REPORT OF THE
SELECT COMMITTEE ON FINANCE ON THE 2011 FISCAL FRAMEWORK AND REVENUE PROPOSALS,
DATED 03 MARCH 2011
The
Select Committee on Finance, having considered the 2011 Fiscal Framework and
Revenue Proposals, reports as follows:
1.
Introduction and Background
The Minister of Finance (the
Minister) tabled the 2011 National Budget (the Budget) before Parliament on 23
February 2011. In tabling this Budget, the Minister met his obligation under
section 27 of the Public Finance Management Act (Act 1 of 1999), (PFMA) that
requires the Minister to table the Budget for the coming financial year in the
National Assembly before the start of that financial year. In addition to that,
the Minister also met his obligation under section 7(1) of the Money Bills
Amendment Procedure and Related Matters Act 9 of 2009 (the Money Bills Act)
that requires the Minister to table the Budget in the National Assembly.
Section 7(2) of the Money Bills Act requires the Minister to include, among other
information, the proposed fiscal framework and revenue proposals in the tabled
Budget.
According to section 8(3) of the
Money Bills Act, the Committees on Finance (the
Committees) must, within 16 days after the tabling of the Budget, report
to the National Assembly (NA) and the National Council of Provinces (NCOP) on
the proposed Fiscal Framework and Revenue Proposals. Fiscal Framework is
defined in the Money Bills Act as “the framework for a specific financial year
that gives effect to the national executive’s macro-economic policy and
includes-
(a)
estimates of all revenue, budgetary and extra-budgetary
specified separately, expected to be raised during that financial year;
(b)
estimates of all expenditure, budgetary and extra-budgetary
specified separately, for that financial year;
(c)
estimates of borrowing for that financial year;
(d)
estimates of interest and debt servicing charges; and
(e)
an indication of the contingency reserve necessary for an
appropriate response to emergencies or other temporary needs, and other factors
based on similar objective criteria”.
In line with section 8(3) of the
Money Bills Act mentioned above, the Committees report on the proposed Fiscal
Framework and Revenue Proposals for the 2011/2012 financial year.
Following the tabling of the Budget
and the engagement with the Minister, the Committees held public hearings on 1
and 2 March 2011, receiving submissions from organised labour, organised
business, public institutions, civil society and individuals.
This report reflects the main themes emerging from the engagement with the
afore-mentioned stakeholders including the Minister of Finance and National
Treasury. This report includes two main
sections, namely: Economic Policy and Fiscal Policy. The Economic Policy gives
an overview of economic outlook and policy with specific reference to key
macro-economic indicators within the context of the current global and national
economic environment. The Fiscal Policy provides details of fiscal policy over
the following Medium Term Expenditure Framework (MTEF) with specific reference
to the fiscal stance adopted by government.
2. The 2011
National Budget
The 2011 National Budget reflects
the collective determination of the Government to address with energy the
challenges of creating jobs, reducing poverty, building infrastructure and
expanding our economy. The 2011 Budget
ensures that government intensify activities that make a difference to the
lives and prospects of all South Africans, and that priority programmes
required for implementing the New Growth Path are funded. It must also ensure that
macroeconomic stability is maintained, with necessary adjustments supporting
enterprises and job creation in order to ensure that youth in the cities,
informal settlements, towns and villages have skills and jobs
The South African government adopted
a countercyclical fiscal stance two years ahead of the recent economic crisis. The
country entered this economic recession with a healthy fiscal position and a
comparatively low level of debt. This allowed the country to maintain
government spending despite a sharp drop in revenue. South African Government
spending continues to grow over the next three years, though at a slower rate
than in the recent past.
3. Economic
policy and outlook
The South African economy is
expected to continue to recover gradually from the recession over the MTEF
period, with the gross domestic product (GDP) expected growth rates of 3.4 per
cent in 2011 and 4.4 per cent by 2013. In strengthening the economy the
monetary and fiscal policies remain supportive in the recovery. The demand for
labour is expected to grow moderately, recovering from approximately one
million job losses during the 2009/2010 period. In evaluating the impact of the
capital inflows on internationally currencies and its effectiveness, the
government has to continue to monitor its effect further on the economy.
Business Unity South Africa (BUSA) recognises that National Treasury has
built a solid reputation of fiscal planning based on projections erring on the conservative
side, and often being much closer to actual outcomes than many estimates from
the non-government organisations and private sector. In line with its realistic
characterisation of the current global economic environment as one of immense
transition, profound risk and great opportunity, most commentators indicated
that the overall structuring of the fiscal framework and monetary policy
setting is conducive to the macroeconomic stability and the fiscal
sustainability of the economy.
The
Financial and Fiscal Commission (FFC) is of the view that
According to the People’s Budget
Coalition (PBC), in line with the apparent adherence to a countercyclical
fiscal policy, the budget deficit is forecast to decrease from 5.3 per cent in 2011
to 3.8 per cent in the medium term. The
implications for crowding out much needed social expenditure is illustrated by
the fact that the budget projects that the average real growth in government
non-interest spending over the next three years is as low as 2.8 per cent. Furthermore, real growth in government
transfers to households (in the form of social grants) is projected to average
only 3.2 per cent in the medium term, despite the acknowledgment in the 2011 Budget
Review that approximately 15 million people now depend on some form of
government grant and, for many households, social grants are the only regular
source of income.
3.1 Opportunities
for
The recent inception of South Africa
to Brazil, Russia, India, China and South Africa (BRICS), which will be
inaugurated in April as announced by the President in the State of the Nation
Address, provides an opportunity for the local firms to a fast-growing market,
investment opportunities and strengthens beneficial trade links for the African
continent. BRICS economies are expected to account for 36 per cent of the world
economic growth, increasing their combined share global GDP to approximately 22
per cent.
3.2 The New
Growth Path and Job creation
The New Growth Path policy outlines
an approach to accelerate growth and employment, focusing on job creation
targets and sector based actions that will help to achieve the desired outcome.
The drivers for job creation identified are:
According
to the FFC, the South African government recognises
the importance of economic growth in job creation as well as the contribution
of different sectors to economic growth.
This is made clear with the announcement of the New Growth Path (which
is one of the focus areas of this year’s budget), State of the Nation
announcement of R9-billion jobs fund, a R10-billion allocation to the
Industrial Development Corporation (IDC) and up to R20-billion tax breaks to
promote investment in the manufacturing sector.
The Peoples Budget Coalition (PBC)
highlighted that further relaxation of exchange controls could have the effect
of pre-empting public consultation processes and the finalisation of
Government’s proposed “New Growth Path” policy document by effecting
macroeconomic policy changes that may be difficult to reverse at a later stage.
4 Global economy
Fast-growing emerging markets are
experiencing rising inflation which is fuelled by strong domestic demand and a steep
increase in commodity prices. It is therefore important to have a tight
monetary policy to rein in demand and reduce risk of boom or bust economic
cycles. High capital flows can finance domestic investment and contribute to
overvalued currencies and domestic asset bubbles. Countercyclical fiscal and
monetary policies are required to offset imbalances and reduce upward pressure
on exchange rate.
5 Domestic economy
In 2010, the South African economy
grew at an estimated rate of 2.7 per cent. Macroeconomic projections of the real
Gross domestic product (GDP) growth rates are to reach 3.4 per cent in 2011,
4.1 per cent in 2012, and 4.4 per cent by 2013. This is attributed by an
estimated GDP inflation rate of 5.9 per cent in 2010, 5.5 per cent in 2011, 5.4
per cent in 2012 and 5.8 per cent in 2013.Table 1 (below) shows macroeconomic
projections in other fiscal elements over the MTEF.
|
Table 1:
Macroeconomic projections, 2007-2013 |
|||||||
|
Calendar
year |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
|
|
Actual |
Estimate |
Forecast |
||||
|
Percentage
change |
|
|
|
|
|
|
|
|
Final
household consumption |
5.5 |
2.2 |
-2.0 |
4.6 |
4.2 |
4.3 |
4.5 |
|
Final
Government Consumption |
4.1 |
4.7 |
4.8 |
4.6 |
4.4 |
4.1 |
3.9 |
|
Gross
fixed capital formation |
14 |
14.1 |
-2.2 |
-3.6 |
3.9 |
5.5 |
6.8 |
|
Gross
Domestic expenditure |
6.3 |
3.4 |
-1.7 |
4.1 |
4.2 |
4.4 |
4.6 |
|
Exports |
6.6 |
1.8 |
-19.5 |
5.3 |
6 |
6.4 |
7.3 |
|
Imports |
9 |
1.5 |
-17.4 |
10.4 |
8.5 |
7 |
7.4 |
|
Real
GDP Growth |
5.6 |
3.6 |
-1.7 |
2.7 |
3.4 |
4.1 |
4.4 |
|
GDP
inflation |
8.1 |
8.9 |
7.2 |
6.3 |
5.3 |
5.4 |
5.8 |
|
GDP at current prices (R' billion) |
2016.2 |
2274.1 |
2396 |
2615.7 |
2846.5 |
3122 |
3445.9 |
|
Head
line inflation |
6.1 |
9.9 |
7.1 |
4.3 |
4.9 |
5.2 |
5.5 |
|
Current
account balance (% of GDP) |
-7 |
-7.1 |
-4.1 |
-3.2 |
-4.2 |
-4.9 |
-5 |
Source: 2011
Budget Review, National Treasury, 2011
The disposable income will be
boosted by low interest and inflation rates which will further support the
household consumption growth. This is expected to add approximately 2.8 per
cent of the GDP growth over the MTEF period. Total investment is expected to
grow by 3.9 per cent in 2011, 5.5 per cent in 2012 and 6.8 per cent in 2013.
The inflation forecasts remains within the target range of 3-6 per cent in the
medium-term.
6 Balance
of payments
The record of transactions of
Strong capital flows to emerging
economies has a strong impact towards appreciation in their currencies, with no
exception to
7 Employment
The New Growth Path
proposes a range of initiatives for sectoral employment and building on
policies already in place. This policy aims at creating approximately 5 million
jobs over the next decade. The proposal focuses on creating approximately 250
000 jobs by 2015 in infrastructure development and housing, approximately 500
000 jobs by 2020 in agriculture and agro-processing, approximately 140 000 by
2020 in mining, approximately 350 000 in manufacturing, approximately 225 000
in Tourism, approximately 660 000 in “green”, “knowledge” and “social”
economies, approximately 100 000 in Health, education and policing, and approximately
150 000 in regional integration by 2020. This will require a greater
cooperation between the public and the private sectors.
The
Industrial Development Corporation (IDC) welcomed investment plans in further
education and training colleges. This will promote labour absorption over and
above addressing critical skills constraints. Laudable initiatives conducive to
job creation were highlighted in the Budget. These should be
complemented/supported by strong coordination across the policy-making and
regulatory segments in order to ensure their success. The IDC further indicated
that a common vision and a united front are critical in the “year of job
creation”, with all public sector players effectively playing their respective
roles in support of calls for the private sector to augment its workforce.
There should be clear sequencing and coordination of various initiatives across
all governmental entities. Small
enterprise development initiatives must be reinforced by timeous payments of
accounts by public entities.
The
PBC is of the view that measures proposed in the budget fall far short and will not
address the structural unemployment crisis the country faces. According to the
PBC, this budget will not help the country in addressing the persistent
structural weaknesses in the economy. The 2011 budget speech projects “steady
employment gains of about 2 per cent a year” and the PBC argues that this low
rate of employment will not be adequate to meet the government’s employment target
of creating approximately 5 million jobs in the following ten years.
The PBC has concerns with
the youth wage subsidies and believes that government needs more capacity to
enforce its laws. They cautioned that the youth wage subsidy
may be abused by the unscrupulous employers.. This, in return, will
undermine the government’s stated objective of creating decent work, addressing
inequalities and poverty.
7.1 Job
creation and inclusion
Out of a population of approximately
50 million, 13.1 million South Africans are employed. Only two of the five
persons of working age (41 per cent) have a job, compared with 65 per cent in
Over the medium term, government’s
capital infrastructure programme will contribute to job creation. Policy will
encourage an environment conducive to business investment and hiring. Enhanced
employment services, more focused skills development and improved further
education will support job growth. The 2011 Budget contained details on the
funding for funds two initiatives targeted at creating jobs, particularly for
young people: a job fund to support projects with high employment potential,
and a youth employment subsidy. Social security reform will ensure that income
protection and basic savings arrangements are extended to workers that are currently
excluded from formal employment arrangements.
The Association of Chartered
Certified Accountants (ACCA) and the South African Institute of Tax
Practitioners (SAIT) are of the view that government should focus on supporting
employers, as they are the ones employing the unemployed, in turn, reducing poverty
levels. They assert that government has increased its personnel database by 15
per cent over the previous four years, and that although government officials
face lower job security risks than employees in the private sector but their
remuneration packages are higher than those in the private sector. They
reported that the private sector has decreased its employees by 2,6 per cent
over the previous four years mainly due to the recent economic recession. Furthermore, they are of the view that smaller
companies spend a lot of time and resources complying with legislations such Financial
Intelligence Centre Act and the Regulation of Interpretation of Communication
Act (RICA). While the laws have good basis many are misusing it. This takes time and can be costly.
The South African Non Governmental Organisation
Coalition (SANGOCO) is pleased that job creation has been put as one of the top
priorities on government agenda. SANGOCO advises that the R9 billion for job
creation fund should be directed at large–scale job creation initiatives
because the 2011/2012 Budget is partly aimed at reducing poverty, inequality
and unemployment.
7.2 Youth
Employment
Youth is among the worst affected by
the global economic crisis. Youth unemployment has increased by 6 percent in
Organisation for Economic Cooperation and Development (OECD) countries and
stands at 19 per cent. The problem of youth unemployment in
Approximately 15 million working age
adults are 30 years of age, equal to just under half of the country’s working
age population (46 per cent), and the population is getting younger.
SANGOCO welcomes any
intervention that seeks to eradicate lack of participation of young people in
the labour market which puts them and their families into abject poverty.
The PBC argued that they have
consistently warned that unemployment, in particular youth unemployment,
constitutes the biggest threat to
The Federation of Trade Unions South
Africa (FEDUSA) proposed the following:
·
That the Government’s New Growth Path must seriously address
the huge challenge of unemployment of the youth if we wish to reach the
Millennium Development Goal of 2014, of halving unemployment and poverty;
·
That the compulsory age for education should be increased to
18, which will increase employability and skills, reduce the youth unemployment
rate and eventually assist with successful school-to-work transition; and
·
That Government should through legislation changes ensure
that those who failed to complete matric remain in the educational system by
providing them with opportunities to enrol for learnerships and apprenticeships
to make them more employable, as well as entrepreneurial skills programmes so
that they can set up their own enterprises and become self-employed.
The Congress
of Traditional Leaders of South Africa (CONTRALESA) is in support of the job
creation initiatives by government, specifically for the rural youth.
7.3
Policies for faster job creation
To achieve the higher rate of
sustainable job creation envisioned in the New Growth Path, the economy needs
to grow at a faster rate than currently experienced. Government’s contribution
to job creation operates on two levels. First, economic policies promote an
environment that is conducive to private sector growth and investment,
including appropriate regulation and microeconomic reform. Second, government
makes a direct contribution through public sector hiring and targeted job creation
programmes.
Business Unity South Africa (BUSA) is
of the view that the overall focus of the 2011 Budget on supporting higher
levels of sustained, inclusive growth, with the emphasis on the facilitation of
job creation, promoting skills development and spending on infrastructure is
appropriate. BUSA does not doubt the intention of government to deliver on
these objectives, the capacity of the state to execute the measures announced
is not only an acknowledged general concern, but an overriding cause for unease
amongst business. BUSA stands ready to assist in this regard.
7.4 Job
Fund
Government has created a R9 billion
Job Fund to support projects that has the potential to create large numbers of
jobs, particularly for youth. The fund will request job creation proposals from
the public and private sector, including non-governmental and civil society
organisations. Projects that will be supported by the fund shall be expected to
employ 50 000 to 100 000 people over the medium term.
7.5 Youth
employment incentives
Government is developing a range of
incentives to promote youth employment. These include a youth employment
subsidy which is intended to increase demand for young workers. The subsidy
will lower the relative cost of labour for business without affecting worker’s
wages. It is expected that the experience and training gained during the period
of subsidised work will improve longer term career prospects. It is estimated
that the subsidy will support 423 000 new jobs for young workers. Given that industries
would have employed a certain number of young workers without the subsidy, net
new job creation is projected to be 178 000 jobs. The subsidy will cost R5
billion over the three-year spending period.
PriceWaterhouseCoopers (PWC)
is of the view that, although the actual mechanics of this proposal remains
uncertain, the subsidy initiative to encourage employers to employ
inexperienced applicants is welcomed. Details of the mechanics of the youth
employment subsidy are awaited. Specifically, the practical and administrative
burden that will be placed on employers should not negate the incentive to
employ inexperienced young employees.
PBC
illustrated that as a result of the pricing of youth labour, it could serve as an
incentive for early exit from the education system especially in households
facing severe economic pressures.
According to the PBC, they have a
serious concern with the way in which government would be monitoring the youth
subsidy under the National Youth Development Agency (NYDA) as they feel it
currently does not have the full monitoring mechanisms. However, the PBC
welcomes the allocation of R9 billion distributed across the current government
programmes.
BUSA supports the
proposal of an employment subsidy for new workers. It believes that such a
subsidy programme could positively impact the inflexibility of wages for
unskilled workers, and so encourage their absorption into formal employment. BUSA
will encourage the implementation of the programme subject to proper
consultation, and urges its expansion, should it perform better and more
cost-effectively than other employment promotion projects, such as the Expanded
Public Works Programme (EPWP)
8. Fiscal
Policy
Economic growth is the prerequisite
for reducing poverty and improving livelihoods. By offsetting the effects of
the business cycle, countercyclical fiscal policy contributes to growth and job
creation. When the economy is doing well, the budget balance improves to build
fiscal space, limit increases in the financing and counteract inflationary
pressures.
8.1 Summary of the budget framework:
The budget responds mostly
to issues as raised by the President in his State of the Nation Address and job
creation remains the driving force of the budget. Key features of the 2011 Budget
include the following:
Government
intends to consolidate the fiscal position in line with economic growth. Over
the next three years, priority spending will continue to be financed as
government stabilizes its borrowing. To encourage and strengthen Parliament in
playing its oversight role, National Treasury has used that principle as a
basis for the current fiscal policy and also to ensure greater transparency and
enhance public accountability. As a result, National Treasury proposes that
government should:
·
Adopt an annual target for
the structural budget balance consistent with long-term growth, desired level
of public debt and inter-generational considerations;
·
Make explicit the costs of
existing and new programmes that require a long-term commitment; and
·
Set out a timeline to bring
the budget back on target following large fiscal shocks.
Government has proposed guidelines for fiscal sustainability which
include the annual target for the structural budget balance, making explicit
the costs of new and existing programmes requiring long term expenditure
commitment and setting out a timeline to bring the budget back on target
following large fiscal shocks. The FFC is of the view that fiscal rules can be
used as a mechanism for achieving these goals. However, there needs to be
careful considerations of the objectives and at what sphere of government these
will have to be applied. The FFC further pointed out that South Africa has come
a long way in operating some sort of fiscal rules that are implemented through
constitutional amendments, statutory provisions or policy guidelines and that a
variety of enforcement mechanisms exist to enforce these.
The FFC’s analysis suggests that sub-national
government’s fiscal policy has been disciplined without necessarily being
rules-based. More nuanced view of the appropriate role of fiscal rules at
national and sub-national government needs to recognize that a sophisticated intergovernmental
system is in place and look at how to improve an existing and functioning
system. Possible option for fiscal rules is to target a balanced budget or
surplus over the cycle without any limits allows for the operation of automatic
stabilisers and also for discretionary countercyclical action. In addition,
limits on the government wage bill need to be imposed. If an expenditure rule
is to be proposed, then limiting capital expenditure (which is thought to
contribute to long-run growth) which is not an option.
The FFC further highlighted that its research on
public expenditure finds some evidence that expenditure on defence, health and
transport seems to be contributing positively to economic growth in
According to the FFC, there is a need for
Parliament to obtain greater clarity on the risks to which the public sector is
exposed, which entails clarifying
potential costs of different risk factors. The political economy challenge of dealing with long-term fiscal policy
issues needs provocation of public debate. The pre-announcement of alternative
ways of financing the National Health Insurance (NHI) and guidelines for fiscal
sustainability by Government are steps in this direction. Comments about how
the proposed NHI will be funded have raised a few concerns. The FFC recommends
that Government should be required to publish analysis of the distributional
impact of new policies. A requirement to evaluate regularly the impact of
policies (where not prohibitively costly) would strengthen the framework.
PricewaterhouseCoopers (PWC) argues that taxpayers
are concerned that, in some way or another, the National Health Insurance is
simply another revenue-raiser without a corresponding improvement in health
service delivery. PwC raised a similar concern that carbon taxes implemented
last year were focused on revenue-generation, rather than behavioural changes.
Table 2 (below) is reflecting the consolidated government fiscal
framework over the MTEF period.
|
Table 2
Consolidated Government Fiscal Framework |
|||||||||
|
R' Million |
2007/08 |
2008/09 |
2009/10 |
2010/11 |
2011/12 |
2012/13 |
2013/14 |
||
|
Outcomes |
Revised estimates |
Medium-Term
Estimates |
|||||||
|
Revenue |
626 705 |
682 997 |
664 840 |
755 023 |
824 466 |
908 714 |
1017187 |
||
|
Percentage of GDP |
30.1% |
29.5% |
27.2% |
28.3% |
28.3% |
28.4% |
28.8% |
||
|
Expenditure |
591 522 |
710 523 |
825 917 |
897 376 |
979 265 |
1061 582 |
1151773 |
||
|
Percentage of GDP |
28.5% |
30.7 |
33.8% |
33.6% |
33.6% |
33.2% |
33.2% |
||
|
Budget balance |
35 183 |
-27 526 |
-161076 |
-142 353 |
-154799 |
-152 868 |
-134586 |
||
|
Percentage of GDP |
1.7% |
-1.2% |
-6.6% |
-5.3% |
-5.3% |
-4.8% |
-3.8% |
||
|
Gross Domestic
Product |
2078822 |
2312 965 |
2442593 |
2 666 894 |
2914862 |
3201 299 |
3536002 |
||
Source: Budget Review, National Treasury, 2011
Table 3 (above)
shows that revenue as a percentage of GDP has been declining in the recent
years until 2009 when there was global financial crisis and suggests a slightly
increase in the next three years of approximately 0.2 per cent at average. The
budget balance projects a deficit of about 5.3 per cent in the 2011/12, 4.8 per
cent in the 2012/13 financial year and 3.8 per cent in the 2013/14 financial
year, which has been adjusted from the announced figures during the MTBPS which
were deficits of 4.6 per cent in the 2011/12 financial year, 3.9 per cent in the
2012/13 financial year and 3.2 per cent in the 2013/14 financial year.
8.2 Revenue
The Industrial
Development Corporation (IDC) highlighted that the world is experiencing an
environment characterised by rapidly rising commodity prices for a variety of
reasons. Demand pressure is being felt almost across the board. This is largely
emanating from rapidly growing emerging markets, as well as recovering advanced
economies. On the supply side, adverse developments such as the effect of the
crisis in the
Tax revenue, which accounts for most
revenue available to government, has become more sensitive to change in the
economic cycle since the tax base was restructured in the early 1990s. As a
result, tax revenue tends to accelerate when the economy is underperforming. If
revenue does not cover expenditure, borrowing is a short term solution, but
higher government expenditure as a share of GDP ultimately requires a growing
tax base or higher tax rates. At the height of the recession in the 2009/10
financial year, revenue underperformed expectations by R60.6 billion. Over the
medium term, tax revenue is expected to cover as the economy grows and the tax
base broadens.
Non-tax revenue, made up of
departmental revenue and mineral royalties, remains about 0.4 per cent of GDP
over the forecast period. Changes in interest income and dividend payments
account for revisions to departmental revenue estimates since February 2010.
Revenue from mineral royalties is expected to be higher than projected a year
ago given high commodity prices. Payments to
BUSA is of
the view that tax policy should be used to stimulate investment in the South
African economy. This approach will ensure that there is higher growth in the
long run, and can be useful in assisting government to generate higher
revenues, by broadening the tax base.
The excessive use of additional taxes and special levies as revenue
generating instruments can be counter-productive, as it invariably reduces
8.3
Expenditure
The fiscal framework adds R20.7
billion to expenditure in the 2011/12 financial year, R29.6 billion in the 2012/13
financial year and R43.8 billion in the 2013/14 financial year, resulting in
average real growth of 2.8 per cent in government non-interest spending over
the next three years. These additions to baseline include:
For the past two years, government
has worked to improve the efficiency of public expenditure. Total savings of
R30.6 billion have been identified over the medium term expenditure framework
(MTEF) period and allocated to priority expenditure.
The
South African government expenditure falls into two broad categories: capital
spending and consumption spending (including wages, goods and services, and interest
payments). Expenditure needs to be balanced appropriately to promote effective
public-service delivery, and to ensure that spending contributes to economic
growth without fuelling inflation.
The
2010 public-sector wage negotiations resulted in a 7.5 per cent wage increase,
which was 3.4 percentage points higher than the expected inflation rate. This
required an extra allocation of R6.5 billion to cover compensation of employees
in the 2010/11 financial year.
During
the recession, government borrowing increased and, as a result of the higher
debt burden, interest costs are projected to be the fastest-growing area of
expenditure over the medium term. As debt costs consume a rising share of expenditure
over the next three years, government should ensure that it can maintain
expenditure on social and economic priorities. A higher wage bill, in
conjunction with a rising interest bill, can reduce spending on maintenance,
capital investment, and public-service employment growth. To cover wage
increases and the additional employment, the proposed fiscal framework makes
provision for 6.6 per cent average annual growth in compensation. Over this
period, consumer price inflation is projected to average 5.2 per cent.
Over
the medium term, real growth in government transfers to households is projected
to average 3.2 per cent. Approximately 15 million people depend on some form of
government grant, and for many households social security payments are the only
regular source of income.
Since
the 2002/03 financial year, consolidated government spending on capital has increased
from 5.2 per cent of consolidated government expenditure to 6.7 per cent in
2010/11. Over the next three years, the rate of capital expenditure will slow
moderately as higher interest costs, wage pressures and growth in social grants
claim a greater share of expenditure.
The PBC is of the opinion
that the public service salary bill has doubled over the past five years as a
result of a combination of various factors such as wage increases, the growth
of the public service personnel, severance packages, the establishment of a
number of new ministries and departments. It is important to indicate that this
“doubling” of the public service wage bill does not factor in the rising costs
of living or inflation, especially for workers in the lower salary levels. A
significant share of this public wage bill disproportionately goes to the
management level of the public service.
8.4 The
fiscal deficit
The fiscal framework supports a
reduction of debt over time, which will reduce interest repayments and create
fiscal space. Government borrowing to fund capital expenditure, such as the
Gautrain, increases the overall wealth of the economy. Conversely, borrowing to
finance consumption creates debt obligation that must be paid off long after
the funds have been spent.
The 2010 budget projected debt stock
would stabilise at about 44 per cent of GDP in the 2015/16 financial year. As a
result of improved economic growth, debt stock is now expected to stabilise at
about 40 per cent of GDP in the 2015/16 financial year. Any deterioration in
the growth outlook, interest rates or the budget balance will prolong the
fiscal recovery.
BUSA welcomes the
specific attention paid by National Treasury to the necessity of eliminating
the primary deficit (deficit after deducting interest payments) as soon as
possible. Currently, the primary deficit is projected to be turned into a
surplus only after the 2013/14 financial year. This means that government
borrowing is currently at levels that tend to reduce, rather than promote the
supply of capital. BUSA would support sensible efforts to return to a primary
surplus position sooner.
The
Committee repeats its concerns expressed in last year’s report about state debt
levels, with net government debt projected to reach R1.2 trillion or 39.3 per
cent of GDP. Debt service costs will amount to R77 billion in the 2012/13
financial year, rising to R104 billion in the 2013/14 financial year. The existing
size of the budget deficit results in debt service costs rising faster than any
other category of spending over the period ahead.
Notwithstanding
previous concerns, the Committee note that the budget deficit is 0.7 per cent
more than forecast in October 2010, and this trend continues over the medium
term.
The Committee welcomes National
Treasury’s steps to reinforce long term sustainability of the public finances
and looks forward to considering the Minister’s fiscal guidelines, informed by
the following trade principals:
9 Revenue trends and tax proposal
One of the
most salient sources of income for government is tax revenues and government
depends on this to provide for basic services and ensure maximum welfare of its
citizenry. For the 2011 financial year, government has recognised that the
medium to long term spending priorities require adjustment to tax and
expenditure framework, and it acknowledge that budget tax proposals are
intended to broaden the tax base in support of inclusive growth.
9.1 The main tax proposal for the 2011 financial year
The tax
proposals for the 2011 financial year are as follows:
Other proposals
made regarding tax include, environmental taxation (proposals on tax on carbon
emissions are under way), electricity levy (the proposed increase will have no
impact on electricity tariffs because it has already been taken into account in
the National Energy Regulator tariff structure), and turnover tax for micro
businesses (adjusted to encourage participation).
Most
commentators considered the 2011 tax proposals to be relatively neutral from a
Taxpayer’s
and tax practitioner’s perspective. On balance, the combined effect of the
proposals does not appear to be unduly harsh or significantly generous. The
2011 tax proposals therefore appear to be well-balanced.
For individuals, the
2011 Budget makes provision for personal income tax relief, namely: the
conversion of monthly deductible contributions to tax credits, the treatment of
employee contribution to retirement funds as fringe benefits and a withholding
tax on gambling winnings somewhat lower transfer duties and capital gains
tax. FEDUSA welcomes the personal income
tax relief to compensate for fiscal drag as well as the increase in the monthly
monetary threshold for tax-deductible contributions to medical schemes.
FEDUSA also welcomes the
increase in the transfer duty exemption threshold as well as the increase in
the capital gains tax exclusion amounts. The conversion of the deductions and
out-of-pockets medical expenses into tax credits will favour the lower income
groups and imply somewhat higher tax of taxpayers in the higher income
categories. According to FEDUSA, the shift could however be defended as it is
more equitable.
FEDUSA believes that the Minister
should engage with trade unions and social partners on the proposed retirement
provisions as it has far–reaching effects on retirement reforms. The reforms
proposed as from 01 March 2012 needs to be subjected to a robust process of
consultation with stakeholders as it has far–reaching implications on the
working life and savings of individuals making provision for retirement. ACCA and SAIT are of the opinion that tax
laws should be simplified.
The South African Institute
of Chartered Accountants (SAICA) welcomes the Minister’s R8.1 billion in tax
cuts to individuals which will partially assist consumers for the current
inflationary pressure, including increased rates and taxes, electricity costs
etc. PWC considers the 2011 tax proposals to be
relatively neutral from a taxpayer and tax practitioner perspective. On
balance, the combined effect of the proposals does not appear to be unduly
harsh or significantly generous. The tax proposals appear to be well-balanced. PWC
commends the National Treasury Tax Policy team, as highly complex concepts are
constantly addressed under stressful time pressure.
BUSA’s view
is that tax policy should be used to stimulate investment in the South African
economy. This approach will ensure that there is higher growth in the long run,
and can so be useful in assisting government to generate higher revenues, by
broadening the tax base. The excessive
use of additional taxes and special levies as revenue generating instruments
can be counter-productive, as it invariably reduces
PBC
argues that,
whilst total tax revenue increased for the 2010/11 financial year, this has
been disproportionately achieved primarily through the reliance on personal
income tax and VAT with corporate income tax revenue performing lower than
originally projected. PBC would have preferred for the budget to disclose a
more redistributory tax model that would not only have expanded the range of
zero VAT rated goods, but would have introduced a progressive tax system that
would target the wealthy, higher income earners as well as taxes on luxury
goods especially those that are imported.
ACCA and SAIT are of the view that
paying taxes is not all that firms do, there are other compliance costs such as
paying for accounting, bookkeeping etc. While these are needed,
9.2 Revenue estimates for 2011/12
The total
tax revenue before tax proposal is expected to increase by 10.9 per cent, which
will result to R745.7 billion in line with improved economic growth, while
budget revenue will increase by 9.7 per cent result to R828.6 billion. The
budget revenue after tax proposals for the 2011/12 financial year is expected
to be R824.5 billion, which is a decrease of 0.5 per cent before tax proposals.
Government
has indicated that, without any tax changes, tax revenue as a percentage of GDP
is expected to increase from R755 billion, which is 25.2 per cent, in the 2010/11
financial year to R1.0178 trillion, which is 26.2 per cent in the 2013/14
financial year.
9.3 Savings
In order to
encourage saving, government will increase the tax-free interest-income annual
threshold from R22 300 for individuals below 65 years, and from R32 000 to R33
000 for individuals 65 years and over. The foreign income threshold will remain
at R3 700.
The
committee, and most of the stakeholders, are of the view that National Treasury
is sending mixed feelings on the issue of savings for our people.
10 Conclusion
and Recommendations
Having considered the 2011 Fiscal
Framework and Revenue Proposals and conducted public hearings on the 2011
Fiscal Framework and Revenue Proposals, the Select Committee on Finance
recommends that the House accepts
the 2011 Fiscal Framework and Revenue Proposals.
The Committee further recommends as
follows:
10.1 That National Treasury should
analyse the set performance indicators progress that has been made before funds
are allocated;
10.2 That National Treasury should
ensure that before funds are allocated to Development Finance Institutions and
the youth development subsidy, a measurable programme with a defined monitoring
and evaluation tool is developed by relevant stakeholders;
10.3 That revitalisation of FET
colleges (mainly infrastructure and curricula) should be prioritised by the
Department of Higher Education and Training as this will help to improve skills
development;
10.4 That Government should
coordinate the growth path and the social security network system in order to
reduce the number of people on the social grants;
10.5 That the information system on
the government database should have a clear indication of how many jobs have
been created and how many people have exited the social grant dependency. This
should be done through the Department of Social Development;
10.6 That the tax regime and
incentive scheme should not only be targeting the older generation, but should
also provide an environment that will encourage the youth to start saving;
10.7 That the provincial (public) wage
bill should be made service orientated and National Treasury should monitor
spending on wages. Proper research should be done on the size of the wage bill
compared to the number of employees;
10.8 That the
government and its provinces should concentrate on filling service delivery
posts, and not only filling posts for the sake of it; and.
10.9 That National Treasury should
present a programme that will instil a culture of saving and investment in
11 Oral
Submissions
Table (below) contains a list of
people who made oral and/or written submissions before the Committees, some in
their personal capacity.
List of
Verbal Inputs
|
Name |
Position |
Organisation |
|
Mr. Pravin J. Gordhan |
Minister of Finance |
National Treasury |
|
Mr. Lesetja Kganyago |
Director-General |
National Treasury |
|
Ms. Gretchen Humphries |
Deputy General Secretary |
FEDUSA |
|
Mr. Coenraad Bezuidenhout |
Business Parliamentary Officer |
Business Parliamentary Office |
|
Mr. Zwelenzima Vavi |
Secretary General |
People’s Budget Coalition |
|
Mr. Woody Aroun |
Parliamentary Officer |
NUMSA |
|
Mr. Keith Vermeulen |
Director: Parliamentary Office |
SACC |
|
Mr. Bongani Khumalo |
Acting Chairperson |
FFC |
|
Prof. Osman Mollagee |
Director: Tax Technical and
Training |
PriceWaterHouseCoopers |
|
Mr Nicolaas Van Wyk |
Technical Support Executive |
ACCA |
|
Mr Stiaan Klue |
Chief Executive |
SAIT |
|
Mr Muneer Hassan |
Project Director: Tax |
SAICA |
|
Mr Mike Schussler |
Economist |
SAIT & ACCA |
|
Mr Abdul Patel |
Managing Director |
Ethicore |
|
Mr L Mondi |
Chief Economist |
IDC |
|
Mr Jimmy Gotyana |
National President |
SANGOCO |
|
Mr Zolani Mkiva |
Head of Presidency: CONTRALESA |
CONTRALESA |
|
Prince Ntuthuko Khuzwayo |
Deputy President: CONTRALESA |
CONTRALESA |
The written submissions by some of
the above-mentioned organisations/people are available on request from the
Committee Secretariat.
12
References
Association of Chartered
Certified Accountants & South African Institute of Tax Practitioners,
(2011), 2011 Budget Speech,
Financial and Fiscal Commission,
(2011), Financial and Fiscal Commission
briefing to the Standing and Select Committees on Finance on the Fiscal
Framework and Revenue Proposals, Cape Town, Parliament of RSA, dated 01
March 2011.
Gordhan, P. (2011), National Annual Budget 2011’s Speech,
Parliament of RSA,
Humphries, G., (2011), FEDUSA 2010 Budget submission to the Joint
Portfolio Committee on Finance, Cape Town, Parliament of RSA, dated 02
March 2011.
National Treasury, (2010), Medium Term Budget Policy Statement,
NUMSA, (2011), NUMSA Response to the 2011/12 Budget,
Peoples Budget Coalition, (2011), Peoples Budget Coalition statement on the
National Budget speech,
Price Water House Coopers, (2011),
Hills to Climb Budget 2011,
South African Institute of Chartered
Accountants, (2011), Call for Comment: 2011 Tax Related Budget Proposals,
South African Council of Churches,
(2011), SACC Submission in Support of PBC,
Ethicore, (2011), Public Hearings on
the 2011 Budget,
Sangoco, (2011), Sangoco’s Position
of Fiscal Framework and Revenue Proposals Concerning 2011 Budget, Cape Town,
Parliament of RSA, 01 March 2011
Industrial Development Corporation,
(2011), The 2011 Budget: IDC Viewpoint,
Zuma, G.J. (2011), State-of-the-Nation address 2011’s speech,
available online at: www.thepresidency.gov.za,
dated 09 February 2011.
Report to be considered.