On 20 March this year, in our submission on the 1997/8 Budget, COSATU Deputy General Secretary Zwelinzima Vavi explained to Parliament’s Finance Committee that:

"We are frustrated by the constraining nature of the budget process which renders meaningless both contributions from civil society and the deliberations of the elected people’s representatives. For this reason we have, after some deliberation, decided that unless the budget process is fundamentally transformed to accommodate real public input and effective parliamentary oversight, this submission on the 1997/8 budget will be our last. We will only participate in future parliamentary budget hearings if meaningful participation is made possible through a reformed budget process."

The firmness of COSATU’s position on budget reform is informed by the historical fact that South Africa has inherited a budget process from a most undemocratic and non-transparent apartheid regime, which used the budget to advance its programme of social inequality and race privilege.

Therefore, one of the key challenges of our new democracy is to see to it that the budget process is transformed in line with the commitment to democratic and transparent governance, to empower society as a whole to engage in and scrutinize the budgetary process to ensure that is in line with the implementation of the RDP.

Although the Money Bills Amendment Procedure Bill ("the proposed Bill") which is presently under the Finance Committee’s consideration, appears technical it has profound implications as, together with plans to implement a Medium Term Expenditure Framework (MTEF), it could radically transform the nature of the budgetary process.

In COSATU’s view the two key pillars upon which a democratic, post-apartheid budget process should be built, are:

• Firstly, an open consultative process around (1) the budget’s parameters, (2) the economic forecasts upon which these parameters are based, (3) the reprioritisation of expenditure patterns and (4) the direction of taxation policy. This consultative process should supplement government’s internal budgetary processes and should include input from a range of stakeholders, such as, parliamentary committees, Nedlac social partners and other organisations of civil society. This consultative process should entail input into a process of medium term planning, as envisaged in the proposed MTEF, spanning a period of three to five years.

• Secondly, as provided for in the constitution parliament must have the authority to amend money bills, including the budget. The promise that "The people shall govern" means that parliament - as the elected representatives of the people - should be empowered to play an effective oversight role with regards to the budget. For this reason, legislation empowering parliament to amend money bills such as the Budget, should grant significant powers to parliament, if not to alter total expenditure levels, then (1) to increase and decrease individual department's budget votes, (2) to introduce new expenditure items into the budget and (3) to effect changes to Bill's imposing taxes, levy's and duties.

As COSATU we do not believe that the present proposals for budget reform measures up to the requirement of these two pillars. We outline our criticisms below.

In principle, COSATU supports the introduction of the MTEF as better planning should mean an end to the kind of massive rollovers of expenditure which have been a hallmark of the first years of democratic governance. It will also provide a platform for the reprioritisation of expenditure in line with the RDP's objectives.

Despite the fact that we are at the initial stages of the MTEF process and that the process can be expected to evolve over time, there are already early warning signs of weaknesses with the MTEF’s consultative processes. These weaknesses should be addressed before they lay the basis for a tradition of non-consultative practice and other non-transparent tendencies.

Thus far, the MTEF – which intends guiding the budget for the next three years - has not been open to any meaningful consultative procedure. Parliament, and through its hearings the public, has still not had the opportunity to comment on the MTEF. At Nedlac discussions on the budget process have been limited – excluding discussion on the budget’s parameters - disorganised and, ultimately, unsatisfactory.

Of central concern to COSATU is that the MTEF is bound by GEAR’s arbitrary and unnecessarily restrictive parameters which, in our view, have the effect of limiting the developmental potential of the state. The fact that Parliament and Nedlac have not been provided with the opportunity to discuss these parameters, or the economic projections and assumptions underlying these parameters, stifles the macro-economic debate and limits the value of consultations concerning the MTEF.

As an alternative, COSATU has proposed that a macro-economic framework more appropriate for the sustained implementation of the RDP should be put into place. This would require that appropriate budget parameters should replace the existing arbitrary limitations.

For example, instead of setting rigid, arbitrary parameters as GEAR does, the following approach could be adopted:

• The deficit target should be set within a flexible band. This flexibility is particularly important in the context of the South African economy which has not reached the GDP growth levels upon which the GEAR model is based, with the result that government expenditure levels will be even lower than anticipated.
• The revenue target should be set within a flexible band. Again, this adjustment is necessary given that GEAR's GDP growth targets have not been met.

• An expenditure programme should be laid out in the MTEF and despite fluctuations in the GDP level, these expenditure levels should be pursued, allowing for GDP fluctuations to be absorbed by variations of deficit and revenue levels within the identified bands.

This alternative approach would assist in overcoming the central problem with the MTEF’s present parameters i.e. that government expenditure is not determined by planning but by arbitrary deficit and revenue targets.

The approach would also assist in overcoming the problem that, as the GDP level is unpredictable and, over the last two years has performed below prediction, government expenditure levels will be unpredictable and will slow with any slowing in GDP level.

The subordination of expenditure to arbitrary deficit and revenue targets will lead to a focus on hitting targets instead of improving the quality, and maximising the social returns, of expenditure. Delivery of basic needs and services to the people will either be postponed, or not be met at all, since departments may be forced to extend delivery periods or cut programmes, to meet deficit targets. Development thus becomes captive to the subsidiary objective of reducing the budget deficit and meeting revenue targets. This denies the state the necessary role to stimulate and lead economic development.

In addition to the restrictions on expenditure levels it is worth noting that there are other negative spin-offs of GEAR's rigid revenue targets. For example, elements in business have already revealed their hand insofar as they wish to use GEAR's commitment to reducing revenue collection to 25 percent of GDP as a basis for resisting the implementation of a training levy which is designed to shift South Africa onto a new growth path by seeing to that workers receive skills training and the type of on-going education and training that is needed to improve workplace productivity. From the same quarter, resistance is growing to the Minster of Health's proposals around compulsory payment by employers and employees into a much needed social health insurance system.

Of great concern to COSATU, is that this mechanical approach which threatens to frustrate the implementation of RDP programmes in key areas is also being spearheaded by officials of the Department of Finance who have opposed the implementation of health and other levies.

The fixing of revenue to be absorbed by government at 25 percent of GDP is one of the key ways in which GEAR ties the hands of government and weakens its potential to deliver in terms of the RDP. The fixing of this ratio is an unnecessary compromise to business, whose corporate taxes since the 1970's have made a sharply declining contribution to the overall tax bill as the burden has been shifted to individual tax payers. Between 1976 and 1995 the contribution of corporate tax to total revenue has declined from 35 percent to 12,5 percent, whereas for the same period the contribution of individuals through personal tax increased from 24,7 percent to 40,9 percent.

Compared to other countries, the 25 percent level is low, as the international experience shows that for many countries the revenue:GDP ratio is over 40 percent and historically has been over 50 percent during developmental periods. In any event, the levels of taxation should be determined by a range of factors, first and foremost South Africa’s developmental needs, and should not be arbitrarily set. The 25 percent revenue target needs to be subjected to thorough scrutiny.

In sum, COSATU will not be satisfied that the budget reform process is being properly approached unless:

• the consultative process around the MTEF is widened to include frank and open-minded discussion concerning the parameters of the MTEF and the economic forecasts upon which these parameters are based,
• the consultative process also allows for input on the reprioritisation of expenditure patterns and the general direction of taxation policy, and
• the consultation process with Parliament, Nedlac and civil society more broadly is well-organised, appropriately timed and meaningful.

The constitution (at s77) requires that legislation should be put in place granting parliament the authority to amend money bills, including the budget. Therefore, in addition to the prior consultative procedure relating to the MTEF (not outlined in the constitution), there is a constitutional requirement that parliament should have the ultimate right to decide on whether amendments should be made to the budget.

It is an important matter of principle, and a benchmark of our new democracy, that the constitution's commitment to an effective oversight role for parliament in budgetary matters should be properly implemented. The RDP is very clear on this matter. It commits government to strengthening the role of parliament in the budget process and to ensuring that parliament is adequately resourced in order to play this role:

It is unacceptable that, despite commitments to the contrary, no draft White Paper on the reform of the budget process has yet been produced. Public debate and discussion on how the budgetary reform process would best be implemented would have been enriching and highly beneficial. A public debate would also have assisted in the development of a clear policy direction that would have provided a guide to Parliament on the content of the proposed legislation.

The restrictive content of the proposed Bill, which is presently under the Finance Committee’s consideration, is a result of the lack of consultation and public discussion concerning parliament oversight role with regards to the budget. In fact, the proposed Bill limits the rights of parliament to such an extent that it would appear to undermine the spirit, if not the letter, of the constitution’s commitment to parliamentary oversight of the budget.

The proposed Bill restricts the role of parliament both substantively and procedurally. Substantively, parliament may not, without the "written support" of the Minister:

• increase total expenditure,
• increase expenditure provided for under any particular budget vote,
• introduce new expenditure item,
• alter the tax rate, tax base or time of imposition of a tax, or
• exempt anyone from a tax

Procedurally, parliament’s Finance Committee is required to give the Minister of Finance 7 days notice of any proposed amendment to a money Bill and allow the Minister the opportunity to address the Committee on the proposed changes. It also requires that the Finance Committee must table any amendments to a money Bill within 7 days of the referral of the Bill to the Committee.

Not only is this arrangement unworkable as it would require the Committee to give the Minister notice of any amendment on the day that the Bill is referred to it, that is, before it had time to properly consider the Bill, but it undermines the significant role which the Constitution requires parliament to play in finalising money Bills, seeing to it that parliament goes through the motions without really providing the opportunity for meaningful input.

In COSATU’s view, the proposed bill needs to be significantly re-worked in order to overcome a number of the Bill’s substantive and procedural restrictions. Following a process of broader consultation, we believe that the Finance Committee should propose amendments to the Bill along the following lines:

• A right for parliament and Nedlac to comment on the MTEF should be clearly provided for.
• Parliament should be granted an unencumbered right to increase and decrease individual department's budget votes.
• Parliament should have the unencumbered right to introduce new expenditure items into the budget.
• Parliament should have an unencumbered right to effect changes to the budget and other money bill's imposing taxes, levy's and duties.
• A role for Parliamentary Committees, other than the Finance Committee, should be provided for with regards to the amendment of money Bills.

The question of whether amendments by Parliament should be allowed to change the overall expenditure levels of government or whether it should be required that any new expenditure initiated by Parliament should be offset by spending cuts on other items, in order to make amendments revenue or deficit neutral, is a matter which should be addressed as part of a wider consultation process about the proposed legislation.

COSATU thanks the Finance Committee, who we are aware are working under very tight time constraints, for this opportunity to comment on the proposed Bill. In this submission we have outlined serious misgivings about the budget reform process in general, and the proposed legislation on the amendment of money bills, in particular.

We would recommend, therefore, that if it is possible, the Bill should be withdrawn in order to enable time for wider consultation and further consideration. We believe that following from such a process, the Committee should propose significant amendments to the Bill in order to see to it that its provisions correspond with the spirit and letter of the constitution. Furthermore, we believe that such a process should be undertaken with a sense of urgency with the aim of seeing the legislation through before the reading of next year’s budget.

Again, we thank the Committee for this opportunity and would welcome any invitation to participate in any further deliberations on these important matters.