REPORT OF THE PORTFOLIO
COMMITTEE ON FINANCE ON THE APPROPRIATION BILL 2007/8, DATED
The Portfolio Committee on Finance,
having considered and examined the Appropriation Bill [B2 – 2007] (National
Assembly – Sec. 77) and its related documents, referred to it, and classified
by the Joint Tagging Mechanism as a Section 77 Bill, reports as follows:
1. Introduction
The Minister
of Finance tabled the Budget for 2007/8, including the MTEF for the 2008/9 and
2009/10, on
On
Between 27
February and
The report
is structured around the following main themes that emerged throughout the
hearings:
·
Macroeconomic framework
·
Fiscal Policy, Revenue trends and
tax proposals
·
Other issues
2. Macroeconomic Framework
There was
general agreement amongst the panellists that
The
Committee commends Government on the fact that the 2007/8 Budget continues to
build on the sound and prudent macro-economic policies reflected in a robust
economy, reinforced by the high levels of business optimism. The Budget
provides for further channelling of the benefits of economic expansion to
increase savings, economic and employment growth, and contributes to
transformation and poverty alleviation.
The 2007/8
Budget identifies the need to accelerate growth at a more rapid pace to further
reduce poverty, unemployment, to eliminate inequality, modernising service
delivery institutions, investing in long-term security, and protecting the
vulnerable. It supports the structural development of the economy with
increased expenditure in economic and social infrastructure investment, which
would have a long-term positive effect on the economy. There was consensus among
the panellists that the Budget identified the need for stronger exports
performance through the development of a growth orientated trade and industrial
policy, as it seeks to address the constraints to a higher economic growth
path. Mr Jorge Maia from the Industrial Corporation of South Africa (IDC)
highlighted that although we have seen a remarkable recovery of
The
panellists welcomed the fact that the Budget sought to consolidate and expand
economic growth through fiscal policy that sought to avoid the “boom and bust”
of past business cycles through prudent management of the current economic
upturn. Improved Government savings over the last few years, reducing future
debt serving obligations further, highlighted the complimentary fiscal and
monetary policies stance underlying a steady improvement in macroeconomic
stability. Prudent fiscal policy will ensure the sustainability of current
economic upswing. The Committee
believes that the planned fiscal surplus could be seen as government’s
contribution to the national savings effort.
The
panellists were in agreement that the strong economic outlook is supported by
global conditions, that although a slow down in the short-term is expected,
global conditions remain favourable. Global economic trends remain supportive
of sustained growth in developing countries, but global imbalance remains
source of economic and financial risks. The reliance on short-term capital
inflows, the high level of domestic consumption expenditure, and the growing
current account deficit are the major risk factors for
All
presenters echoed that business and consumer confidence remains high, providing
a good indication of their confidence about the performance and prospects of
the economy, despite inflationary pressures and high imports. Pieter Laubscher alluded to the fact that the
current buoyant economic conditions are cyclical, and a result of favourable
global conditions that might change. National Treasury viewed the continued
buoyancy of tax revenues as a signed of strong economic growth as tax receipts
grew at a faster rate than reported GDP. This would imply a tax multiplier and
the average value of the tax multiplier had gone through significant peak and
troughs. National Treasury implied that this was due cyclical factors, such as
swings in commodity prices, the external value of the currency and shifts in
the business cycle.
2.1.
Domestic economic outlook
Panellists
welcomed
The growth
rate has substantially increased to an average of 5% projected over the MTEF
period, marginally better that the ASGI-SA target of 4, 5%. Pieter Laubscher,
chief economist at the Bureau for Economic Research (BER), concludes that the
growth rate is more stable and sustainable and that the growth rate over the
last three years was underpin by strong household consumption as well as gross
fixed investment of above 9% since 1993.
The panellists highlighted the fact that the demand side has
driven the growth, while the supply side had been fairly muted. Net export made
a strong negative contribution to economic growth with a sharp increase in
domestic demand resulted in the widening of the output gap.
2.2
Inflation
CPIX
inflation has remained within the 3 – 6 % target range for 41 consecutive
months averaging at 4.6% in 2006. The rising oil price, along with acceleration
in food prices, contributed to the higher inflation rate. The business
community welcomed the better coordination between fiscal and monetary policy.
The short-term interest rates seemed to have peaked, however, but risks do
remain. The panellist agreed
that fiscal policy supportive of the need for a higher level of domestic
savings would make the implementation of monetary policy easier. The inflation
outlook has improved since the end of 2006, and inflationary expectation seems
to be well anchored.
2.3 Current
Account deficit
The strong
expansion of domestic spending and imports over the 2004-2006 period, combined
with a poor export performance over the 2002-2006 period, 3% on average per
annum, led to the widening of the current account deficit. Government argued,
supported by the panellist that the current account deficit not only reflected
the imbalance between investment and savings, but that the country was
consuming more than it had produced, with the difference being imported.
Pieter
Laubscher (BER) further concluded that the strong currency played an important
role in constraining manufacturing exports, stimulated by domestic spending and
import demand. Prof Ray Parsons said during the hearings that “
Although the
current account deficit had risen from 4.2% of GDP to 5,7% of GDP since last
year, stimulated by the increase in import levels, high oil prices and sharp
increase in South African Customs Union (SACU) payments, Government and
business remained optimistic, as this would be offset by strong capital inflows.
Factors underpinning this view were the stable macroeconomic climate and the
improved economic growth position.
The
Committee commends Government on its fiscal stance as it helps to sustain
growth by improving Government savings and prioritising spending programmes,
thus strengthening the economy. The Committee would caution Government on its
reliance on portfolio investments, adding that it needs to attract foreign
direct investment to address this imbalance. Pieter Laubscher (BER) cautioned
against this reliance as the direction of these inflows was globally
determined. Government, however, is committed to improving export performance
through appropriate industrial policy initiatives.
2.4 Exchange
Control
The Budget
contained few announcements with respect to further exchange control
relaxation, with the gradual approach still in place. The Committee welcomed
the announcement that the current shareholding threshold for foreign direct
investment outside of
3. Fiscal
Policy
The
continued expansionary fiscal stance adopted received widespread endorsement by
all commentators, as it supports the growth momentum. Pieter Laubscher (BER)
alluded to the fact that as fiscal policy continued on its expansive phase,
Government had to guard against stimulating the consumption side of the
economy.
The strong
fiscal position underpins the medium term policy objectives of job creation,
modernising service delivery institutions, accelerating economic growth and
tackling crime. As highlighted in the Budget Review of 2007, the Budget
continues to build on the gains of prudent fiscal management to make a further
contribution to economic growth and social development.
Expectations
are that the economy will to grow 5% a year over the medium term, reaching 5.4
% in 2009 in line with the ASGI-SA target, with inflationary expectations to
remain within the target range. The 2007 Budget reflects real growth in
non-interest expenditure by an annual average of 7.7% over the medium term.
The Budget
reflects quite strong expenditure over the MTEF both in terms of current
payment of 11% and wages and salaries of 10%. Dawie Roodt highlighted that
Government’s spending trajectory was faster than the rate of economic
expansion, with social expenditure (education, housing, health and social
development) the main beneficiaries.
Gross fixed
investment is forecast to increase rapidly with R410 billion Government
infrastructure programmes accompanied by higher levels of private sector fixed
investment. Jorge Maia from the IDC highlighted in his presentation the
positive spin-offs of infrastructure growth, of increased demand inputs, the
manufacturing of capital goods and transport equipment, and the crowding in of
private sector investment through effective infrastructure. He further argued that in order to achieve
the ASGI-SA targets of 6% GDP growth, fixed investment activity for the economy
at large had to accelerate by more than 13% per year over the period 2011 to
2014.
3.1 Budget
deficits and surplus
The 2006
Medium Term Budget Policy Statement (MTBPS) announced a projected surplus of
0.5% of GDP for the fiscal year 2007/8. Due to strong revenue growth the
revised predictions for 2006/7 forecast a budget surplus of 0.3% to GDP and a
surplus of 0.6% of GDP forecast for 2007/8.
Jorge Maia
(IDC) argued that prudent fiscal policy and continued improvements in tax
collections resulted in a shift in Government balance from progressively lower
deficits towards a budget surplus, hence enabling a developmental approach to
fiscal expenditure going forward. The broadly balance budget over the MTEF
period was welcomed by all commentators, as it is positive from both a
confidence and credibility point of view. Pieter Laubscher (BER), although
welcoming the budget surplus, cautioned that, from a cyclical perspective, this
might stimulate the demand side of the economy.
4. Tax
Policy
The tax
policy framework seeks to broaden the tax base, taking cognisance of societal
realities, by minimising the distortionary impact that taxes may have on
economic growth and employment creation. The tax reforms support accelerated
growth in job creation and poverty alleviation, while at the same time
encouraging individual savings. The buoyant tax revenue over the past three
years was due to strong economic growth and the broadening of the tax base,
coupled with the efficiency of SARS. The broad underpinning principles of the
2007 Budget’s tax proposals are:
·
Supporting economic growth,
investment and job creation, business development and confidence
·
Promoting financial security of
households and reducing their vulnerability through retirement reforms that
encourage savings
·
Supporting macroeconomic policy
objectives.
The Budget
provides for individual tax relief of R 8.4 billion, which, according to some
commentators provide further stimulus for consumer spending, with total net
relief of R12.5billion.
As the GEAR
policy intention was to maintain a ratio of tax-to-GDP of about 25%, the
increase from 26.4% to 27.9% of tax revenue as percentage of GDP was met with
concern by certain commentators.
4.1 Corporate Income Tax (CIT) and Secondary Tax on
Companies (STC)
Robust debate on the global competitiveness of the
South African corporate tax structure was evident during the hearings on the
Budget. BUSA/CHAMSA argued that to encourage Foreign Direct Investment (FDI),
the CIT should be internationally competitive, as a lower CIT rate would
attract investment. Pieter Laubscher argued that CIT had been a major source of
the revenue overrun, and that going forward, fiscal policy had to consider the
tax burden borne by companies. Tax relief to companies would stimulate the
production side of the economy. Government was not convinced that a reduction
in CIT would automatically lead to supply side benefits as suggested by
business.
The
Committee requested that in the debate on the international competitiveness of
the tax system, commentators should not be selective in their comparative
analysis of international CIT, as information provided by National Treasury and
SARS indicated that
In supporting and encouraging business development and confidence the
Government announced the phase-out of secondary tax on companies and replace it
with a dividend tax. This would be two phased approached as the dividend tax
would be applied at a rate of 10% down from 12, 5%. The second phase,
commencing in 2008, would entail the conversion to a dividend tax on
shareholders, with administrative enforcement through a withholding tax at
company level. The Committee welcomed this, as it is in line with the
international norm, and also would have a stimulatory effect on business.
5. Social
Security Reform
Improved economic performance has created the fiscal space that allowed
Government to move towards a social security system that provides income
security for all. Despite the economic upturn, the Committee recognised that
poverty and unemployment remain a major challenge for government. The Committee
welcomed the proposal by Government to introduce a broad-based social security
framework over the 2001-2010 period. This would involve a broadening of social
security reform to include an earnings-related contributory system. If the
principles mentioned – those of equity, pooling of risks, mandatory
participation, and administrative efficiency - are adhered to, it could be a
force for greater social stability and increase the levels of personal savings.
The Committee welcomed the commitment by Government that all details on
the earning-related social security tax system, the wage subsidy and revision
of retirement industry would be tabled, and an all-inclusive consultative
process would be undertaken before the new dispensation was finalised.
5.1 Savings
and Retirement fund reform
Over the
past two years the Committee has provided a platform for the discussion on
retirement fund reforms. The Committee welcomed the recent announcement in the
Budget of proposed reforms to retirement funds savings as part of the broader
social security reform process. Business supports the proposed reforms and will
contribute to the debate as a social partner at NEDLAC.
The
Committee, business and labour sectors welcomed the abolition of retirement
fund tax, urging trustees to be vigilant in ensuring that the benefits accrue
to the intended beneficiaries.
6. Concluding comments
South African is experiencing sustained
growth, with the management of public finance creating the fiscal space to step
up spending in key areas. The previous Budgets had laid the foundation for
future sustained economic growth, job creation and alleviating the plight of
the poor.
The growth outlook remains positive over the
medium term, strongly supported by investment. Investment would continue to
grow underpinned by public corporation’s and departments capital investment
programmes. Export growth is expected to exceed 6% over the MTEF as it benefits
from significant investment in new capacity and continued international demand.
The projected softening in consumption
expenditure and possible moderation in the exchange rate would ease import
volume growth. The continued strong investment expenditure means that capital
import growth might remain high. This will be good as it contributes to the
productive capacity of the economy.
Despite the upward pressure on the CPIX it is
expected to remain within the target range. The fiscal stance adopted by
Government provides a buffer against economic instability and the fiscal space
allows for reforms on the social front.
The proposal to introduce a broad-based social security system will
seek to address the legacy of discrimination and inequality, and will work
toward the elimination of poverty.
7. Oral submissions
The following people made oral submissions before the
Committee, some in their personal capacity. These submissions are available on
request from the Committee Section of Parliament.
1. Mr T Manuel, Minister of Finance
2. Mr L Kganyago, Director-General: National
Treasury
3. Mr P Gordhan, Commissioner of SARS
4. Mr Pieter Laubscher, BER:
5. Mr D Roodt, Chief Economist: Efficiency
Group
6. Mr Hennie Bester, Director: Mallinicks
7. Mr J Vilakazi, CEO: BUSA
8. Prof R Parsons, Business Unity
9. Adv A Meiring, BUSA
10. Mr R Baxter: Chief Economist: CHAMSA
11. Ms Riefdah Ajam, Federation of Unions of
Report
to be considered.