Report of the Portfolio Committee on
Finance on the Appropriation Bill [B 4 - 2002] (National Assembly - sec
77), dated 8 March 2002:
The Portfolio Committee on Finance, having considered the Appropriation Bill
[B 4 - 2002] (National Assembly - sec 77), referred to it and classified by the
Joint Tagging Mechanism as a Money Bill, reports as follows:
A. Introduction
The Committee held hearings on the 2002-03 Budget from 21 February 2002 to 1
March 2002. The Committee 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 Services, the Chairperson of the Financial and Fiscal Commission, and
their respective staffs, for their presence and contributions during the
hearings. A list containing the names of those who made oral submissions is
included in part D of this Report.
B. Overview of 2002-03 Budget as presented in Budget Review
The Budget was presented within the context of growth recovery. Years of fiscal
discipline provide the framework of the Budget, which now represents a
significant expansionary fiscal policy over the medium term. The Budget offers
considerable tax relief on the revenue side and strong growth in spending on
the expenditure side. The central priorities outlined in the Budget include
increasing infrastructure investment, broadening the social security net, fighting
crime and increasing support to local government to extend access to basic
services.
1. Macro-economic outlook
Despite the global slowdown and the recent sharp depreciation of the rand,
South Africa's economic growth remains positive and is expected to recover
within the medium term. Furthermore, South Africa is expected to benefit from
the global recovery anticipated in the second half of 2002-03, due particularly
to improved performance of the export sector.
(a) GDP growth
The assumption underlying the Budget is that South Africa will experience
economic recovery. The National Treasury believes that economic growth will be
positive over the medium term and projects growth to average 3,1% over the next
three years. Underpinning the National Treasury's assumptions are the following
characteristics of the South African economy:
* Healthy balance of payments
* Improved export performance as a result of the rand depreciation
* Real growth in government spending
* Improved productivity
* Increased infrastructure spending
Annual GDP Growth Rate
2001 2,2%
2002 2,3%
2003 3,3%
2004 3,6%
(b) Inflation
Due to the substantial depreciation of the rand that took place during the
latter part of last year, CPI inflation is expected to fall marginally outside
the Reserve Bank's target of 3-6% this year, returning to the target in
2002-03.
Expected Average CPI Inflation
2001 6,6%
2002 6,9%
2003 5,8%
2004 5,0%
(c) Other economic indicators
The National Treasury reported as follows:
(i) Depreciation of rand
The rand depreciated by 37,4% in nominal terms against the US dollar in 2001
and the real trade-weighted effective exchange rate declined by 6,5% from
December 2000 to August 2001. The National Treasury maintains that the
depreciation towards the end of last year was overdone since the underlying
health of the South African balance of payments is not in question. There has
been some recovery in the exchange rate in early 2002. The adverse movement in
the exchange rate improves South Africa's international competitiveness and
helps to strengthen the economy by creating a more export-oriented balance of
payments.
(ii) Exports
While slower world exports have slowed South African exports, the underlying
trend has been an increase in South African manufactured exports as a
proportion of total exports. Manufactured exports increased from 9% in 1990 to
27% of total exports in 2001. Total real exports increased by 4,7% in the first
three quarters of 2001 from a year earlier. The depreciation of the rand also caused
substantial increases in the revenue from gold and platinum export production
in the latter part of last year. The value of mineral and non-mineral exports
have increased by 17,3% and 29%, respectively, in the year to November 2001.
(iii) Real merchandise imports
Total real imports increased by 0,4% in the first three quarters of 2001 from a
year earlier due to weaker domestic conditions and the depreciation of the
rand. Import volume was sluggish, increasing by 1,3% compared to the same
period in 2000.
(iv) Current account and balance of payments
The current account and balance of payments remain strong. The current account
deficit remained small in 2001 as a consequence of a healthy export sector. An
increase in capital flows is expected as the world recovers.
(v) Net open forward position (NOFP)
The NOFP of the Reserve Bank has been reduced from US$4,8 billion in 2001 to
US$3 billion in 2002. This is expected to be phased out by the end of 2003.
2. Projected Fiscal and Budget Framework
The fiscal stance of the Budget is expansionary, oriented towards growth and
improved targeting of public spending. Government expenditure trends reflect
the nation's broad social and economic objectives - economic growth, job
creation, increased spending in poverty alleviation and infrastructure
investment and improved social development. The primary outcome of the
expansionary fiscal policy is significant tax relief and substantial increases
in public expenditure. Resources for such expansionary policies are made
available from increased revenue receipts and savings realised from a lower
budget deficit and a reduction in the government debt burden. Main budget
revenue translates into R15 billion more than the 2001 budget estimate. This
increased revenue performance is largely due to improvement in company tax
receipts.
(a) Increased expenditure
Real non-interest expenditure across the national and provincial governments is
expected to grow at an annual average rate of 4,1% in real terms over the
medium-term period.
Total National Expenditure over medium-term
2002-03 R287,9 billion
2003-04 R311,2 billion
2004-05 R334,6 billion
Highlights of increased spending over the 2002 medium-term:
* Capital spending growth is budgeted to grow by 18,1% per annum over the next
three years
* Significant additional amounts of R1,5 billion in 2002-03, R2,3 billion in
2003-04 and R2,7 billion in 2004-05 have been allocated to the Department of
Provincial and Local Government to assist the provincial and local spheres with
development planning, capacity building, infrastructure and service delivery
- Provincial infrastructure grants amount to R6,7 billion in total
- Assistance for municipalities grows by 18% per year - this includes support
for water and sanitation, electrification, free basic services and local
economic development
- The Consolidated Municipal Infrastructure Programme (CMIP) will grow by 27,8%
* Over the next three years, increases in the real value of the grants will
place more money in the hands of the poor
- Social services expenditure (education, health, welfare and other social
services) make up about 57% of non-interest allocations in 2002-03, and is
expected to grow steadily over the MTEF period.
- The child support grant for children of seven and younger will go to a
further 1,2 million children by the end of the year and is increased by 18%
- The disability grant, care dependency grant and old-age pension have each
been raised by R50 or 8,7%
* 16 000 additional police personnel are to be employed over the next three
years - expenditure on safety and security has risen from R19,2 billion in
2002-03 to R22,9 billion in 2004-05 to fund the employment of additional police
personnel
(b) Budget deficits
Increased expenditure is financed through revenue growth and a budget deficit
of 2,1% of the GDP in 2002-03.
Expected Budget Deficit
2001-02 1,4% of GDP
2002-03 2,1% of GDP
2004-05 1,7% of GDP
(c) Debt service cost
Debt service costs are expected to fall within the medium-term framework,
releasing R10 billion for spending on servicing.
Debt service cost
2001-02 4,8% of GDP
2002-03 4,4% of GDP
2004-05 4,1% of GDP
3. Revenue - lower taxes
The Budget proposes significant tax reductions in both direct and indirect
taxes. This is largely comprised of substantial personal income tax relief to
all taxpayers, skewed in favour of low- and middle-income taxpayers. Tax relief
for small businesses is provided to encourage entrepreneurship and reform to
corporate tax structures is undertaken in order to enhance the competitiveness
of the South African economy. In his address to the Committee, the Minister
highlighted the following significant tax reforms:
(a) Personal income tax
R15 billion in personal income tax relief is proposed. Individuals earning
below R27 000 (R42 640 for taxpayers over 65) will not pay any personal
income tax. This constitutes an increase in the current threshold of 17,4% (R4
000) for taxpayers below 65 and 8,9% (R3 486) for taxpayers over 65. Rates and
brackets are adjusted to provide relief across the income spectrum. However,
average rate cuts are skewed towards lower- and middle-income groups. The
income bracket earning less than R150 000 gains 57% of the R15 billion. The
highest marginal rate is cut by 2%.
(b) Domestic interest and dividend income
It is recommended that the domestic interest and dividend income exemption is
raised from R4 000 to R6 000 for those under 65 and from R6 000 to R10 000
for people aged 65 and older. It is further proposed that foreign interest and
dividends are only exempt up to R1 000 of the total exemption (estimated
revenue loss - R163 million).
(c) Transfer duty
R300 million in transfer duty relief is proposed to ease the acquisition of
property, To provide relief to low-income groups, certain residential property
is exempt from transfer duty. A new rate structure is proposed, which cuts
rates on all property value and where no duty payable on property with a value
of less than R100 000.
(d) Taxation of deemed foreign income
This is an important part of the residence-based income tax structure
introduced in January 2001. The proposal is to make deemed foreign income
subject to income tax where a taxpayer does not account for foreign assets.
(e) Review of monetary thresholds
The following changes are proposed regarding several monetary thresholds:
* Bravery and long service award: exemption from income tax to rise from R2 000
to R5 000
* Donation tax causal: increase from R5 000 to R10 000
* Donations individuals: increase from R25 000 to R30 000
* Estate duty: basic deduction increase from R1 million to R1,5 million
* Medical aid deduction: elimination of the R1 000 threshold
* Bursaries and scholarships: increase in exemptions for bursaries and
scholarships
(estimated revenue loss - R36 million)
(f) Administration improvements
The following reforms are proposed in order to improve the efficiency of tax
administration:
* Single tax year (estimated revenue gain - R10 million)
* Increase in provisional tax registration threshold from R2 000 to R10 000
(estimated cost - R60 million)
* Review of SITE
(g) Company accelerated depreciation
As part of an investment boost to the economy to increase short-term stimulus
and build long-term capacity, an accelerated depreciation scheme is proposed.
Manufacturing assets acquired within three years will be depreciated at 40% of
cost in the first year and at 20% per annum for the subsequent three years. It
is also proposed that the immediate expensing threshold be increased to R2 000
(estimated cost - R295 million).
(h) Tax relief for small business
In order to enhance small business development, the following tax relief for
small business is proposed:
* An increase in the threshold from R100 000 to R150 000 for the 15% tax rate
* An increase in the threshold from R1 million to R3 million turnover for small
business relief
* Simplification and reduction of the tax administrative burden in order to
reduce compliance costs
(estimated net revenue loss - R40 million)
(i) Indirect taxes
The Minister emphasised the decision not to increase the general fuel levy.
Traditionally the fuel levy is adjusted to cater for inflation. This would help
to contain the impact of inflation on transport and food cost, thereby helping
the poor. The following indirect tax changes are proposed:
* A two-cents-a-liter increase in the Road and Accident Fund Levy (estimated to
raise R310 million for the RAF)
* Environmentally-friendly diesel fuel subject to 70% of the general fuel levy
* Duties on alcoholic beverages raised by 8-10% (estimated revenue gain R355
million)
* Duties on tobacco products raised by 10,7 to 43,7% (estimated revenue gain -
R443 million)
* Elimination of duties on soft drinks and mineral water (estimated revenue
loss - R135 million)
(j) Southern African Customs Union (SACU)
The Minister highlighted that important negotiations are taking place regarding
SACU. South Africa's outlays to SACU are anticipated to rise to R8,3 billion in
2002-03.
(k) Further individual tax changes
* Limit on employee deductions (estimated revenue gain - R85 million)
* Elimination of the R150-a-day expenditure provision (estimated revenue gain -
R15 million)
* Elimination of the R500 occasional free service allowance (estimated revenue
gain - R5 million)
(l) Other company and trust tax changes
* Expensing of intellectual property threshold raised to R5 000 (estimated
revenue loss - R5 million)
* Flat 40% tax rate on certain trusts (estimated revenue gain - R90 million)
(m) Further tax reform programmes
* Taxation of the retirement industry
* Banking sector
4. Asset and liability management
Financial management and debt restructuring remain key priorities. Key
developments include:
* The announcement of a credit-rating upgrade in November 2001
* Reduced domestic public sector borrowing
* Total government loan debt as a percentage of the GDP is projected to decline
from 42,9% at the end of March 2002 to 37,4% by the end of 2004-05
* Foreign borrowing of R33,2 billion in 2001-02, with a further R16,3 billion
planned for 2002-03
5. Provincial and local government finance
There have been strong increases in equitable share allocations to both
provinces and municipalities. Provincial transfers grow by 7,9% and the
equitable share to provinces is to grow at an annual average rate of 8,5%.
Municipality allocations increase significantly by 18,3% a year over the MTEF.
Other important reforms include:
* Extension of provincial taxation powers to take effect this year
* Three-year rolling budgets to be introduced at local government level
* Simplification of transfers to local government to increase certainty and
greater flexibility for municipalities
* Further steps taken in restructuring and rationalising conditional grants to
improve administrative efficiency
* Phasing out of the supplementary grant
* Housing grants increase by 10,3% a year, while grants to tackle HIV/AIDS
increase sevenfold over the period
C. Main priorities of Budget
The main priorities that emerged from the hearings on the Budget were:
Economic growth, investment and job creation
Poverty alleviation
Tax concerns
1. Economic growth, investment and job creation
A central objective of the Budget is achieving sustainable economic growth,
attracting investment and creating employment opportunities. The National
Treasury recognises that, in addition to improving the lives of all South
Africans, these factors play an important role in the alleviation of poverty
among the most vulnerable. The Budget addresses the issues of economic growth
through the following measures:
* Increased spending on infrastructure and capital
* Well-targeted tax incentives for individuals, small business and corporations
* Greater investment in education and skills development
Furthermore, the increasingly important role to be played by exports was
highlighted and concern over inflation and South Africa's monetary policy was
expressed. The following section highlights the salient points and themes in
this regard:
(a) Increased infrastructure and capital investment
The Budget emphasised greater infrastructure investment as a central objective.
This will assist in lowering production, transport and communication costs as
well as in increasing job creation opportunities. The priorities of
infrastructure spending outlined in the Budget include:
* Increased funding for construction, electrification, water, industrial
development and road and rail services
* Improved provincial spending for social infrastructure, including schools,
hospitals and housing
* Greater allocations directed towards municipal infrastructure financing
Capital expenditure by all three spheres of government increases from R20
billion in 1998-99 to R38,9 billion in 2004-05, representing an annual average
growth rate of 11,7% per annum. This capital expenditure includes allocations
specifically for infrastructure programmes through supplementary allocations in
2001-02 and 2002-03 and conditional grants to provincial and local governments.
Consolidated national and provincial capital expenditure is projected to
increase from R18 billion in 2001-02 to R29,6 billion in 2004-05, representing
an average growth of 18,1% over the next three years. Provincial infrastructure
grants amount to R6,7 billion over the 2002-03 medium-term expenditure period,
an increase of 44% over the 2001 budget allocations. Funding for the CMIP is
raised by R600 million to R1,7 billion in 2002-03, increasing to R2,5 billion
in 2004-05. Other programmes targeted at resource service, including water and
electrification, brings the total contribution to local infrastructure spending
to R3,3 billion next year. Furthermore, direct expenditure by the government is
complemented by investment programmes of public enterprises and public/private
agreements.
Macro-economic experts, Mr Roux from Investec and Mr Ballim from Standard Bank,
pointed out that capital expenditure by the government has been decreasing
significantly, with the government's capital to current expenditure ratio
falling. Consequently, the public sector has constrained investment. Thus, the
increase in infrastructure spending over the medium term was welcomed.
Furthermore, Mr Ballim highlighted that positive spin-offs could be expected
from front-loaded investment spending, since this will create a higher base for
expansion in subsequent years. Mr Roux suggested that government investment
could be decisive and the Budget implies massive growth. The challenge is for
the government to deliver. Mr Ballim warned that the government risks
reputational damage of over-promising and under-delivering. Failure to deliver
promised infrastructure spending will harm confidence and bring into question
any future government commitments.
The business sector, represented by SACOB, also welcomed the increase in
capital expenditure in the Budget. However, it was suggested that, while higher
capital investment represents a shift in the right direction, it is
insufficient to encourage the foreign direct investment that South Africa
needs. SACOB pledged its support for further increases in capital expenditure
on economic infrastructure.
While FEDUSA, as a voice of labour, expressed general approval of the Budget,
it was highlighted that social capital is as important as capital expenditure.
FEDUSA expressed concern regarding the role of the government in creating jobs,
savings and achieving reasonable levels of growth. According to FEDUSA, the
MTEF growth rates projections are still well below the rates that are required
to provide relief for the millions of unemployed. Thus, it was FEDUSA's
recommendation that the government draws its attention to introducing
imaginative schemes to boost employment.
(b) Tax incentives
The proposed tax reforms contained within the Budget include well-targeted tax
incentives, aimed at stimulating consumption demand, increasing savings,
boosting small business and increasing investment. Such factors help contribute
towards job creation and growth. The personal income tax relief, which is
significantly skewed towards the poor, includes an increase in the primary
threshold to R27 000 and cuts the top marginal bracket by 2%. According to the
National Treasury, these measures would help stimulate consumption and saving
as the lower-income groups have a greater propensity to consume while the
upper-income bracket is likely to save more. Companies can expect to benefit
from the R295 million set aside for an accelerated depreciation scheme and an
increase in the immediate expensing threshold. The National Treasury has also
focused on tax relief for small business to create incentives for
entrepreneurship. Relief is extended to businesses with a turnover of R3
million and simplification to the tax regime governing small business has also
been proposed.
Tax incentives, particularly to small business, were generally well received.
(Greater detail regarding the discussion of tax issues is more completely dealt
with under the subsequent poverty alleviation and tax sections). The extension
of the threshold for small business tax rates was welcomed by tax experts as a positive
incentive for new entrepreneurs. Tax expert Mr Clegg suggested that it would be
useful to track the period it takes for a small business to expand to the
threshold limit in order to establish whether the new threshold is at the right
level. The accelerated depreciation allowance was also received positively. Mr
Clegg welcomed the new manufacturing tax depreciation allowance as an
improvement over the previous regime. Mr Clegg suggested that the three-year
life be extended indefinitely.
Business welcomed both the personal and corporate tax incentives. SACOB pointed
out that lowering of the marginal rate to 40% could serve to retain skills in
the country and would enable the top bracket to contribute to the economic
saving needed for growth. SACOB further welcomed the relief to small business
as significant. In particular, the proposed simplification of the tax
compliance administration procedure was strongly supported. This proposal for
further simplification was echoed by tax expert, Adv Du Toit. However, SACOB
pointed out that these measures in the Budget are focused at
"non-service" sector, while the service sector is becoming
increasingly important, having grown by 4,5% last year. Particularly, SACOB
expressed concern at the manner in which personal service companies are treated
under the tax system and highlighted the need to extend concessions to the
service sector.
IDASA also agreed that tax incentives for businesses have the potential to
reduce poverty through the impact they would have on investment and job
creation.
(c) Education and skills development
Education remains a central priority in the Budget, and spending in this regard
increases to R59 billion next year, or 24% of non-interest expenditure. Skills
development forms part of this priority. Consequently, the Employment and
Skills Development Programme has been allocated R157 million in 2002-03, with a
projected allocation of R494 million. This represents real growth at an annual
average of 2,44% over the medium term. The 1% skills levy on company payrolls,
introduced in 2000-01, directs resources to SETAs and the National Skills Fund,
which are responsible for addressing training needs. For 2002-03, projected
revenue from this tax has been revised, from R2,8 billion to R2,75 billion. Implementation
of a learnership incentive has also been proposed. This entails a tax allowance
to employers that fund learnership for employees.
During discussions, a concern was expressed at the issues surrounding the
Skills Development Fund. SACOB articulated some anxiety regarding the
functioning of the SETAs. The National Treasury pointed out that the initial
two years were used to set up the infrastructure and to develop SETA capacity.
With the framework now in place, the pace of skills development can improve.
However, the need to get a sense of the obstacles was expressed.
(d) Role of exports
Miss Moola, an economist with Merrill Lynch, pointed out that demand in the
economy was very weak and was expected to slow down during the first six months
of the year. It was suggested that the difficulty of getting higher growth from
the domestic side could be overcome through improved export performance. South
Africa's recent export performance, helped by the depreciation of the rand, has
been reasonably strong, despite the slowdown in the global economy. This
positive sentiment is reinforced by Mr Roux, who expects export volumes to rise
as the global economy recovers and the effects of the rand depreciation take
place. Mr Roux predicts relative growth in the value of exports to imports,
which will have a positive effect on the trade balance as predicted by the
National Treasury.
(e) Concern at lack of investment and investor confidence
A recurring theme throughout the hearings was the concern expressed at the lack
of investment in South Africa. Mr Ballim explained that investment is affected
by factors relating to profitability, which include investor confidence. It was
suggested that a key contributing factor to the lack of investment is the lack
of confidence in the South African economy. This is worrying, particularly
since South Africa is a stable democracy which has been experiencing positive
and sustainable growth based on sound macro-economic principles. Thus, the lack
of confidence is seen as a major problem. Furthermore, Mr Ballim pointed out
that higher inflation, the tightening of monetary policy, hesitant global
economy and greater uncertainty may temper confidence and thus dampen consumer
spending and private investment. While private sector investment will be
encouraged by tax incentives, government infrastructure spending could also
help off-set these negative factors and boost confidence if there is delivery.
It was suggested that, in order to increase confidence, South Africa needed to
break from its relatively constrained growth of between 2% and 3% and achieve
growth rates of between 5% and 6%.
(f) Inflation concerns
The recent depreciation of the rand has contributed to an anticipated inflation
rate this year of 6,9%. Several concerns were expressed in this regard.
According to Mr Roux, the major risk to inflation in 2002 are food price
increases. This was a matter of deep concern for the Committee. Mr Ballim
further expressed concern at the risk of wage spiral. If upward pressure in wages
and prices affects future wage negotiations, this could translate into a wage
spiral, which would exacerbate pressure on the market.
A concern was raised that the expansionary fiscal policy would exacerbate
inflation. However, the National Treasury says South Africa has the capacity
and this should not become a reason for strong concern.
(g) Monetary policy
The macro-economists agreed that there might be potential for a hike in
interest rates, which may retard spending, reduce some of the stimulus of the
fiscal injection and dampen domestic demand. Mr Ballim and Miss Moola agreed
that a restrictive monetary policy might mean that tax relief is not as robust
as suggested. However, Mr Roux pointed out that fiscal policy is a long-term
tool, used to build a long-term framework, and should not be used in a cyclical
fashion. Monetary policy is the instrument to use to manage the cycle. At
times, the two policies may clash. However, according to Mr Roux, it was
preferable to attempt to contain inflation through monetary policy, rather than
by withholding tax cuts.
2. Poverty alleviation
Poverty alleviation remains a priority in the Budget process, and was a clear
concern throughout the hearings. Specifically, the Budget aims to alleviate
poverty directly through strong real growth in expenditure and targeted tax
relief. A 6,9% real growth in government expenditure is proposed, with
significant increases in spending on social services and an 18% nominal
increase in infrastructure spending. The growth in real government expenditure
averages at 4,1% over the 2002 medium-term. According to the Minister, on the
expenditure side all services that impact on the lives of the poor in South
Africa add up to R140 billion. These services include increased spending on
social grants, education, health and improving municipal infrastructure in
order to provide more free basic services. The Budget also addresses poverty
indirectly through growth and job creation. The National Treasury believes the
Budget will have a significant effect on consumer spending, which would boost
economic growth.
(a) Increased social security expenditure
Over the next three years, spending on social services grows by an average of
8,7%. Allocation to national departments includes R1,5 billion in 2002-03 and
in 2003-04 for poverty relief and income-generating projects targeted towards
the rural poor, woman, youth and the disabled. The provincial equitable share
increases to accommodate improvements in health services and welfare spending.
Provinces receive R132,4 billion next year, which represents 56% of the
national Budget. Assistance to municipalities increases by 18% per year, which
includes support in respect of water, sanitation, electrification and free
basic services. Significant increases and extensions of interventions and
programmes that address HIV/AIDS are proposed, and spending on HIV/AIDS exceeds
R1 billion over the medium term.
(b) Increased social grants
In order to relieve poverty, the Budget proposes to increase social grants. The
child support grant for children seven years and younger is budgeted to reach a
further 1,2 million children by the end of 2003, and increases by 18% from R110
to R130 per month. The disability grant, care dependency grant and old age
pension have all been raised by R50 or 8,7%, from R570 to R620.
However, IDASA's budget Information Service Manager, Albert van Zyl, criticised
the R15 billion in personal income tax relief as excessive, and argued that
social security allocation was insufficient. While IDASA welcomed the real
increases in the value of the grants, Mr Van Zyl pointed out that the limited
reach of the present poverty relief system does little to help the poor. He
argued that the challenge to poverty relief is to include poor households that
do not currently qualify for grants. According to IDASA, only 4,3 million, or
15,9% of people in need of income support, received grants. No support is
offered to the economically active population and their children older than
six. Consequently, IDASA argued in favour of extending the child support grant
to children aged seven to twelve. IDASA suggested that this could be funded
either through a deficit of 2,6% or more income tax relief. According to the
National Treasury, while the government considered extending the grant, the
current system was ill-equipped to cope administratively with a number of
recipients greater than that planned for.
(c) Basic Income Grant
During the hearings, the possibility of introducing a Basic Income Grant to
alleviate poverty was brought up. IDASA agreed that introducing the proposed
universal grant scheme would significantly boost the income of the poor.
However, the Minister pointed out several problems that surround the
introduction of a Basic Income Grant. The government is awaiting publication of
the Commission's report, advising it on a comprehensive system of social
security.
(d) Tax relief for low- and middle-income groups
The greatest proportion of the personal income tax relief was skewed towards
low- and middle-income groups. The National Treasury felt that the significant
tax relief measures, which increase the disposal income of these groups, would
impact positively on consumption demand. Furthermore, it was pointed out that
many poor people survived with support from the employed and therefore income
tax cuts would indirectly increase support to them substantially.
However, IDASA criticised the personal income tax relief as not being a direct
income support measure of the very poor, who are either unemployed or earning
less than R27 000 per year. IDASA argued that the tax cuts were excessive and
that more should have been spent on social security allocation. While IDASA's
Mr Van Zyl agreed that families that are supported by employed people in this
country would benefit, he maintained that there was still a significant gap
between the employed and unemployed.
(e) Local government
Increased support of local government through greater appropriations in the
Budget was welcomed. SACOB pointed out that much of service delivery takes
place at local government level, and supported the Budget's initiative.
However, SACOB warned that these increased transfer payments needed to be met
with care, especially since problems in local government included lack of
skills, non-spending of resources and service delivery. Co-operation with local
businesses would be central to local government development.
(f) Food prices
Due to higher inflation this year, severe concern was expressed at its impact
on food prices, in particular the price of maize, which forms part of the
stable diet of many of the poor. IDASA highlighted its concern regarding the
hike in food prices and the impact this would have on the income of the poor.
IDASA predicted food inflation for 2002-03 to be between 12% and 15%.
Particularly, the price of maize increased by between 17,5% and 20% in January
and has increased by 66% since May last year. However, the National Treasury
pointed out that, with the current changes in the global food market and food
shortages, the world will be buying maize from South Africa, who could secure
good maize prices. Ms Moola suggested that healthier maize harvests this year
meant that prices should decrease. All members agreed that this was an
important issue, which needed attention.
(g) Improved service delivery
Speakers expressed general concern at the lack of service delivery,
particularly in local government, as this directly impacts on the poor. Mr
Ballim warned that the government risks damaging investor confidence by
promising and not delivering. SACOB also urges the government to ensure
delivery and to hold public managers accountable for measurable delivery.
(h) Economic growth and job creation
The Minister pointed out that there is an important link between economic
growth and poverty alleviation. In order to keep reducing poverty, it is vital
that South Africa keeps growing.
3. Tax concerns
The present tax-to-GDP ratio is 25,1%, falling to 24,3% next year. The National
Treasury and SARS target to keep this ratio between 24% and 25%. The Minister
highlighted that on the revenue side the goal was consolidation and improved
collection and efficiency. The previous years of discipline permit the
significant proposed tax relief.
Adv Du Toit pointed out that the Budget focused on tax stabilisation, rather
than on making any significant tax changes. This stance was welcomed by the tax
experts. However, there remained some controversy over the tax cuts. Concern
about taxing the retirement industry, the non-profit sector and the general tax
regime was also expressed. Finally, positive comment was received about SARS's
administration.
(a) Controversy over tax cuts
In response to the tax cuts, concern about relief to the unemployed was also
expressed. In order to address these concerns, the Minister highlighted several
reasons for the tax cuts:
* The need to eliminate fiscal drag, which is the effect of inflation on wages.
* The need to close the gap between the corporate rate and personal rate in
order to assist taxpayers with compliance.
* The tax cuts have been focused on low-income groups, with an increase in the
primary threshold raised to R27 000.
* The commitment to re-examine SITE, which has approximately three million
contributors.
Thus the Minister stressed that examining the taxes has been a process, which
continuously focused on examining the impact of tax on the lives of ordinary
South Africans. The Minister also stressed that a further attempt to help the
poor was the decision not to increase the fuel levy. This would limit increases
in transportation and food costs.
The macro-economist perspective concurred that the tax cut was a welcome
stimulus for dampened domestic demand, particularly for the low and
middle-income groups. Merril Lynch calculated the tax cuts to be of equal
benefit to consumers as a four-percentage point cut in interest rates. Mr Roux
pointed out that the income tax cuts fully off-set the negative impact of
rising inflation. Tax cuts would increase transfers to households' income,
which would off-set the crunch.
SACOB expressed concern that no other tax relief for the corporate sector was a
negative signal, which failed to bring South Africa in line with other emerging
markets. Specifically, they pointed out that present corporate tax of 30% and
STC of 12,5% resulted in an effective company tax rate that was not
synchronised with South Africa's trading partners.
(b) Need to reassess tax on retirement funds
Adv Du Toit emphasised that the present tax regime on retirement funds
represents a significant imbalance in the economy. This concern was echoed by
SACOB. SACOB pointed out that the bearer of such taxes is not the insurance
industry, but members of the retirement industry. At its present level of 25%,
the tax on retirement funds is a disincentive to saving and especially harsh to
lower- and middle-income workers whose personal tax rate is lower than 25%. In
addition, people who receive pensions from these funds are penalised through
severe erosion of their savings. They stressed that the tax on retirement funds
is in dire need of drastic reform. The Budget reiterates a review of the
retirement industry. However, the concern expressed by SACOB was that in the
process of revamping the system, people continue to be penalised. Hence, they
suggest that the problem needs to be addressed by an interim ad hoc
relief measure. The interim measure suggested was to decrease the rate from 25%
to the minimum personal income tax rate of 18%.
The Committee also expressed its concern regarding this issue, and agreed that
it needed to be addressed with some urgency. The Committee expressed its desire
to engage the National Treasury in this regard.
(c) Tax concerns of non-profit sector
According the voice of the non-profit community, the Non-Profit Partnership,
the present tax regime is inadequate for non-profit organisations, particularly
regarding changes in respect of income tax.
The Non-Profit Partnership welcomed the increase in thresholds for
tax-deductible donations by individuals. However, they submitted that there was
no justification for the differentiation between individuals and companies, and
suggested that the issue of deduction limits be revisited. Concern was
expressed that the new framework has been narrowed instead of extending the tax
exemption and deductible donation benefits. They also urged that their proposal
regarding a general category of public benefit activity be included in the list
of public benefit activities.
(d) Concern over taxes
Adv Du Toit highlighted the need to revisit a group tax. According to Adv Du
Toit, South Africa is not synchronised with the rest of world, because it has a
residence-based tax system and a capital gains tax, but not a group tax regime.
South Africa's present tax regime in this regard is fragmented and creates difficulties.
A group tax will better reflect the economic reality of the corporate world.
This concern at the lack of a group tax was echoed by SACOB, who pointed out
that, when combined with the capital gains tax, this regime has a cascading
effect.
Adv Du Toit also emphasised the importance of a robust tax regime, with a
balanced degree of regulation.
Mr Clegg pointed out that the capital gains tax and residence-based taxation
rules are complex. Therefore, he urged SARS not to introduce any substantive changes
in these systems over the next two years, so as to enable taxpayers to become
familiar with the new system. Concern was also expressed by SACOB for the need
to simplify the tax system. They pointed out that tax simplification was urgent
in the interest of tax certainty and tax morality. The Minister had expressed
his commitment to simplify compliance procedure for small business.
(e) SARS administration
SARS' success in collection is commendable, with significant increases in
efficiency. SACOB commended SARS on an efficient system regarding both
enforcement and service.
4. Other issues
The following section highlights various issues raised by the groups in their
submission to the Committee.
(a) Tax experts
In his address to the Committee, Adv P du Toit pointed to the need for a
fundamental re-examination of the auditing profession, both in its scope and
underlying principles. He highlighted the inadequacy of the auditing principles
underlying generally accepted accounting practice (GAAP).
(b) Business
SACOB highlighted that interaction with small business in the consultation
stage of the Budget would be useful. Ensuring interaction between business and
labour at this level forms part of the cornerstones of South Africa's objective
of a participatory democracy.
(c) Labour
FEDUSA articulated its concern about the arms procurement package. FEDUSA also
expressed its concern regarding the Reserve Bank. While recognising the role of
the Reserve Bank, FEDUSA suggested that the activities of the Bank were too
narrowly focused on inflation targets. The Bank, according to FEDUSA, also has
a responsibility to stimulate the economy.
(d) Non-profit sector
In its submission, the Non-Profit Partnership called for institutionalised
dialogue between the National Treasury and its technical team of lawyers, on a
three- to six-monthly consultation basis. They expressed a desire to form a
regular relationship with the National Treasury that would take account of
their views before the Budget is finalised. It was their opinion that Budget
Proposals do not necessarily reflect the priorities of the sector in its
overall aim of poverty relief and sustainable development.
D. Oral submissions
The following people made oral submissions before the Committee, some in their
personal capacity. These submissions are available on request from the
Committee Section of Parliament:
1. Mr M Morobe, Chairperson: Financial and Fiscal Commission
2. Mr J Josie, Deputy Chairperson: Financial and Fiscal Commission
3. Dr H Fast, Manager: Parliamentary Office
4. Mr I Momoniat, Deputy Director-General: Intergovernmental Fiscal Relations
5. Mr V Kahle, Chief Director: Legal Services, Intergovernmental Fiscal
Relations
6. Ms M Ngqaleni, Director: Intergovernmental Fiscal Relations
7. Mr P du Toit, Tax Expert
8. Mr D Clegg, Tax Expert
9. Ms N Moola, Economist: Merrill Lynch
10. Mr A Roux, Economist: Investec
11. Mr G Ballim, Economist: Standard Corporate Merchant Bank
12. Adv A Meiring, SACOB
13. Mr R J Wood, SACOB
14. Adv K Warren, SACOB
15. Mr W Boonzaaier, Afrikaanse Handelsinstituut
16. Mr A van Zyl, IDASA
17. Ms G Humphries, FEDUSA
18. Mr E Saldanha, Non-Profit Partnership
19. Ms K Nelson, Non-Profit Partnership
20. Ms P Dlamini, Non-Profit Partnership