THE FEDERATION OF UNIONS OF SOUTH AFRICA (FEDUSA) COMMENTS ON THE 2005/06 BUDGET
In terms of the multi-year budgetary process of Government followed during the last couple of years, there are actually far less surprises in the yearly budget than before. Multi-year budgeting improves planning by both the public and the private sector. If however figures announced in the yearly budget deviate from the MTBPS figures, this may have important effects on the economy. As an open economy, the South African economy is affected by unexpected changes in the global economy. This naturally has positive or negative implications for fiscal policy and through fiscal policy on the South African economy. Table 1 shows that the economic growth forecasts have been revised upwards.
Table 1
Macroeconomic projections [2005/06 budget figures] and (2004/05 budget figures)
|
|
2003/04 |
2004/05 |
2005/06 |
2006/07 |
2007/08 |
|
Real GDP growth |
1,7 [2,7] (2,7) |
3,5 4,2] (3,3) |
3,9 [4,1] (3,6) |
3,6 [3,9] (4) |
4,3 [4,4] |
|
GDP deflator |
5,3 [4,2] (4,2) |
5,1 [5,5] (5,4) |
5,3 [4,6] (5,5) |
5,2 [5,4] (5,2) |
5,3 [5,7] |
The 2005/06-budget forecast for inflation for the 2005/06 fiscal year is somewhat lower than the 2004 MTEF or the 2004/05 budget figures. It is expected that inflation will again increase during the outer MTEF year. Economic growth is however expected to be higher during the MTEF period and this will have favourable effects on the economy and provides more scope for fiscal policy. In the outer years, it is expected that global economic growth would be lower and this will also affect our growth rate negatively. The forecasts seem to be realistic, although there is always the possibility that a rise in the price of oil may lead to higher inflation. Currently the price of oil is in a rising trend, but is counter-acted by a strong Rand. A matter of concern remains that a short-term capital outflow may cause the Rand to depreciate, which again may result in rising inflation. FEDUSA agrees with the Minister that, given our credit ratings, and the relaxation of exchange controls over the last couple of years would lessen the chances that such an outflow takes place.
It would seem as if the South African economy will be in a higher stable growth path during the MTEF period. The higher growth path that the South African economy is now entering, can however not only be attributed to global economic developments, but also to domestic economic policy. Following sound and consistent over the last ten years, the economic environment for fiscal policy has changed over the last ten years. In the earlier part of this period, when the economy was characterised by low economic growth and high inflation, fiscal policy focussed on a more equitable income distribution through the restructuring of expenditure and on the revenue side through inflation revenue. In the last two or three years, the economy is characterised by higher growth and lower inflation. While not neglecting the goal of income redistribution, focus has shifted from redistribution through inflation taxation to redistribution through economic growth. Fiscal policy has also focused on the promotion of economic growth, for example through the promotion infra-structural investment.
FEDUSA is convinced that this new economic environment of stable economic growth will make it possible to promote private sector investment more directly, without neglecting the other goals of economic policy, such as government’s income distribution goals. Although economic growth is a multi-dimensional phenomenon, private sector investment remains the crucial factor in employment creation and growth. FEDUSA has noted with satisfaction in the 2004 MTBPS that Government committed itself to promoting gross fixed capital investment in both the public and private sectors and acknowledge that the investment required must largely come from the business sector.
In the new global competitive environment tax competition plays an important role, and it is essential that company tax as well as income tax on individuals be evaluated on a continuous basis. In the latest Budget Review the Minister acknowledge the necessity for lower business taxes to compete for scarce foreign direct investment. According to the Budget Review the Minister is convinced that the preferred policy route should be a moderate tax statutory rate structure, with a graduated lower tax regime for incorporated small business. FEDUSA fully agrees with this approach. Government is commended for the first step that has been taken in this regard, namely the lowering the company tax from 30% to 29%.
In the multi-year budgeting system used today, the yearly budget is only providing more up to date data on the current MTEF and is therefore largely without surprises. Most of the fiscal measures announced in this year’s budget are included in the 2004 MTEF. For example increases in government capital expenditure to underpin economic growth and social expenditure to provide a safety net for the vulnerable groups in the economy. The Minister hinted in the MTBPS that there would not be much scope for tax relief in the 2005 Budget, but that the tax on small businesses will be reduced. FEDUSA calls on Treasury to allow a proper consultation process with stakeholders on these proposed changes which can have a huge impact on a workers financial position. The Public Finance Chamber at Nedlac represents the appropriate forum to discuss concerns on these issues. It was also indicated that an amendment of the tax treatment of medical scheme membership is considered. Further that there will be a stricter treatment of travel cost that can be claimed against the existing motor vehicle allowance. The yearly budget is however not totally without surprises, as was illustrated for example by the lowering of 1% in company taxes.
Government is commended for the consistent and balanced way in which budget policy has been conducted over the last decade or so. Good progress has been made with its economic policy goals of higher stable economic growth, balance of payments equilibrium and income redistribution. The exception is still that employment-creation remains at an unacceptable level. Another concern is that our economic growth over the last few years is demand driven. Although government investment is increasing, the affect of an increase in expenditure, as well as tax deductions to the public, is to increase consumption expenditure. The supply of goods is provided by a rise in imports, resulting in an increase in our current balance of payments deficit. The deficit is made good by capital inflow, largely portfolio investment. As mentioned above, the withdrawal of these funds remains a possible, although not such a serious problem as a few years ago.
This scenario points to the necessity of increasing private sector investment, including investment in export goods. FEDUSA fully supports the importance given to private sector investment in this year’s budget and agrees that in the final instance business investment should be responsible for growth and employment-creation. This does not mean that government should neglect its balanced approach to promote economic development over both the short and longer term.
Government is commended for two important steps taken in this year’s budget to promote business investment, namely, the lowering of the company tax and the steps to promote small business. In our previous comments on the budget , FEDUSA has stressed the importance of promoting small business, and want to congratulate the Minister on this. Although the lower level of interest rates contributes towards higher investment, Government is urged to consider further steps to promote private sector investment.
The savings rate of the South African is among the lowest in the world. Compared to Africa where the savings rate is low but increasing during the last few years, the savings rate in South Africa is declining. Household savings is a mere 2,5% since 2004. Up to 2004 government savings was about 0,2% of GDP. In the main budget projection, however, government will be dissaving again after succeeding to turn around its dissaving in recent years. It means that government is again borrowing to buy its groceries. According to the Minister, the reason for this turn around is the large increase in welfare payments. Government however plans to turn around this situation in the outer years of the MTEF.
Against this background the increase in the interest and dividend exemption of R15000 for persons less than 65 years and R22000 for persons older than 65 is welcomed. This should contribute to higher personal savings. Personal income tax relief for individuals of R6.8 billion, including an increase in the rebates and the income tax threshold over a wide income range is welcomed. In the past, FEDUSA in its comments stressed that a tax relief to low income earners would only lead to an increase in consumption expenditure and not in savings.
FEDUSA is of the opinion that taxation on retirement funds should also be evaluated against the background of the very low level of savings in South Africa. The Minister correctly states in the Budget Review that retirement fund tax reform should seek to enhance and facilitate adequate retirement savings. More specific comments will be made on the draft document on retirement funds.
A primary purpose of the retirement fund reform Discussion Paper is to provide and encourage individuals to ensure proper guidelines and provision for retirement. In doing so FEDUSA support a review of the current retirement fund legislation. We have called for the review and specifically the tax review on the retirement funds in our Budget submissions to the Parliamentary Portfolio Committee on Finance since 2000. The right of individuals to provide adequately for retirement is an important provision in public policy. However, the taxation on the retirement funds have a direct effect on the retirement capital of contributors and could add an additional burden on the state coffers if pensions cannot live off secure pensions. It is imperative that the legislator also reviews income tax legislation during the process of the retirement fund review.
FEDUSA would like to submit that the taxation of pension funds requires further attention. When the tax on retirement funds was introduced in 1996, it was seen as a temporary measure pending the review of the retirement industry as a whole. Despite various suggestions from the Katz Commission, the review has still not taken place and we believe that this pension fund reform should have followed the tax reform and not visa versa. Absent from of the discussion document is the tax treatment of retirement funds. The principles of the review imply a delay in this very important process.
As mentioned above, providing sufficient employment opportunities to new entrants to the labour market and to make provision for a large backlog of unemployed is a socio-economic goal that is still out of our reach. This year’s budget contains fiscal measures to alleviate this problem. Measures include the relatively large increase in the budget deficit shown in the table below, the increase in government capital expenditure, tax relief for companies and the tax treatment of small business. In this year’s budget the policy shift towards supporting economic growth is continued. This is illustrated by an increase of 8.7% in real spending and 5.2% in revenue, bringing the budget deficit to increase from a low 2.3% in 2004/05 to 3.1%. The deficit, expenditure and revenue remain at sustainable levels.
These measures will contribute to higher economic growth and investment and employment. Government is commended for the comprehensive measures introduced to stimulate small business. FEDUSA is convinced that these measures will contribute to higher investment and job-creation.
Table 2
Total expenditure, revenue and the budget deficit of the 2004 MTEF and the 2005 budget (Main budget) (The 2005 budget is shown in brackets)
|
|
2003/04 |
2004/05 |
2005/06 |
2006/07 |
2007/08 |
|
Total expenditure |
328,7 (328,7) |
371,7 (370,1) |
413,6 (417,8) |
449,7 (456,4) |
488,2 (494,9) |
|
Percent of GDP |
26,7% (25,7%) |
27,7% (26,4%) |
28,2% (27,3%) |
28,1% (27,3%) |
27,8% 26,8% |
|
Total revenue |
299,4 (299,9) |
328,2 (338) |
363,0 (369,9) |
399,1 (405,4) |
440,5 (444,6) |
|
Percent of GDP |
24,3% (23,4%) |
24,5% (24,1%) |
24,7% (24,2%) |
25,0% (24,2%) |
25,1% (24,1%) |
|
Deficit |
- 29,3 (- 29,2) |
-43,5 (-32,2) |
-50,6 (-48) |
-50,6 (-51) |
-47,7 -50,3 |
|
Percentage of GDP |
-2,4% (-2,3%) |
-3,2% (-2,3%) |
-3,5% (-3,1%) |
-3,2% (-3%) |
-2,7% (-2,7%) |
Government realises that employment-creating growth is a multi-faceted phenomenon and that it should be tackled over a wide front in the short as well as the longer term in a balanced way. FEDUSA fully agrees with this approach. In the final instance the longer-term option of empowering people through education and training is probably the only sustainable way to tackle the unemployment problem in South Africa. As shown in the table below, this year’s budget provides for a real increase in expenditure on education of 2,5% in this year, 5.3% and 3,6% respectively in the next two years. This provision is higher than in the MTEF because of an additional R1 billion for the recapitalisation for Further Education and Training colleges, R776 million to shore up the National Student Financial Aid Scheme and R6.9 billion to improve salaries for teachers.
Table 3
Real percentage growth in selected consolidated national and provincial votes (Real) MTEF. Budget figures in brackets
|
2004/05 |
2005/06 |
2006/07 |
2007/08 |
|
|
Education |
|
3.5 (2.5) |
2.9 (5.3) |
2.5 (3.6) |
|
Health |
|
6.0 (7.6) |
5.2 (5.1) |
2.8 (2.7) |
|
Welfare and social services |
|
12.8 (9.9) |
7.6 (6.8) |
1.4 (4.1) |
|
Defence |
|
6.9 (8.3) |
-1.7 (-2.6) |
-4.9 (-5.3) |
|
Justice, police and prisons |
|
7.5 (8.9) |
4.5 (4.8) |
320 (3.9) |
|
Economic services and infrastructure |
|
3.8 (7.6) |
5.3 (8.5) |
9.1 (7.5) |
|
Interest |
|
2.5 (4) |
5.5 (2.6) |
5.1 (0.5) |
The long-term nature of the employment problem makes it necessary to provide a safety net in the meantime. The above table shows relatively large real increases in spending on welfare and social services. R22 billion above the 2004 budget is included over the MTEF period. This brings welfare and social service spending to a high 9,9% in 2005/06 and 6,8% in the next year. As mentioned above, this large expenditure is responsible for dissaving by government.
The table above also clearly illustrates government’s fiscal strategy to increase economic growth through higher spending on economic services and infrastructure, while also providing a safety net for the poor and unemployed. Other than in previous years, spending on economic services and infrastructure makes up the largest real increase, followed by welfare and social services.
This year’s budget can be regarded as a fiscal policy shift from income distribution to a policy of economic growth promotion while providing a safety net to the poorer section of the population. FEDUSA agrees with this policy shift and hope to see a further shift in policy to step up employment-creating economic growth.