FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
In the Foreword of the "Medium Term Budget Policy Statement 2002" the Minister of Finance Trevor Manuel comments as follows:
"Our policy priorities continue to be the creation of jobs, the delivery of services, enhancing the productive capacity of the economy, and protecting society's most vulnerable. In short, a better life for all."
The Minister furthermore, states that:
"The enormity of the task of rebuilding our country has served to remind us of the importance of eradicating poverty in our region and our continent. As Africans we are determined to enhance these challenges and put our rich endowments to work for the benefit of our people. This is the spirit embodied in NEPAD and the championed by our President"
Macroeconomic Perspective
FEDUSA wants to commend Government on the consistent and transparent way it has managed the country's public finances over the last couple of years. This, without any doubt, contributed to a stable environment conducive to financial planning.
The success of the South African Revenue services in bringing tax evaders to task over the last eighteen months and the subsequent recovery of the funds is commended. Unauthorised and questionable spending within Government Departments should also continue to be investigated and addressed as a matter of urgency.
In this section FEDUSA will focus on growth and development, employment, savings and investment, inflation, the exchange rate, local government finances, restructuring of higher education, food pricing and the Umsobomvu fund.
Growth and Development
According to the economic outlook in the MTPS, it is expected that the economy will grow 2.6 percent this fiscal year and increase to 3.5 percent next fiscal year. Although this is an improvement over the last few years and also higher than the average population growth, a growth rate of this order will not make inroads in the massive unemployment in South Africa. It is generally accepted that a much higher growth rate would be needed. A higher economic growth could also have a favourable influence on our exchange rate.
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002
FEDUSA is of the opinion that Government should play a much more active role in increasing employment opportunities, not only via direct participation in the production and service delivery process, but by way of imaginative schemes to create job opportunities. This could be done by way of tax incentives or by way of transfers. The unemployment problem is so serious that much time will have to be given to this problem, involving business and labour.
We have to continually ask ourselves: What will the effect of any decision we make have on existing and future jobs? Should the answer be negative, we must focus our attention on alternative solutions. A positive response will indicate that we are on the right track and this must be re-enforced with concrete and practical action. The Growth Summit that will be taking place during the first quarter of next year should finalise the question of job creation by concrete action otherwise the process would be unsuccessful.
A serious problem in South Africa is also that the Governments plans do not realise because of a lack of capacity at lower tiers of government. This leads to ineffective spending.
FEDUSA is not convinced that a low budget deficit of approximately 1 percent of GDP is at this stage of development of South Africa the right policy option. An increase in the budget deficit could be rationalised if it is for the right reasons, such as an increase in infra-structural investment.
The MTPS and MTEF however already contain many aspects that will foster growth and development and therefore employment.
Unemployment
Unemployment, amounting to over 41 percent according to the expanded definition, remains South Africa's most serious economic problem. The unemployment problem is most serious in certain rural areas. FEDUSA realises that there is no short-term solution to the unemployment problem. The only lasting solution would, from the supply side, be training and education, and from the demand side an increase in employment opportunities by business firms. In the short term it would be necessary to provide for the unemployed and the poorest of the nation by way of a safety net.
FEDUSA noted important steps included in the budget framework for the next three years to alleviate poverty, such as:
.A provision for social services of more than 57 percent of consolidated non-interest spending (education, health, social security and other social services) in 2002/2003 that will increase by 3.6 percent in real terms over the MTEF period. This includes an increase in the old-age pension and disability grant and the child-support grant.
Increased provision of basic services such as water and electricity to households, especially in the rural areas.
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002
Investment
Investment, both private and by government, play a crucial role in economic growth. FEDUSA notes that private sector showed a welcome upturn since 1999, which without doubt contributed to the somewhat lower unemployment rate this year, however this should be somewhat higher. The figures below however show that investment in economic infrastructure gradually declined since 1996. It is only from 2000 that it started to pick up. Investment in social infrastructure and economic services also decreased after an initial increase. FEDUSA notes that Government budgeted for an increase in investment by general government over the MThF period. The budgeted increase would play an important role in economic growth and would hold promise for creating jobs.
FEDUSA welcomes the other steps proposed to increase investments, such as:
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A continuation of accelerated depreciation allowances for manufacturing assets
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Extended tax relief for small business
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Increasing support for national research and development strategy
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Increased expenditure on safety and security to prevent crime, to create an environment that is conducive to investment
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Increased overall government expenditure in real terms over the MTEF period.
Savings
In vestment depends on the level of savings, both government and private savings. FEDUSA noted with interest that general government will for the first time since 1994, begin to make a positive contribution to the country's level of savings during the MTEF period, to supplement private savings.
FEDUSA feels strongly that private savings should be encouraged and that retirement savings should not be liable for personal income taxation. The Minister is urged to give serious consideration for an increase in the tax exemption level of savings. FEDUSA is naturally disappointed that the review of taxation on retirement savings will only be overhauled during 2004.
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002 FEDUSA has consistently been calling for the reduction of the current tax rate of 25% on interest and rental income earned by retirement funds. This tax rate is exceptionally high when compared with countries such as Canada, which have a 0% rate, and reduces a member's end benefit by anything between 20% to 25% over a thirty year period. The effect of the present tax acts as a disincentive for citizens to make adequate provision for their retirement and places an additional burden on the State. Our present savings levels need to be significantly boosted and lowering the retirement fund tax rate substantially will both directly and indirectly benefit our existing savings level.
VAT zero-rating should be extended to include basic services such as electricity and water, regardless of the amount used. This would also be a means of offering the consumer, particularly those in the lower income groups with relief.
Inflation and the exchange rate
FEDUSA realises that the vulnerability of South Africa as a small open economy to external shocks poses a serious problem for economic policy making for South Africa. Every time that the economy is set to grow, external shocks occur, which set the economy back again. There seems to be a vicious circle, with a lag, of a depreciation of the rand, higher inflation and a rise in interest rates to curb inflation. Although higher interest rates to curb inflation, is a cost to the economy, FEDUSA also realises that the cost would be very much higher, if the external shock is accommodated by easier monetary policy.
FEDUSA is of the opinion that the effect of the previous large depreciation of the rand has worked itself out, and agrees with Government decision of increasing the inflation targets for next fiscal year from 3-5 percent to 3-6 percent,. This implies that it would probably not be necessary to increase the interest rate further.
Having said this, FEDUSA however urges Government to find imaginative ways to avoid large depreciation fluctuations with its disruptive effects on the economy and a large section of the population who have no way to protect themselves from the harmful effects.
An important further step that could benefit South Africa would be the elimination of the 'Net Open Forward Position" of the Reserve bank. Government is therefore urged to eliminate forward book rather sooner than later. Although this could place a cost on the country and the taxpayer, the cost of maintaining the forward book would probably over time outweigh the cost of eliminating it.
According to Focus, a publication of the Bureaux for Economic Policy and Analysis of the University of Pretoria (BEPA) (2003, No 52) low levels of foreign reserves constrain the Reserve Bank in its efforts to protect or stabilise the rand in times of external shocks. They are also of the opinion that for as long as the forward book remains negative, the rand will be perceived as a vulnerable currency.
FEDUSA agrees with BEPA's conclusion that policy authorities and politicians have the additional responsibility of managing market psychology and other types of risk perceptions to ensure foreign direct investments and a more stable rand. Further, to ensure that the ~ fundamentals are sound, including a higher growth rate and much lower unemployment
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002
Local Government Finances
Existing accumulated (prior to 2000 amalgamation) debt within the local government sector needs to be addressed. Financial assistance needs to be given to municipalities which should be targeted to alleviate the burden of non-payment of benefits and salaries to personnel. Provision should be made that a portion of the equitable share allocation could be accessed for the purpose of meeting debt demands as mentioned above.
With regards to the current capacity of various municipalities it is problematic that municipalities outsource a major portion of their capacity thereby losing or diminishing that capacity to forces outside of the municipality structure.
As far as the labour-based infrastructure development of local government is concerned the need exists that more information relating to the human aspect to be used/ people benefiting from development from within the community be made available to determine whether community based projects reach the goals and objectives of econornic growth for the community within the region. Focussing on the community when implementing labour based programmes would benefit the community itself and also lead to the improvement of revenue collection within the community as people would be able to pay for their services and thereby putting back into the economic well-being of the region.
Cross subsidisation in so far as the provision of free basic services to commanities is ~ccep~ed, but it must be done in such a manner that no excessive burden is placed on residents within a certain municipality.
Another key concern to FEDUSA and specifically our affiliate, the Independent Municipal and Allied Trade Union (TMATU) is the current infrastructure development with no upgrading of existing services being provided spelled out and no value added to the community e.g. development of Blaauwberg/ Dc Noon for housing but no proper water purification or upgrading of existing sewage works at Potsdam supplied resulting in a halt to housing and sanitation development in the surrounding area; Lekoa Vaal sewage wastage in rivers and the overllow there off is evident to the notion that infrastructure funds should not just focus on the creation of new infrastructure but also focus on the maintenance or upgrading of existing infrastructure. Infrastructure maintenance should not focus on key priorities such as roads only but also on water purification and sanitation.
Restructuring of Higher Education
The Medium Term Budget Policy Statement highlighted amongst others the following:
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Additional allocation for key social and economic priorities will be provided
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Funding will be increased to provide learner and support material in schools and medicine supplies in clinics
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Key national functions will be reinforced, with the proposed budget framework enhancing services and aid restructuring, to mention one area; in the universities and technikons undergoing institutional mergers
Whilst the Medium Term Budget Policy Statement states that restructuring in higher education will receive supplementary funding over the MTEF, concern must be raised in that there is no quantification of these supplementary funds. The substantial direct merger costs have as one of the major components.
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002
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the human resources in view of the fact that the transformation and reconstruction of the higher education system will not be achieved overnight.
"A five year time frame for completing the process is envisaged. It is recognized that the restructuring is costly and will involve both recapitalisation of individual institutions to ensure their financial stability and substantial direct merger costs."
A further concern has been expressed from many sectors for the capacity of the higher education sector to manage ~l the proposed mergers as well as sustain the ongoing delivery of the sector. This stresses the importance of not losing the employees currently employed in the sector as a result of uncertainty with regard to their professional futures and also through forced retrenchments. Supplementary funds should be made available to enhance the broader National Skills Development Strategy so that the supply of high-quality skills to the industry is provided and by so doing enhance productivity across the economy instead of putting funds aside to settle retrenchment payouts.
The FEDUSA affiliate, South African Parastatal and Tertiary Institution Union (SAPTU), drafted a position document, The Transformation and Reconstruction of the Higher Lducation System -- Labour Perspective" in which more information concerning the issue of mergers is highlighted. The document has been submitted to NEDLAC, the Development Chamber on the 1 November 2002.
Food Pricing
Food prices have soared uncontrollably since the fall of the Rand late last year. The results and recommendations of the NEDLAC Food Pricing Task Team, have been factored into the Budget in order to take corrective measures where required, and ensure recommendations are implemented, and sustained. Whereas a basic income grant in the FEDUSA viewpoint is not practical for various reasons, something needs to be done to address poverty and hunger. We believe that by entering into a partnership with its social partners and civil society with the sole purpose of distributing food to hungry people across the length and breadth of this country on a daily basis Government will make a major stride into fighting hunger and poverty. FEDUSA welcomes the increased spending on the Integrated Nutrition Programme against the backdrop of rising food prices. This will be a major stride in meeting hungry people at their point of need, restoring peoples pride, improving productivity and laying a corner stone in the rebuilding of ou~ nation, aimed at a better life for all.
Umsobomvu Fund
The perception exists that the Umsobomvu fund is not spending the money it has at its disposal to meet the original intention, namely empowering the people and creating jobs. FEDUSA believes that the success of this fund should be publicised. Should the success of this fund be limited we believe that the role and function of this fund should be addressed at with the necessary social partner input, which has to date been absent.
FEDUSA COMMENTS ON THE MEDIUM TERM BUDGET POLICY STATEMENT
Presented to the Portfolio Committee of Finance on 7 November 2002 Increased Spending on HIV/Aids
FEDUSA are in full support of the post-exposure prophylaxis for victims of sexual abuse, the rollout of mother to child transmission prevention, strengthening programmes combating STD's, targeted interventions for commercial sex workers, voluntary counselling and testing. By engaging in a budgetary response to the above mentioned life threatening issues Government would be able to provide a basic constitutional right of health for all.
In conclusion, the last budget was balanced and generally well received. FEDUSA believes that addressing the issues raised in this budgetary term will make for an even better budget in 2003/2004.