2013 Budget , Fiscal Framework & Revenue Proposals: Public hearings

Meeting report

2013 Budget (Fiscal Framework and Revenue Proposals): Public hearings
Business Unity South Africa submission: A business perspective on the 2013/14 National Budget
Professor Raymond Parsons, Special Policy Advisor, Business Unity South Africa, noted that it had been quite a challenge to unpack the budget speech, a document that was several months in preparation. A bird’s eye perspective of the economic scenario for 2012 had shown disappointing signs for South Africa’s economic performance, and the final figure showed GDP growth of 2.5%. Even then, there was evidence of ‘a tale of two deficits’ emerging: fiscal deficit and trade deficit, together with a combination of other events during the course of year.  South Africa was also facing relatively low levels of business and investor confidence. The general consensus over the years was that the economic performance was not sufficiently strong to address the challenges of unemployment, poverty and inequality.

Professor Parsons said that Business Unity South Africa (BUSA) had identified eight broad tests that it would apply to the budget to determine convergence and areas of disagreement or difference of emphasis. These were: economic trends, predictability and stability in policy, alignment of the economic strategy with the National Development Plan (NDP), youth unemployment, role of the private sector/global competitiveness, infrastructure rollout, State capacity and fiscal sustainability/discipline.

Expanding on these, he said that BUSA shared the outlook expressed by Minister of Finance, Mr Pravin Gordhan, that there was still uncertainty for the global economy, particularly the Eurozone and its impacts on South Africa’s exports. Although the global economy as a whole had passed its lowest turning point, forecasts predicted very modest global growth expectations all-round for 2013. The tectonic shifts in the global economy were leading to new business strategies, and South Africa needed to diversify its foreign markets to areas with better growth prospects.  

Professor Parsons said a survey of 1 500 executives undertaken for ‘The Economist’ and ‘Financial Times, for the first quarter of 2013, showed that the business barometer pushed into positive for the first time since 2011, with business executives for the Middle East and Africa being the most positive. Four out of five executives thought that the Euro crisis was not yet over and that employment prospects were best in Asia, Middle East and Africa, but worst in Europe and North America.

Professor Parsons echoed the statements of both the Minister (in the budget speech) and the President (in the State of the Nation Address) that South Africa’s most vulnerable export point was Europe, and that nothing much could be done about this.

In terms of the domestic economic trends, South Africa had, over the last five years, averaged 3% to 3.5% growth, under half of comparative growth by its emerging market peers, and there was increasing tension for South Africa to unlock its true potential. The 2013 economic growth would remain positive, but unbalanced, with obstacles posed by structural imbalances and lower productivity. It was predicted that South Africa’s GDP would be around 2.7%, but with downside risks due to the structural imbalances. Inflation was at the upper end of the target range due to cost-push factors and exchange rate.

Professor Parsons said that South Africa had to deal with the large current account deficit. Ratings downgrades were an issue and if inflows reversed, circumstances could deteriorate dramatically. The rand was suffering, as seen in the exchange rates. It was no longer a reliable gauge of global risk appetite, but was rather a gauge of what was happening in South Africa. Although a weaker rand would be helpful to exporters, it was not an economic panacea. South Africa needed about R200 billon in capital flows to finance its current account and supplement its limited domestic savings. One positive was that although overseas events had affected South Africa negatively, domestic policy was now under scrutiny.

BUSA’s forecast of GDP growth in 2015 was at 3.6%, as opposed to Minister Gordhan’s forecast of 3.8%, but this was merely a forecast, and this could rapidly change. A roll out of the infrastructure and implementation of the National Development Plan (NDP) with no downward spiral of the global economy would mean that the forecast numbers for GDP growth would hold.

Professor Parsons said that predictability and certainty in policy was important for the promotion of investor confidence. The Medium Term Budgetary Framework was an important tool. The budget reinforced the commitment to fiscal discipline, ‘value for money’, and the increasing commitment to the NDP was creating a more certain framework. He also commended the Minister’s consultation prior to making decisions. The authoritative investigations into the tax system, which some had referred to as a ‘smoke screen’, had also created certainty instead of ad hoc decisions.

One of the cross cutting instruments, which had been neglected, but which he thought should be revived, was the Regulatory Impact Assessment (RIA) mechanism. He explained that this meant that any proposed law or regulation would be subjected to an analysis to determine its impact, and he recommended that this should be broadened and deepened in the government machine. The Minister’s promise of a long term fiscal report by the National Treasury (NT) was also working towards promotion of a certain environment.

BUSA supported the NDP and it was seen as a road map for South Africa and a national rallying call. BUSA was not suggesting that the plan was perfect, but the imperfections would be ironed out in the implementation, because implementation would be done with consultation. BUSA supported the President’s initiative and the appointment of the National Planning Commission. The call in the Budget Speech to develop a constructive partnership model with the government was also welcomed.   

Professor Parsons noted that youth unemployment remained one of South Africa’s main challenges. Negotiations were done at the National Economic Development and Labour Council (Nedlac) that would soon result in the signature of the Youth Employment Accord. Support was needed, in addition to tax incentives, for sharing the costs of employing young work-seekers. In the long-term, the answer for South Africa lay in shifting from welfare to work.

Speaking on the role of the private sector and global competitiveness, Professor Parsons said that BUSA recognised the co-dependence between the public and private sectors, as set out in the budget speech. It was important to try and create a “virtuous circle” of growth, investment and jobs, and particular support was needed for small businesses, as this was where the most potential lay. Diversification, to increase South Africa’s role in Africa, was needed. The shift from welfare to work would require South Africa to be a globally competitive economy, able to carve out a large share of world trade and investment.  

Infrastructure spending was important to support growth and job creation and so the rollout of the R827 billion Infrastructure Programme had to be expedited. BUSA had pledged its support, after a meeting between the President and social partners on 18 October 2012, and a Memorandum of Understanding on infrastructural development was signed that would assist government with the rollout of the infrastructure programme. The role of the private sector could be maximised through an expansion of Public Private Partnerships (PPPs). Professor Parsons said that the issue of administered prices related both to the future and to the present, because in some large infrastructural plans the financing had not yet been discussed. This was now necessary, to avoid similar problems to those of Eskom and the tariffs. There was still a need to have a policy on how administered prices would be fixed, taking into consideration the shocks of rising prices for the economy, growth and employment.

Professor Parsons said that the budget had recognised that South Africa had inherited a severe unevenness in state capacity from the previous regime. Business was willing and able to join partnerships to address capacity shortfalls at all levels of government, especially at local government. Business could help explore models for direct partnerships with local government, to fill the gaps created by a lack of skilled engineers, managers and other key professionals.  He also strongly supported intensified steps to eliminate corruption and said that BUSA was working with the government on this.

Professor Parsons said that fiscal discipline now would help to avoid fiscal austerity later on. Government must learn to do more with less, although there were concerns about its ability to do so at present. The principles of ‘borrow-and-spend’ and ‘tax-and-spend’ both had limits and, although the debt ratios currently still appeared manageable, they masked vulnerabilities. South Africa should abide by its current commitments, but there were other factors that were outside the National Treasury’s control.   

In concluding, Professor Parsons said that South Africa had showed disappointing economic performance from a business perspective, but the Minister had done “a brilliant job” in balancing the books in a difficult background. South Africa had to pay attention to its debt management, to avoid unfavourable reactions. Effectiveness of public spending would be crucial to the success of government’s programmes and their effect on economic growth.  He recommended that the Parliamentary Committees needed to use the NDP as their basic framework of reference in all relevant hearings. BUSA was promoting the NDP news. South Africa should attempt to “write its own story” in the years ahead.

Federation of Unions of South Africa (FEDUSA) submission
Ms Gretchen Humphries, Deputy Secretary General, Federation of Unions of South Africa, said that the main focus of the budget speech was the implementation of the NDP and the New Growth Path (NGP) framework. The key public policy considerations were elimination and reduction of poverty, lowering the cost of living and doing business, increasing exports, creating a job creation trajectory and making economic growth more inclusive. The spirit of collaboration and innovation to create a capable developmental state was positive and heartening, and encouraged all South Africans to play a role in macro-economic change, stability and sustainability. The budget, overall, remained steadfast in addressing the challenges of creating jobs, reducing poverty, building infrastructure and expanding the economy.

Ms Humphries said that the directed NDP infrastructure roll-out was the main thrust of the 2013 Budget and that it was the most positive policy direction undertaken by the Government since the downturn in the economy in 2007. The building of infrastructure was considered imperative to implementing the NDP, enhancing capabilities and promoting active citizenry in South Africa.

Ms Humphries said that the World Economic Outlook of 23 January 2013 indicated that weak global growth was projected to increase during 2013, as the factors underlying soft global activity were expected to subside. The upturn was projected to be more gradual. The risk in the Eurozone and in the United States (US) had been lowered. Policies had supported a modest growth pickup in some emerging market economies, although others continued to struggle with weak external demand and domestic bottlenecks. The 2013 Budget updated the Medium Term Budget Policy Statement (MTBPS) figures according to the global and economic outlook. Some figures were bleak, but for the first time there was a positive indicators of input into certain aspects.

Job creation was the central theme in the New Growth Path (NGP), and also in the Report of the National Planning Commission. Government, however, had failed to make real inroads in the country’s unemployment problem although much had been done in other areas, so this begged the question of whether the NDP would fare any better. One positive was that the NDP was compiled by an expert Commission, which drew on extensive research and wide consultation with different groups. The NDP recognised the role of government, business and labour, and it further provided practical ways of taking the Plan forward, in conjunction with the social accord of the NGP framework. FEDUSA applauded government in making the plan part of the budget and including elements into its spending and revenue plans. There was vast potential to increase the alignment between the Plan and the budget priorities.

Ms Humphries said that FEDUSA also welcomed the long-awaited establishment of the Parliamentary Budget Office (PBO), which would provide ‘independent, objective and professional advice’ to the portfolio committees on matters related to the budget and other money bills. FEDUSA suggested that its mandate should extend to holding meaningful consultation with civil society, such as Nedlac, academics, non-governmental organisations and other institutions of civil society. FEDUSA had also welcomed the secondment of a specialist from the Development Bank of Southern Africa to design a model for the budget office that would give effect to the Money Law bills. FEDUSA concurred that legislatures generally lacked technical and analytical capacity and this had led to limited legislative oversight, and consequently poor fiscal outcomes, in the past.

FEDUSA fully agreed with government’s strategy of lowering spending to counteract the rise of the budget deficit. This would be achieved through reprioritising the allocations, mostly for national departments, and by lowering the contingency fund. This was in line with fiscal best practice. The Minister’s assurance that government would adhere to fiscal sustainability by changing its spending and revenue plans if economic conditions so dictated, to keep the deficit from increasing, was also welcomed.

Ms Humphries said that the NDP proposed interventions that aimed to expand economic opportunity for all, such as investing in infrastructure, diversifying exports, strengthening links to faster-growing economies, enacting reforms to lower the cost of doing business, reducing constraints to growth in various sectors, moving to more efficient and climate friendly production systems and encouraging entrepreneurs and innovation.

FEDUSA welcomed the new reporting format for the consolidated government account, as it would allow for greater comparison with international standards. It also applauded the Minister for the efforts made over the medium term to bring the deficit back to an acceptable level.

On the expenditure side, FEDUSA welcomed steps to increase jobs in line with the NDP, based on feasibility and value for money. It believed that the proposed new local government equitable share formula would provide a subsidy for free basic services, designed to reach about 59% of households. The identification of high unemployment as the most pressing challenge facing South Africa would pave way for more measures to create jobs.

In terms of “social security and the social wage”, Ms Humphries said that FEDUSA had always believed that curbing poverty was the prime way to allow more individuals to provide for their retirement and old age, through pensions and medical insurances. The 2013 Budget highlighted that almost 60% of Government spending was allocated to the social wage. Decent work addressed both earned income and the living conditions of working people, as well as increased access to services such as healthcare, education and housing, which could increase both productivity and employability. FEDUSA was in agreement with the Minister’s emphasis that a growing dependency on the state was not a sustainable long term solution to reducing poverty, inequality or unemployment. FEDUSA welcomed the nominal increase in the monthly state old age grant and the disability grant, both of which provided a safety net for the poor. However, it warned against the growing dependency, which simultaneously raised concerns as the percentage of social grant spending continued to increase. Negotiations were on-going with Nedlac on retirement reforms, to see how some of these concerns could be overcome. In addition, given the 60% spending on the social wage, FEDUSA called on National Treasury to investigate measures that would increase the return on the social investment. It suggested that conditionality of grants be explored to maximise impact and eradicate misspent grants.

FEDUSA noted that a large majority of social spending went to providing basic education to the poorest 60% of learners, but remained concerned about the standard of free basic education in the country, and noted the demands to improve the basic infrastructure of such schools, and the levels of difficulty associated with the school curriculum.

The additional funding for Non-Governmental Organisations (NGOs) for recruitment of social worker graduates was commended by FEDUSA. It believed the initiative of involving the NGO sector in the addressing youth unemployment was a sound decision, as it not only provided employment opportunities but simultaneously ensured provision of much-needed welfare services to address rape and gender based violence.  Measures to streamline the management of the South African Social Security Agency, and measures to fight fraud and corruption that were eroding the social welfare system, were welcomed.

Ms Humphries said that healthcare took a large portion of the budget, but there was at the moment insufficient information on the National Health Insurance (NHI) pilot project roll-out. Government needed to engage more with stakeholders on issues such as the health sector. FEDUSA represented a huge section of workers that belonged to medical aid.

In relation to the Road Accident Fund proposed benefit scheme, Ms Humphries said that the implementation of a no-fault system would have a major impact on road users of the country. This system was similar to that of the Workman’s Compensation Fund, which excluded legal representation, which not only left claimants vulnerable, but there were also concerns that the current Workman’s Compensation Fund was not efficient or effective.

FEDUSA acknowledged that the retirement fund coverage was poor for low-income workers and employees in small firms. For the past four years it had been calling for a discussion document to contextualise further retirement reform, to encourage voluntary savings. FEDUSA had engaged with National Treasury and Nedlac on 1 March 2013, to discuss the proposals in more detail. The intention to provide proper training to trustees of retirement funds through the assistance of the Financial Services Board was welcomed. One major retirement fund issues addressed in the budget speech centred on funds preservation. Minister Gordhan had suggested that social partners consider ways to limit people’s ability to withdraw money from their retirement savings. FEDUSA agreed that a move to restrict lump sum withdrawals of accumulated savings would help to ensure savings for retirements. Retirement reform must consider not only how all South Africans saved for retirement, but also the income received during retirement and more discussion was needed on the details.

FEDUSA welcomed the personal tax relief of R7 billion, as this would bring some relief to some individuals and small businesses. The youth tax incentive and encouragement of the hiring of young workers was welcomed, but FEDUSA cautioned that tax incentives schemes for special economic zones must be carefully designed to avoid the kind of unintended consequences that had arisen in Atlantis and Butterworth.

In relation to carbon tax, FEDUSA thought its phased introduction was a positive measure to ensure mitigation of the impacts of climate change, food security and environmental challenges. She added that creating a savings culture as a tax incentive was also welcomed, and would be addressed in detail later.
In relation to tax in general, FEDUSA had previously recommended that there should be more favourable tax treatment for small and micro businesses, and now welcomed the different steps announced in the 2013 Budget as they would reduce red tape and costs of doing business for the engines in job creation.

The general fuel levy on petrol and diesel had a heavy impact on FEDUSA members, since most used public transport. The increase in the petrol price would be felt in all spheres of the economy and would directly impact on all South Africans. The plastic bag levy was another area of concern, because there had been an agreement with retailers, but the increase could lead also to loss of jobs.

In relation to the “sin taxes” FEDUSA’s main concern related to the agricultural sector and specifically the wine industry. An increase in the taxes would prevent South Africa’s products from becoming too expensive for the international market where it had to compete with major global players.  

FEDUSA welcomed the proposals to ensure the effective and efficient administration of the tax system. The research on tax policy would attract a lot of interest from FEDUSA membership and so its commissioning was eagerly awaited. FEDUSA would also like to see research on the impact of the multi term wage agreement on the public sector wage bill.

Ms Humphries said that FEDUSA questioned the absence of any reference, in the 2013 budget, to gender equality mainstreaming, and it was disappointed that it contained no tangible and actionable statements to address the gender inequality inherent in South Africa’s patriarchal society, which was no doubt the primary contributor to the unacceptable rates of rape and sexual violence in the country. FEDUSA urged all Ministers, especially those for Health, Women, Children and People with Disabilities, Labour and Social Development to restructure their programmes and budgets to include urgent measures and call for financing in this regard. FEDUSA welcomed the reference, for the Justice and Constitutional Development vote, to reprioritising funds to the Thuthuzela Care Centres, but said that more details were required on the exact model through which the extra funding would be disbursed. FEDUSA was disappointed at the silence of the Department of Women, Children and People with Disabilities on the issue of rape, which was one of the most traumatic and extreme manifestations of gender based violence.

Co-Chairperson Mr TA Mufamadi (ANC) noted that the issue of votes would be discussed at a future meeting.

In conclusion, Ms Humphries summarised that FEDUSA had covered only a few aspects of the dense budget. She said that the limited time scheduled for public hearings was always problematic, and did not allow for intensive and objective comments. It was hoped that the establishment of the PBO would bring change to the budgetary process. FEDUSA, in summary, considered the implementation of the National Planning Commission strategies and reprioritising of expenditure towards infrastructure, as the most important aspects that would steer the economy on a growth and employment creation path.

Discussion
Mr B Mashile (ANC – Mpumalanga) said that BUSA’s comment on corruption was very brief. He would have expected more details, given the observation that some companies appointed accountants who assiduously assisted the companies towards non-compliance with tax obligations. Tax consultants and auditing firms similarly helped companies avoid tax.

Professor Parsons said that the rigorous time limits imposed for the submissions prevented further detail, but no adverse conclusion should be drawn from this. There was ongoing awareness of the practices. It took two people to engage in corrupt activities. The Regulatory Impact Assessment could assist in bringing about discipline in this area.

Ms Mashile asked FEDUSA if it saw any alternatives to the fuel levy that would raise the same amounts.

Ms J Tshabalala (ANC) welcomed the youth incentive programme and the proposed youth accord. She told BUSA that government was the biggest employer in South Africa, but that it was wrong for government to provide infrastructure for large businesses to operate, and suggested that BUSA itself needed to adopt a “NDP approach”. She asked for more detail on the fears about the global outlook and questioned if confidence levels were being raised amongst South Africa’s partners, as far as competition was concerned, and if South African manufacturing capability was adequate.

Ms Tshabalala asked if FEDUSA could help in reducing the number of strikes in the country through negotiations and promotion of worker confidence. She also questioned the consequences to follow from the youth tax incentive.

Ms Z Dlamini-Dubazana (ANC) asked BUSA if there was confidence and trust between the private sector and the Government in relation to private sector wages..

Ms Dlamini-Dubazana commented that Eskom earned a profit of R3.5 billion, and if the carbon tax of R120 per tonne of emission were introduced into the equation, there would be a serious impact on job creation.

Ms Humphries responded that the green economy had potential to create jobs, as indicated in the NDP and NGP. Carbon tax was an incentive to ensure that companies emitted less.

Mr D Ross (DA) noted the GDP growth rate and the R1.5 trillion backlog in infrastructure. He commented that addressing these would be a formidable task, and there were currently low implementation levels. However, he also noted that 22% of the budgeted activities were not accomplished. 60% of implementation goals had not been achieved by state-owned entities in 2010/11, and 40% were not implemented fully. He questioned if the relatively low levels of business and investor confidence were due to a lack of implementation, and how BUSA recommended more progress for infrastructure. He noted that, since the World Cup, not one tender had been received by the Minister.

Professor Parsons responded that in regard to low levels of implementation, BUSA had engaged with the South African Local Government Association (SALGA) and the relevant government departments, to try to form some kind of cooperative effort to promote improvements.

Mr Ross noted that the NERSA recommendation to reduce the requested 16% increase by Eskom down to 8% was welcomed, because there had been a feeling that the pricing formula was flawed. He asked how future capital expenditure would then be financed.

Mr Ross noted FEDUSA’s comment on the overall measures for tax administration and wage agreements in the public sector, and asked what tax recommendations were available. He also asked if the carbon tax costs were likely to be filtered down to consumers. He reminded Members that South Africa was completely coal-reliant.

Mr N Koornhof (COPE) asked BUSA what measures it would consider relevant to promote business in Africa.

Mr Koornhof commented, as a follow up to the questions of Mr Mashile, that tax management was perfectly legal, and had been taken into account in the tax legislation of the country. He added that companies were already paying their fair share of tax.

Mr Koornhof thanked FEDUSA for highlighting the agricultural sector, and said that this sector had been downplayed too much in the past. He urged the various representatives from this sector to come to the Committee and fight for their own cause.

Mr D Van Rooyen (ANC) pointed out that analysts had commented that South Africa’s moderate spending pattern would not help economic growth. He requested an update on the engagements aimed at assisting the human resource requirements for local government.  

Mr Van Rooyen asked FEDUSA how it proposed that it could make use of the PBO, since it was intended to advise the Committees on their oversight duties.

Co-Chairperson Mr Mufamadi said that the budget was premised on the NDP. He felt that BUSA needed to indicate more specifically what it would propose to take the NDP forward. There was a need for policy alignment of Small and Medium Enterprises (SMEs), for purposes of tax an legal frameworks. He asked BUSA what was holding South Africa back since PPPs were recognised but it was not growing at a similar rate to other developing countries where the PPPs were successful. He noted that South Africa had a presence in Africa, in terms of investment, but this tended to be done on an individual basis and was not coordinated collectively, as was the case in Brazil and China. He asked BUSA to propose ideas how South Africans could collectively enter into these investment areas in Africa. The private sector had to contribute ideas and funds in order to revolutionalise the country.

Professor Parsons agreed with these observations and said that the budget was a peg on which to hang other important questions. He added that there was merit in having a separate meeting to discuss, at length, what the private sector could offer.

He added that there was a sense that the questions asked by Members related to “pre-NDP” and “post-NDP” scenarios. Some questions were pre-NDP because the country was in a transition. Commitments had been made by the country and the private sector to a vision that would continue through to 2030, something that had never been done before. Some of the answers already were addressed in the NDP programme. This was the right time to rally the country behind the shared vision of the NDP.

With regard to Africa, Professor Parsons said that the infrastructure of Africa, and more specifically the SADC region, was very important. There was a need to cooperate in improving the infrastructure of the region, as it would greatly reduce transaction costs. There was need to bond with the economy and to make sure that South Africa was part of its development.

Professor Parsons referred to comments about the small businesses, and said that it was not only the incentives that were important, but also for regulatory frameworks on how to use incentives. He urged the need for “smart tape” rather than “red tape”.

Ms Humphries said that there were legal frameworks around the wages and collective bargaining, which were essential, a point emphasised by the World Bank. FEDUSA was trying to drive the creation of jobs in labour unions, in addition to work in education, mentoring, rolling out solar power installations and the Road Fund initiatives.

Financial and Fiscal Commission (FFC) Submission
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, said that the subdued growth rate recovery in the global economy perpetuated a trajectory of sub optimal growth. Whilst the  economy was not collapsing; it was also not performing well enough to make a meaningful contribution to reducing the high unemployment rate. The conditions and foundations in the 2013 Budget were premised on the NDP, so there was a story line and vision of what each sector was expected to do. The emphasis was to link what was in the budget around the NDP imperatives.

Mr Khumalo said that the proposed fiscal reforms aimed to create a fiscal framework that would give South Africa a greater ability to increase sustainable economic development. The key pillars were long-term competitiveness and the ability to respond global trends and patterns. One key question was how likely the fiscal framework and revenue proposals were to meet the objectives of the NDP. Two main areas that government undertook to improve were enhanced efficiency and sustainability.

Dr Ramos Mabugu, Research and Recommendations Director, Financial and Fiscal Commission, said that the interaction between the Parliamentary Committees and the Commission (FFC) had highlighted the issues of efficiency and sustainability. Enhanced efficiency spoke to getting the maximum output from a given amount of resources. The FFC supported the Budget’s statements on how government was planning to use the levers available to it to boost South Africa’s economic growth. The economy was projected to grow at 2.5% which was not indicative of an economy that was collapsing. Since the 2009 recession, there had been three years of positive economic growth. However, it must be remembered that this growth was only halfway to what South Africa hoped to achieve in 2030.

Dr Mabugu said that, when trying to find ways of enhancing efficiency, FFC looked at the Expenditure Component Revisions by functional classification. The 2012 MTBPS showed very few major changes to what was promised, but there were nuance changes. Science and Technology received the highest priority and was growing by 12.4%, while transport, energy and communication were falling (at minus 3.2%) and were below where they were expected to be. These were important levers to push the government towards an economic growth rate that would attain the two major objectives of poverty reduction and unemployment reduction.

Sustainability could be dependent on three areas: macroeconomic stability, budgetary stability and affordability. Macroeconomic stability was the ability to respond swiftly and decisively to short term economic pressures that were vital to minimising negative shocks to growth, jobs and investment. Since the 2009 recession, government had committed to cushion the poor by maintaining the social safety net. Evidence suggested that government was committed to a countercyclical fiscal policy and fiscal guidelines, with plans to reprioritise the budget. while maintaining the social net.

Budgetary stability had to do with the stability of the system as a whole. In this, the equitable share formulae, conditional grants and setting of three-year spending plans would provide predictability for a decentralised budget. However, he added that the allocation to the contingency reserve decrease by R23.5 billion had been taking a lot of distress, in terms of maintaining stability, which he considered a new trajectory. Government had, in the 2010 Budget, announced a very aggressive consolidation plan, but the 2013 Budget shows a slower pace of fiscal consolidation, which would raise credibility considerations.

Dr Mabugu stressed that plans must be affordable in the lead up to 2030. Government economic programmes and policies had dual objectives of accelerating growth, and fighting poverty and unequal access to opportunities. Ambitious social reforms to tackle poverty, growth and inequality problems were being proposed in the areas of job creation, education and health. FFC believed that these programmes s were sustainable in the medium to long term, on condition that the expenditure was productive.

Dr Mabugu then addressed the macro economic outlook and fiscal risk confronting South Africa. The  FFC saw the biggest strategic risk at the moment as the economic deficit. The fiscal downturn meant that difficult choices would have to be made on public expenditure. Reprioritisation, to ensure growth-friendly expenditure, would have to be maintained. Dr Mabugu added that from a sustainability perspective two critical challenges were evident – namely, the sovereign debt downgrades (as they would increase the borrowing costs, making it more expensive to attain the NDP) and public debt.

FFC had not, in 2012, disagreed that downgrades had been warranted. There was a need to consider government’s commitment to countercyclical fiscal policy and fiscal guidelines, with plans to reprioritise the budget while maintaining the social net. However, FFC thought that there was room to improve composition of expenditure, eradication of wasteful expenditure and the public sector wage bill.

In terms of the public debt, there was an increasing state debt burden, which implied that expenditure increases were being financed by debt. The loan debt in real terms was increasing while real state debt costs were decreasing, reflecting government’s debt restructuring efforts through the switch programme (which substituted maturing debt with longer term instruments) to cushion the consolidation. 

Speaking on the revenue estimates and tax proposals, Dr Mabugu said that revenues had been revised downwards from the 2012 Budget and MTBPS, due to weaker economic growth and VAT revenue growth. FFC welcomed the idea of fiscal consolidation through expenditure efficiencies and control as opposed to tax increases, as this would support the economy in the short term. Major tax reforms were welcomed, given the long term concerns around tax revenues.

FFC welcomed the tax relief to individuals of R7 billion in a tight fiscal environment. Tax breaks to business would support growth and promote job creation. FFC supported tax incentives to promote youth employment. In regard to indirect taxes, FCC supported the comprehensive carbon tax proposed for 2015/16, but noted that it should be ring fenced to be a true instrument of behavioural change and environmental sustainability.

Dr Mabugu then set out some proposals from the FFC. It felt that the fiscal framework could be improved through an improvement of long term fiscal reporting, where the budget process would take long-term risks into account. In this regard, government had promised to put out a document during the course of the year. There should be an extended public debate on long term fiscal challenges. Distributional impact of new policies, particularly on gender and children, should also be looked into. Consolidation of fiscal reporting should take into account local government’s contribution to infrastructure development. Dr Mabugu also recommended the need to integrate the NDP into the budget process, with Medium Term Expenditure Frameworks (MTEFs) evolving from simple macro-fiscal framework into comprehensive processes that were driven by and gave effect to the NDP. FFC also felt that the tax revenue initiative should be broadened to include other non-tax revenue, such as borrowing policy and optimal debt.

South African Institute of Chartered Accountants (SAICA) submission
Mr Piet Nel, Project Director, South African Institute of Chartered Accountants, said that the main expertise of the Institute’s (SAICA’s) members lay in the application of tax laws, so that its submission would focus on the revenue side of the budget. SAICA usually met with National Treasury, as well as making submissions whenever proposals relating to tax were made available. He added that the budget did not generally contain all the details that were needed to make fully comprehensive comments, but SAICA nonetheless had some comment to offer.

Mr Nel said that SAICA had hoped that the appointment of the Tax Ombud would have been announced in the 2013 budget. SAICA had received a number of reports from its members and taxpayers that they had been unable to solve disputes between South African Revenue Service (SARS) and themselves. He also added that this was the first time that the budget had been delivered before the end of the financial year for individuals, as it had been presented on 27 February, two days before the new tax year commencement on 1 March. This impacted on tax rebates and tax tables, and also put extreme pressure on long-term insurers for the annuity runs that commenced on 1 March each year.

SAICA was glad that some of its proposals had been included in the budget. He also noted that many employees were giving assistance to their employees to study, and so the bursary amount remuneration doubling was welcomed.

In terms of Value-Added Tax (VAT) business rescue, Mr Nel said that SAICA had already pointed out an anomaly in the legislation in the previous year, in the case of a business rescue plan that had been started and then hampered by the VAT legislation. He added that VAT supplies between connected persons also had anomalies, and that cash flow problems were experienced by some people having to pay VAT money upfront and out of pocket.

Speaking on VAT registration and apportionment, Mr Nel said that the time it took to register a business for purposes of VAT was a hindrance to doing business in South Africa. Submissions were made by SAICA to the National Treasury and SARS, but no amendments had yet been made to the legislation. The impact of the Tax Administration Act was to impose automatic penalties for late submission of returns.

Mr Nel said that SAICA did not share the view that trusts were predominantly set up to avoid tax, and therefore it did not agree with the proposals to amend trust laws. He said that any change to the trust law and the succession of trusts should be done only after significant research, and certainly not done in a hurry. If tax legislation was driven by anti-avoidance measures, the country would end up with very complex laws. There was currently a general anti-avoidance rule in the legislation on which SARS could already rely. The court, in the May 2012 Supreme Court of Appeal case of Raath v Nel undertook to ensure that trust form was not abused. The Minister had noted that trusts were being used to avoid estate duty, and SAICA therefore suggested that the Estate Duty Act should be amended, to incorporate a general anti-avoidance of tax principle, rather than attempting to change the taxation of trusts themselves. The Minister had also hinted that estate duty may be scrapped, and if this was to be done, any amendments to the tax law around estate duty would have limited benefit to revenue collection.

Ms Deborah Tickle, Deputy Chairperson, SAICA National Tax Committee, spoke to the earlier question raised by Mr Mashile, on tax consultants who assisted companies to avoid tax. She clarified that in fact they assisted companies to pay the right amount of tax in accordance with the law. Tax consultants were not there to cheat government, but to ensure that the taxpayers paid only what was due.

Ms Tickle spoke to proposals around the source of employment income. The source was generally considered to be where the services were rendered. South Africans followed a world-wide taxation regime, which meant that a South African resident would be taxed on his/her income, regardless of where it had been earned. Therefore, income earned from working outside South Africa would, without specific legislation, be taxed in that country, subject to certain double tax treaties, and would also be liable to being taxed in South Africa. However, if a person stayed outside South Africa for more than six months, with 60 days consecutively stayed outside, South Africa would not tax that individual. Unlike other countries who had abolished the foreign earnings exemption, South Africa made it difficult to break residence on an outbound assignment, and where a South African resident outbound assignee did not break residence he or she would suffer an exit charge. The end result to this would be migration of South Africa’s skilled labour and this could lead to critical skills shortage. Furthermore, it would also be hard for companies conducting business in South Africa using South African nationals.

Ms Tickle agreed that SAICA welcomed the fact that pensions were being looked into, but the main concern of SAICA was whether the tax focus should rely solely on the national source of the services provided, or the national origin of the pension fund serving as the savings vehicle. SAICA’s proposal in this case was that deductions should be made when payments were made, for equal deduction and equal inclusion. She added that it would be more beneficial to allow, instead, a deduction to any retirement fund, irrespective from where the funds were paid out.

In terms of tax avoidance, Ms Tickle said that where the debt was considered to be excessive, then the interest deduction would be disallowed, but then it would be able to be rolled out over four years. Specific avoidance legislation would only result in capturing normal non-avoidance tax transactions.

Speaking on the certainty of investing in South Africa, Ms Tickle said that this could be exemplified by the Transfer Pricing Practice Note, and this required clarity, as it contained no requirements around thin capitalisation, namely how much could be put in as debt, and how much as capital. Transfer pricing referred to the prices at which goods and services were transferred across the border, between multi-national connected parties. SARS had not withdrawn Practice Note 2 and, despite indications that it was preparing new guidelines, nothing had been issued, and South African taxpayers who were party to such loans from offshore still were in a quandary about their position.

Discussion
Mr Mashile asked whether SAICA had total control over all the tax consultants in the country.

Mr Nel responded that when SAICA last made a submission to the Committee, the Tax Administration Act had not yet been signed into law. The Act required registration of all tax consultant bodies with SARS. There were around 7 000 members engaged in tax services. He invited SARS to report any wrong conduct of tax consultants to SAICA, for follow up.

Ms Tickle added that there was a move, globally, towards greater tax morality because of the economic situation in the world. Big corporations were moving towards assessing what was the right amount of tax that they were supposed to pay, instead of focusing upon how much tax they could save.  

Mr Mashile asked what FFC meant when it said that the budget lacked detail.

Mr Khumalo said that the FFC accepted that the Budget could not address every detail, but what was relevant was the ability to track a particular programme. Referring to questions on corruption earlier, he noted that the FFC was going to sign a Memorandum of Understanding with the Public Service Commission on a corruption project, and this was ongoing work.

Ms Tshabalala wanted to know the take on the increase on dividends, following last year’s proposed increase of dividends on big companies by around 5%.

Ms Tickle responded that the whole concept of dividends was very new, and that companies were withholding tax when they were paying out the individuals or intermediaries withholding. Companies were still trying to get their heads around the mechanics of the system. 

Mr Ross noted that the servicing of South Africa’s debt was about R1 billion per year. He thought more detail was needed on the pressure points in terms of the downgrades.

The meeting was adjourned.