PEOPLE’S BUDGET CAMPAIGN RESPONSE TO THE 2007-10 MEDIUM TERM BUDGET POLICY FRAMEWORK
SUBMISSION TO THE JOINT
COMMITTEE ON THE BUDGET

1 November 2006

 

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 South Africa to fulfil its commitments to FIFA, we would also wish to see equitable and even development in other cities and in rural areas.

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;

  • A more moderately expansionary budget with growth in real and per capita terms. While this is a good indication, we think that greater expansionary budget is needed to meet developmental objectives and address the needs of the poor.
  • We continue to raise concerns over the adjusted budget deficit expected to be 0.4% in 2006/7 and the move to achieve a balanced budget. Over the medium term it estimated that deficit spending will be eliminated. We believe this is a foregone opportunity for government to increase spending in social and physical infrastructure, providing for sustainable job creation opportunities and improved growth.
  • PBC welcomes the restrain on tax cuts. We have always argued that this disproportionately benefited the rich.
  • While we welcome the continued zero-rating of certain goods primarily used by the poor. We continue to call for a review of the VAT system as a regressive form of tax against the poor.
  • The policy introduction of free basic services and support for the indigent was an important step; however, this continues to be slow with many municipalities not delivering these important benefits to the poor.
  • PBC continue to raise concerns over the capacity constraints faced by local government in developing infrastructure such as roads, electricity, water refuse, and sanitation and telecommunications services. Many municipalities continue to face huge backlogs and thus urgent attention should be drawn towards unblocking bottlenecks and accelerating service delivery
  • PBC continues to welcome the policy shift that State Owned Enterprises will play in terms of governments developmental objectives. The notion that privatisation of SOE will reduce the deficit is a ideological debate that would stifle an important role SOE’s will play in infrastructure investment, reducing unemployment and poverty
  • The establishment of a national Social Security Agency and the expansion of the social security net is a positive step. However we need a more comprehensive social security system, including the introduction of a universal income grant

 

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 South Africa. Similarly, the integration of Metrorail into the South African Rail Commuter Corporation is an important step towards developing quality and affordable public transport.  

 

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 South Africa to even higher and more sustainable levels of growth.

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 South Africa 72, 6% of all doctors and 41,1% of nurses are in the private sector. This is despite the fact that 82% of the population relies on public health facilities.

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 South Africa. Moreover, crime is rooted in social conditions and deprivation; and it will continue to flourish while poverty and inequality and squalor breed desperation.

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 South Africa’s internationally admired Constitution, Parliament still does not have the power to amend money bills as required by Section 77.  We applaud the Minister for his willingness to listen to civil society organisations and members of the public at large, but we cannot pretend that submitting “Tips for Trevor” is an adequate substitute for a thorough, meaningful and binding process of popular review of the patterns of spending and resource allocation captured in the budget.

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 South Africa.  At the time, the PBC warmly welcomed this initiative and urged the Minister to involve a broad cross-section of civil society in those consultations.  Unfortunately, we have heard little more on this subject during the past twenty months.  We would reaffirm our support for this effort and repeat our call for this to be an open, transparent and broadly participatory process.

 

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

 

 

 

People's Budget Campaign · COSATU (011 339 4911) · SACC (011 241 7800) ·  SANGOCO (011 403 7746)