ATC110303: Report on 2011 Fiscal Framework and Revenue Proposals

Finance Standing Committee

REPORT OF THE STANDING COMMITTEE ON FINANCE ON THE 2011 FISCAL FRAMEWORK AND REVENUE PROPOSALS, DATED 03 MARCH 2011

 

The Standing Committee on Finance, having considered the 2011 Fiscal Framework and Revenue Proposals, reports as follows:

 

1. Introduction and Background

 

The Minister of Finance (the Minister) tabled the 2011 National Budget (the Budget) before Parliament on 23 February 2011. In tabling this Budget, the Minister met his obligation under section 27 of the Public Finance Management Act (Act 1 of 1999), (PFMA) that requires the Minister to table the Budget for the coming financial year in the National Assembly before the start of that financial year. In addition to that, the Minister also met his obligation under section 7(1) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (the Money Bills Act) that requires the Minister to table the Budget in the National Assembly. Section 7(2) of the Money Bills Act requires the Minister to include, among other information, the proposed fiscal framework and revenue proposals in the tabled Budget.

 

According to section 8(3) of the Money Bills Act, the Committees on Finance (the Committees) must, within 16 days after the tabling of the Budget, report to the National Assembly (NA) and the National Council of Provinces (NCOP) on the proposed Fiscal Framework and Revenue Proposals. Fiscal Framework is defined in the Money Bills Act as “the framework for a specific financial year that gives effect to the national executive’s macro-economic policy and includes-

 

(a)      estimates of all revenue, budgetary and extra-budgetary specified separately, expected to be raised during that financial year;

(b)      estimates of all expenditure, budgetary and extra-budgetary specified separately, for that financial year;

(c)      estimates of borrowing for that financial year;

(d)      estimates of interest and debt servicing charges; and

(e)      an indication of the contingency reserve necessary for an appropriate response to emergencies or other temporary needs, and other factors based on similar objective criteria”.

 

In line with section 8(3) of the Money Bills Act mentioned above, the Committees report on the proposed Fiscal Framework and Revenue Proposals for the 2011/2012 financial year.

 

Following the tabling of the Budget and the engagement with the Minister, the Committees held public hearings on 1 and 2 March 2011, receiving submissions from organised labour, organised business, public institutions, civil society and individuals. This report reflects the main themes emerging from the engagement with the afore-mentioned stakeholders including the Minister of Finance and National Treasury. This report includestwo main sections, namely: Economic Policy and Fiscal Policy. The Economic Policy gives an overview of economic outlook and policy with specific reference to key macro-economic indicators within the context of the current global and national economic environment. The Fiscal Policy provides details of fiscal policy over the following Medium Term Expenditure Framework (MTEF) with specific reference to the fiscal stance adopted by government.

 

2. The 2011 National Budget

 

The 2011 National Budget reflects the collective determination of the Government to address with energy the challenges of creating jobs, reducing poverty, building infrastructure and expanding our economy.  The 2011 Budget ensures that government intensify activities that make a difference to the lives and prospects of all South Africans, and that priority programmes required for implementing the New Growth Path are funded. It must also ensure that macroeconomic stability is maintained, with necessary adjustments supporting enterprises and job creation in order to ensure that youth in the cities, informal settlements, towns and villages have skills and jobs

 

The South African government adopted a countercyclical fiscal stance two years ahead of the recent economic crisis. The country entered this economic recession with a healthy fiscal position and a comparatively low level of debt. This allowed the country to maintain government spending despite a sharp drop in revenue. South African Government spending continues to grow over the next three years, though at a slower rate than in the recent past. 

 

3. Economic policy and outlook

 

The South African economy is expected to continue to recover gradually from the recession over the MTEF period, with the gross domestic product (GDP) expected growth rates of 3.4 per cent in 2011 and 4.4 per cent by 2013. In strengthening the economy the monetary and fiscal policies remain supportive in the recovery. The demand for labour is expected to grow moderately, recovering from approximately one million job losses during the 2009/2010 period. In evaluating the impact of the capital inflows on internationally currencies and its effectiveness, the government has to continue to monitor its effect further on the economy.

 

Business Unity South Africa (BUSA) recognises that National Treasury has built a solid reputation of fiscal planning based on projections erring on the conservative side, and often being much closer to actual outcomes than many estimates from the non-government organisations and private sector. In line with its realistic characterisation of the current global economic environment as one of immense transition, profound risk and great opportunity, most commentators indicated that the overall structuring of the fiscal framework and monetary policy setting is conducive to the macroeconomic stability and the fiscal sustainability of the economy.

 

The Financial and Fiscal Commission (FFC) is of the view that South Africa is steadily moving out of the recession with the domestic demand being supported by automatic stabilisers and monetary accommodation, increased public investment, as well as greater social support.  Economic growth (in real terms) has increased from a decline of 1.7 per cent in 2009 to 2.8 per cent in 2010 which are reflective of the ongoing economic recovery.  However, the International Monetary Fund (IMF) lowered its projection for South African economic growth in 2011 by 0.1 per cent to 3.4 per cent (World Economic Outlook, January 2011), citing slower pace of recovery due to lower world trade and high (chronic) unemployment rate. Similarly, South African Reserve Bank (SARB) has adjusted its growth forecast downwards to 3.4 per cent, which is well below the expected average growth rate of 6.5 per cent for developing countries. 

 

According to the People’s Budget Coalition (PBC), in line with the apparent adherence to a countercyclical fiscal policy, the budget deficit is forecast to decrease from 5.3 per cent in 2011 to 3.8 per cent in the medium term.  The implications for crowding out much needed social expenditure is illustrated by the fact that the budget projects that the average real growth in government non-interest spending over the next three years is as low as 2.8 per cent.  Furthermore, real growth in government transfers to households (in the form of social grants) is projected to average only 3.2 per cent in the medium term, despite the acknowledgment in the 2011 Budget Review that approximately 15 million people now depend on some form of government grant and, for many households, social grants are the only regular source of income.

 

3.1 Opportunities for South Africa in the changing world economy

 

The recent inception of South Africa to Brazil, Russia, India, China and South Africa (BRICS), which will be inaugurated in April as announced by the President in the State of the Nation Address, provides an opportunity for the local firms to a fast-growing market, investment opportunities and strengthens beneficial trade links for the African continent. BRICS economies are expected to account for 36 per cent of the world economic growth, increasing their combined share global GDP to approximately 22 per cent. South Africa’s primary opportunity is to advance the transition to the inclusive, diversified economy by encouraging a virtuous cycle of savings and investment, economic participation and sustainable job creation, infrastructure development and skills upgrading.

 

3.2 The New Growth Path and Job creation

 

The New Growth Path policy outlines an approach to accelerate growth and employment, focusing on job creation targets and sector based actions that will help to achieve the desired outcome. The drivers for job creation identified are:

• Continuing public investment in infrastructure, creating employment directly in construction, operation, maintenance and the production of inputs and indirectly improving efficiency across the economy:
• Targeting more labour-absorbing activities in the agricultural and mining value chains, manufacturing, construction and services:
• Promoting innovation through “green economy” initiatives: and
• Supporting rural development and regional integration.

 

South Africa’s macroeconomic approach affords the government the space to grow expenditure at a moderate pace to support social and economic priorities. Over the MTEF period, fiscal and monetary policies will continue to work together in a counter cyclical fashion to keep inflation and interest rates at a low and stable level and to reduce the capital costs.

 

According to the FFC, the South African government recognises the importance of economic growth in job creation as well as the contribution of different sectors to economic growth.  This is made clear with the announcement of the New Growth Path (which is one of the focus areas of this year’s budget), State of the Nation announcement of R9-billion jobs fund, a R10-billion allocation to the Industrial Development Corporation (IDC) and up to R20-billion tax breaks to promote investment in the manufacturing sector. 

 

The Peoples Budget Coalition (PBC) highlighted that further relaxation of exchange controls could have the effect of pre-empting public consultation processes and the finalisation of Government’s proposed “New Growth Path” policy document by effecting macroeconomic policy changes that may be difficult to reverse at a later stage.

 

4 Global economy

 

Fast-growing emerging markets are experiencing rising inflation which is fuelled by strong domestic demand and a steep increase in commodity prices. It is therefore important to have a tight monetary policy to rein in demand and reduce risk of boom or bust economic cycles. High capital flows can finance domestic investment and contribute to overvalued currencies and domestic asset bubbles. Countercyclical fiscal and monetary policies are required to offset imbalances and reduce upward pressure on exchange rate.

 

5 Domestic economy

 

In 2010, the South African economy grew at an estimated rate of 2.7 per cent. Macroeconomic projections of the real Gross domestic product (GDP) growth rates are to reach 3.4 per cent in 2011, 4.1 per cent in 2012, and 4.4 per cent by 2013. This is attributed by an estimated GDP inflation rate of 5.9 per cent in 2010, 5.5 per cent in 2011, 5.4 per cent in 2012 and 5.8 per cent in 2013.Table 1 (below) shows macroeconomic projections in other fiscal elements over the MTEF.

 

Table 1: Macroeconomic projections, 2007-2013
Calendar year	2007	2008	2009	2010	2011	2012	2013
	Actual			Estimate	Forecast
Percentage change
Final household consumption	5.5	2.2	-2.0	4.6	4.2	4.3	4.5
Final Government Consumption	4.1	4.7	4.8	4.6	4.4	4.1	3.9
Gross fixed capital formation	14	14.1	-2.2	-3.6	3.9	5.5	6.8
Gross Domestic expenditure	6.3	3.4	-1.7	4.1	4.2	4.4	4.6
Exports	6.6	1.8	-19.5	5.3	6	6.4	7.3
Imports	9	1.5	-17.4	10.4	8.5	7	7.4
Real GDP Growth	5.6	3.6	-1.7	2.7	3.4	4.1	4.4
GDP inflation	8.1	8.9	7.2	6.3	5.3	5.4	5.8
GDP at current prices (R' billion)	2016.2	2274.1	2396	2615.7	2846.5	3122	3445.9
Head line inflation	6.1	9.9	7.1	4.3	4.9	5.2	5.5
Current account balance (% of GDP)	-7	-7.1	-4.1	-3.2	-4.2	-4.9	-5

Source: 2011 Budget Review, National Treasury, 2011

 

The disposable income will be boosted by low interest and inflation rates which will further support the household consumption growth. This is expected to add approximately 2.8 per cent of the GDP growth over the MTEF period. Total investment is expected to grow by 3.9 per cent in 2011, 5.5 per cent in 2012 and 6.8 per cent in 2013. The inflation forecasts remains within the target range of 3-6 per cent in the medium-term.

 

6 Balance of payments

 

The record of transactions of South Africa with the rest of the world reflects that the current account deficit has decreased from 4.1 per cent in 2009 to an estimated 3.2 per cent of GDP in 2010. The country’s import and export volume growth recovered strongly to 9.1 and 5.1 per cent respectively in the first nine month of 2010.

 

Strong capital flows to emerging economies has a strong impact towards appreciation in their currencies, with no exception to South Africa, the rand appreciated by 12 per cent against a trade-weighted basket of currencies in 2010. However, since the middle of December 2010 capital has begun to flow out of the country resulting in a rand depreciation of approximately 10 per cent.

 

7 Employment

 

South Africa faces an employment crisis. Creating millions of jobs and bringing more people into economic activities are at the centre of the government’s agenda. Employment is not only about earning an income; it is also the condition for a decent life. The President, in his 2011 State of the Nation Address, indicated that the creation of decent jobs is at the centre of the economic policies government has “declared 2011 a year of job creation through meaning economic transformation and inclusive growth”.

 

The New Growth Path proposes a range of initiatives for sectoral employment and building on policies already in place. This policy aims at creating approximately 5 million jobs over the next decade. The proposal focuses on creating approximately 250 000 jobs by 2015 in infrastructure development and housing, approximately 500 000 jobs by 2020 in agriculture and agro-processing, approximately 140 000 by 2020 in mining, approximately 350 000 in manufacturing, approximately 225 000 in Tourism, approximately 660 000 in “green”, “knowledge” and “social” economies, approximately 100 000 in Health, education and policing, and approximately 150 000 in regional integration by 2020. This will require a greater cooperation between the public and the private sectors.

 

The Industrial Development Corporation (IDC) welcomed investment plans in further education and training colleges. This will promote labour absorption over and above addressing critical skills constraints. Laudable initiatives conducive to job creation were highlighted in the Budget. These should be complemented/supported by strong coordination across the policy-making and regulatory segments in order to ensure their success. The IDC further indicated that a common vision and a united front are critical in the “year of job creation”, with all public sector players effectively playing their respective roles in support of calls for the private sector to augment its workforce. There should be clear sequencing and coordination of various initiatives across all governmental entities.  Small enterprise development initiatives must be reinforced by timeous payments of accounts by public entities.

 

The PBC is of the view that measures proposed in the budget fall far short and will not address the structural unemployment crisis the country faces. According to the PBC, this budget will not help the country in addressing the persistent structural weaknesses in the economy. The 2011 budget speech projects “steady employment gains of about 2 per cent a year” and the PBC argues that this low rate of employment will not be adequate to meet the government’s employment target of creating approximately 5 million jobs in the following ten years.

 

The PBC has concerns with the youth wage subsidies and believes that government needs more capacity to enforce its laws. They cautioned that the youth wage subsidy may be abused by the unscrupulous employers.. This, in return, will undermine the government’s stated objective of creating decent work, addressing inequalities and poverty.

7.1 Job creation and inclusion

 

Out of a population of approximately 50 million, 13.1 million South Africans are employed. Only two of the five persons of working age (41 per cent) have a job, compared with 65 per cent in Brazil, 71 per cent in China and 55 per cent in India. To match the emerging markets average employment rate of 56 per cent, South Africa would need to employ, at least, 18 million people, that is 5 million jobs to be created.

 

Over the medium term, government’s capital infrastructure programme will contribute to job creation. Policy will encourage an environment conducive to business investment and hiring. Enhanced employment services, more focused skills development and improved further education will support job growth. The 2011 Budget contained details on the funding for funds two initiatives targeted at creating jobs, particularly for young people: a job fund to support projects with high employment potential, and a youth employment subsidy. Social security reform will ensure that income protection and basic savings arrangements are extended to workers that are currently excluded from formal employment arrangements.

 

The Association of Chartered Certified Accountants (ACCA) and the South African Institute of Tax Practitioners (SAIT) are of the view that government should focus on supporting employers, as they are the ones employing the unemployed, in turn, reducing poverty levels. They assert that government has increased its personnel database by 15 per cent over the previous four years, and that although government officials face lower job security risks than employees in the private sector but their remuneration packages are higher than those in the private sector. They reported that the private sector has decreased its employees by 2,6 per cent over the previous four years mainly due to the recent economic recession.  Furthermore, they are of the view that smaller companies spend a lot of time and resources complying with legislations such Financial Intelligence Centre Act and the Regulation of Interpretation of Communication Act (RICA). While the laws have good basis many are misusing it. This takes time and can be costly.

 

The South African Non Governmental Organisation Coalition (SANGOCO) is pleased that job creation has been put as one of the top priorities on government agenda. SANGOCO advises that the R9 billion for job creation fund should be directed at large–scale job creation initiatives because the 2011/2012 Budget is partly aimed at reducing poverty, inequality and unemployment.

 

7.2 Youth Employment

 

Youth is among the worst affected by the global economic crisis. Youth unemployment has increased by 6 percent in Organisation for Economic Cooperation and Development (OECD) countries and stands at 19 per cent. The problem of youth unemployment in South Africa, already acute, has worsened over the past two years. Youth accounted for about 40 per cent of all job losses during this period, as employment of 15 to 24 year olds fell by 21.8 per cent (355 000) compared with an overall decline of 6.4 per cent.

 

Approximately 15 million working age adults are 30 years of age, equal to just under half of the country’s working age population (46 per cent), and the population is getting younger. South Africa’s demographics present both a challenge and an opportunity. Inclusive growth requires greater participation and employment, particularly among young people.

 

SANGOCO welcomes any intervention that seeks to eradicate lack of participation of young people in the labour market which puts them and their families into abject poverty.

 

The PBC argued that they have consistently warned that unemployment, in particular youth unemployment, constitutes the biggest threat to South Africa’s stability and that they have repeatedly pointed out that the country is sitting on a ticking time bomb that is already starting to explode. Therefore, the PBC supported the continued focus on addressing unemployment in particular youth unemployment which is in line with the 2011 State of the Nation Address. However, the PBC cautioned that the employment creation measures proposed in the 2011 budget should be strengthened.

 

The Federation of Trade Unions South Africa (FEDUSA) proposed the following:

·         That the Government’s New Growth Path must seriously address the huge challenge of unemployment of the youth if we wish to reach the Millennium Development Goal of 2014, of halving unemployment and poverty;

·         That the compulsory age for education should be increased to 18, which will increase employability and skills, reduce the youth unemployment rate and eventually assist with successful school-to-work transition; and

·         That Government should through legislation changes ensure that those who failed to complete matric remain in the educational system by providing them with opportunities to enrol for learnerships and apprenticeships to make them more employable, as well as entrepreneurial skills programmes so that they can set up their own enterprises and become self-employed.

The Congress of Traditional Leaders of South Africa (CONTRALESA) is in support of the job creation initiatives by government, specifically for the rural youth.

 

7.3 Policies for faster job creation

 

To achieve the higher rate of sustainable job creation envisioned in the New Growth Path, the economy needs to grow at a faster rate than currently experienced. Government’s contribution to job creation operates on two levels. First, economic policies promote an environment that is conducive to private sector growth and investment, including appropriate regulation and microeconomic reform. Second, government makes a direct contribution through public sector hiring and targeted job creation programmes.

 

Business Unity South Africa (BUSA) is of the view that the overall focus of the 2011 Budget on supporting higher levels of sustained, inclusive growth, with the emphasis on the facilitation of job creation, promoting skills development and spending on infrastructure is appropriate. BUSA does not doubt the intention of government to deliver on these objectives, the capacity of the state to execute the measures announced is not only an acknowledged general concern, but an overriding cause for unease amongst business. BUSA stands ready to assist in this regard.

 

 

7.4 Job Fund

 

Government has created a R9 billion Job Fund to support projects that has the potential to create large numbers of jobs, particularly for youth. The fund will request job creation proposals from the public and private sector, including non-governmental and civil society organisations. Projects that will be supported by the fund shall be expected to employ 50 000 to 100 000 people over the medium term.

 

7.5 Youth employment incentives

 

Government is developing a range of incentives to promote youth employment. These include a youth employment subsidy which is intended to increase demand for young workers. The subsidy will lower the relative cost of labour for business without affecting worker’s wages. It is expected that the experience and training gained during the period of subsidised work will improve longer term career prospects. It is estimated that the subsidy will support 423 000 new jobs for young workers. Given that industries would have employed a certain number of young workers without the subsidy, net new job creation is projected to be 178 000 jobs. The subsidy will cost R5 billion over the three-year spending period.

 

PriceWaterhouseCoopers (PWC) is of the view that, although the actual mechanics of this proposal remains uncertain, the subsidy initiative to encourage employers to employ inexperienced applicants is welcomed. Details of the mechanics of the youth employment subsidy are awaited. Specifically, the practical and administrative burden that will be placed on employers should not negate the incentive to employ inexperienced young employees.

 

PBC illustrated that as a result of the pricing of youth labour, it could serve as an incentive for early exit from the education system especially in households facing severe economic pressures.

 

According to the PBC, they have a serious concern with the way in which government would be monitoring the youth subsidy under the National Youth Development Agency (NYDA) as they feel it currently does not have the full monitoring mechanisms. However, the PBC welcomes the allocation of R9 billion distributed across the current government programmes.

 

BUSA supports the proposal of an employment subsidy for new workers. It believes that such a subsidy programme could positively impact the inflexibility of wages for unskilled workers, and so encourage their absorption into formal employment. BUSA will encourage the implementation of the programme subject to proper consultation, and urges its expansion, should it perform better and more cost-effectively than other employment promotion projects, such as the Expanded Public Works Programme (EPWP)

 

8. Fiscal Policy

 

Economic growth is the prerequisite for reducing poverty and improving livelihoods. By offsetting the effects of the business cycle, countercyclical fiscal policy contributes to growth and job creation. When the economy is doing well, the budget balance improves to build fiscal space, limit increases in the financing and counteract inflationary pressures.

 

 

 

8.1 Summary of the budget framework:

 

The budget responds mostly to issues as raised by the President in his State of the Nation Address and job creation remains the driving force of the budget. Key features of the 2011 Budget include the following:

• Tax revenue increases from 25.2 per cent of GDP in the 2010/11 financial year to 26.2 per cent in the 2013/14 financial year;
• Baseline expenditure additions total R94.1 billion;
• Real non-interest expenditure growth averages 2.8 per cent a year;
• Debt-service costs rise from 2.5 per cent of GDP in the 2010/11 financial year to 2.9 per cent by the 2013/14 financial year; and
• The budget deficit improves to 3.8 per cent in the 2013/14 financial year.

 

Government intends to consolidate the fiscal position in line with economic growth. Over the next three years, priority spending will continue to be financed as government stabilizes its borrowing. To encourage and strengthen Parliament in playing its oversight role, National Treasury has used that principle as a basis for the current fiscal policy and also to ensure greater transparency and enhance public accountability. As a result, National Treasury proposes that government should:

·         Adopt an annual target for the structural budget balance consistent with long-term growth, desired level of public debt and inter-generational considerations;

·         Make explicit the costs of existing and new programmes that require a long-term commitment; and

·         Set out a timeline to bring the budget back on target following large fiscal shocks.

 

Government has proposed guidelines for fiscal sustainability which include the annual target for the structural budget balance, making explicit the costs of new and existing programmes requiring long term expenditure commitment and setting out a timeline to bring the budget back on target following large fiscal shocks. The FFC is of the view that fiscal rules can be used as a mechanism for achieving these goals. However, there needs to be careful considerations of the objectives and at what sphere of government these will have to be applied. The FFC further pointed out that South Africa has come a long way in operating some sort of fiscal rules that are implemented through constitutional amendments, statutory provisions or policy guidelines and that a variety of enforcement mechanisms exist to enforce these.

 

The FFC’s analysis suggests that sub-national government’s fiscal policy has been disciplined without necessarily being rules-based. More nuanced view of the appropriate role of fiscal rules at national and sub-national government needs to recognize that a sophisticated intergovernmental system is in place and look at how to improve an existing and functioning system. Possible option for fiscal rules is to target a balanced budget or surplus over the cycle without any limits allows for the operation of automatic stabilisers and also for discretionary countercyclical action. In addition, limits on the government wage bill need to be imposed. If an expenditure rule is to be proposed, then limiting capital expenditure (which is thought to contribute to long-run growth) which is not an option.

 

The FFC further highlighted that its research on public expenditure finds some evidence that expenditure on defence, health and transport seems to be contributing positively to economic growth in South Africa. These expenditures have been given priority in the 2011/12 budget.

 

According to the FFC, there is a need for Parliament to obtain greater clarity on the risks to which the public sector is exposed, which entailsclarifying potential costs of different risk factors. The political economy challenge of dealing with long-term fiscal policy issues needs provocation of public debate. The pre-announcement of alternative ways of financing the National Health Insurance (NHI) and guidelines for fiscal sustainability by Government are steps in this direction. Comments about how the proposed NHI will be funded have raised a few concerns. The FFC recommends that Government should be required to publish analysis of the distributional impact of new policies. A requirement to evaluate regularly the impact of policies (where not prohibitively costly) would strengthen the framework.

 

PricewaterhouseCoopers (PWC) argues that taxpayers are concerned that, in some way or another, the National Health Insurance is simply another revenue-raiser without a corresponding improvement in health service delivery. PwC raised a similar concern that carbon taxes implemented last year were focused on revenue-generation, rather than behavioural changes.

 

Table 2 (below) is reflecting the consolidated government fiscal framework over the MTEF period.

Table 2 Consolidated Government Fiscal Framework
R' Million	2007/08		2008/09	2009/10	2010/11	2011/12	2012/13	2013/14
	Outcomes				Revised estimates	Medium-Term Estimates
Revenue	626 705	682 997		664 840	755 023	824 466	908 714		1017187
Percentage of GDP	30.1%	29.5%		27.2%	28.3%	28.3%	28.4%		28.8%
Expenditure	591 522	710 523		825 917	897 376	979 265	1061 582		1151773
Percentage of GDP	28.5%	30.7		33.8%	33.6%	33.6%	33.2%		33.2%
Budget balance	35 183	-27 526		-161076	-142 353	-154799	-152 868		-134586
Percentage of GDP	1.7%	-1.2%		-6.6%	-5.3%	-5.3%	-4.8%		-3.8%
Gross Domestic Product	2078822	2312 965		2442593	2 666 894	2914862	3201 299		3536002

 

Source: Budget Review, National Treasury, 2011

 

Table 3 (above) shows that revenue as a percentage of GDP has been declining in the recent years until 2009 when there was global financial crisis and suggests a slightly increase in the next three years of approximately 0.2 per cent at average. The budget balance projects a deficit of about 5.3 per cent in the 2011/12, 4.8 per cent in the 2012/13 financial year and 3.8 per cent in the 2013/14 financial year, which has been adjusted from the announced figures during the MTBPS which were deficits of 4.6 per cent in the 2011/12 financial year, 3.9 per cent in the 2012/13 financial year and 3.2 per cent in the 2013/14 financial year.

 

8.2 Revenue

 

The Industrial Development Corporation (IDC) highlighted that the world is experiencing an environment characterised by rapidly rising commodity prices for a variety of reasons. Demand pressure is being felt almost across the board. This is largely emanating from rapidly growing emerging markets, as well as recovering advanced economies. On the supply side, adverse developments such as the effect of the crisis in the Middle Easton oil prices, or climatic disturbances on food production, are taking their toll. Increases in fuel, Road Accident Fund and electricity levies, complemented by stealth taxes that have an indirect association with the budgeting process, will add to inflationary pressures in 2011, at a time when the South African Reserve Bank will be under pressure to mitigate upside risks.

 

Tax revenue, which accounts for most revenue available to government, has become more sensitive to change in the economic cycle since the tax base was restructured in the early 1990s. As a result, tax revenue tends to accelerate when the economy is underperforming. If revenue does not cover expenditure, borrowing is a short term solution, but higher government expenditure as a share of GDP ultimately requires a growing tax base or higher tax rates. At the height of the recession in the 2009/10 financial year, revenue underperformed expectations by R60.6 billion. Over the medium term, tax revenue is expected to cover as the economy grows and the tax base broadens.

 

Non-tax revenue, made up of departmental revenue and mineral royalties, remains about 0.4 per cent of GDP over the forecast period. Changes in interest income and dividend payments account for revisions to departmental revenue estimates since February 2010. Revenue from mineral royalties is expected to be higher than projected a year ago given high commodity prices. Payments to South Africa’s Southern African Customs Union (SACU) partners have been revised upwards as a result of a recovery in customs and excise revenue since the 2009/10 financial year.

 

BUSA is of the view that tax policy should be used to stimulate investment in the South African economy. This approach will ensure that there is higher growth in the long run, and can be useful in assisting government to generate higher revenues, by broadening the tax base.  The excessive use of additional taxes and special levies as revenue generating instruments can be counter-productive, as it invariably reduces South Africa’s competitiveness, by raising the costs of doing business. BUSA believes that these can distort economic activity leading to sub-optimal outcomes in the economy.

 

8.3 Expenditure

 

The fiscal framework adds R20.7 billion to expenditure in the 2011/12 financial year, R29.6 billion in the 2012/13 financial year and R43.8 billion in the 2013/14 financial year, resulting in average real growth of 2.8 per cent in government non-interest spending over the next three years. These additions to baseline include:

• R26.3 billion to cover the carry through costs of the 2010 public sector wage agreement, including a 7.5 per cent cost of living adjustment and an R800 monthly housing allowance;
• R23.9 billion allocated from the policy reserve for priority expenditure in job creation, skills, health and education;
• R40.8 billion in adjustments to baselines for existing programmes, including education, health, public safety and social protection; and
•  R3.1 billion allocated from the contingency reserve to provide flood and drought relief to provinces.

 

For the past two years, government has worked to improve the efficiency of public expenditure. Total savings of R30.6 billion have been identified over the medium term expenditure framework (MTEF) period and allocated to priority expenditure.

 

The South African government expenditure falls into two broad categories: capital spending and consumption spending (including wages, goods and services, and interest payments). Expenditure needs to be balanced appropriately to promote effective public-service delivery, and to ensure that spending contributes to economic growth without fuelling inflation.

 

The 2010 public-sector wage negotiations resulted in a 7.5 per cent wage increase, which was 3.4 percentage points higher than the expected inflation rate. This required an extra allocation of R6.5 billion to cover compensation of employees in the 2010/11 financial year.

 

During the recession, government borrowing increased and, as a result of the higher debt burden, interest costs are projected to be the fastest-growing area of expenditure over the medium term. As debt costs consume a rising share of expenditure over the next three years, government should ensure that it can maintain expenditure on social and economic priorities. A higher wage bill, in conjunction with a rising interest bill, can reduce spending on maintenance, capital investment, and public-service employment growth. To cover wage increases and the additional employment, the proposed fiscal framework makes provision for 6.6 per cent average annual growth in compensation. Over this period, consumer price inflation is projected to average 5.2 per cent.

 

Over the medium term, real growth in government transfers to households is projected to average 3.2 per cent. Approximately 15 million people depend on some form of government grant, and for many households social security payments are the only regular source of income.

 

Since the 2002/03 financial year, consolidated government spending on capital has increased from 5.2 per cent of consolidated government expenditure to 6.7 per cent in 2010/11. Over the next three years, the rate of capital expenditure will slow moderately as higher interest costs, wage pressures and growth in social grants claim a greater share of expenditure.

 

The PBC is of the opinion that the public service salary bill has doubled over the past five years as a result of a combination of various factors such as wage increases, the growth of the public service personnel, severance packages, the establishment of a number of new ministries and departments. It is important to indicate that this “doubling” of the public service wage bill does not factor in the rising costs of living or inflation, especially for workers in the lower salary levels. A significant share of this public wage bill disproportionately goes to the management level of the public service.

 

8.4 The fiscal deficit

 

The fiscal framework supports a reduction of debt over time, which will reduce interest repayments and create fiscal space. Government borrowing to fund capital expenditure, such as the Gautrain, increases the overall wealth of the economy. Conversely, borrowing to finance consumption creates debt obligation that must be paid off long after the funds have been spent.

 

The 2010 budget projected debt stock would stabilise at about 44 per cent of GDP in the 2015/16 financial year. As a result of improved economic growth, debt stock is now expected to stabilise at about 40 per cent of GDP in the 2015/16 financial year. Any deterioration in the growth outlook, interest rates or the budget balance will prolong the fiscal recovery.

 

BUSA welcomes the specific attention paid by National Treasury to the necessity of eliminating the primary deficit (deficit after deducting interest payments) as soon as possible. Currently, the primary deficit is projected to be turned into a surplus only after the 2013/14 financial year. This means that government borrowing is currently at levels that tend to reduce, rather than promote the supply of capital. BUSA would support sensible efforts to return to a primary surplus position sooner.

 

The Committee repeats its concerns expressed in last year’s report about state debt levels, with net government debt projected to reach R1.2 trillion or 39.3 per cent of GDP. Debt service costs will amount to R77 billion in the 2012/13 financial year, rising to R104 billion in the 2013/14 financial year. The existing size of the budget deficit results in debt service costs rising faster than any other category of spending over the period ahead.

 

Notwithstanding previous concerns, the Committee note that the budget deficit is 0.7 per cent more than forecast in October 2010, and this trend continues over the medium term.

 

The Committee welcomes National Treasury’s steps to reinforce long term sustainability of the public finances and looks forward to considering the Minister’s fiscal guidelines, informed by the following trade principals:

• A counter-cyclical fiscal stance, to counteract variations over the business cycle;
• Long-term debt sustainability to ensure that financing costs do not crowd our expenditure on public services; and
• Inter-generational equity, so that our children’s well being is not compromised by short-term interests.

 

9 Revenue trends and tax proposal

 

One of the most salient sources of income for government is tax revenues and government depends on this to provide for basic services and ensure maximum welfare of its citizenry. For the 2011 financial year, government has recognised that the medium to long term spending priorities require adjustment to tax and expenditure framework, and it acknowledge that budget tax proposals are intended to broaden the tax base in support of inclusive growth.

 

9.1 The main tax proposal for the 2011 financial year

 

The tax proposals for the 2011 financial year are as follows:

• Personal income tax relief of R8.1 billion through adjustment to personal income tax brackets and rebates. These adjustments compensate for the effects of inflation (fiscal drag). Those with taxable income of over R580 thousand will account for 39 per cent income tax revenue, this is foundation for an equitable tax system;
• A third rebate for individual 75 years and older;
• Conversion of medical tax deductions to tax credits. The 2011 Budget  proposes to increase the monthly monetary threshold for tax-deductible contribution to medical schemes from R670 to R720 forte first two beneficiaries and for qualifying out-of-pocket medical expenses will be converted into tax credit effective from 1 March 2012;
• Transfer duty relief. Transfer duty exemption threshold to increase from R500 000 to R600 000;
• Higher taxes on fuel. Fuel tax levy to increase by 10 cent per litre;
• Higher taxes on alcohol and tobacco; and
• Taxation of gambling winnings. All winnings over R25 000 to be subject to 15 per cent withholding tax.

 

Other proposals made regarding tax include, environmental taxation (proposals on tax on carbon emissions are under way), electricity levy (the proposed increase will have no impact on electricity tariffs because it has already been taken into account in the National Energy Regulator tariff structure), and turnover tax for micro businesses (adjusted to encourage participation).

 

Most commentators considered the 2011 tax proposals to be relatively neutral from a

Taxpayer’s and tax practitioner’s perspective. On balance, the combined effect of the proposals does not appear to be unduly harsh or significantly generous. The 2011 tax proposals therefore appear to be well-balanced.

 

For individuals, the 2011 Budget makes provision for personal income tax relief, namely: the conversion of monthly deductible contributions to tax credits, the treatment of employee contribution to retirement funds as fringe benefits and a withholding tax on gambling winnings somewhat lower transfer duties and capital gains tax.  FEDUSA welcomes the personal income tax relief to compensate for fiscal drag as well as the increase in the monthly monetary threshold for tax-deductible contributions to medical schemes.

 

FEDUSA also welcomes the increase in the transfer duty exemption threshold as well as the increase in the capital gains tax exclusion amounts. The conversion of the deductions and out-of-pockets medical expenses into tax credits will favour the lower income groups and imply somewhat higher tax of taxpayers in the higher income categories. According to FEDUSA, the shift could however be defended as it is more equitable.

 

FEDUSA believes that the Minister should engage with trade unions and social partners on the proposed retirement provisions as it has far–reaching effects on retirement reforms. The reforms proposed as from 01 March 2012 needs to be subjected to a robust process of consultation with stakeholders as it has far–reaching implications on the working life and savings of individuals making provision for retirement.  ACCA and SAIT are of the opinion that tax laws should be simplified.

 

The South African Institute of Chartered Accountants (SAICA) welcomes the Minister’s R8.1 billion in tax cuts to individuals which will partially assist consumers for the current inflationary pressure, including increased rates and taxes, electricity costs etc. PWC considers the 2011 tax proposals to be relatively neutral from a taxpayer and tax practitioner perspective. On balance, the combined effect of the proposals does not appear to be unduly harsh or significantly generous. The tax proposals appear to be well-balanced. PWC commends the National Treasury Tax Policy team, as highly complex concepts are constantly addressed under stressful time pressure.

 

BUSA’s view is that tax policy should be used to stimulate investment in the South African economy. This approach will ensure that there is higher growth in the long run, and can so be useful in assisting government to generate higher revenues, by broadening the tax base.  The excessive use of additional taxes and special levies as revenue generating instruments can be counter-productive, as it invariably reduces South Africa’s competitiveness, by raising the costs of doing business.

 

PBC argues that, whilst total tax revenue increased for the 2010/11 financial year, this has been disproportionately achieved primarily through the reliance on personal income tax and VAT with corporate income tax revenue performing lower than originally projected. PBC would have preferred for the budget to disclose a more redistributory tax model that would not only have expanded the range of zero VAT rated goods, but would have introduced a progressive tax system that would target the wealthy, higher income earners as well as taxes on luxury goods especially those that are imported.

 

ACCA and SAIT are of the view that paying taxes is not all that firms do, there are other compliance costs such as paying for accounting, bookkeeping etc. While these are needed, South Africa must try to simplify taxes. In order to comply with taxes, companies have to comply with FICA, RICA, and a host of other laws, which takes time and can be costly.

 

9.2 Revenue estimates for 2011/12

 

The total tax revenue before tax proposal is expected to increase by 10.9 per cent, which will result to R745.7 billion in line with improved economic growth, while budget revenue will increase by 9.7 per cent result to R828.6 billion. The budget revenue after tax proposals for the 2011/12 financial year is expected to be R824.5 billion, which is a decrease of 0.5 per cent before tax proposals.

 

Government has indicated that, without any tax changes, tax revenue as a percentage of GDP is expected to increase from R755 billion, which is 25.2 per cent, in the 2010/11 financial year to R1.0178 trillion, which is 26.2 per cent in the 2013/14 financial year.

 

9.3 Savings

 

In order to encourage saving, government will increase the tax-free interest-income annual threshold from R22 300 for individuals below 65 years, and from R32 000 to R33 000 for individuals 65 years and over. The foreign income threshold will remain at R3 700.

 

The committee, and most of the stakeholders, are of the view that National Treasury is sending mixed feelings on the issue of savings for our people.

 

10 Conclusion and Recommendations

 

Having considered the 2011 Fiscal Framework and Revenue Proposals and conducted public hearings on the 2011 Fiscal Framework and Revenue Proposals, the Standing Committee on Finance recommends that the House accepts the 2011 Fiscal Framework and Revenue Proposals.

 

The Democratic Alliance reserves its position on the above-mentioned recommendation.

 

The Committee further recommends as follows:

 

10.1 That National Treasury should analyse the set performance indicators progress that has been made before funds are allocated;

 

10.2 That National Treasury should ensure that before funds are allocated to Development Finance Institutions and the youth development subsidy, a measurable programme with a defined monitoring and evaluation tool is developed by relevant stakeholders;

 

10.3 That revitalisation of FET colleges (mainly infrastructure and curricula) should be prioritised by the Department of Higher Education and Training as this will help to improve skills development;

 

10.4 That Government should coordinate the growth path and the social security network system in order to reduce the number of people on the social grants;

 

10.5 That the information system on the government database should have a clear indication of how many jobs have been created and how many people have exited the social grant dependency. This should be done through the Department of Social Development;

 

10.6 That the tax regime and incentive scheme should not only be targeting the older generation, but should also provide an environment that will encourage the youth to start saving;

 

10.7 That the provincial (public) wage bill should be made service orientated and National Treasury should monitor spending on wages. Proper research should be done on the size of the wage bill compared to the number of employees;

 

10.8 That the government and its provinces should concentrate on filling service delivery posts, and not only filling posts for the sake of it; and.

 

10.9 That National Treasury should present a programme that will instil a culture of saving and investment in South Africa.

 

 

11 Oral Submissions

 

Table (below) contains a list of people who made oral and/or written submissions before the Committees, some in their personal capacity.

 

List of Verbal Inputs

Name	Position	Organisation
Mr. Pravin J. Gordhan	Minister of Finance	National Treasury
Mr. Lesetja Kganyago	Director-General	National Treasury
Ms. Gretchen Humphries	Deputy General Secretary	FEDUSA
Mr. Coenraad Bezuidenhout	Business Parliamentary Officer	Business Parliamentary Office
Mr. Zwelenzima Vavi	Secretary General	People’s Budget Coalition
Mr. Woody Aroun	Parliamentary Officer	NUMSA
Mr. Keith Vermeulen	Director: Parliamentary Office	SACC
Mr. Bongani Khumalo	Acting Chairperson	FFC
Prof. Osman Mollagee	Director: Tax Technical and Training	PriceWaterHouseCoopers
Mr Nicolaas Van Wyk	Technical Support Executive	ACCA
Mr Stiaan Klue	Chief Executive	SAIT
Mr Muneer Hassan	Project Director: Tax	SAICA
Mr Mike Schussler	Economist	SAIT & ACCA
Mr Abdul Patel	Managing Director	Ethicore
Mr L Mondi	Chief Economist	IDC
Mr Jimmy Gotyana	National President	SANGOCO
Mr Zolani Mkiva	Head of Presidency: CONTRALESA	CONTRALESA
Prince Ntuthuko Khuzwayo	Deputy President: CONTRALESA	CONTRALESA

 

The written submissions by some of the above-mentioned organisations/people are available on request from the Committee Secretariat.

 

12 References

 

Association of Chartered Certified Accountants & South African Institute of Tax Practitioners, (2011), 2011 Budget Speech, Cape Town, Parliament of RSA, dated 01 March 2011.

 

Financial and Fiscal Commission, (2011), Financial and Fiscal Commission briefing to the Standing and Select Committees on Finance on the Fiscal Framework and Revenue Proposals, Cape Town, Parliament of RSA, dated 01 March 2011.

 

Gordhan, P. (2011), National Annual Budget 2011’s Speech, Parliament of RSA, Cape Town, available online at: www.treasury.gov.za, dated 23 February 2011.

 

Humphries, G., (2011), FEDUSA 2010 Budget submission to the Joint Portfolio Committee on Finance, Cape Town, Parliament of RSA, dated 02 March 2011.

 

National Treasury, (2010), Medium Term Budget Policy Statement, Pretoria: Government Printers, also available online at: www.treasury.gov.za

 

NUMSA, (2011), NUMSA Response to the 2011/12 Budget, Cape Town, 02 March 2011.

 

Peoples Budget Coalition, (2011), Peoples Budget Coalition statement on the National Budget speech, Cape Town, Parliament of RSA, dated 02 March 2011.

 

Price Water House Coopers, (2011), Hills to Climb Budget 2011, Cape Town, Parliament of RSA, dated 02 March 2011.

 

South African Institute of Chartered Accountants, (2011), Call for Comment: 2011 Tax Related Budget Proposals, Cape Town, Parliament of RSA, 02 March 2011

 

South African Council of Churches, (2011), SACC Submission in Support of PBC, Cape Town, Parliament of RSA, 02 March 2011

 

Ethicore, (2011), Public Hearings on the 2011 Budget, Cape Town, Parliament of RSA, 01 March 2011

 

Sangoco, (2011), Sangoco’s Position of Fiscal Framework and Revenue Proposals Concerning 2011 Budget, Cape Town, Parliament of RSA, 01 March 2011

 

Industrial Development Corporation, (2011), The 2011 Budget: IDC Viewpoint, Cape Town, Parliament of RSA, 02 March 2011

 

Zuma, G.J. (2011), State-of-the-Nation address 2011’s speech, available online at: www.thepresidency.gov.za, dated 09 February 2011.

 

 

Report to be considered.