Introduction Few would contest the prudent nature in which fiscal policy has been managed since 1994. Not only has fiscal deficits declined but the tax base has broadened in the process. And despite pressing realities of the existence of poverty and growing unemployment, fiscal authorities remained steadfast in their commitment to resist temptation to borrow to finance poverty reduction programmes. Today the fruits of fiscal austerity since 1994 have come to bear as attested by the Budget 2003/04. The latter proposes an extension of child support grant to include children up to the age of 14. This will go a long way in reducing poverty and limit the opportunistic spread of diseases. We believe that the proposed R10 billion BEE funding allocation will go a long way in fostering economic participation by the deprived sector of the economy.
We specifically wish to note the bold move on exchange controls in particular the amnesty on illegally held offshore assets.
. Macroeconomic environment Growth It is encouraging to notice the downside revision of expected domestic expansion this year. We still believe that at 3.3%, this year’s expected expansion may be still high. We believe that the lagged effect of high interest rates last year could limit the extent of growth this calendar year. And allied with weak global demand and uncertainty in international markets exacerbated by impending attack on Iraq, growth above 3% looks increasingly threatened. The danger of our exports losing their competitive attractiveness remains apparent as the Rand gathers appreciation momentum. The challenge remains for the exporters to continue to be competitive. Last year’s fourth quarter domestic expansion amply demonstrated the prohibitive nature of our interest rates and the limiting extent of weak global demand.
At the same time we acknowledge the inherently resilient nature of our economy that hovered on positive territory over the last decade. That trend could continue over the next three years supported by recovery in world demand and growing investment domestically. We believe private consumption expenditure (PCE) will continue to be the driving force in our economy. With one of the worst skewed income distribution in the world, which translates into a large part of the population spending their income on consumption of goods and services, PCE would underpin growth in the medium term.
We fully support the expected surge in government consumption without threatening fiscal budget balance. At about 4% in real terms, the expected surge in government consumption
expenditure (GCE). would greatly assist in the fight against poverty through increases in social incomes amongst others.
Whilst fixed investment remains somewhat tepid, we believe the government has provided the necessary environment for business development to thrive.
The country remains severely challenged by low savings rate itself occasioned by the structural impediments inherent within our economy. From about 5% in 1988, savings as a percentage of household income have declined sharply to around 0.2% in 2001 (source: SARB). The measures outlined in the budget, we believe, will go a long way in arresting of dwindling savings.
Inflation
We are fully in support of government’s effort to fight inflation via inflation targeting. High inflation milieu normally attracts higher borrowing costs and the consequences are prohibitive to growth. And to attract foreign savings, our inflation environment needs to be reasonably stable lest it will erode the net worth of assets and erode the purchasing power of money. This will put undue pressure on the Rand as capital flight sets in searching for rewarding returns in low inflation environs. We also concur with government that inflation has downside bias this year supported by a stronger currency, which will then lower import prices.
Interest rates
Interest rates are still high and this have a negative effect on SMME development. We however, believe that the bias is more towards the downside as price pressures dissipates this year, due to strengthening of the Rand. Risks remain though in the form of higher unit labour costs and the high international price of crude oil. 2. Budget: Salient features Black Economic Empowerment – BEE
It is noteworthy to mention government’s commitment to BEE with the allocation of R10bn over the next five years. Whilst we still await details on the BEE allocation, we believe it is a step in the right direction. The BEE dedicated funding, we believe will assist in accelerating the pace of integrating previously disadvantaged persons of the economy into the mainstream economic activity as well as foster growth and employment. This is the right thing to do.
SUGGESTION: whilst it is government prerogative to decide on the BEE allocation, we wish to be considered in the deliberations preceding the finalisation on the process of disbursement.
Poverty alleviation
We note with appreciation the increase in transfers to pensioners and disabled people. In view of the high domestic price environment last year and its concomitant income reduction consequence, the increase in pensions was warranted. Suggestion: In the fight against poverty we suggest government reduce the pensionable age for women by between 2 to 5 years from the current 60. South Africa’s life expectancy indicator has declined considerably over the last decade. Besides, rural women face the worst hardship having to rear families from meagre incomes or no incomes at all. We note that there are financial implications with this submission but believe that the national fiscus can begin deliberation on the subject.
Increasing the child support grant to include children up to the age of 14 is commended. Suggestion: if it is the intention of government to extend the grant to children above 14 years of age, we submit that such funds be allocated to free primary education instead.
Taxes (growth supportive)
The tax bracket adjustments translating in over R13 billion relief to the taxpayers, we believe this, will underpin growth with little threat to inflation. Moreso, the country’s savings culture could receive a boost through increases in disposable incomes. Suggestion: Next year’s tax bracket adjustment should concentrate on the lower income earners such that the savings made could be dedicated to support low pensionable age for women.
The increase in the threshold for small concerns qualifying for lower company taxes from R3 million to R5 million should support small business development and consequently investment.
The reduction of retirement fund tax should boost savings and thus assist a much more subdued borrowing cost milieu c.1. Reduction of tax rate on retirement funds When the tax on retirement funds was introduced at 17%, we understand that it was intended to be a temporary measure to curb anti –avoidance structures through utilisation of retirement funds. The reduction of the rate from 25% to 18% is welcomed and we hope that the trustees of these funds will ensure that the benefit is ultimately enjoyed by the members who have invested in these funds. c.2Transfer duty The increase in threshold for transfer duty from R100 000 to R140 000 is appreciated as it will to a greater extent reduce the cost of acquiring residential properties especially by the low and middle income groups. c.3 Accelerated depreciation for urban development zones The proposal to grant a special depreciation allowance for investment undertaken for construction or refurbishment of buildings is welcomed. This allowance will give taxpayers refurbishing a building within a prescribed zone, a 20% straight line depreciation allowance over 5 years while the construction of a new commercial or residential building within such a zone, would result in a 17 year write-off (20% in year 1 and 5% thereafter).
This allowance is intended to support efforts aimed at regenerating impoverished urban areas especially those suffering from extensive urban decay. All the major urban areas will benefit from this incentive with prime emphasis on areas with high population carrying capacity, CBD’s and areas with developed urban transport infrastructure for trains, buses or taxis.
This incentive bodes well for small business currently operating in these target areas. c.4Extension of accelerated depreciation window period for manufacturing It has been proposed that the time-frame over which the 4-year write-off period for assets employed in the manufacturing sector last year, be extended beyond the 28 February 2005 limitation. This proposal is a positive indication on the part of Government to help stimulate the manufacturing sector and is welcomed. c.5Tax relief for re-investment of sales proceeds Income and capital gains tax relief will now be available where the proceeds from sale of depreciable moveable assets are reinvested in other moveable assets within an 18-month period.
It is anticipated that this proposal will stimulate business reinvestment that may otherwise have been delayed. c.6 Losses on sale of depreciable business assets The proposed legislation is hailed as a long-awaited change to the current practice of holding "less than optimal" business assets until these could be scrapped after the applicable write-off periods. c.7 Repealing ad valorem excise duties on computer equipment In view of the resultant decrease in the price of information technology products, this proposal is welcomed. However, the negative effect on locally produced products needs to be examined.
At this stage, some uncertainty exists as to exactly what products the proposed abolishment relates to. Unemployment We believe that government has provided the requisite conducive environment to allow business to thrive and create employment. Whilst acknowledging the fact that unemployment has soared from about 16% in mid-1990’s to the present 30%, we advance that the high unemployment rate is a structural issue. Exchange controls and investment We do not support blanket relaxation of exchange controls, but support the bold move adopted by government in relaxing exchange controls, we believe this will stand government in good stead. In recognition of the inevitable reality that we are part of the economic global village, it was a bold move on government to relax exchange controls.
The extension of the threshold for companies to qualify for low company taxes from R3 million to R5 million should augur well for domestic investment. Equally the inner-city renewal concessions should be able to arrest capital flight from inner city to the outer-periphery. That we believe will restore the vibrancy of the inner city.
4. Proposed matters for consideration in the 2004/2005
Small, Medium and Micro Enterprises
The Small, Medium and Micro Enterprises ("SMMEs") are the building block of economic growth and job creation in South Africa. They have been and will continue to be the back bone of black business development and success. The government talks about job creation and the stimulation of SMMEs being at the very top of its agenda, but with the exception of the accelerated depreciation allowance for manufacturing companies, there is nothing else that encourages or stimulates growth in other sectors.
We strongly believe that incentives similar to those available to the manufacturing sector should be made available to other sectors such as the leisure and tourism industry. The leisure and tourism industry, is not only labour intensive, it’s also a source of foreign currency resulting into major job creation and improved balance of trade.
We welcome the announcement in the Budget by the Minister of Finance about double deduction for expenses initially incurred with respect to start-up expenses. As correctly stated in the Budget Review, the deductibility of start-up expenses affects the liquidity of SMMEs. This is a step in the right direction.
We are of the view that the tax dispensation of SMMEs needs to be reviewed. In this regard it is our submission that consideration should be given to the following:
The review of the definition of "small business" in the Income Tax Act. The definition is in our view very narrow, and currently places the same compliance burden on SMMEs as on big businesses. Although the definition was widened in the definition was widened in the budget to allow companies whose shareholders have de minimis levels of ownership in other companies, we believe more could be done to widen the definition. We await with keen interest what the de minimis levels would be;
The extention of concessions currently available only to the manufacturing sector to other sectors;
Simplification of tax compliance requirements; and
Further extension of the turnover ceiling.
We would welcome an opportunity to submit our views on how the above could be achieved.
4.2Corporate reorganisation relief The requirements that need to be satisfied for a transaction to qualify for this relief have an unintended effect of limiting its application to BEE transactions. The purpose of this relief is to promote onshore restructuring and that should include BBE transactions.
The equity shareholding test of 75% and exclusion of trusts are in our view some of the issues that need to be reconsidered. We appreciate that there can be no special rules for BEE companies and trusts and do not suggest that. We however believe that an equity shareholding of 75% and exclusion of all trusts may not be warranted. We submit that a shareholding test of at least 50% and inclusion of community trusts should be considered. Conclusion The stimulatory nature of the Budget we believe does not threaten the domestic price environment. Although we expect growth to again post positive rates this year underpinned by supply side support, we expect prices to ebb buttressed mainly by RAND strength. The biggest challenge remains the creation of sustainable employment. We note government’s effort of creating favourable environment from which business can thrive.
We thank the Chairman of this committee for the opportunity to present our comments.