ATC150305: Report of the Standing Committee on Finance on the 2015 Fiscal Framework and Revenue Proposals, dated 5 March 2015
REPORT OF THE STANDING COMMITTEE ON FINANCE ON THE 2015 FISCAL FRAMEWORK AND REVENUE PROPOSALS, DATED 5 MARCH 2015
The Minister of Finance tabled the 2015 National Budget before Parliament on 25 February 2015 in line with section 27 of the Public Finance Management Act (PFMA), (Act 1 of 1999) and section 7(1) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (the Money Bills Act). 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 Budget.
After the tabling of the Budget and the subsequent engagement with the Minister of Finance on 26 February 2015, the Standing and Select Committees on Finance received input from the Parliamentary Budget Office (PBO) on 3 March 2015 and held public hearings on 4 March 2015. The Congress of South African Trade Unions (COSATU), National Union of Metalworkers of South Africa (NUMSA), Federation of Unions of South Africa (FEDUSA), the South African Institute of Tax Practitioners (SAIT), the South African Institute of Professional Accountants (SAIPA), the South African Institute of Chartered Accountants (SAICA), PricewaterhouseCoopers (PwC), the Financial and Fiscal Commission (FFC) and Mr J Rossouw (on behalf of independent researchers J Rossouw; F Joubert and A Breytenbach) made submissions at the hearings on the Fiscal Framework and Revenue Proposals.
2. Stakeholder inputs
FEDUSA supported the view that the best short-term prospects for faster growth is located in the less energy intensive sectors such as tourism, agriculture, light manufacturing and housing construction. COSATU, like FEDUSA, welcomed the focus on the oceans economy and in particular the proposed investment of R9.6 billion in Saldanha Bay. COSATU further welcomed the commitment to include the mining sector in the Phakisa processes and the development of a strategy towards its growth.
COSATU expressed concern about what it called the abuse of the expanded public and community work programme by provinces and municipalities as a source of cheap labour in what are supposed to be decent jobs. They further reiterated their reservations about employment tax incentives which do not seem to benefit the youth as intended.
The FFC emphasised that the downwards revisions to growth forecasts is an indication of a further obstacle to the achievement of the targets set in the National Development Plan (NDP) - most notably a decrease of 14% in the unemployment rate by 2030 - that would require a 5.4% annual growth. The Commission further noted that these revisions are based on risks posed by disruptions to production emanating from labour unrest, electricity supply constraints, slow recovery in the Eurozone and the gradual deceleration of growth in China.
SAIT believes that the only long-term answer to the South African economy is real economic growth.
PwC acknowledged that the 2015 Budget was the toughest since the advent of democracy; that the Minister of Finance was faced with difficult choices and fiscal consolidation was essential in order to reduce the risk of further credit rating downgrades.
The PBO has noted with concern the fact that the private sector businesses have reverted to investing in only what is necessary to maintain current operations. The most common explanations for a lack of investment include loss of business confidence emanating from deteriorating industrial labour relations; weaker than expected global growth; a slowdown in household expenditure; electricity constraints; a reluctance by banks to lend and policy uncertainty. Given the proposed reduction of public sector employment, more jobs would have to be created by the private sector. Failure to do so, poses a risk to the fiscus and debt.
According to the FFC, factors influencing the persistently high rate of unemployment include sluggish economic growth; inadequacies in education and training, skills mismatches, the collective bargaining system; the setting of barriers to entry in product markets and constrained electricity supply.
Inadequate electricity supply will continue to pose a risk to the economic outlook, particularly on output and exports. The outcome of the public sector salary negotiations and financing needs of state-owned companies pose additional risks, while lower than projected economic growth could have negative consequences for revenue. The FFC identified key risks to the outlook including possible rate hikes in the United States; falling commodity prices due to increased supply; weak recovery in the Eurozone and uncertainty over oil prices.
FEDUSA supported the reduction in the main budget expenditure ceiling of about R25 billion over the next two years, compared with the 2014 Budget baseline.
COSATU was of the view that the massive reduction in the budget deficit from 4.1% in 2014 to 2.5% by 2017 will be achieved through real spending cuts, which can only cause the economy to further stagnate. COSATU further argued that “the decline in real growth of spending to 1.3% in 2015 (from 10.8% in 2009) is lower than the level of population growth, and therefore a real cut in spending, at a time when we have a desperate need to stimulate our economy, deliver services in under-serviced areas, and invest in employment creation”.
Although COSATU recognised the need for a contingency fund, it was concerned about the proposal for a jump from R5 billion to R45 billion in two years whilst critical state expenditures and employment levels are cut.
NUMSA felt that government’s cutting of expenditure would make the situation of the poor and working people even worse. The union was of the view that growth cannot happen without changing spending patterns.
NUMSA further submitted that the discrepancies in electricity pricing between Eskom and municipalities require urgent attention. The union is of the view that for many municipalities the situation has become untenable. NUMSA believes that government has to implement measures to harmonise tariffs, ensure that electricity is affordable and increase the amount of free basic electricity from 50kwh to 100kwh.
FEDUSA supported the projected conditional allocation over the Medium Term Expenditure Framework (MTEF) to emerging farmers, education, sport and culture, post-school education and training. FEDUSA further supported the centralised procurement system and believes such a move will promote efficiency and also curb corruption.
PwC was of the view that, despite structural increases in tax revenues that have been proposed in the budget, the budget deficit should be more decisively and aggressively reduced.
Mr Rossouw, on behalf of three independent researchers, submitted that a fiscal cliff in South Africa has not yet been averted and that there is no scope to grant general annual civil service remuneration increases of more than the rate of inflation plus one percent. These researchers further proposed that a moratorium must be placed on the growth in civil service employment numbers, promotions, larger increases of senior officials and new senior appointments to contain remuneration growth.
Over the medium term, risks to the fiscal outlook include weaker than expected economic growth; a public sector wage settlement significantly above Consumer Price Index (CPI) inflation and the provision of additional direct fiscal support, equity injections or guarantees to public entities. If Mr Rossouw’s proposals were not heeded, he said South Africa was heading towards “fiscal suicide”.
The FFC identified risks to the fiscal framework, including intentions to reform healthcare and social protection; salary negotiations that still have to be concluded and persistent weaknesses in the balance sheets of certain state-owned entities, which could trigger calls for additional government support. To improve the fiscal framework, the FFC proposed that not only should emphasis be more on reduction of the expenditure ceiling, but growth in allocations should be aligned to the inflation rate as well as expanding own financing of capital expenditures and economic development, for example through improvements in expenditure efficiencies; reigniting economic growth and structurally transforming the economy by diversifying exports away from raw mining commodities and moving towards a low-carbon economy.
PwC shared the same sentiment with the Minister and the FFC that expenditure estimates associated with the wage bill posed a considerable risk to the fiscal framework and the budget deficit.
SAIT proposed that government’s efforts should be on the expenditure side such as the 30 day payment rule and learning from the South African Revenue Services (SARS) and other help desks to reduce the burden on small businesses, rather than continue with the small business incentives.
FEDUSA acknowledged the role of SOEs in promoting economic growth and social development. The federation argued that it is critical to align their operations and corporate governance to the King III Report and the Companies Act to improve their governance.
COSATU indicated that “while it is critical that SOEs are made to account for their continuous financial crises and lack of delivery of key developmental mandates, government must also take responsibility for ensuring that they are capacitated and that their funding model is geared towards that mandate”.
PwC welcomed the R10 billion reduction in the expenditure ceiling and submitted that if expenditure were to be limited to a nominal 6.4% as opposed to 7.4%, it would reduce government expenditure by a further R10 billion or approximately 0.25 % of GDP.
According to National Treasury, fiscal constraints mean that transfers to provinces and municipalities will grow more slowly in the period ahead than they have in the past. Accordingly, provincial and local government must renew their focus on core service delivery functions and reduce costs without adversely affecting basic services. National Treasury is working with provinces and municipalities to help cities mobilise their own revenues and borrowing to finance infrastructure investments.
PwC generally welcomed the personal income tax relief provided to lower income tax earners; retirement savings; the decision not to increase the tax rates of companies; relief for small businesses; energy efficiency saving incentives; transfer pricing; research and development and the self-assessment system of tax administration. They did however express some concerns: Individuals earning over R200 000 per year will be affected by an increase in the general fuel levy and Road Accident Fund (RAF) levy, which will offset the relief provided; and the fuel levy could have been increased by more than the current amount. Further reforms for small businesses should be considered; the threshold for compliance to transfer pricing should not be set too low and the incentive for energy efficient savings is only viable for large scale projects and its benefits are eroded by the fact that it applies only for the first year in which the savings are realised.
PwC raised further concerns about the structural increase in personal income taxes; a significant increase in the transfer duty to 11% on properties in excess of R2.25 million; the wholesale withdrawal of foreign tax credits for South African-sourced fees; the significant increase in the RAF levy; the introduction of carbon tax in 2016 and the fact that the Southern African Customs Union revenue sharing formula is weighted heavily against South Africa.
PwC proposed that South Africa’s tax mix needs structural reform, in order to reduce reliance on volatile corporate taxes and increase reliance on more stable consumption taxes. It also noted that the objectives of maintaining the overall progressivity of the tax system and generating the desired structural increase in Personal Income Tax (PIT) can be achieved without increasing the tax rate; that the proposal to withdraw foreign tax credits should be subject to further consultation; that the UIF surplus should rather be used to clear the RAF deficit as part of the transition to the no-fault system and in anticipation of social security reform; that the Minister should urgently refer the proposed carbon tax to the Davis Tax Committee for their consideration and recommendations and that the SACU (Southern African Customs Union) revenue sharing formula should be more equitable since South Africa is no longer in a position to subsidise the Botswana, Lesotho, Namibia and Swaziland (BLNS) countries.
The PBO commented as follows:
· As indicated in the 2014 Medium Term Budget Policy Statement (MTBPS), National Treasury is proposing additional measures to increase revenue collection due to low economic growth and revenue collections combined with a desire to stabilise debt levels. The only alternatives would be to decrease expenditure growth further than has been proposed or allow debt to increase beyond the levels that National Treasury believe to be prudent.
· National Treasury have suggested that the revenue proposals maintain, or increase, the progressivity of the tax system but have not provided any analysis supporting this conclusion.
· As a general principle, it would be useful if National Treasury provides – either in their standard Budget documents or additional appendices – greater substantiation for their choice of some mechanisms or rates over others.
· The PBO’s analysis, suggests that the personal income tax changes may be compatible with the claim about progressivity in terms of the share of income paid in income tax.
· An important innovation is provision of tax relief to employers and employees by drawing-down the Unemployment Insurance Fund (UIF) surplus. This has the effect of significantly reducing the effect of the personal income tax increases for most income earners. That may change in 2016/17 if the 1% increase in PIT is maintained in that year without another ‘UIF holiday’.
· It would be useful to be provided with information from National Treasury on the reasons for the surplus, how this apparent structural problem will be resolved and whether UIF ‘holidays’ are the most appropriate way to draw down the surplus.
· A significant amount of additional revenue is proposed from the fuel levy, RAF levy and excise duties on cigarettes and alcohol. These may all be ‘regressive’ tax measures. A recent World Bank study noted that excise duties in South Africa are regressive.
· The presence of many corporate tax incentives, maintaining the level of CIT and the UIF holiday raises the question as to whether shifting the tax burden away from companies is leading to the desired investment and growth. If not, what is the next step, the PBO asked.
· Linked to this is a concern that there appears to be no expectation that Base Erosion and Profit Shifting (BEPS) measures will yield greater future revenue. Furthermore, it remains unclear whether there are adequate disincentives to BEPS.
· The SACU revenue model has been in place for a while. South Africa as a member state has lost considerable revenue in recent years and the amount has fluctuated quite a lot. The question is whether the current model used in SACU leads to equitable sharing of revenue. If not, and without undermining the broad principles and purpose of the Union, there is a need to review the model.
· A general concern is the potential for the taxes proposed in the Budget to adversely affect the growth of the economy by reducing consumption expenditure. That may compound the negative effects of factors outside government’s control such as increases in the fuel price.
The FFC was of the view that these tax proposals are more of a “holding pattern” than a radical consolidation exercise, compared to the magnitude of revenue shortfall announced in the 2014 MTBPS required for successful fiscal consolidation. The FFC would have preferred to see an increase in all taxes and a decrease in the wage bill, for a successful consolidation. The Commission further proposed a revenue review such as a simultaneous reform of Value Added Tax (VAT) on one hand and the National Health Insurance and social security reforms on the other hand.
SAIT accepted the Minister’s tax increase widely as the least “worst” alternative. The Institute further acknowledged the need for redistribution but raised concerns about corruption and wasteful expenditure.
SAIT acknowledged that the removal of foreign tax credits on South African source activities may be an important tool to eliminate double tax for South African service providers operating in the Southern African Development Community (SADC) and that this is a more widely used tool for gateway status than the headquarter company regime, but theoretically questions the relief. SAIT further submitted that tightening the estate duty is a larger policy issue, as it redistributes wealth equitably but is complex to enforce. SAIT raised concerns around the effectiveness of environmental taxes (such as the carbon tax) versus environmental regulation. It further proposed the introduction of a VAT cash method of accounting for smaller companies and a self-assessment system for income tax, similar to VAT, to increase the speed of the tax process.
SAIPA was of the view that a 1% increase in the VAT rate would provide 50% of the required additional revenue, would be easy to administer and would require very minimum legislative adjustment. SAIPA was concerned that not much has come out of the Budget on the small business corporation taxation and about the factors prohibiting micro businesses from registering for turnover tax. It proposed that the annual turnover thresholds should be increased from R1 million to R2 million. SAIPA further highlighted that the proposed removal of foreign tax credits may reduce exports to the affected countries and that may have a negative effect on the country’s GDP.
While FEDUSA supported the proposed tax proposals, it was concerned that the proposed increase in the electricity levy was not subjected to NEDLAC processes. The federation is also of the opinion that the national fuel levy should be used to build roads for the country instead of the current principle of cost recovery from road users. COSATU, like FEDUSA, was also concerned about the user-payer principle to finance the road networks especially in Gauteng and feels the system will perpetuate inequalities within society.
FEDUSA was also concerned about the proposed one year UIF contribution relief to employers and employees. The federation feels the surplus should have been used to improve benefits to beneficiaries.
COSATU welcomed the move towards a progressive system of taxation but called for further steps that would tax the super-rich, such as high tax on luxury goods, land tax, financial transactions and a tax on firms paying below the minimum wage.
SAICA indicated that the South African tax regime is not in line with the international trends. SAICA further submitted that the global average of marginal tax rates for individuals, as at February 15, across 154 countries has decreased from 29% to 28.9%. On the other hand South Africa’s marginal tax rate for individuals has increased from 40% to 41%. In relation to corporate taxes the global average is 23.57%, compared to South Africa’s corporate tax rate of 28% whilst for VAT the global average is 15.8% compared to South Africa’s current VAT rate of 14%. Although SAICA acknowledged that the tax rates should be customised to local conditions, the institute felt that global comparisons were valuable, given that South Africa forms part of the global economy.
NUMSA indicated that South Africa is a demand-driven economy and that it was unlikely that consumption growth would be high given the tax burden placed on South Africans this financial year. According to NUMSA apart from the energy generation levy, all the tax proposals would affect the purchasing power of people.
NUMSA was of the opinion that the job creation and tax incentives are not yielding any positive results. The union cast doubt on the authenticity of the reported 211 000 jobs created through this incentive. The union was worried that government is unable to explain why the unemployment rate amongst the youth in the age group 15 to 24 and 24 to 34 was rising each quarter. NUMSA argued that even though Statistics SA does not measure employment of people from 18 to 29 years, it captures employment data of those aged between 15 to 24 and 24 to 34. Accordingly, if the youth tax incentive was favourable either one or both of the categories of employment would have increased. However, compared to the last quarter of 2013 there are fewer people employed between the ages of 15 to 34 and the unemployment rate increased by an average of 2.75% despite R1.2 billion having been spent by the end of August 2014.
3. Committees’ Observations
In terms of the Money Bills Act, the Standing and Select Committees on Finance processed the budget together and adopted this joint Report as required.
3.1 The Committees believe that the budget should be more clearly located in terms of the National Development Plan and the Medium Term Strategic Framework.
3.2 The framework for the budget has been provided by the State of Nation Address (SONA), and the Committees need to monitor the implementation of key aspects of the budget in terms of the SONA. A key focus should be the 9-point plan to “ignite the economy and create jobs”.
3.3 In the context of the weak global outlook and the major economic growth and financial constraints the country faces, National Treasury has managed to shape a balanced budget mainly in favour of the poor. The Committees welcome the budget’s focus on education, health and social grants expenditure.
3.4 While challenging, achieving the 2% projected growth in Gross Domestic Product (GDP) is possible, especially if the electricity shortages are managed effectively.
3.5 The Committees expressed their concern about the effect the low GDP growth will have on job creation.
3.6 The budget’s support for Small, Medium and Micro Enterprises (SMMEs) is most welcome, and if the programmes to be funded are implemented effectively BBBEE goals will be advanced and a significant number of jobs also created. The newly established Department of Small Business Development has a crucial role to play in this regard.
3.7 The Committees accept National Treasury’s view that the best short-term prospects for faster economic growth are in the less energy intensive sectors such as tourism, agriculture, light manufacturing and housing construction.
3.8 The Committees believe that South Africa’s debt to GDP ratio is too high at 42.5 % and needs to be brought down.
3.9 The Committees accept that fiscal consolidation is necessary, but this should be done in ways that are consistent with the country’s developmental agenda.
3.10 The Committees welcomed the prioritisation of infrastructure investment for economic development and social programmes that support needy citizens.
3.11 The Committees welcome the progressive character of the tax increases.
3.12 The Committees expressed their concern about the effects of the fuel levy increases on the poor.
3.13 While supporting the current social grants system, the Committees are aware that the current system is not sustainable and needs to be reviewed.
3.14 The Committees acknowledge the work being done by National Treasury and the South African Revenue Service (SARS) on Base Erosion and Transfer Pricing (BEPs), but believe that more should be done, especially in the context of declining revenues.
3.15 The Committees welcome the new chapter in the Budget Review on the financial position of state-owned entities (SOEs).
3.16 In the Committees’ November 2014 report on the Medium Term Budget Policy Statement (MTBPS), it was noted: “As also noted in the Committee’s Budget Report, the Committee believes that it is not sustainable for National Treasury to keep rescuing challenged SOEs who fail to improve their performance despite constant support. The Committee accepts that there may be a need to sell non-strategic assets, but is interested to know what criteria will be used to determine what non-strategic assets are and on what terms they will be sold.” The Committees remain interested in this, and will monitor Treasury’s decisions on this.
3.17 The Committees welcome the proposal for a new BRICS Bank, and believe that it will over time contribute to funding infrastructure investment in the country and Africa generally.
3.18 The Committees welcome the role of the Chief Procurement Office and the creation of a central database for procurement, as it will reduce government costs and curb corruption.
3.19 While recognising the importance of the international ratings agencies, the Committees raised questions about how objective the decisions of these agencies are and the criteria they use in arriving at their decisions.
These recommendations should be linked to those made in the Committees’ November 2014 Report on the Medium Term Budget Policy Statement (MTBPS).
4.1 National Treasury (NT) should, within a month of the adoption of this Report by the House, respond to the submissions made by the stakeholders referred to in section 2 above, and the Committees will consider Treasury’s report.
4.2 The quality and composition of government spending need to change. NT needs to be effective in this regard and the Committees will monitor this more closely.
4.3 While the Committees acknowledge NT’s good work in improving the quality of spending at local government level, more needs to be done in this regard, in cooperation with the national and provincial departments of cooperative governance and traditional affairs and the provincial treasuries.
4.4 NT should do more to ensure that its proposals on cost-containment and efficiency gains are effectively implemented and should report to the Committees periodically on progress in this regard.
4.5 The Committees noted that the state is creating more jobs than the private sector, and believe that the state should do more to encourage the private sector to invest in growth and create more jobs.
4.6 NT needs to ensure that the employment tax incentive scheme does not lead to the displacement of established workers.
4.7 While the Committees welcomed government’s many incentives and other forms of funding to private companies to advance the country’s economic growth and job-creation goals, they feel that there should be more careful evaluation of the number of jobs created through this funding support. NT, preferably together with the Department of Trade and Industry, should brief the Committees on the overall success of these support programmes, with a particular emphasis on job-creation. The Committees will cooperate with the parliamentary trade and industry committees in regard to this briefing.
4.8 NT, working through the Presidential Infrastructure Coordinating Commission (PICC) and together with other departments, need to contribute more to the speedier and more effective implementation of the National Infrastructure Plan.
4.9 The Committees welcomed the new fiscal package for cities, and urges NT to ensure that the funds are effectively used for the correct purposes.
4.10 NT needs to provide more information on the assumptions on which its revenue proposals are based and their impact, as well as more information on the impact of the budget on the poor.
4.11 NT needs to periodically brief the Committees on the progress of the Davis Tax Committee’s work.
4.12 While recognising the complexities of the issues, the Committees believe that NT and SARS should do more to tackle Base Erosion and Transfer Pricing, and the Committees will actively engage with them on this.
4.13 The Committees noted PricewaterhouseCoopers’ concern that, in the Southern African Customs Union, South Africa received 17% from the revenue sharing pool in the 2013/14 financial year instead of at least 80% that it was entitled to. While recognising South Africa’s responsibilities to its neighbouring countries, the Committees believe consideration needs to be given to reviewing the revenue sharing formula.
4.14 The World Bank’s 2014 Report on South Africa entitled "Fiscal Policy and Redistribution in an Unequal Society" examined the redistributive nature of existing South African fiscal policy, in comparison to other countries and found that South Africa’s tax and spending policies are significantly progressive. This is particularly welcomed. But as the government and a wide range of stakeholders and experts have constantly maintained, the cost of the welfare benefits is not sustainable. NT, together with government as a whole, need to look into ways of linking social grants to forms of self-employment and skills development, and over time wean people away from the grant system into sustainable livelihoods.
4.15 In the Committees’ November 2014 MTBPS Report, it was recommended that “National Treasury needs to be very clear about the criteria it uses to define non-strategic assets and the terms of any sale of these. Treasury also needs to seek to ensure that the sale of these non-strategic assets do not lead to job losses or other unintended consequences that undermine the country’s economic growth and developmental goals.” The Committees expect National Treasury to take this into account in its pending sale of non-strategic assets.
4.16 The Committees noted that Eskom is to receive a capital injection of R23 billion, to be paid in three instalments, with the first transfer to be made in June 2015; and that the Minister of Finance will table an appropriation Bill in Parliament to this effect. While recognising the complexities and sensitivities related to the sale of non-strategic assets, the Committees recommend that the Minister should introduce this Bill by early May.
4.17 The Development Finance Institutions (DFI’s) need to do more to support small businesses and co-operatives.
4.18 NT should do more to assist the Department of Small Business Development, given the importance of Small, Medium and Micro Enterprises (SMMEs).
4.19 While the Committees welcome the role of the Chief Procurement Office and the centralised Supply Chain Management (SCM) process in general, NT and the Chief Procurement Office should provide the Committees with more information on how the Office will work and how the centralised SCM process will be implemented, including how the practical and logistical difficulties will be dealt with. National Treasury and the Chief Procurement Office also need to ensure that local service providers will not be unduly disadvantaged. The Committees welcome the proposals for centralised procurements, including school textbooks from January 2016. The proposal to centralise school construction and decentralise their maintenance is also welcomed. However, again, NT and the Chief Procurement Office need to provide the Committee with more information on how these proposals will be implemented. NT and the Chief Procurement Office need to brief the Committees in regard to these issues by the end of June 2015.
4.20 While the Committees understand the need for Eskom to charge cost-reflective tariffs, they feel that this should be done in ways that do not disadvantage the poor and needy.
The DA reserves its position on this Report.
Report to be considered.
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