture to assist workers to cope with the VAT, fuel and income tax hikes. The 52 cents fuel hike will hurt workers massively as it will force businesses and retailers to pass that tax increase onto workers through price hikes.

COSATU rejected and condemned the VAT and fuel hikes in the strongest possible terms and called for Parliament to defend workers and reverse them. Whilst government had been bold in taxing workers, it had avoided increasing taxes on the rich, company tax or significantly increasing luxury goods and imports taxes. What the country has was a situation where politicians and their friends have looted the state and now nurses, teachers, police officers and other lowly paid workers are forced to foot the bill.

COSATU condemned government’s through-the-back-door effective income tax hike upon working and middle class families by minimising inflation adjustments for tax brackets at below inflation levels. This was the third year in a row that Treasury is raising income taxes upon the working and middle classes through this back door.

COSATU believed that government can significantly increase revenue and thus provide more resources in support of economic stimulus, job creation and developmental objectives by: fast tracking the SARS Commission of Inquiry; immediately removing the compromised leadership of SARS; fast tracking the engagement on and implementation of progressive tax proposals from the Judge Davis Tax Commission; cancelling the VAT tax hike to 15%; increasing company taxes to 30% or 32% which should generate an additional R13 to R26 billion in revenues; increasing the estate and inheritance taxes; increasing income tax for incomes above R1 million to 45% which should generate an additional R5 billion; introduction of progressive tax system, with an introduction of a tax category for the super-rich; imposition of a land tax to aid the process of land redistribution; zero-rating of medicines, water, domestic electricity and public education; taxation of firms that pay below the statutory minimum wage, and the distribution of such tax proceeds back to the workers concerned; among other proposals.

Overall the 2018 Budget had been very disappointing for workers. It also proved that the ANC government was yet to be rehabilitated from its addiction to neoliberal policies. COSATU was disappointed that instead of explaining how it will stop wasteful expenditure and looting or how it will recover stolen funds; government had rushed to punish workers by raising VAT, fuel levies and adjusting income tax brackets at below inflation levels. It called upon Parliament to reject these taxes upon the working and middle classes.

National Union of Metalworkers of South Africa (NUMSA) presentation
The NUMSA representative submitted that the Budget must be premised on the absolute principle that government priorities and spending must at all times be fundamentally geared towards reducing unemployment, poverty and inequality. However, fiscal discipline and liberalised markets would remain the bedrock of government economic policy and will not be compromised in favour of a developmental trajectory that sought to redistribute wealth and restore the resources of the country through common or public ownership. It seemed highly unlikely that consumption growth would be that high given tax burden placed on South Africans this financial year. Apart from energy generation levy, all the tax proposals were affecting the purchasing power of people and are placed on South Africans rather than companies. This was reflected in the detrimental, ripple effect on especially middle- and low-income earners of the 52-cents increase on the fuel levy and the increase of VAT to 15%”. The fuel levy and Road fund levy increases will affect not only those travelling by car or taxi. These levy increases will affect the cost structure of transport and logistical companies that are delivering food, clothes, appliances and other goods. Hence, these items might also experience a spike in prices, and subsequently, South African consumers will be overpaying.
All the proposed increases were coming at a time when citizens were still trying to cope with the unacceptable 5% increase in Eskom tariffs. The progressive social grant increase of old age grant by R90 in April and R10 October will do very little to cover the harm that would be caused by the hike in VAT. Similarly with the Child support grant increase of R400 (April) and R410 (October). NUMSA could not continue to celebrate the fact that about 11 million people are on social grants. This simply shows that this government had decimally failed to transform the lives of the poor. Given the rising costs from all sides: taxes, goods, levies, transport, electricity and other tariffs, it is hard to understand why does the National Treasury puts so much faith in the household consumption increases and in the GDP real growth. This meant that ordinary citizens would be paying more taxes than big corporates. In a country like South Africa with extreme poverty, as it is [social grants recipients] struggle to make ends meet. Many were already vulnerable to money lenders and take out loans.

On what was to be done, government must be prepared to build an active developmental state that will introduce strategic nationalisation in order to access the resources so desperately needed for free education, free health care, industrialisation, and an infrastructure that meets the needs of our people. The Freedom Charter should be adopted and the commanding heights of the economy should be nationalised so that the bottom 50% people can benefit. SARS should decisively deal with tax avoidance by big corporates. There should be clear legislation that deals with sophisticated crimes done by White Monopoly capital to avoid illicit financial outflows, base erosion and profit shifting. In light of this national crisis of a jobless society, there can be no justification whatsoever to increase taxes that affect the poor such as VAT. What government should be doing, was to stop the rampant looting of billions of rands that are leaving the national purse and get squandered in cronyism and corruption associated with tenders. This money should be redirected to fund to revive the economy and deliver free and compulsory education to all.

Amandla.mobi submission
Mr Nqaba Mpofu, Campaigner, Amandla.mobi, made a submission on behalf of over 47 000 people who submitted a petition to completely reject the proposed VAT increase. He called on Members, as elected leaders, to scrap the VAT increase for the 2018/2019. Amandla.mobi joined the call with 35 civil society organisations rejecting the VAT increase, and advocating for other ways of raising revenue including increasing personal income tax on high income earners, increasing the corporate tax and implementing a carbon tax. Increasing, sin and sugar taxes should also be considered. All of this should make it possible to relieve the burden on the poor, and get rid of regressive tax policies in opposition to mainstream economists who are calling for VAT increases. Citizens will be deeply hard-hit by the proposed VAT hike. Although the free education proposal was welcome, the marginal increase in grants would not help the poor. This regressive VAT increase would not be for the greater good. He deplored the very short timeframes allocated for public participation.

Pietermaritzburg Agency for Community Social Action (PACSA) submission
Mr Mervyn Abrahams, Director, PACSA, called on Parliament to withhold it approval for a hike in VAT to 15%. A 1% hike in VAT was, in real terms a 7% increase in the VAT rate (15-14 = 1. 1 / 14 X 100 = 7%). The implications of a 15% VAT rate on food, electricity and water (amongst other important basic needs) together with the 52 cents per litre on the fuel levy will have severe implications for millions of South African households. The measures as argued in Budget 2018 to mitigate the negative impact of the VAT hike, would not protect the working class. Budget 2018 argues that the impact of the 15% VAT rate on working class households will be limited by the current zero-rating of basic foods. However, empirical evidence showed that the basket of zero-rated foods will not compensate for the VAT increase. It was not true that “The current zero-rating of basic food items such as maize meal, brown bread, dried beans and rice will limit the impact on the poorest households.” The food baskets of low-income households include more VAT taxable foods than zero-rated foods. By arguing that increasing the VAT rate will have no impact on working class households because certain foods are zero-rated revealed a lack of understanding on what people eat and how meals are put together. There was just no way in which households are able to escape this increase in VAT when it comes to food. The only way in which households can escape the impact of VAT was if all foods are zero-rated. Budget 2018 argued that the impact of the 15% VAT rate on working class households will be lessened by “an above average increase in social grants.” However, research conducted by PACSA, showed that the increases in the value of social grants will not compensate for the VAT increase.

There were numerous other reasons why increasing VAT on food was not a good idea. These being that: food price inflation is highly volatile and unpredictable as seen by the impact of the recent drought. For example, between November 2015 and September 2017 the cost of the PACSA Food Basket increased by 16.1%. Given the volatility of food price inflation, it was not possible to accurately predict the extent of the negative impact of raising VAT for working class households; just because foods were zero-rated does not mean that these foods are affordable; the current affordability context meant that working class households are already struggling to afford food. An increase in VAT will make putting food on the table even more difficult.

There was too much wealth amongst too few people. PACSA did not believe that the answer lies in whether zero-rated foods protect the poor or whether the zero-rated basket should be expanded. It was not correct that millions of South African households cannot afford to put proper nutritious meals on the table. On principle, it believed that all foods should be zero-rated as food should be a public good. If however the state seeks to recover higher revenue off VAT than instead of working class households having to fight for an expanded basket of zero-rated foods; it should be the wealthy that argue about what foods should or should not be included in a higher VAT band.

It seemed that a multipronged approach should have been taken to raise additional revenue rather than increasing VAT. For example an increase in Company Income Tax could have been considered. Going forward, any approach to revising our tax system should be guided by the principle that government does not choose any instrument which deepens inequality – even if marginal. That is, if there is a burden to be shouldered that working class households be excluded from sharing in this burden. Black South African households have carried this burden too heavily and for too long. The burden of inequality and injustice must be shifted to those who can afford it, and in solidarity, so that by paying a bit more; all can at least live at a basic level of dignity.

In conclusion, PACSA called on the Joint Committee to withhold their approval for a hike in VAT to 15%. In order to recover revenue it suggested an increase in the Corporate Income Tax.

Discussion
Mr Carrim said the Joint Committee was aware of and sympathised with concerns about the time available for organisations and the public to prepare submissions for the fiscal framework hearings. However, in terms of the Money Bills Amendment Procedure and Related Matters Amendment Act, both Houses of Parliament have to finalise the fiscal framework within 16 days of the Budget being introduced to Parliament. A key reason for this was that the tax year begins on 1 March and the financial year on 1 April each year. Only after the fiscal framework is adopted can other aspects of the Budget, such as the Division of Revenue and Appropriations Bill, be processed and they must be finalised within 35 days of the adoption of the fiscal framework. The Joint Committee was, in fact, in the final stages of amending the Money Bills Act to give both the public and Parliament more time to process the Budget. Understandably, there was significant opposition to the 1% increase in VAT. In terms of the Value Added Tax Act, a VAT increase comes into effect on the date the Minister announces this in the Budget. In this case, 1 April this year. Parliament has 12 months within which to accept, reject or amend the increase in some other way within 12 months.

Ms Tobias asked COSATU about its proposal to increase PIT. At what percentage should the increase be given the current income matrix? She asked stakeholders how jobs could be created in the context of the fourth industrial revolution and artificial intelligence.

Mr Parks said COSATU was not oblivious to the economic challenges and the budget crisis, hence it had offered recommendations. COSATU believed there was still room to tax the higher income bracket earning more than R1 million per year. COSATU was keen to engage on a number of proposals. He noted that revenue shortfalls in SARS could only be addressed through extensive redresses. COSATU believed there was much that government could do.

Mr Mpofu aid the top three income tax tiers’ tax burden had not been increased hence the organisation believed that the required revenue could be raised without resorting to a VAT increase. Taxes should work for the benefit of all South Africans.

Organisation of Undoing Tax Abuse (OUTA) submission
Mr Matt Johnston, Information Specialist & Parliamentary Liaison, OUTA, strongly urged government to commit to zero tax increases in the next financial year. Increased VAT was not sustainable and can be replaced by other forms of fiscal consolidation going forward. Deeper econometric analysis of the potential impacts of proposed quantitative adjustments would require more time than was allotted for public participation in Committee hearings. Large scale, centralised social welfare initiatives such as National Health Insurance, fee free higher education among other increases the burden on taxpayers; that is in the context of poor financial performance of SOEs and other organs of state. Care must be taken to ensure that these welfare policies are not mismanaged or exploited as in the SASSA / social grants debacle.

OUTA supported the role of the Standing and Select Committees on Finance and Appropriations in overseeing and managing the executive and its entities’ financial conduct. Listed oversight priorities include appointing effective board members, ensuring that boards appoint competent managers, tackling wastage and corruption, and, crucially, acting against entities that are not performing. Other recommendations included: improving supervision of revenue collection; optimising government’s borrowing strategy; preserving the expenditure ceiling; satisfying the demands of key ratings agencies; increasing penalties for wasteful expenditure.

OUTA noted that large portion of budget was allocated to the servicing of sovereign debt. The sustained reduction of South Africa’s sovereign debt is understandably a priority, but there are several means to this end. OUTA recommended a permanent refocussing on the optimisation of public expenditure as opposed to ever-increasing tax revenue. Government’s decision to cut spending at the provincial and local levels is concerning given the importance of improving public service delivery – especially to indigent and poor communities in predominantly rural provinces. How will allocations to municipalities, for example, be optimised when past increases in grants have been misappropriated to increased remuneration of existing posts?

Rather than proactive deployment of competent and ethical expertise in key positions at Eskom, Transnet, Prasa, Denel, SAA, SANRAL and others, there have been massive bailouts granted to SOEs which continued to prop up poor governance. Investor confidence is a measuring stick of good business practices in SOEs. Public Investment Corporation (wielding the discretionary power to invest on behalf of Government Employees Pension Fund) should not accommodate poor financial performance with merciful investments in Eskom and other SOEs.

The supposed necessity for increased tax revenue was regrettable. Fiscal consolidation is a recognised necessity, but this can take many forms. OUTA was concerned that there is not a concrete plan in place for drastic long term reduction of state spending given debt servicing costs and high levels of fruitless, irregular and wasteful expenditure to date. The ostensibly positive impact the proposed tax reforms are expected to have on the economy is tentative and based on quantitative estimations as put forward by the Parliamentary Budget Office and National Treasury. There remained uncertainties around the global economic outlook; speculative macroeconomic externalities cannot be relied upon to inform domestic tax policy and spending plans for the public sector. The risks were considerable.

OUTA recommended that government must systematically shift the yoke of sovereign debt onto its own shoulders by reducing its overall expenditure and fostering decentralised service delivery models and stronger public-private partnerships in the energy, transport and water sectors. This is in line with progressive governance- and business trends globally. In China and the European Union, for example, the historical model of centralised, monopolistic electricity generation and distribution is being fundamentally rewritten. Such societal progress requires new financial models in the public sector.

The reduced allocation of revenue to provinces and municipalities was a concern; transfers to provinces are reduced by R5.2 billion, and to local government by R3.2 billion. Reductions focus on infrastructure conditional grants. It asked how municipal spending will be improved given this state of affairs. Moreover, sovereign debt could be limited and controlled through a range of financial measures – and need not predominantly rely on an ever-expanding tax revenue base that is unpopularly mismanaged and wastefully appropriated. The latter method exacerbates poverty, inequality, economic stagnation and fiscal non-compliance.

OUTA recommended that more time and opportunity for public participation in budgetary decision making processes through Parliamentary committees and other forums be provided. It called for the expeditious setting up and reinforcement of the commission of enquiry into the operations and human resources of the South African Revenue Service. Also, OUTA hoped the Committees will enhance parliamentary mechanisms that harness civil society’s energy at this time of renewed hope.

Parliament Watch submission
Ms Samantha Waterhouse, Dullah Omar Institute, commented mainly on the Committee consultation processes. Parliament Watch was concerned about the short time-frames for public input, the lack of access to comprehensive information, and the time to comprehend, communicate, consult and develop positions on the proposals. The failure to advertise the opportunity for public input within adequate timeframes and on a range of appropriate platforms, to provide accessible information to the public, and to allow for timeframes in which the public can engage with the information undermines the overall transparency and accessibility of the process. Parliament Watch appreciated that resolving these challenges within the timeframes between the annual Budget Speech and the time in which the proposals must be finalised by Parliament is a challenge, and that in some respects it is a challenge that is not surmountable at this stage of the 2018 process. Nonetheless, the effect was that the majority of people affected by the proposals and decisions – those living in poverty and working class people, as well as the organisations seeking to represent the interests of those parts of our society are unable to ‘meaningfully’ engage in the process.

Parliament Watch submitted that the current participation process excludes the meaningful engagement of the majority of people in South Africa, whose lives will be significantly impacted by the current proposals. Some of the proposed budget allocations and cuts, as well as the revenue proposals represent a strong departure from the direction taken over the past few years. Thus it submitted that the ‘nature and importance’ of this process and the intense impact on the public requires more effective public participation and that the current provisions for participation do not constitute ‘measures that ensure that people have the ability to take advantage of’ the opportunity as required by the Court. As such Parliament Watch argued that the constitutionality of the process is questionable.

On the proposed VAT hike, Parliament Watch strongly urged the Joint Committee to extend the period for decision-making with respect to the revenue proposals and in particular regarding the question of increasing VAT. This extension period must take into account the significant impacts of the proposal on the majority of people and ensure that reasonable measures are taken to ensure engagement with and participation of those sectors of society whose lives will be seriously impacted. Should the Committees decide that it is not able to extend the period of decision-making regarding the proposal to increase VAT, Parliament Watch submitted that it should be rejected by Parliament at this time, in order to enable the required public participation.

Parliament Watch submitted that the Joint Committee must consider how to facilitate participation at all stages of the process. This must include considering what information is made public; how information is disseminated to ensure that the public at large and not only specialists and technical experts are in a position to work with that information; when information will be made available; and the timeframes between making information available and the deadline for submissions. It recognised the inherent difficulties at this stage of the process and respected that the committees had made provision for some level of public input into the process as per the Money Bills Act. It confirmed its availability to work with committees to find solutions that can address some of these fundamental challenges.

Civil Society Coalition submission
Dr Gilad Isaacs, Institute for Economic Justice, submitted concerns about the proposed Budget with specific attention to revenue raising, proposed tax measures, and the increase to VAT. The Coalition was alarmed at the regressive taxation measures proposed in the 2018 Budget Speech, particularly the proposed VAT and fuel levy increases. While it recognised the need to raise additional revenue for the national fiscus, the proposals made to Parliament by the Minister of Finance made the tax regime more regressive and stood to exacerbate already unacceptably high levels of poverty and inequality and retard job creation and economic growth. The Coalition was concerned that the negative effects this will have on the poor, had not been adequately considered.

The South African context of extreme inequality was critical to consider: the top 10% of full-time earners earn 82 times more than the bottom 10%; the top 10% of South Africans hold at least 90-95% of its wealth, much of which is inherited; the top 1% holds 50% or more of total wealth; the majority of people, including the more than 9 million unemployed, do not receive any social assistance transfers and social grants increases have barely kept pace with inflation in recent years. Taxation must play a positive redistributive role and the context of low growth is also relevant and spending by government is vital to ensure that social needs are met and economic expenditure supports growth and development. The budget made significant cuts to social expenditure on schools, housing, informal settlements, transport and various forms of infrastructure, despite government’s constitutional obligations to fulfil socio-economic rights and promote economic growth.
Progressive taxation should aim to sufficiently cover pressing social needs. Therefore, the Coalition made four main arguments: the changes to the tax regime must be seen in the context of high inequality and an already imbalanced tax mix; increases to indirect taxation are the least progressive options available; the increases to indirect taxation will negatively impact the disposable income of lower-income households and the most vulnerable; and other viable, more progressive options are available. Increases to indirect taxation was the least progressive option. In analysing tax choices, when considering the impact on the poor there was need to concentrate on the share of disposable income this tax takes up. Cumulative share of indirect taxes paid by the lowest 70% of income earners exceeds their cumulative share of disposable income. Davis Tax Committee (DTC) noted that increases to indirect taxes can exacerbate poverty and inequality. These indirect taxes will make up a larger share of the revenue mix rising from 33.5% in 2017/2018 to 34.8% in 2020/2021. This is in contrast to trends across the OECD where the contribution of these taxes has fallen.
The Coalition expressed concern about zero-rating as follows: zero-rated goods do not necessarily make up the majority of low-income household’s food consumption needs. PACSA analysis shows only 45% of food basket is zero-rated; the current basket of zero-rated goods was not, in some cases, optimally targeted; the current basket of zero-rated goods excludes a number of goods consumed heavily by the poor, for example, white flour, canned beans, margarine, chicken, polony, candles, airtime and data, and soap; and food consumption patterns matter and food and fuel price rises can push low-income households away from zero-rated items.

Other options existed within the tax mix. PIT tax rates have dropped dramatically since 1999 and risen only modestly in last few years (the 45% rate on the top marginal bracket notwithstanding); CIT has also dropped dramatically and corporate tax is below international averages. SMMEs pay higher effective CIT rate; property taxes raise a very small share of tax revenue, below international averages. There is strong evidence that raising these progressive taxes can shift income from capital to labour (the functional distribution of income) and from wealthier people to poorer people. These taxes reduce inequality, improve social outcomes and increase economic growth. It would be critical to raise enough tax to substitute for VAT increase and ensure vital social spending can be maintained. Revenue can be gained from VAT through making it more progressive, by introducing a luxury tier for goods mainly consumed by the wealthy, as has been done in a number of other countries.

Dr Isaacs said Treasury’s claim that VAT is “least detrimental to growth” was questionable given that such a conclusion was based on a statistical model used that can only show negative growth impact from rising taxes; distributional issues (within the main macro model) are ignored; and international evidence was ignored. A government budget was not the “same as a household budget”. Therefore, civil society organisations called on Parliament to: withhold approval of the tax proposals, in particular the increases to indirect taxes, including keeping VAT at its current level of 14%; institute a proper process of public engagement regarding the optimal revenue raising mechanisms; to review the processes of public participation – its timeframes, format, and implementation – which presently limit public participation in the budget process.

The Coalition asked National Treasury to: make available, in full, the evidence upon which it based its claim that raising direct taxes (such as PIT and CIT) is more harmful to economic growth, including the assumptions and models upon which these are based; provide its analysis of the distributional effects of its proposals; and provide evidence of its reasoning on the proposal level and rate of contraction in borrowing in relation to the need to boost economic growth.

Discussion
Ms Tobias commented on proposals which implied that taxing few people in the high income tax bracket was unsustainable. South Africa was dealing with a complex matter and redressing inequality originating from the injustices of the past was crucial. The country should come together and come up with solutions. She indicated that the PIC loan to Eskom was not a blank cheque but a business transaction. She agreed that corruption had to be dealt with decisively. She noted the various proposals being put forward in raising revenue. She felt the Joint Committee would require more presentations on the wealth tax, and the various scenarios and models articulated by the submissions. She asked how the immediate revenue shortfall would be addressed in an event that the VAT increase was not put into effect.

Mr Monakedi agreed that accountability on the part of the executive and effective oversight by the legislature was paramount. Good governance and financial management was key.

Mr Carrim indicated that the Joint Committee would allow public submissions up to the day before Members vote on the Bill. Committee staff would also engage endlessly telephonically and via email with participants. This was the first tranche of exchanges between now and November 2018. He urged Treasury to meet with the participants before the Joint Committee votes on the Bill to iron out the issues as was being presented. Most Members deeply regretted that there was going to be a VAT increase but, in the same vein, recognised it may be something which was unavoidable. This was the most challenging Budget and in particular this was the first VAT increase. This was new territory and the Joint Committee would do what it could in the face of the various constraints.

Mr Johnston agreed with the comment that there was need to address inequality. Outa did not disagree with the principle at all. On loans to SOEs, the fact that the PIC injection into Eskom became necessary was problematic. It is understandable that it was ultimately necessary but the consistent bailout of SOEs by government was unsustainable. Maladministration, corruption, deviation from normal procurement procedure among other ills had to be addressed. He implored deeper formal public participation as it was a good avenue to also augment Committee capacity.

Ms Waterhouse said stakeholders may not know enough but trusted that Treasury had not exhausted all revenue alternatives other than the VAT.

Dr Isaacs commented on the revenue shortfalls which would result if the VAT increase was deferred. It was a complex question with implications for any tax proposal. He presumed that Treasury had made the choices with a slew of alternatives and scenarios which could be brought forward and also made available to the public. These must be thoroughly interrogated by the public. Parliament should not be held hostage by Treasury by providing one tax proposal.

Mr Carrim clarified that the Joint Committee was not being held hostage to the Treasury proposals but desired to reach some concerted conclusions. Given the constraints that Parliament faces during the tax year, it was vital to deal with proposals that are perceived to hurt the low income earners. He urged Treasury to consult far more concertedly. Parliament would also do its research independent of executive and stakeholder processes.

Quaker Peace Centre (QPC) submission
Ms Carol Bower, Chairperson, Quaker Peace Centre, at the outset, acknowledged with appreciation that the budget contained a number of provisions which have pleased the organisation. These included: the increase in excise duty on luxury goods; the provisions made for school feeding schemes; and the increases in social grants, in particular raising the Child Support Grant to R400 a month. However, it remained concerned at the consistent below-inflation increases to grants annually.

In general, QPC was concerned that, while engagement with the Budget had been sought, this was difficult due to an absence of detailed information on just how the measures proposed were going to be implemented. The time-frames were also too short to allow for the necessary level of public engagement. The proposed increase in VAT will have a significant impact on the large numbers of poor people in South Africa. Despite the exemptions on certain basic goods, research had consistently proved that the poor pay a higher share of their income in VAT than the rich. This is due to the Marginal Propensity to Consume (poor people spend a higher proportion of their income, while rich people save a higher proportion). Increasing VAT was a regressive step. The increase in the fuel levy would have the greatest negative impact on the poor, in increased public transport costs and food prices as the result of increases in transport costs. The increase in VAT and the fuel levy would erode the already inadequate increases in social grants, leaving grant recipients with less money than before. QPC believed that the issue of VAT increases should be preceded by a period within which civil society can engage with government and seek creative solutions to minimise the negative impact on the poorest South Africans.

While QPC was not in disagreement with the need to increase revenue, nor with the required amounts, it called on the Joint Committee to increase the timeframe for deciding on how the additional revenue will be raised. The problems with the growing national debt and servicing it link directly to the capture of the state and the industrial-scale of the corruption which besets society. It was in recouping this money that funds should be sought to reduce the need to increase VAT. Government should not be reducing expenditure in service delivery; NGOs delivering services that the state is constitutionally bound to provide are struggling to keep going in the face of dwindling resources. This was unacceptable. As VAT impacts most severely on the poorest of the poor, QPC believed VAT increases should be a ‘last resort’ option.

Mr Guy Harris submission
Mr Guy Harris, Education & Governance Activist, submitted that the ratings downgrade had impacted on confidence and was costing the country directly and indirectly. Education is the key driver of reducing inequality, along with redistribution which is not sustainable. In a knowledge based economy there was need for effective education and far more than the existing 4% of youth getting more than 50% in maths, good reading, writing, arithmetic, coding and social skills. Early Childhood Development (ECD) is the base and needs even more support. Job creation, most likely via medium sized business, was key to reducing unemployment and avoiding an “Arab Spring” and if jobs are entry level upskillable, jobs will start reducing poverty. To fund the above without raising Debt/GDP ratio or further increasing marginal tax rates (corporate, individual or indirect) requires innovative thinking and strong leadership.

He emphasised the need to transform for inclusive growth. The South African economy was currently an unstable, teetering, elegant thin stem, top heavy wine glass with large, overly concentrated industries dominated by a few big companies, supported by big government and big labour, in the bowl of the glass. The fragile thin stem was of SME businesses and an economically small (but large population) base of 70% of SA households surviving on less than R6000 per month. Thus there was need to transform into a much more robust tumbler: concentrated bowl transformed to be more competitive through supply chain inclusion; a substantially expanded and strong SME stem; and a capacitated base that has pathways out of poverty into formal business sector via jobs and entrepreneurship via scalable rather than poverty alleviation micro businesses.

Education is the key driver for reducing inequality sustainably but needs a much stronger Early Childhood Development base that is well funded and has clarity of where responsibility lies (Province, Municipal or Basic Education) – Free Tertiary was populous and too late. To fund the above without negatively impacting on government ratios and tempting further downgrade, there was need to use selected, targeted commercialisation and additional sin taxes for areas with high social costs such as substance abuse, import surcharges where locally manufactured substitute products are available. Medium sized business that accelerate from 10-50 and scale from 50-500 employees were the remaining hope.

Manufacturing Circle submission
Ms Philippa Rodseth, Executive Director, Manufacturing Circle, recommended that government had to: align fiscal policy with industrial objectives; apply an Inclusive approach that includes incentives, infrastructure upgrades, improved labour relations and addressing high cost, low skill labour; reduce tax burden on the industry; increase manufacturing allowances in line with the mining sector; and review and direct tax incentives towards the manufacturing sector.

The Black Industrialist Incentive was welcomed and supported as a key driver for economic transformation, and greater involvement was planned by the Manufacturing Circle in engaging industry to identify commercially viable, bankable opportunities. Extension of the window period for the Section 12I tax incentive to 31 December was also welcomed. Manufacturing Circle however noted that no additional allowance to top up the initial R20 billion budget was announced. To date, the full budget allocation for this incentive has been committed.

Budget increase for Special Economic Zones was welcomed with incentive support offered through Sections 12R and 12S. She motivated the extension of benefits to existing industrial areas, to better utilise existing infrastructure stock and protect and grow job opportunities in areas with high levels of unemployment. Creation of additional jobs – not only from a social and standard-of-living point of view – would clearly far outweigh the revenue foregone. Illustratively, if government introduced more generous tax incentives in the manufacturing sector and as a result creates an additional one million jobs, the benefit to the fiscus is estimated at an additional R56 billion in tax revenue collectable from the additional one million taxpayers. As personal income tax contributes about 36% of total taxes, if the same ratio was applied to the R20 billion, an additional R36 billion in other taxes will be collected. This showed the benefit to the economy as a whole of using fiscal measures to better support the manufacturing sector.

Discussion
Mr De Beer directed his comment to Mr Harris. He noted that the ECD programme was a priority for government and funds had been provided for ECD infrastructural development in the Division of Revenue Bill.

Mr Carrim also commented on ECDs. The Standing Committee on Finance had referred the issue to the Standing Committee on Appropriations three years ago and believed significant progress had been made. He agreed with a lot of what the submissions had to say. He noted that Members not asking many questions was because most of the points had been covered by previous presenters. Politicians had to be pragmatic about what was possible and what was not. He asked Treasury to give quick responses to some of the issues raised for the benefit of those who would not be able to make it to the Joint Committee meeting when Treasury was scheduled to formally respond.

Mr Momoniat said Treasury was a listening Department and was quite willing to hear stakeholders’ input and, if necessary, review its positions. Evidence-based proposals were useful. The key point was that the country was facing challenging times and there had been brutal cuts on the non-wage sides of government expenditure. Treasury had to find the R36 billion shortfall and would provide the information and models used to reach decisions on its proposals. The VAT increase was thoroughly considered by Cabinet, not Treasury alone- it was quite an extensive process. However, a lot of consultations on tax policy were usually made after the announcement due to their sensitivity. He noted that there were consequences in deferring VAT revenue collection beyond the start of the financial year as it would mean that the deficit would go up. He noted that the fuel levy was adjusted for inflation yearly and expressed frustration in that Treasury had to finance claims from the Road Accident Fund (RAF). Treasury has been waiting on legislation for more than a decade to limit payments made to the Fund. The deficit was massive and bulk of the price increase in fuel was going towards the RAF. Also, any tax increase was unpalatable but was unavoidable in this instance. It was not correct to say corporates were not being subjected to any tax increases. There were real difficulties in raising revenue.

Mr De Beer, in closing, thanked everyone for their commitment and robust engagement and urged stakeholders to be in attendance when Treasury was expected to respond to their submissions.

The meeting was adjourned.