CHAMSA (CHAMBERS OF COMMERCE & INDUSTRY SOUTH AFRICA)

MEDIUM TERM BUDGET POLICY STATEMENT - COMMENTARY TO THE JOINT BUDGET COMMITTEE

29 October 2004

 

1. Introduction

 

CHAMSA (Chambers of Commerce and Industry of South Africa) is a Business Association that represents the united voice of business in South Africa. It is an organization made up of four major South African business bodies, namely the Afrikaanse Handelsinstituut (AHI), the Foundation for African Business and Consumer Services (FABCOS), the National African Federated Chambers of Commerce (NAFCOC) and the South African Chamber of Business (SACOB). CHAMSA welcomes the invitation from the Joint Budget Committee (JBC) to participate in the public hearings on the Medium Term Budget Policy (MTBP) statement. Summarised below are some of the issues covered in the MTBP statement on which CHAMSA would wish to comment and that will be articulated by CHAMSA representatives at the hearings.

2. Economic

CHAMSA recognises the difficulties faced by Government in reconciling the needs of the 'First' and 'Second' Economies and in accommodating the twin challenges of promoting growth and securing a better distribution of opportunity, income, and wealth. The Minister's MTBP statement provides a worthy compromise for reaching a solution to those needs and challenges. CHAMSA believes that the statement should bring about a greater level of business confidence and will hopefully provide a further spur to private sector investment.

The initiatives outlined under the MTBP statement for the enhancement of growth prospects fall into those of a cyclical nature and those of a long-term nature. With regard to the cyclical measures, the increases in budgeted public expenditure and the budget deficit are to be noted. Although we support the notion that the sustainability of government finances is not under threat (the debt-to-GDP ratio is for example projected to remain below 40%), we are however concerned that insufficient attention is being paid to the coordination of fiscal and monetary policy, and that the possibility of conducting fiscal policy in an anti-cyclical manner is being jeopardised.

The projected increase in the public sector borrowing requirement, mainly because of increased infrastructure spending by public corporations, could result in some crowding-out of the private sector and upward pressure on bond yields that will be growth retarding. The flow of funds to contractual savings institutions that are the main investors in long-term paper should therefore be encouraged as a countervailing measure. Not enough is in general being done to improve the savings performance of the economy, and the increase in government dissaving (even if temporary) is disappointing.

Understandably, the long - term initiatives are similar to many of those announced last year, though with some important nuances. They include: -

Investment in infrastructure (with the emphasis on transport)

Prioritising service delivery, housing, health and education

Social security programmes with an emphasis on need

Regulatory reforms designed to assist small business

A multi-dimensional approach to Black Economic Empowerment

Public works programmes focusing on services and infrastructure

 

In attempting to bridge the divide between the First and Second Economies a focus is directed to the upliftment of rural communities by way of land reform/restitution and agricultural support programmes. We are in full support of these measures, but we believe that it can be questioned whether sufficient funds have been allocated towards these needs. We furthermore believe that the difficulty in mobilising funds to this end is being exaggerated.

 

Business welcomes the Government's commitment to low inflation and accepts the role that inflation targeting fulfils in lowering inflationary expectations. We support the decision to keep the inflation targeting range unchanged at 3% to 6% to prevent pressure on the SARB to adopt a more restrictive policy stance. However, we wish to suggest that government considers moving to a so-called thick point definition of the target instead of a range in order to address confusion regarding the target and to better anchor inflation expectations.

The significance of 'administered prices' continues to be an issue of concern to both business and consumers generally. We therefore fully support government’s efforts to discipline increases in administered prices. In the case of regulated prices, we are somewhat concerned about the fact that Eskom will increase electricity tariffs by more than the upper end of the inflation targeting band in 2005, and we believe that the reaction of local authorities in setting local tariffs will need close scrutiny. In the case of unregulated administered prices, we believe that the long-term solution is to be found in the encouragement of greater competition.

 

CHAMSA believes that the adjustments to the macro-economic assumptions underlying the MTBPS are in the right direction and that they therefore contribute to enhancing the credibility of the budget, although the forecast growth rates remain above consensus. We particularly welcome the greater recognition of the expected course of the business cycle (international and domestic) in the near future. We nevertheless note that the higher forecasts for economic growth depend crucially on an improvement in net exports, which could be jeopardised by the projected global downturn being more severe that expected. Such a development could then put pressure on the revenue budget and/or the funding requirement.

We welcome the report on the progress with the foreign exchange amnesty process, in particular the quantification of the amounts involved. However, we would like to encourage government to be explicit about the amount that has been/will be repatriated to South Africa as it will enhance the ability of the financial markets to judge its impact on the exchange rate of the rand.

 

CHAMSA notes the concern expressed over the 'capacity' of certain state institutions and the efforts that are to be directed at strengthening that capacity. Privatisation initiatives do not feature in the MTBP statement; that seems to confirm the suspicions that the programme no longer retains any degree of priority.

3. Taxation

 

3.1 At the macro level CHAMSA notes that tax revenue is again expected to exceed the February Budget estimate - albeit marginally. The fact that corporate income tax is expected to be some R6 bn less than budgeted this year, underscores the importance of stable corporate profitability to our tax base.

 

3.2 CHAMSA (and its individual constituencies) have consistently expressed strong support for Government's stated intention to keep the overall ratio of tax to GDP below 25%. We therefore note with some concern that the 2007/8 estimate is 25,1% of GDP, thus undermining the goal.

 

3.3 The MTBP statement offers very little prospect of tax relief in the 2005 Budget. CHAMSA understands the underlying reasons for this, but would urge that two matters of principle should not be neglected, viz, adjusting individual taxation for "fiscal drag" and ensuring the competitiveness of the South African corporate tax regime in relation to our trading partners and our competitors.

 

3.4 CHAMSA would like to comment on the specific tax policy consideration for the 2005 Budget (as they appear in the MTBP statement 2004 (p47 et seq):-

 

3.4.1 Tax issues relating to small enterprises

Given the profile of CHAMSA constituencies, we are particularly pleased to see a renewed commitment to deal with the administrative and tax compliance concerns of small business. We agree with National Treasury that there are also tax policy issues related to small enterprises that warrant review. We therefore reiterate our call for the extension of the graduated company tax rate of 15% (on the first R150 000) to small service companies as a matter of policy.

 

3.4.2. Tax treatment of health care benefits

CHAMSA would support tax measures to make health care benefits more accessible and affordable, but notes that there are still important health care policy matters to be negotiated in NEDLAC. These should precede tax reform. In the interim corrective measures should be taken, such as amending the fringe benefit taxation of employer-provided HIV/AIDS treatment off site.

 

 Deduction of business travels cost against motor vehicle

allowances

CHAMSA notes the proposal to introduce changes to business travel allowance claims. Whilst appreciating the desire of the taxation authorities to overcome the potential abuse that could arise from deemed business travel claims, the proposed enforcement measures that appear to target 'high-value' vehicle purchases should be the subject of consultation with the motor vehicle industry. This would hopefully prevent the introduction of unintended distortions in the motor vehicle market. We also believe that since the objective is to eliminate tax-motivated distortions to behaviour and not to increase the tax burden per se, any reduction in the tax benefits pertaining to motor vehicle allowances should be balanced by adjustments to the personal income tax tables, e.g. the upward adjustment of tax brackets.

 

3.4.4. Pension fund reform

CHAMSA is deeply concerned about the slow progress in this area which organized business first raised in 1999 with the PCOF. Apart from the serious flaws in the current tax regime, we believe that tax certainty in this area has now become critical for both employers and for millions of members of retirement funds. The taxation of retirement savings remains inappropriate, even at 18%.

 

3.4.5. Other tax issues

CHAMSA will support the envisaged adjustment of the monetary threshold for compulsory VAT registration, but would urge that attention be given to the simplification of VAT compliance and tax and regulatory compliance in general. We reiterate our view that a business environment must be created that makes it easy for business people - and small business in particular - to comply with the law. (Laws that place the majority of business people outside its ambit are bad laws). Regulatory impact assessments should become a key input to any legislative reform, including new tax legislation.

 

4. Conclusion

 

CHAMSA recognises the value of the MTBP statement as a strategy that gives direction as to the route to be followed in the short term. The Chamber fully supports government in its efforts to promote economic growth and to alleviate poverty. It has and will continue to engage with government structures in ensuring that these goals are attained. It has endeavoured to ensure that the Black Economic Empowerment strategy is implemented in a manner that will not undermine growth and employment objectives. Furthermore CHAMSA through its representation in NEDLAC will continue to engage with the parties in striving to reach consensus on economic issues.