The Portfolio Committee on Finance, having considered the brAppropriation Bill [B 10 - 2001] (National Assembly - sec 77), referred to it and classified by the Joint Tagging Mechanism as a money Bill, reports its proceedings, as follows:

COMMITTEE REPORTS:
National Assembly:
1. Report of the Portfolio Committee on Finance on the Appropriation Bill [B 10 - 2001] (National Assembly - sec 77), dated 13 March 2001:

The Portfolio Committee on Finance, having considered the Appropriation Bill [B 10 - 2001] (National Assembly - sec 77), referred to it and classified by the Joint Tagging Mechanism as a money Bill, reports its proceedings, as follows:

A. Introduction
The Committee held hearings on the Budget from 22 February 2001 to 2 March 2001, and wishes to express its appreciation to all participants for their contributions. Written presentations submitted form part of the records of the Committee Section. The Committee would also like to express its appreciation to the Minister of Finance, the Deputy Minister of Finance, the Director-General of Finance, the Commissioner of the South African Revenue Service, the Chairperson of the Financial and Fiscal Commission, and their staffs, for their presence and contributions during the hearings. A list containing the names of those who made oral submission is included in part D of this Report.

B. Overview of 2001-02 Budget
The Minister of Finance presented the 2001-02 Budget as a turning point in South Africa's fiscal priorities. After several years during which the nation's macro-economic fundamentals were aligned through fiscal discipline, this Budget now begins to move fiscal policy forward to the next stage of focusing on the micro-economic priorities that are so important to growing our economy.

1. Macro-economic outlook
The National Treasury has predicted stronger economic growth and declining inflation over the medium-term. However, the economy remains vulnerable to external shocks. The two major concerns reported to the Committee were the potential global repercussions of a protracted US economic downturn affecting South Africa's economy and the risk a rise in oil prices could hold for inflation and economic growth.

(1) GDP growth
The National Treasury has predicted a relatively good economic forecast for South Africa over the medium term. The basic underpinnings of the Budget's assumptions are that we will experience an average growth rate of 3,5% for the next three years. This is supported by several factors, including stronger growth on the demand side, further productivity improvements on the supply side, and real growth in government spending. Stronger household spending, improving domestic and foreign business confidence, positive long-term capital flows, growth in investment, and a competitive currency, are the key assumptions underlying this anticipated growth in domestic consumption and exports.

Annual GDP Growth Rate
* 3,0% in 2000
* 3,5% in 2001
* 3,7% in 2002
* 3,3% in 2003

(2) Inflation
After peaking late last year, CPIX inflation is also expected to decline to within the government's target range of 3,0% to 6,0% by 2002:

Annual Growth in CPIX Inflation
* 7,7% in 2000
* 6,6% in 2001
* 5,3% in 2002
* 4,7% in 2003

(3) Other economic indicators
The Treasury reported that last year -
(a) capital market interest rates fell, according to the January 2001 R150, to around 11,9%;
(b) the rand lost about 9,5% of its value against the US dollar;
(c) non-gold exports rose from 11,5% of GDP in 1990 to 18,8% in 2000; and
(d) real merchandise imports also rose from 12,0% in 1990 to 19,8% in 2000.

2. Projected Budget Framework
While continuing to maintain the fiscal discipline that helped to bring South Africa to the current state of macro-economic stability, this Budget expresses the view that we are now ready to undertake a more expansionary economic policy with a greater emphasis on micro-economic issues. The primary outcomes of this are realised in increased expenditures and tax relief, largely due to savings realised from a diminishing deficit.

(1) Increased expenditures
Spending on public services has increased significantly from the projections made in the 2000-01 Budget. Fiscal Year 2001-02 spending is increasing by 9,9% from last year. Over the next three years this spending on non-interest items will experience real growth of some 3,8% each year. In rand terms, this means that spending will be R10,2 billion greater in 2001-02 and R16 billion greater in 2002-03 than projected in the 2000-01 Budget.

Medium Term Total Expenditures
* R258,3 billion in 2001/02
* R277,3 billion in 2002/03
* R297,5 billion in 2003/04

The money for this enhanced spending is made available from increased revenue receipts and declining debt service costs, brought about by the reduction of deficits and the utilisation of proceeds from the restructuring of State assets.

The Minister's Budget Speech lists the basic public expenditure objectives in South Africa:

(a) Economic growth and job creation.
(b) Reducing inequality and promoting social development.
(c) Strengthening safety and justice.

Highlights of increased spending over the medium-term:
* Local government restructuring and delivery of basic services - R2,6 billion.
* Increase in old age/disability grants by R30 to R570 per month.
* Increase in child support by R10 to R110 per month.
* Provincial Social Service delivery - R16 billion.
* Criminal Justice - R4 billion for more personnel, vehicles and salary.
* Supplementary infrastructure investment and maintenance - R7,8 billion.
* SARS and Foreign Affairs - R2 billion.

(2) Lower taxes
In addition to the greater expenditure on public services, the fiscal discipline of the last several years has allowed net tax reductions of R 9,1 billion. This is largely realised in decreases in the personal income tax for those making under R80 000 per year, but also in forms of several targeted tax reductions intended to spur growth by stimulating household spending and investment in certain economic sectors.

R12,8 billion in tax cuts and incentives:
(a) Personal income tax reductions principally to those earning under R80 000 per year. This includes no personal income tax for workers making less than R23 000 per year (R8,3 billion).
(b) Wage tax incentive (R600 million).
(c) Targeted incentives for industrial projects meeting specific criteria (R3 billion) over four years.
(d) Tax privileges for small businesses (R40 million).
(e) Reduction in estate duty and donations tax by 20% (R51 million).
(f) Elimination of VAT on paraffin (R400 million).
(g) Extension of diesel fuel concession to the primary production sector for off-road diesel consumption (R417 million).
(h) Raising the exemption in interest and dividend income from R3 000 to R4 000, and to R5 000 for those over 65 (R200 million).

And some tax increases and revenue-raising tax policy changes:
(a) Increase levies on alcohol and tobacco (R779 million).
(b) A below inflation rate increase in fuel levy (R363 million).
(c) Increase road accident fund levy (R437 million).
(d) Increase in skills levy by 0,5% to 1,0%.
(e) Capital gains tax to become effective on 1/10/01.
(f) Closing income tax loopholes.
(g) Review tax on banks.
(h) Unbundling transactions.
(i) Change in Eskom's tax status.

Revenue collection exceeded expectations in 1999-2000 by R7,7 billion and are expected to exceed 2000-01 estimates by R3 billion, even with the new tax cuts.

Estimated medium-term revenue collection:
* R233,4 billion in 2001/02
* R252,9 billion in 2002/03
* R273,1 billion in 2003/04

(3) Diminishing deficits
Fiscal discipline, declining annual deficits, restructuring of State assets, reorganisation of government liabilities and anticipated economic growth will contribute to the decline of our net national loan debt in proportion to the size of the economy, reducing the debt burden from 48% of GDP in 1996 to 44,3 in 2001, eventually falling to 39,1% in 2004.

The Budget deficit as a percentage of GDP was 2,4% last year, and will be -
* 2,5% GDP in 2001/02
* 2,3% GDP in 2002/03
* 2,1% GDP in 2003/04

The benefits of this can already be seen in lower debt servicing costs, releasing funds for greater public service expenditure and tax reductions. This decline in government borrowing has the potential to stimulate the economy by increasing the overall savings rate and making the South African economy more attractive to investment. All in all, debt service costs are expected to fall from 5,5% of GDP in 1999-2000 to 4,4% of GDP in 2003-04.

3. Better documentation
The Treasury's initial efforts to bring the Budget documentation in line with the requirements of the PFMA are commendable. The Estimate of Expenditure is a fresh start, with government departments moving towards an output-based budgeting system and promoting public sector accountability. While recognising that it is still in its early stages, there is a definite need to improve the way in which outputs, outcomes and measurable objectives are classified. A dialogue between departments and the corresponding committees in Parliament should lead to expenditure statements that make clear the government's objectives, policies and priorities and assist Parliament in its oversight responsibility.

The need for changes in the focus of national economic data surveys to bring them in line with the current realities of the economy was highlighted by the Black Business Council (BBC) and Dr Iraj Abedian of Standard Bank, with particular reference to the inclusion of data on the informal and tertiary sectors.

4. Budget reform
Section 77 of the Constitution mandates that legislation be enacted giving Parliament the power to amend money bills. In protest against the lack of progress on this and other Budget reform issues, Cosatu, for the fourth year in a row, has opted not to appear at the Committee's hearings. In a letter addressed to the Chairperson, Mr Neil Coleman, the head of Cosatu's parliamentary office, has called for the Committee to "ensure the urgent tabling of an adequate Money Bills Amendment Procedure Bill." Additionally, BusinessMap called for further procedural improvements in the Budget process, with more parliamentary involvement prior to the tabling of the Budget, thus making the Budget more meaningful for all South Africans.

In response to these comments, the Committee agreed to send a letter to the Speaker requesting advice on whether such legislation must be tabled by the Minister of Finance, or whether it can be tabled by a committee or any Member of Parliament.

C. Main priorities of Budget
The main priorities that emerged from the Committee's hearings on the 2001-02 Budget were the following: Ongoing restructuring and reduction of public sector debt; economic growth and job creation; poverty alleviation; and revenue reform.

1. Stabilising debt and reducing Budget deficit: Contributing to lower interest rates and fiscal sustainability
Figures supplied by the National Treasury show that the strict fiscal discipline practiced over the last several Budgets has finally brought about much needed economic stabilisation. Limited government spending and higher revenue receipts have allowed the government to steadily bring down the rate of deficit spending. Additionally, the nearly R19 billion in revenue already realised from the restructuring of public enterprises has contributed to reducing the deficit.

This programme of stabilisation has had multiple beneficial effects. Firstly, it has helped to bring down long-term interest rates, lowering the cost of capital. It has also emphasised to the international investor community that South Africa's economy is stable and its management is steady and disciplined. Most importantly, the success of the stabilisation programme now permits the focus of the Budget debate to shift to micro-economic issues by bringing the debt servicing costs downward and releasing more funds for increased public service expenditure and lower taxes.

The business sector's evidence before the Committee lauded the "exemplary" management of the national debt. Die Afrikaanse Handelsinstituut (AHI) pointed out that for the first time in decades the management of debt is under control. Hovever, Dr Abedian noted that while macro-economic stabilisation has been achieved and the fundamentals are in place, economic leadership is needed to capitalise on this in terms of transforming it into increased employment and poverty reduction. BusinessMap also suggested that there was space for more expansion in public spending policies.

(1) Advantages of managing debt down
According to the National Treasury, the steady reduction of the Budget deficit has freed up over R10 billion in the medium-term for additional Public Service expenditure. As recently as three years ago, in the 1999-2000 financial year, interest on the debt consumed over 20% of government spending; now that figure is down to 16,4% and declining. The South African Chamber of Business (Sacob) has endorsed the Treasury's projection of R10 billion being made available as a result of debt reduction. Evidence was given that this estimate may even be slightly too conservative.

Besides making more money available in the Budget for Public Service expenditure, there are additional macro-economic benefits realised from reducing the government debt. It will contribute to the lowering of long-term interest rates, allow the government to have a "cushion" for bad economic times, and enhance international investor confidence.

(2) Restructuring of State assets
A key aspect of paying down the debt has been the restructuring of State assets. To date, the Treasury shows that nearly R19 billion has been realised from asset restructuring, of which nearly R12,5 billion has been paid to the exchequer for debt reduction.

In the next year the Treasury estimates that R18 billion will be realised from the further restructuring of State assets. The most significant portions of this will be made up from the IPO of Telkom, sale of M-Cell shares, and revenue from the restructuring of Denel and Sasria. In view of the lower than expected receipts from recent restructuring programmes, much attention was given to the Treasury's estimate during the hearings. While the general feeling was that the R18 billion was a reasonable target, the AHI felt that a more realistic figure would be R15 billion. On the contrary, Sacob and BusinessMap endorsed the Treasury's view that the R18 billion estimate was a rather conservative one. The primary concern was how much the estimate relied upon the Telkom IPO, especially considering the weakened state of the global telecommunications market.

The BBC wanted to ensure that black empowerment remains a priority during government restructuring, with special emphasis on small businesses.

2. Impact on economic growth and job creation
The 2001-02 Budget addresses these two issues through three primary approaches: Investment in capital and government administrative infrastructure, targeted tax incentives to promote growth and job creation, and investment in human resources to build the supply of skilled workers in South Africa.

Infrastructure investment
(1) Increased capital infrastructure investment
The primary aspect of this fiscal programme is the R7,8 billion promised over the medium-term for new infrastructure, infrastructure maintenance and rehabilitation required in response to recent disasters. The government sees such a programme as reinforcing the foundations on which sustainable growth is built. Such infrastructure investment will lower the costs of production, transportation, and communication. Also, the spending will directly contribute to job creation. This investment was welcomed by all, both in terms of short-term job creation and improving infrastructural assets. Capital expenditure by the government has been decreasing significantly, so this reversal is welcome.

There were some concerns about this ambitious programme, largely directed at the capacity of the government to fully deliver. For example, Idasa's submission to the Committee particularly emphasises concerns with the capacity to spend these funds through the medium-term. They point out that there has been incomplete planning regarding the destination of the funds and that national and provincial departments are still significantly underspending their budgets. This is especially of great concern since the largest allocations under this programme are going to departments which have not been able to spend their budgets. Similarly, the BBC raised a note of caution regarding the capacity of local government to deliver sustainable employment through this mechanism, on the basis of the poor performance of similar projects previously implemented.

In response to such questions from the Committee, the National Treasury emphasised the use of conditional and matching grants with local and provincial governments to encourage the proper spending of the money. Also, most of the money is going to be spent in the outer years of the medium-term, giving governments adequate time to prepare and plan the implementation of the programme.

(2) Improving government administrative capacity
Capital infrastructure is not the only infrastructure investment that the government has a responsibility to undertake. The government has seen the need to address weaknesses in the administrative infrastructure in order to alleviate service delivery problems. Also, government institutions have to be made more efficient in performing their duties in support of economic growth and job creation. This problem is a combination of the lack of capacity and inadequate funds. Major problems pointed out to the Committee were the failures in Home Affairs to allow for a more simplified way of bringing in non-South African skilled workers who could contribute to the growth of the economy.

The primary allocations to address these problems are as follows:
(a) R4 billion over the medium term to address crime/criminal justice.
(b) R2 billion for Home Affairs, Foreign Affairs and SARS.
(c) R2,4 billion extra for local government to increase infrastructure spending.

These expenditures are intended to improve the government administration in criminal justice, streamline the much maligned process of granting work permits to non-South Africans, improve revenue collection and assistance to taxpayers, and help local governments cope with the additional administrative and governance responsibilities facing them.

Tax incentives
There was a general welcome for the South African revenue system coming broadly in line with international norms and addressing outstanding equity issues, although it was recommended that further simplification would enhance effectiveness in terms of both revenue collection and management. This section addresses the evidence given on tax incentives intended to spur growth in the economy and job creation. Further comments on the tax reforms outlined in the 2001-02 Budget are discussed under the tax reform section.

Much of the tax relief was targeted to the extremely poor and those who earn less than R80 000 a year. These will be more fully discussed under the poverty alleviation section, but, according to the National Treasury, part of the advantage of lowering personal income tax and other incentives, such as zeroing the VAT on illuminating paraffin, is to encourage higher household savings rate, or at least a further reduction in household indebtedness. There is also a belief that these tax breaks could lead to an increase in consumer spending and demand. All of these results would hopefully increase the growth in the economy. Pierre du Toit, formerly of the Katz Commission, disagreed, arguing that such tax breaks do not affect savings, but just move them around. Others pointed out that previous tax decreases were followed by significant reductions in household debt, although a fair amount of last year's decrease was consumed by rising transport costs. The AHI also said that the rising tax burden in South Africa severely affected the savings rate, and it is therefore good to reverse this trend.

(3) Investment incentives
The National Treasury, through extensive discussions with the Department of Trade and Industry, has agreed to R3 billion in tax allowances for strategic investments over the next four years. The intent is to encourage both foreign and domestic investment in the economy. Included in the programme are initial investment allowances of 50% or 100% for strategic projects. The allowance will be available for the first three years following the investment. These incentives will be allocated by an adjudication committee on the basis of qualitative and quantitative criteria defining strategic investment purposes.

There was some significant skepticism regarding such incentives. Mr du Toit commented that they should be implemented from the bottom up, encouraging growth and development in small and medium businesses, and not to forget about targeting domestic investment.

The BBC was also skeptical of such incentives, concerned that the emphasis would not be on black empowerment. The BBC feels that black empowerment should be primary criteria for receipt of such investment. The AHI commented that it is possible that the money could be better spent on further infrastructure improvement.

Mr du Toit did give some criteria of giving such tax incentives: They should be legitimate and necessary, have an immediately foreseeable impact pass a reasonable cost/benefit analysis, and be kept under control. Also, he was more in favour of giving tax incentives as opposed to cash subsidies. However, Sacob pointed out that tax incentives.

(4) Wage incentives
The National Treasury has set aside R600 million for 2001-02 for economically and administratively efficient tax measures that will encourage job creation by reducing the cost of hiring new workers and of offering learnerships. This will have positive effects on other government programmes and ensure their benefits are more widely available. It should be fully operational on 1 October 2001.

Most of those who appeared before the Committee were reluctant to offer extensive commentary because most details about the programme were not yet available. However, a number of commentators expressed reservations about the efficacy of such tax incentives and whether it was wise to add more taxes.

(5) Small business
R40 million has been set aside for an accelerated depreciation scheme for small businesses, allowing the full cost of an investment to be deducted in the year it was purchased. Ideally, this proposal will improve the cash flow of growing small businesses, enhancing job creation in this sector.

Those who commented before the Committee, welcomed this relief for small business, but a few other points were brought to the Committee's attention regarding issues affecting small businesses. For instance, the AHI pointed out that the burden of compliance for small businesses is often quite high. While additional tax relief is welcome, it also adds complexity to calculating the taxes for such businesses. There are some fears that this additional complexity may be stifling growth in this area. Mr Hassan Kajie requested that small business be allowed to use a cash basis, rather than accrual accounting, which will reduce their need for chartered accountants and should speed up the processing of tax returns.

The BBC is concerned that the Budget really is not helping most small businesses. A key concern of theirs is that many small businesses have a turnover above R1 million, but are left out of most relief measures. They argue that the cap on small businesses should be raised to R2 million.

(6) Diesel fuel reduction for primary producers
Significant relief on diesel concessions will be granted to primary producers in the agricultural, forestry and mining sectors. This concession will come into effect on 4 July 2001, cutting the tax burden on diesel fuel by 42,1 cents a litre, or 41,5% of the total tax burden.

There was some concern that the concession will come too late this year to benefit farmers in winter rainfall areas. The concern was noted by the Treasury, but the response was that time was needed to ensure that adequate administration was in place to minimise the risk of fraud.

(7) Additional business concerns about taxes
Most of this discussion is dealt with under the tax relief Section, but there were some concerns from those who gave evidence about the economic impact of certain tax reforms and some desired changes that were not realised in this Budget.

Many in the business community expressed concern that the corporate tax rate was too high and should be brought down to be more in line with those of other emerging markets. However, concern was also expressed that if South Africa started cutting corporate taxes, they would be engaging in a destructive "race to the bottom" of corporate tax rates. The National Treasury argued that South Africa's corporate taxes were in line with international norms. There were also concerns about the implementation of capital gains tax (CGT), and the AHI expressed continued unhappiness with the STC.

Some commentators noted that the difference between the highest PIT rate of 42% and the corporate tax rate of 37,8% (when including STC) created a situation for tax arbitrage. They argued that a cut in PIT at the highest level would bring this more in line. Also, the AHI felt that there was need to re-examine the South African highest marginal PIT and move it to within international norms, where it should kick in at around R1 million instead of the current R215 000.

Human resource investment
Limited skills levels within the labour market are inhibiting growth prospects, and excluding many from employment prospects in the growing tertiary sector. Many commented that there is an urgent need for increased investment in strategic skills development, in line with the changing requirements of the economy. Dr Abedian noted that this ongoing reduction in demand for labour is a structural feature of the economy, particularly in the unskilled sector. Hence specific measures are required to stimulate both economic growth and job creation.

(8) Skills development levy
This Budget sees the increase in the skills development levy from 0,5% to 1%, effective 1 April 2001. This is expected to raise collections from R1,3 billion in 2000-01 to R2,8 billion in 2001-02.

The increase in the skills levy received a mixed reaction. Concern was expressed about its effectiveness and about current mechanisms for delivering labour skills development. R430 million was not claimed last year, and it is feared that many companies are merely seeing this as another tax and not taking advantage of the opportunities it presents for increased training subsidies. Idasa also fears that the skills development programme focuses on those who are already employed, occurring at the expense of the poor, illiterate and unemployed.

Also, simplified incentives for skills training are needed (in place of the current complex mechanism of claiming back training costs which actually acts as a disincentive to utilise the funds because of the unclaimed administrative costs), and training should focus on strategic skills currently required by the economy.

Other areas where skills need to be addressed, are by increasing investment in improving basic human capital through support to the education system, and while these initiatives will deliver a skilled labour force in the medium term, the importation of foreign expertise needs to be facilitated in the short term by streamlining the process of obtaining work permits and visas for skilled workers.

3. Linkage between poverty alleviation and growth in South African economy
Throughout the hearings a recurring theme was how South Africa can break free of the relatively constrained growth experienced now, and anticipated in the medium term, and achieve the needed growth rates of near 6%, as anticipated by GEAR. The discussion between the Committee and those who appeared before it is summarised hereunder.

GEAR has successfully achieved stability in terms of macro-economic fundamentals. However, the South African economy has undergone a fundamental structural transformation in recent decades in terms of sectoral change, labour skills profile and production technology. The consequence of this transformation is the rise in importance of the tertiary sector, which Dr Abedian argues now generates 65% of the national income. This shift has created a structural reduction in demand for unskilled labour, and increased demand for skilled labour. Given this profile, it is likely that poverty and inequality will increase through rising levels of structural unemployment, even within the context of ongoing aggregate growth. Major investment in skills training and employment generation are now the key policy challenges required to capitalise on the achievements of GEAR.

The labour force is not adequately skilled to meet the changing demands of the transformed economy. There is an urgent need for investment in effective training and education in order to ensure that the labour force can provide the economy with the skills it requires, and also to enable the workforce to participate in the economy. Pending the development of a skilled workforce it will be necessary to recruit skilled labour from overseas.

There is also a need to create employment for those suffering from structural unemployment in order to prevent the growth of inequality between those participating in the economy and those excluded. One contribution to this objective will be the large-scale public funded infrastructural projects proposed in the Budget. However, the capacity of provincial governments to implement the projects will be a major consideration in terms of the effectiveness of this strategy for reducing unemployment. Increases in infrastructural spending are, nevertheless, a necessary rather than sufficient condition for addressing poverty and inequality, and an integrated medium-term poverty reduction programme is required in response to the profound challenges of growing inequality.

Socio-economic factors related to poverty and inequality have a negative impact on investor confidence and inhibit prospects for future growth. Concerns regarding the business risk associated with investing in an economically polarised society (as manifested in terms of crime rates, political stability, etc) combined with concerns regarding the low skills base of the labour force limit both domestic and foreign investment.

Uncertainty regarding the government's future investment strategy, following the attainment of the main GEAR targets, and concerns about future policy on the redistribution of capital investments and assets, are compounding low investor confidence.

There are also some concerns that affect South Africa's growth from an international perspective. The Minister, in his Budget Speech, alluded to the inequitable trade practices of the developed world in relation to developing countries. These include the Common Agricultural Policy of the European Union and other countries' similar protectionist measures. Other concerns are the perception of South Africa, and Africa as a whole, in the world community. Political, social and economic troubles in our region have ramifications that affect economic growth and stability throughout our continent. This contributes to the perception amongst many foreign investors that the risk of doing business in South Africa is not outweighed by its potential returns. Restoring investor confidence needs to be a national priority.

Decisive leadership is now required to address these issues, from both the government and the business sector. In order to consolidate the gains of macro-economic stability, it is critical to develop mechanisms to promote trust between the government, labour and business, and to develop a new framework for co-operation based around the creation of new jobs, rather than the preservation of old ones.

It is also critical to develop the capacity of local government to generate an environment conducive to economic growth and employment through infrastructural investment in order to address the issue of structural unemployment that is arising from the transformation of the national economy.

In order to capitalise on the achievements of macro-economic stabilisation, both domestic and international confidence are now critical to promote increased investment. This can only be achieved by addressing the socio-economic issues outlined above.

4. Poverty alleviation
Poverty alleviation has received a significant amount of attention in the 2001-02 Budget. It is specifically targeted with certain expenditures and tax reductions. It also is indirectly addressed through overall efforts to grow the economy and create new jobs, as outlined in the previous section. Significant additional spending is going to be made available to directly attack poverty in South Africa, and this will be coupled with over R8 billion in tax relief directly to the low- and middle-income taxpayers.

While many suggestions on how to improve service delivery to the poor came from independent submissions or the NGO community, the business community also expressed a concern over increasing income disparity and the negative effect this has on investor confidence, and hence investment prospects.

(1) Increased social services expenditures
The National Treasury has made R16 billion available to provinces to enhance social service delivery. R1,5 billion per year over the medium term will be spent on specific allocations under the poverty relief and jobs summit allocations, and over R400 million will be spent on fighting AIDS this coming year.

(2) Increase of social grants
Old-age and disability grants are to be raised by R30 to R570 per month and child support grants will grow by 10% to R110. Idasa commented that an additional R10 per month would be needed for the old age grants and disability grants to outstrip inflation. Also, concerns were expressed that these grants are not yet permanently inflation-linked. The Treasury is waiting to see what the total uptake on the grants will be (especially the child support grant) before committing themselves to increases. In the meantime, the MTEF allows for inflation-related adjustments to these grants over the medium term.

Beyond these programmes, Idasa commented that other direct government spending to help the poor include the integrated nutrition programme, short-term relief measures, funds for low-cost housing and the subsidisation of public transport, and the financing of local government and pricing of basic services in order to provide minicipal services to poor households free of charge.

In addition to this direct spending on poverty alleviation, it is important to examine the entire context of the Budget with a view to how government intends to help the poor. Concentrating on economic growth and job creation, largely emphasised in the previous section, along with skills development and education, will lead to the greatest benefits for the poor.

(3) Tax cuts to help low and middle income earners
By far, the largest part of the tax cuts are R8,3 billion in cuts for those earning below R80 000. Also, no taxes are paid by those earning under R23 000 per year. These cuts were welcome by all who commented on them. There are concerns that the unemployed and those employed in the informal sector would not benefit.

Zero VAT on illuminating paraffin will return R400 million to the pockets of the very poor, who rely on paraffin for heating, cooking and light. This was also widely welcomed, with the caveat that the benefits are passed on to consumers. Even the Treasury expressed concern that the retailers of paraffin may not pass on this reduction. This concern was mirrored by several organisations, the consensus being that consumers must be aware of their rights and report unscrupulous retailers who do not lower prices or defy the law by charging a VAT that no longer exists.

Finally, the fuel levies will rise below the rate of inflation this year, helping to slow the increase in transport costs.

(4) Job creation
Job creation measures are more specifically addressed in the section on economic growth and job creation. One problem that the BBC highlighted, was the importance of the informal sector in absorbing labour excluded from the formal economy. Data regarding this sector is currently inadequate and research is needed to better understand the role of informal employment, and enable policy development to promote employment in this sector.

(5) Improving delivery of poverty alleviation programmes
A consistent complaint to the Committee was that it seems that poverty is being addressed in piecemeal fashion, and not with a systematic unified approach. The BBC, BusinessMap, Dr Stephen Gelb and Dr Abedian all argued for a more comprehensive approach to micro-economic policy to address poverty alleviation. BusinessMap was critical of separate funds being set up to address poverty alleviation, rather than it being integrated into a national strategy. Dr Abedian proposed a 10-year integrated national poverty alleviation programme to address both medium-term and structural aspects of poverty alleviation. Idasa outlined a range of possible policy instruments, including strengthening the government's delivery capacity and a review of social grants, adult literacy and adult education allocations to enhance short-term poverty relief.

4. Revenue reform
Most of the tax relief measures have been discussed under the sections on economic growth and job creation and poverty alleviation, but there are other tax measures, mainly new policies, increases, or the desire for more reform, that elicited significant commentary from those who gave evidence before the Committee. The Treasury has commented that one of their objectives is to keep total revenue collections below 25% of GDP, and all the adjustments contained within the Budget maintain that goal. There are also some new taxes proposed, including a re-examination of the tax on banks, extending PAYE to directors of private companies, and the implementation of CGT. There was substantial commentary on these and other tax issues, which are outlined below.

(1) Some controversy over new taxes
The National Treasury has proposed a review of the tax on banks. The feeling expressed by it is that banks pay less than their fair share of tax, thus raising the burden on other taxpayers. The issue will be examined by the Treasury, also looking at the response of other countries, since this is an international phenomenon. The AHI opposes increasing the tax on banks. They argue that most banks already pay their fair share, pointing out that the four big banks pay around 22,8% in tax, while the amount is not much higher for most large corporations (with the notable exception of those in the retail sector). They also claim that banking provides much help for the economy by assisting local councils and parastatals, providing financial services for South Africans, and holding statutory reserves for the Reserve Bank at no interest.

Extending PAYE to private company directors also elicited much debate. David Clegg of Ernst & Young was especially concerned that this would amount to an unfair taxation on loans from a company. The idea is that director payments are generally considered advances on end-of-year remunerations. If company profits are below expectations, then the directors have to reimburse the difference, so in such a case this tax would essentially be a tax on a loan. Mr Du Toit responded to this by suggesting that it is the company accountant's responsibility to estimate what are reasonable payments to directors, and thus avoid such a problem.

The AHI argued that the fuel levy should not be increased, challenging the Treasury's assertion that it leads to lower fuel consumption. They argue that this is untrue when there are no viable mass transit alternatives in existence, and that it simply has the effect of diverting a greater proportion of household spending to transportation.

(2) Need to reassess tax on retirement funds
There was a strong belief amongst many who gave evidence, and many members, that the current system of taxing retirement needed some revision. The argument that they provide a disincentive to save for retirement and therefore contribute to the low savings rate, was put forward by Fedusa. Mr Kajie also commented that they disproportionately hit the poor. The Committee reminded the Treasury that there was a previous promise to re-examine them, and the Director-General of Finance agreed to such a re-examination within two years.

(3) Other concerns over taxes
A strong plea was made by Mr Du Toit to refrain from any new taxes in the short term, largely to give SARS and the private sector time to adjust to all the recent changes.

Some put forward suggestions of a review of allowances and thresholds, especially the highest marginal PIT rates. One argument presented for cutting the rate from 42% was to help reduce the opportunity for arbitrage between the highest corporate rates. Another argument was that the highest marginal rate is not in line with international norms, as the Treasury argues. The AHI points out that it starts at R215 000, whereas if it were in line with international norms it would begin at R1 million.

(4) SARS doing good job on administration

There was a universal belief that SARS has been doing an outstanding job in tax collection and in adapting to the rapidly changing tax situation. The Treasury acknowledged this, and also pledged an additional expenditure for SARS to improve administration and prepare for significant changes in collection.

One suggestion that many from business and tax experts wanted to see implemented, was for SARS to begin the practice of issuing advance written tax rulings.

D. Oral submissions
The following people made oral submissions before the Committee, some in their personal capacity, and these submissionsare available on request from the Committee Section of Parliament:

Mr D Clegg, Ernst & Young Associates.
Mr H Kajie, Godobo Chartered Accountants.
Mr P du Toit, formerly of the Katz Commission.
Dr I Abedian, Standard Bank.
Dr S Gelb, Development Bank.
Ms J Cargill, BusenessMap.
Ms K Hesse, BusinessMap.
Mr D Kruger, Sacob.
Mr D Dykes, Sacob.
Mr K Warren, Sacob.
Mr Y Waja, Black Business Council.
Prof F Ahwireng-Obeng, Black Business Council.
Mr L Mondi, Black Business Council.
Mr W Boonzaier, AHI.
Mr R Gouws, AHI.
Mr D Roodt, AHI.
Mr P Haasbroek, AHI.
Mr J Laubscher, AHI.
Mr R Wildeman, Idasa.
Ms M Sadan, Idasa.
Ms J Streak, Idasa.
Ms A Folsher, Idasa.
Ms G Humphries, Fedusa.
Mr P Motlhomme, Nactu.