PEOPLE’S BUDGET CAMPAIGN
RESPONSE TO THE 2007-10 MEDIUM TERM BUDGET POLICY FRAMEWORK
SUBMISSION TO THE JOINT
The
Peoples Budget Coalition appreciates this opportunity provided by the Joint
Committee on the Budget, to present its view on the Medium Term Budget Policy
Statement (MTBPS). We certainly see this as an important step towards
governments continued commitment in making the budget process more open,
transparent and participatory.
The People’s Budget Campaign (PBC) welcomes the growth in government
spending envisioned by the medium term budget policy statement (MTBPS). We are
pleased that government appears to be increasingly committed to mobilising
resources for infrastructure development and social investment. Certain key indicators – notably the
relaxation of the tax:GDP target – suggest that government is moving towards a
macroeconomic strategy that is much closer to the model of state-led
development that the PBC has long advocated.
We regret that it seems to have taken the impending 2010 World Cup to
generate the political will to harness these resources, but we trust that this
event will be a catalyst to intensified efforts to address the deep-seated
problems of poverty, inequality and unemployment.
At the same time, however, we believe that there is still scope for
faster growth in government spending.
Such spending can play a crucial role in enabling government to meet the
important commitments associated with ASGI-SA, the Growth and Development
Summit and the Millennium Development Goals. Moreover, the direction of
growth – the policies designed to achieve growth need to be revisited to ensure
employment creation and alleviate poverty above all other objectives.
While it is unsurprising that the Minister’s statement gave particular
emphasis to plans for the 2010 World Cup, it is imperative that World
Cup-related projects be carefully designed to promote development and social
investment over the long-term on a much longer horizon. The World Cup must not
be an end in itself, but rather a springboard to meeting broader state
objectives: achieving sustainable reductions in unemployment, poverty, and
inequality; investing in basic infrastructure – such as reliable and efficient
public transport – that serves the needs of all South Africans, especially the
poor and the working poor, considering they have fell so far behind in terms of
prosperity and economic participation.
There is a danger that, in our eagerness to host a “world class” soccer
tournament, we may focus development efforts on the cities where the matches
will be held. This approach would further magnify the urban and rural divide
and would accelerate immigration to the cities. Whilst we recognise the need for
Let 2010 serve, in part, as the vehicle for us to implement the RDP on
the scale already envisaged. After twelve years of freedom, we cannot simply
tell the poor in cities not hosting World Cup matches to wait their turn. We
must attach the same urgency, zeal and vigour that we demonstrated in our World
Cup bid to our broader development efforts.
This must be the most prominent legacy of the World Cup. It is a goal
that necessitates a thorough review of our fiscal and monetary policy and a
sustained focus on improved spending on key education, health and social policy
initiatives.
Policy Shifts and
Trends in brief
Since 2000 PBC has seen some significant policy shifts. In summary these
shifts include;
Adjustment Budget
The adjustments to
the 2006/7 financial year amount to R 8,8 billion, which translates to a net
increase of R 1,5 billion after taking into account declared savings and the
contingency reserve.
Unfortunately the
adjustment budget envisions the allocation of additional funding to the Pebble
Bed Modular Reactor (PBMR). There are two concerns that the PBC would like to
raise. First, that the PBMR as a venture should be financed from private
venture capital sources, rather than public monies. We would, for instance,
welcome government putting up capital for start-up small businesses that are
labour intensive, rather than into the capital intensive PBMR. Secondly, the
environmental concerns with the PBMR remain. Whilst the Environmental Impact
Assessments are continuing, we remain unconvinced that the nuclear technology
will have a benign impact on the environment.
Similarly, the
additional investments in Denel and Alexkor, means that government supports the
arms and diamond industries. The primary concern is that both these enterprises
have not developed adequate business plans, to move towards profitability.
The Department of Public Enterprises we believe should play a more significant
role in turning these enterprises around. In particular, we should be looking
seriously at converting Denel to peaceful pursuits. Moreover, these adjustments
divert resources away from public spending in other areas.
The adjustment for
Infraco is an important and significant one. The costs of broadband needs to be
brought down for competitive reasons and for making internet access more
affordable. However, in the context of the now privatised Telkom being unable
to bring the costs of broadband access down we believe that there is a role for
price regulation. The SNO might bring down costs but we remain sceptical of the
benefits that will accrue from an uncoordinated and inappropriately sequenced
deregulation of telecommunications.
We welcome the
additional allocations to the N2 Gateway housing project, as a demonstration
project for integrated housing communities in
Revenue
The People’s Budget Coalition commends the Minister for his restraint in
not committing to any additional tax reductions. Clearly this has not achieved
a desired result of promoting household savings.
In this context, we are pleased that the National Treasury has at last
allowed the tax:GDP ratio to rise above 26%.
The MTEF envisions an average tax:GDP ratio of 27,7% over the life of
the MTEF. This approaches the 29% level
that the PBC has long advocated as a way of maximising the redistributive
capacity of the budget without introducing substantial economic distortion.
Looking at the composition of revenue, the news is also largely
good. The most significant change is
that companies will be expected to shoulder a more equitable proportion of the
tax burden. The corporate sector’s
contribution to total revenue is projected to rise from 23,9% in 2005/06 to
27,6% in 2009/10 when both company taxes and secondary taxes on companies are
taken into account.
Against this, the MTEF continues a worrying trend to shift the tax
burden from personal income tax to VAT – albeit much less dramatically. Personal income tax will decline by 2% from
30,3% to 28,3% over the same period, dipping below 30% of revenue for the first
time since the late 1980s. Meanwhile,
VAT will rise by nearly 1% from 27,4% to 28,2%.
The shift becomes even more noticeable when one recalls that VAT
accounted for 24.2% of revenue in 2001/02 – when personal income tax made up
36,4% of revenue. Thus a gap of more
than 12% will close in less than a decade.
The trend is alarming because VAT is a notoriously regressive form of
taxation that consumes a larger proportion of the incomes of the poor than of
the wealthy. The PBC urges the Minister to review this situation and to give
priority to reducing VAT through a reduction in the general rate and/or through
the introduction of a tiered VAT system.
The latter approach is not only one for which the PBC has long agitated,
it is also the dominant model among countries that have a VAT system.
Whilst we applaud the strongly expansionary nature of the MTEF, which
envisions nominal expenditure growth of nearly R170 billion over the next three
years, we also recognise that there is ample scope for even more growth. In particular, we note with concern that
Treasury aims effectively to eliminate deficit spending over the next three
years. The revised estimate for the
2006/07 deficit is a mere 0,4% of GDP, with a 9,3 billion surplus expected next
year. Although this may appear
commendably frugal, it also means that the Treasury is foregoing further
opportunities to invest in social and physical infrastructure capable of
propelling
The PBC appreciates the work being done by SARS to ensure the fair and
efficient collection of revenue. Given
SARS’ reliable record, we remain puzzled as to why Treasury continues to
underestimate revenue so consistently and so dramatically. A certain level of caution in projections is
justified. However, this year the
Minister has announced that he expects collections to exceed the budget
estimate by R30 billion or 6,6% of total revenues. Such a large margin of error distorts the
planning and budgeting process. We urge
the Treasury to develop more accurate predictive models so that expenditure can
be properly planned and not perpetually accommodated as a “windfall”.
Expenditure
While the People’s Budget Coalition welcomes the increased spending over
the MTEF on a number of key line items, we remain concerned about the emphasis
in the Minister’s speech on the 2010 World Cup event. Spending must not only be geared towards
ensuring a successful event but must also be placed in the context of a medium
to long term overarching developmental agenda.
Although we recognise the need for increased spending on infrastructure,
not all infrastructure spending is equally desirable. It must also be socially useful. In this context, there must be greater
emphasis on building support for important State Owned Enterprises, such as
Transnet and Eskom and increasing public sector investment to meet the ASGI-SA
targets of overall Fixed Investment to achieve levels of 25-27% as a percentage
of GDP.
On
the other hand, the PBC welcomes the overall increase in health spending (8.3%)
over the MTEF. Clearly government’s
change of direction towards a ‘developmental state’ is a land-mark, recognising
that only the state sector can fund
sufficiently the level of employment in public health that is required. The At the same time,
the PBC welcomes the commitment to increase staffing levels in the health
sector. This has been one of the many concerns raised by the PBC coupled with
the deteriorating services of the public health system. It should further be
noted that in relation to percentages of health care workers in the public and
private sectors, in
Similarly, a developmental state will take
responsibility for all public investment that enhances a people’s human
resources: not only health, but education, justice, housing, sanitation, water,
energy supplies, transport and communications. Without these no amount of
enterprise development can flourish.
The focus on increasing the
allocation in spending towards retaining and growing professionals in the
health, social work and teaching sector is extremely welcomed. However, we
should guard against increasing remuneration cost for professionals at the
expense of providing adequate compensation for public sector employees in
Provinces.
We further welcome the increased spending to improve basic services such
as water and sanitation (R1, 4bn) and the additional allocation of R400m for
the eradication of the bucket system. With many municipalities facing delivery
and capacity constraints, it should be important that government continue to
address these challenges in order to achieve deliverable targets.
PBC applauds governments continued support for increasing the much
needed housing budget (R134m) and increased expenditure over the MTEF for
public transport. It is important that this expenditure be geared to meeting
local needs and not be squandered on elite projects such as the Gautrain. Such
spending is critical to ensure that we eliminate the huge housing backlog,
improve infrastructure investment and public transport.
The continued commitment of government to reducing crime through
increasing the number of policing officials is welcomed. The PBC notes that
this may however be in the context of reducing crime towards the 2010, and not
part of the overall crime prevention strategy needed to reduce domestic
violence and rape, decrease violent crimes and improving the overall human
security in
We welcome the increased
allocations for provincial and local government. The Provincial Budget Review (PBR) announces
that capital spending is the "fastest
growing item in provincial expenditure”. However, we are concerned by the
claim that expenditure on employee compensation is set to continue in its
declining cycle “to more acceptable
levels”. We remind government that staff
reductions also imply reduced service delivery. The continued under spending of
R1bn in provinces is linked to the continued capacity constraints which
underscores the need to increase personnel. As the Minister has noted there is no more important
objective than enlarging the capacity of the public service, which is not
necessarily served by a concept of ‘acceptable levels’ of staffing.
Budget Process
We commend the Minister and the Treasury for the growing transparency of
the budget documentation. However, the
challenge of enabling greater public participation in the budget process –
especially through Parliament – remains. If budgeting remains a largely
technocratic exercise, there will be few opportunities for popular input into
the determination of revenue patterns or spending priorities. In this context, we note with grave concern
that ten years on from the adoption of
We therefore welcome the Minister’s acknowledgement of the importance of
greater consultation on budget priorities as a key to both improved democratic
participation and more effective delivery.
The PBC has studied various ways of enhancing popular participation in
budgeting, particularly those that make use of Parliament as the primary forum
for public engagement with legislation and policy. We have made extensive and detailed proposals
for reforming the budget process in earlier People’s Budget documents. We attach one of our most comprehensive
analyses to this submission in case Members of the Budget Committee are not
familiar with our recommendations. We look forward to discussing these with the
Minister and with Parliamentary officials in the coming months.
In order to promote informed and effective involvement in the
development and implementation of the budget, it is also important to have shared and reliable benchmarks against
which to assess the impact of spending.
In this context, we recall the Minister’s commitment in his February
2005 budget speech to seeking advice on the development of an official poverty line for
Conclusion
Public
representatives must take the lead by spending effectively in the fight against
poverty and inequality. In times of extreme poverty, hunger and homelessness,
the PBC asks our representatives to cease the convening of lavish parties and
to seek other, more appropriate, ways of rewarding hard working public
employees.
Ultimately, the
budget must be judged annually against our commitments in the Growth and
Development Summit and the Millennium Development Goals. Sadly, the Minister
has failed to provide guidance on what the impacts of the budget will be on the
employment, poverty headcounts and inequality. Moreover, despite the rising
levels of fixed capital formation, there are significant areas in the GDS which
have not been reported upon, and have little budget support.
It has become clear that growth in itself does not –
contrary to expectations – reduce poverty, unemployment or inequality. Growth
can do the opposite, or it can be neutral. Government policy directions will
decide that outcome. The PBC argues that poverty elimination should be the
first priority when assessing the effects of policy
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