Report of the Portfolio Committee on Finance on the Appropriation Bill [B 8 - 2003] (National Assembly - sec 77), dated 14 March 2003:

The Portfolio Committee on Finance, having considered the Appropriation Bill [B 8 - 2003] (National Assembly - sec 77), referred to it and classified by the Joint Tagging Mechanism as a Money Bill, reports as follows:

The Portfolio Committee on Finance and the Joint Budget Committee together held hearings on the 2003/04 Budget between 27 February 2003 and 6 March 2003. The Committees wishes to express appreciation to all participants for their contributions. Written presentations submitted form part of the records of the Committee Section. The Committee would also like to express its appreciation to the Minister of Finance, the Deputy Minister of Finance, the Director-General of Finance, the Commissioner of the South African Revenue Service, the Chairperson of the Financial and Fiscal Commission and their staff for their presence and contributions during the hearings. A list containing the names of all those who made oral submissions is included in part D of this Report.

The 2003/04 Budget was presented in the context of South Africa's relative economic resilience and growth in the face of global slowdown and uncertainty. The expansionary fiscal policy stance begun in 2001 is continued. In line with the 2002/03 Budget, the 2003/04 Budget offers considerable personal income tax relief to lower and middle income groups, and shows strong growth in expenditure which focuses on the themes set out in the Medium Term Budget Policy Statement (MTBPS). Continuing on from last year's Budget, the focus areas of this Budget include poverty reduction, increased infrastructure investment, broadening the social security net, strengthening access to health and education while focusing on the quality of service delivery and the expansion of municipal and provincial services. Real non-interest expenditure growth of 4,5 per cent is expected over the MTEF.


 (a) International context and forecast
Internationally, global economic conditions are unfavourable, with falling stock markets, weak consumer and business confidence, and sluggish output and activity indicators.

 Despite this global slowdown, and hardship within Southern Africa due to drought, shortfalls in regional grain production and rising food prices, South Africa's economy is growing steadily. Growth and development is expected to gather momentum in the years ahead due to initiatives to encourage investment, raise skills levels and reduce constraints on business formation. Further gradual liberalisation of exchange control is proposed to support the further integration of South Africa with the global economy.

 (b) GDP Growth
South Africa's growth proved resilient in 2002, increasing to 3 per cent. Projected growth for 2003 is 3,3 per cent, rising to 4 per cent by 2005. A number of factors underpin Treasury's optimism: strong consumer demand and investment spending (investment grew by 6,6 per cent in 2002 and is expected to continue to grow around 6 per cent a year over the medium term); declining household debt; formal sector employment is turning around; the current account balance is healthy; and inflation is expected to decline in 2003 and 2004.

(c) Interest rates
Following the sharp depreciation of the currency, rising food prices and the increase in money demand in the early part of 2002, the Reserve Bank increased interest rates by 400 basis points in the first nine months of last year in an effort to stem second round inflationary pressures. This has assisted in moderating the inflation trend.

(d) Inflation
Inflation increased sharply in 2002, with CPIX inflation peaking at 12,7 per cent in November 2002, with headline CPI inflation rising to 14,5 per cent in the same month. Towards the end of 2001 the depreciation of the Rand put upward pressure on inflation. Consumer price inflation as measured by CPIX averaged 10 per cent in 2002 and peaked at 12,7 per cent for the year to November. Much of the increase was due to rising food prices, housing and medical costs.

Following the Rand's subsequent recovery, CPIX inflation started to decline, and is set to fall within the target range in 2004. The Treasury remains committed to inflation targeting and stated that the inflation target of 3 to 6 per cent will be retained for 2005.

(e) Output and investment trends
Investment growth was strong across the economy in 2002, increasing by 6,3 per cent. Treasury believes it is set to grow by around 6 per cent over the medium term, buoyed by robust public infrastructure spending, several major mining projects and diversified manufacturing growth.

Net foreign direct investment reached R12,8 billion in the first three quarters of 2002. Gradual liberalisation of exchange controls continues this year, supporting global expansion by South African companies and unwinding of blocked assets.

(f) The Balance of Payments and the Current Account
The balance of payments remains healthy. A surplus on the current account of the balance of payments was recorded in 2002, despite sluggish global demand for South Africa's exports. Manufactured exports continued to grow strongly, tourism is booming and trade performance is expected to benefit from the global recovery. With strong investment growth and increased import demand, it is expected that the current account will move into a moderate deficit of 0,5 per cent of GDP in 2003.

The latest data indicates net capital inflows of R21,4 billion for the year to September.

(g) The Net Open Forward Position
Treasury has made significant progress in reducing the net open forward position (NOFP) from US$4,8 billion at the end of December 2001 to US$1,5 billion at the end of January 2003.

(h) Employment and productivity
Formal sector employment increased in 2002 for the first time since 1996, and labour productivity continues to improve steadily, increasing the competitiveness of the economy and helping to stabilise prices. Treasury announced that black economic empowerment must take priority over the next decade. Alongside sectoral initiatives to deepen participation in the ownership and management of South African companies, government will support the funding of new ventures and business expansions that meet agreed empowerment criteria.

(i) Accountability for service delivery
Treasury hopes that the Estimates of National Expenditure, together with the publication of the 2003 Intergovernmental Fiscal Review in April, will provide all 10 legislatures with comprehensive and quantifiable information to exercise their oversight responsibilities.


(a) Fiscal policy trends and targets
Beginning with the 2001 Budget, a more expansionary stance was enabled by the earlier period of consolidation. Strong real spending growth is now projected within a sustainable fiscal framework, with social spending and infrastructure investment increasing strongly. At the same time, tax relief again benefits lower income households and encourages targeted industrial investment. Over the next three years, a budget deficit of between 2 and 2,5 per cent is accommodated within a sustainable framework and a declining debt-GDP ratio, after an estimated 1,4 per cent in the current year.

General government capital formation is targeted to grow by at least 5 per cent a year, while government consumption expenditure will stabilise at about 19 per cent of GDP. General government tax revenue will remain at between 27 and 28 per cent of GDP, and interest on public debt is expected to decline from 4,9 per cent of GDP in 2002 to 4,2 per cent in 2005. A public sector borrowing requirement of 2,6 per cent of GDP is projected.

(b) Revised budget framework
The main budget provides for expenditure of R334 billion in 2003/04, rising to R395,6 billion in 2005/06. Revenue increases from R304,5 billion to R361,2 billion over the same period. Higher GDP growth and inflation contribute to substantial upward revisions in revenue estimates for 2002/03 and the following three years. Main budget revenue is expected to be 26,6 per cent of GDP in the budget year, and to remain at that level over the next three years, which again allows for substantial tax relief in 2003/04.

The budget deficit for 2002/03 is expected to be 1,4 per cent of GDP, mainly due to robust revenue growth. Expansion in spending planned for the MTEF period will however raise the deficit to a projected 2,4 per cent of GDP in 2003/04.

Debt service costs, however, are expected to fall from 4,2 per cent of GDP in 2002/03 to 3,8 per cent by 2005/06. National government debt will decline to a projected 36,8 per cent by the end of the MTEF period, in contrast to its level of 48,1 per cent of GDP at the end of 1997/98.

(c) Fiscal policy as tool for growth and development

This budget framework reinforces growth and development partly through strong expenditure growth and tax relief, but also through the emphasis on investment and transfers to households.

The Minister emphasised that growth in spending has to be accompanied by improved management and service delivery at all levels, with measurable objectives in the Estimates of National Expenditure aimed at improving accountability and oversight. Additional allocations signal a marked shift in favour of provinces and local government, whose role in driving successful development is recognised.


Revenue collections remain buoyant, reflecting both improvements in administration and longer term benefits of tax policy reforms. This provides scope for further tax relief, increased incentives for domestic investment and savings, and tax reforms designed to stimulate business growth and development. All of these trends are in line with this budget's expansionary stance concentrating on employment and enhanced economic development.

(a) 2003/04 tax relief proposals

(i) Direct tax measures affecting individuals

* The tax threshold is raised by 11,1 per cent to R30 000, so those earning less than this amount will not pay personal income tax next year. Income tax brackets have been adjusted across the income spectrum to provide relief for all income earners and to compensate for bracket creep.

* Interest income exemption is raised from R6 000 to R10 000 for individuals below 65 years, and from R10 000 to 15 000 for individuals 65 years and older.

* The transfer duty threshold is increased from R100 000 to R140 000, reducing the cost of buying property at the lower end of the market.

* The tax on retirement funds is reduced from 25 per cent to 18 per cent once again. However, tax treatment of retirement vehicles is under comprehensive review, with legislative changes expected in 2004.

(ii) Business tax stimulus measures

* Accelerated depreciation for investment in designated urban areas.

* Conversion of the accelerated depreciation window period for manufacturing assets into a permanent feature.

 * Comprehensive business asset reinvestment relief.

 * Losses on sale of depreciable business assets.

* Accelerated depreciation for research and development.

 * Accelerated depreciation for biodiesel plant and machinery.

Small businesses are given tax relief and incentives in the form of lower tax rates, an increased turnover limit and extra deductions on start-up expenses. Tax rules will be clarified in the case of start-up expenses.

 The tax on foreign dividends is removed where a South African taxpayer has a meaningful interest in the foreign subsidiary paying the dividend. A number of collateral changes accompany this.

The list of public benefit organisations eligible for tax-deductible donations is expanded, and government grants are exempted from income tax.

(b) Indirect taxes

Excise duties on alcohol and tobacco products see a general increase on all alcoholic beverages of between 10 and 11 per cent. Sorghum beer and sorghum flour are the only exceptions; these products will see no change in excise duty. Taxes on tobacco products will also rise from 11 per cent (cigarettes and pipe tobacco) to 39 per cent (cigars).

The fuel levy increases an average of some 4 cents per litre.

Other excises and charges: Ad valorem excise duty on computers is abolished, and duties on lower cost motor vehicles are adjusted for inflation. A levy on plastic bags will be introduced and some of the revenues collected will be earmarked for the recycling of plastic bags. Air passenger departure tax will be adjusted by 10 per cent.

(c) Foreign exchange amnesty
Government has moved to introduce a tax and foreign exchange amnesty in order to facilitate repatriation of assets illegally moved offshore. Government's view is that individuals with illegally held offshore assets increasingly want to repatriate these assets, both because domestic and international enforcement targeting illicit funds has increased, and because of disappointing yields of foreign markets.

The amnesty will run for six months. A 5 per cent Exchange Control one-time levy will be enforced for the repatriation of any foreign assets, and a 10 per cent Exchange Control one-time levy will be enforced to the extent that any foreign assets remain offshore. All individuals filing for amnesty relief are released from all civil penalties and criminal liabilities, except those currently under investigation, who may not file.

(d) Measures to enhance tax administration
Tax administration is being enhanced by reforming collection mechanisms, increasing the penalties for non-compliance and introducing an advance rulings process. Reforming collection mechanisms include outsourcing undisputed tax debts to private collection agencies and making those responsible for collecting VAT directly liable for failure to pay.


(a) Debt management strategy
Since 1999, debt management's primary aim has been to reduce debt costs within risk limits. The debt consolidation programme is now complete, and total nominal value of outstanding illiquid government bonds is now some R2 billion, down from R50 billion three years ago.

Government has steadily increased the share of foreign debt in the overall debt portfolio. The proceeds of these issues have contributed to reducing the net open forward position (NOFP) held by the Reserve Bank from US$23,3 billion in 1998 to US$1,5 billion at the end of January 2003.

South African debt has performed well on international and local markets.

(b) Borrowing requirements, debt costs and total debt trends
In addition to financing the budget deficit, the budget provides for extraordinary payments of R28 billion between 2002/03 and 2005/06 to compensate for forward cover losses.

R10,2 billion is expected to be paid into the fiscus in 2003/04 from Transnet's disposal of its M-Cell interest, sale of Telkom shares, and restructuring dividends from the Central Energy Fund.

(c) Contingent liability
Contingent liability is provided for, to deal with unexpected eventualities such as natural and human disasters, and to provide stability to the financial sector.

In 2002/03 a total of R10,5 billion in guarantees were provided. The Saambou liquidation includes an outstanding claim against the State for R4 billion.

(d) Public enterprise restructuring and corporate governance
The Telkom listing in March 2003 is viewed as broadening equity participation in the SA economy, while a 20 per cent stake in M-Cell has been bought by its management and staff.

Forthcoming projects include concessioning of the Durban port container terminal; sale of 30 per cent of Denel to British Aerospace; sale of 30 per cent of Eskom's generation business; transformation of electricity distribution under management of an Electricity Distribution Holding Company; sale of 51% of Western Cape Safcol forests; and completion of sale of Aventura resorts.

Cabinet has approved a revised Protocol on Corporate Governance for public entities.


(a) Policy priorities and the MTEF
Priorities include deepening infrastructure expenditure by all levels of government; with increased emphasis on investing in skills; public-private partnerships; targeting poverty through extending the child support grant, skills investment, access to education and health, land redistribution and small business development. Provision for increased local government funding, utilities user support and capacity building initiatives stress local upliftment, while strengthening of the social protection services (police, justice and prisons), increased foreign representation, peace-keeping activities and support for NEPAD are envisaged.

Additions to the MTEF spending plans include:

* R11,0 billion more for extension of the child support grant to children up to 14 by 2005/06, and primary school nutrition.

* R38 billion more for hospital and road improvement, medicines and school books, as well as increased pay for health care and welfare workers.

* R6,5 billion more to extend free basic services, municipal infrastructure and community services.

* Significant additions for courts and police, higher education and further skills development, and land restitution and land reform.

* Increased support for services to citizens, SARS, research and technology development.

* More for a growing international role, peace-keeping and NEPAD.

(b) Consolidated expenditure by function

Social services account for 58,3 per cent of spending, and will grow rapidly in the years ahead, mainly because of the extension of child support. Growth in the criminal justice sector is mainly service-orientated.

(a) Provincial grants and spending trends
The division of revenue in the 2003 Budget shows strong increases at provincial and local level, reflecting their responsibilities for delivery.

The provincial share of nationally raised revenue is projected to rise from 56 per cent in 2002/03 to 57,6 per cent in 2005/6. The provincial equitable share is increased to improve education and health materials as well as personnel pay, social assistance grants, road construction and maintenance and economic development services.

(b) Local government
The financing framework for local government is under review, with both revenue and spending issues under scrutiny. A new division of powers and functions between local and district municipalities will be part of a transformation of municipal finances this year.


National budget transfers to municipalities will increase by 18,4 per cent over the MTEF period. Free basic electricity, water and sanitation services for poor households are an important factor in this. Infrastructure grants to municipalities and district management areas are a key instrument in urban renewal and rural development, and their rationalisation is proposed.

Poverty alleviation:
The Committee approved of the measures taken in the Budget to alleviate poverty, as they felt that this would support economic stability and raise standards of living. The question of how to ensure that the vision of policy makers is shared by policy implementers was posed. The Minister replied that standards of delivery would be improved by holding management accountable, and emphasised that local-level accountability was important. National office bearers should not be involved in implementing policy on a local level.

Privatisation: In reply to a committee enquiry about the drop in projected returns from privatisation, the Minister pointed out that the current situation was quite different from the heady period when privatisation was first mooted. This is not a uniquely South African problem: there have been worldwide shifts in both market sentiment and business thinking, which are reflected in the modest anticipated proceeds. Further, headlong privatisation can create additional problems, as this is not an easy time for privatising large industries.

Growth and skills: Asked about the limits placed on tertiary sector growth by skills shortages, the Minister said that the tertiary sector is indeed the main growth sector and will remain so. It will run into absorption ceilings because of the skills supply constraint. In this budget, the skills development fund is up to R3,5 billion from R3,3 billion, but there is little suggesting that SETAS focus on output. They have few measurable objectives for training, and it is wrong that SETAS' required outputs are as vague as at present.

Consumer activism: In relation to the food price monitoring programme, the Minister raised the issue of consumer activism, which is still weak in SA. Media comparisons of prices are useful. Government is not looking at price controls, but will closely scrutinise retailers' behaviour.

TRC Reparations: Asked why there was no provision for TRC reparations in this budget, the Minister pointed out that in the 2001/02 Budget, R800 million was allocated to the Department of Justice for reparations. Now that the litigation threat has passed, discussion can go forward with the Department of Justice, since the R800 million is still available, plus interest.

Black Economic Empowerment: Asked how BEE would be delivered, the Minister responded that BEE was not a budgetary issue, but part of the economic plan. The details are being worked on, and within three weeks the DTI should announce these. The Minister said that the National Empowerment Fund must be revamped with substantially amended legislation and Treasury representatives on the board, to be used as a vehicle for BEE, quite different than hitherto.

He added that he was not saying that the R10 billion allocated for BEE would be financed via the foreign exchange amnesty, but that it would be good if the levy from the amnesty facilitates expansion of the economy. It cannot be the only source, as the amnesty lasts six months, and BEE is planned for at least the next five years.


Management and delivery: The Committee was concerned that the value-for-money and performance measures mentioned in the Budget would not be realised. When questioned as to how this would be done, the Minister said that greater emphasis would be placed on management training, specifically management in the accounting for and planning of expenditures. If management were trained and skilled, they would be better able to implement public programmes.

Three economists made submissions to the Committee, focusing on the macroeconomic implications of the Budget. All strongly endorsed the Budget and the expansionary policies it embodied, and stressed that there was higher private sector confidence in government's will to deliver on policy than ever before.

(a) Sandra Gordon: Independent economist
Ms Gordon noted that this is the boldest pro-growth Budget to date, and called for still more stimulatory measures aimed at domestic demand, as the export-led growth strategy comes under pressure in the present global context. She sees an increased role for the State.

Local growth is set to slow in 2003, due to the effects of high inflation and high interest rates, and domestic demand has declined. Although the tax cuts tabled in the 2003 Budget have addressed this to some extent, further oil price increases are likely to act as a tax on consumers and negate some of the benefits of tax relief.

Additional factors slowing growth in 2003:
* Export-led growth, so successful during 2002, is beginning to falter, due in part to the stronger Rand.

* The global economic slowdown is also cutting into export performance, with war fears and uncertainty, and consequent higher fuel prices exacerbating this.

* In the medium term, US economic recovery will see a lower growth norm of around 2 to 2,5 per cent; it will cease to be the global growth engine.

* Positive pro-growth government policies include:

- Inflation targeting, if wage and price increases can be kept within target levels.

- Tax relief, which reinforces stability, with consumer spending less volatile, and household debt dropping to its lowest since 1991.

She noted that there is a tendency by government to underestimate revenue, which affects GDP deficit projections and results ultimately in a less stimulatory Budget. Government should develop additional methods to manage inflation, supplementing the Reserve Bank's interest rate interventions.

During the period of jobless growth in the 1990s, South Africa experienced a steady shedding of employment. There needed to be a strong focus on the capacity to deliver on expenditure.

Economic reforms in the 1990s have created a much more resilient economy. However, they also saw the steady shedding of employment. She acknowledged the success of policies in generating growth, and setting the stage for further growth, but stressed global trends suggest a shift of focus to fostering domestic demand. There is scope for an increased role for government. New stimulatory measures, notably capital expenditure, should be accelerated as capacity for delivery improves.

(b) Prof Charles C Okeahalam, Chair of Minerva Group and Professor at WITS
Prof Okeahalam's view was that the crux of this Budget was the decline in sovereign debt and debt service costs, which have brought down the overall cost of capital.

In general he reviewed the Budget positively, areas for concern to be:

* The household savings structure.

* Uncertainty about the long-term effects of HIV/AIDS.

* The ability of the supply-side to deliver.

The last was his major concern: he felt that policies to stimulate the private sector must not be expected to solve the problems of unemployment and poverty. However, he noted increased spending on infrastructure, with government capital expenditure projected to increase to 23,3 per cent over the 2003/04 period, and the increased focus on service delivery. However, he felt that there had been insufficient attention to HIV/AIDS and competition issues.

(c) Dr Iraj Abedian, Director and Group Economist, Standard Bank
Dr Abedian's overview was strongly positive, seeing this Budget as a leap forward in normalising macroeconomic conditions. He pointed to three major developments:

* The rising level of general confidence, in particular of the business sector in government.

* The nature of the global economy in which the Budget is presented. For the first time in four decades South Africa's growth rate of 3 per cent is above the global average of 2,5 per cent.

* Budget 2003 is a leap forward in normalising macroeconomic conditions. He pointed to the fact that disposable incomes have been rising since 1994.

The increasing resilience of South Africa's economy stands on four pillars:

* Reinforced by structural changes, South Africa's economic efficiency is rising. South Africa's economy is no longer dominated by the primary sector. In combination, the secondary and tertiary sectors' share of GDP is close to 90 per cent, with the tertiary sector dominant at 66 per cent of GDP. These structural changes have transformed the economy.

* South Africa's export diversification is paying off. In the World Economic Forum's competitiveness rankings, South Africa is in now 32nd out of 84 industrial and emerging economies.

* Macroeconomic stability and solid fiscal conditions afford predictability, with steady real GDP and rising fixed investment, and inflation trends declining.

* Deepening democracy and social stability also strengthen confidence.

Dr Abedian stressed that in the now dominant tertiary sector, confidence was far more important than in other sectors. Availability of skills is also a key limiting factor. He was also critical of SETAs as being poorly designed and failing to deliver. Although continued privatisation was important to maintain political credibility, he said, the government should pay more attention to ensuring that better competition policy and regulations were in place in all sectors.

(d) Major issues raised by the Committee

(i) Concrete measures to improve demand
Ms Gordon responded that demand within the economy could be increased through land redistribution, public works programmes - though these are a temporary measure - and supporting establishment of more SMMEs by simplifying their regulatory environment. Creating an entrepreneurial spirit and effective learnerships in the workplace were also important.

She stressed that she advocated broadening the growth policy focus to include domestic demand, but not abandoning export led growth. Some supply-side measures are needed in the present global uncertainties. To supplement these with domestic demand stimulus, one should look towards the primary and secondary sectors, which have greater capacity to absorb less skilled labour. Dr Abedian, however, noted that activity in the secondary sector is different from 10 years ago, with greatly diminished labour intensity.

Ms Gordon added that the business sector would be happy with smaller tax cuts if government had the capacity to spend more to alleviate poverty or strengthen SA's growth rate - stability is increasingly seen as a priority.

(ii) Inflation

The Committee questioned whether there was a conflict between trying to increase domestic demand and containing inflation. Ms Gordon's opinion was that there was no conflict at present. The Reserve Bank should cut interest rates as soon as possible. She noted that the position of the Reserve Bank was severely complicated by the present value of the Rand and the threat of war, with the possibility of oil prices spiking at $40 per bbl.

Asked how inflation policy could be managed differently, her view was that inflation targeting should have been on hold until pre-privatisation price increases introduced by rationalisations by parastatals had been absorbed.

Asked about the effects of privatisation, Prof Okeahalam replied that privatisation has value as an effective efficiency policy, but called for a robust regulatory framework.

Dr Abedian's view was that the main focus should not be privatisation per se, but with promotion of competition and an appropriate regulatory frameworks. He stressed that government should not simply replace a public monopoly with a private monopoly, which improves neither pricing nor delivery.

(iii) Cash surpluses
The Committee enquired about cash surpluses in the corporate sector due to a lack of domestic investment opportunities. Ms Gordon agreed that they existed, but stated that this was because of a lack of investment opportunities internationally as well as in SA. Such money used to be taken offshore, but perception of the international environment has changed.

Ms Gordon felt that if government took the initiative in investing in capital expenditure and these projects were perceived as raising SA's growth, then the corporate sector was likely to become involved in the form of public-private partnerships.

(iv) Growth and the need for skills
The Committee raised the issue of how government could continue to drive tertiary sector expansion since it is our main growth area, while at the same time stimulating the primary and secondary sector because those impact more strongly on the unemployment problem. Dr Abedian commented that there are no shortcuts in this regard. The national skills shortfall is an intergenerational problem, requiring retraining and commitment to growing existing skills as much as possible, while taking care of those who will never gain the skills.

There is a real challenge for SETAs to become industry-led, providing usable skills, the kind of training that is genuinely demanded. They must be held accountable for delivery.

He criticised the new immigration legislation as inappropriate for an economy with a shortage of expertise, especially since much growth was in the tertiary sector, which needs skilled professionals. Saying xenophobia is costly, he estimated that each skilled immigrant could generate four to eight jobs.

(v) Black Economic Empowerment
Asked for views on the Budget's BEE measures, Prof Okeahalam responded that a number of countries have a history of adopting such policies. A common problem is that only a small number of elites benefit from BEE, with intended beneficiaries often not reached.

Dr Abedian's view is that BEE is part of the normalisation of South Africa, and will take some time. The present risk is one of maldistribution of wealth and income, making BEE a dangerous, double-edged sword. In general, where the tertiary sector is dominant, the economy is increasingly knowledge-based, with knowledge as the major wealth creator. In efforts to broaden BEE, the focus must remain on effectively increasing and dispersing knowledge and thus wealth.

Representatives of the National Treasury and SARS presented the tax proposals set out in the Budget, outlining their projected impact and setting the strategic context of medium-term tax policy. SARS' compliance strategy, use of depreciation as incentive, exchange control amnesty and their effect on taxpayers were discussed at some length. Prof Matthew Lester and Prof Pieter le Roux gave their respective views on the effectiveness of tax policy to date and of potential policy developments.

(a) National Treasury
A representative of Treasury outlined the background to the present tax proposals, setting out their global context and objectives. He noted that personal income tax (PIT) relief has been a feature of Budget policy since 1995, with R49 billion given in relief over the past eight years, and corporate tax having dropped 10 per cent, to 30 per cent, since 1994. These rates compare favourably to the rest of the world, notably the EU and OECD economies.

He outlined the 2003/04 tax relief proposals and their objectives (See Section B3 above). Direct tax provisions, general business tax stimulus measures and indirect tax provisions were presented and motivated. Notable elements were exemption of foreign dividends from taxation and a six-month amnesty period for repatriating or declaring illegally exported assets.

(b) The South African Revenue Service
The SARS presentation outlined the revenue position to date, and the target for 2003/04:

* The revised estimate is R11,6 billion above the Budget estimate - R280,1 billion compared to R268,5 billion.
* For the past six years SARS has had collections above its targets, with total additional collections at R46,8 billion.

* Additional collections have assisted in the reform of tax rates and increased expenditure programmes.

* The revenue target for 2003/04 is R310 billion.

SARS unveiled its Compliance Strategy, as based on education to create a culture of compliance; enforcement through high visibility and targeted campaigns; and a service culture, focusing on efficiency and communication.

The foreign exchange amnesty was motivated as having low penalties relative to international standards, and easy accessibility.

(c) Prof Matthew Lester
Professor Matthew Lester of Rhodes University presented a review of the period between the 2000/01 and the 2003/04 Budgets. He argued that last year was a year of consolidation, while the coming year is one in which major legislation comes into force.

He reviewed in detail the following changes:

* Individuals' tax position, showing that payers of PIT are clear gainers over five years, despite the fact that a number of loopholes have been closed over the period.

* Elderly and retired taxpayers he calculates to be entitled to R62 222 free of tax, and obliged to pay only 14,9 per cent on R155 000 under the current proposals.

* Corporate tax collections have increased in real terms by more than a third since 2000. Major factors are the introduction of capital gains tax (CGT), the residence-based tax system (RBT), and the disallowing of personal service companies, as well as the increase in SARS' efficiency.

* The change in residential property rules means that individual ownership, as opposed to trust or company membership, will from this year pay far less in tax and duties when selling property.

(d) Prof Pieter le Roux
Prof Pieter le Roux of UWC presented an argument in favour of increasing VAT to 21 per cent in order to finance a basic income grant of R100 per person.

He argued that the VAT increase would bite hardest on the richest five per cent of the population, despite their also receiving the BIG, allowing a net benefit to the poorest 80 per cent of the populace. He felt this would be an effective measure to alleviate poverty, while acknowledging the practical problems in implementing it.

(e) Issues interrogated by the Committee

(i) Impact of tax cuts

The Committee enquired whether the Treasury is realising the desired benefits of the tax cuts given so far to taxpayers, for example in higher private savings or increased consumption.

Individual savings behaviour over the last five years has shown improvement, officials indicated, and Treasury is working on a modelling exercise that may provide hard data. Meanwhile, it is difficult to be exact as to how many changes in economic activity are direct effects of tax cuts.

However, over the past two years household consumption expenditure in South Africa has been robust, growing in excess of 3 per cent per annum. Treasury believes that the tax cuts did underpin the growth in household consumption expenditure, because the household sector has not yet been saving.

(ii) Value-Added Tax (VAT)
The Committee expressed relief that VAT had not been increased, and wanted to know if this was premised on the assumption that no VAT increase compensated for inflationary increases.

Treasury noted that it was loathe to tamper with VAT, as this would open up a debate which might not be productive. South Africa's VAT model is very much designed to support the enforcement capacity of SARS. Currently it contributes some 24-25 per cent to overall revenue, which is the world average. South Africa's relatively low VAT rate of 14 per cent still contributes 6,5 per cent of GDP.

(iii) The foreign exchange amnesty
Prof Lester sparked some discussion by suggesting that the amnesty might not succeed if perceived as a witch hunt. The Committee noted that all applications for amnesty would be dealt with confidentially, because this is how SARS is obliged to operate.

The Commissioner responded that the amnesty move was about cleaning up SARS' history and its act, and making sure that it broadens the tax base. It also serves to create a new kind of compliance culture in South Africa and to ensure that, as of the 2003 return, SARS gets a different set of figures that appear on its books, which it can then take forward from that point.

(iv) Viability of BIG
The Committee asked whether any serious work had been done on the macro-economic impact of a social income grant versus tax relief, because this seems to be at the heart of the current debate in South Africa.

This work, which is ongoing within Treasury, is more comprehensive than the BIG concept because it considers the entirety of social security provision in South Africa. However, Treasury is also guided by the need to give as many people as possible an opportunity to participate meaningfully in economic activity, guiding them away from dependence on welfare.

Prof le Roux argued for raising a BIG by increasing indirect taxes, notably VAT. There was some debate about whether this would be harshly punitive to the poor, a larger proportion of whose spending would be in respect of VAT, even without calculating distribution costs, before BIG benefits reached them.

(v) Urban Development Zones
The Committee asked whether Treasury has focused on depreciation because it is believed to be a more effective stimulator than income tax adjustments. With the urban zone depreciation provisions, Treasury incentivises a specific behaviour, with the aim of channelling investment towards declining urban centres. It is a highly targeted approach. Treasury has clearly limited it to some 13 areas major areas, where the biggest impact can be made.

 Prof Lester, however, noted that numerous examples of targeted incentives have had unintended consequences, been ineffective or even corrupting.

(vi) The fuel levy
The Committee posed questions about the impact of an increased fuel levy. Public sector transport would be severely affected, and the Committee asked about the impact on long-distance commuters.

The Treasury replied:
* The taxi industry has the oldest stock of vehicles, mainly using leaded fuel, and these would need to be upgraded. There may be a time lag, but taxi recapitalisation will happen this year.

* The contingency reserve of R8 billion over the next three MTEF years is available for taxi recapitalisation, after which taxis would most probably be utilising diesel-powered engines.

* Tax policy has taken into account incentives to use larger vehicles using more efficient (diesel) fuel.

(vii) Corporate tax rate
The Committee raised the issue of whether a reduction in the corporate tax rate was desirable. Treasury responded that numerous international instances show a convergence of corporate tax rates at 30-32 per cent.

Treasury is unconvinced by the argument that the rate should be reduced:

* Instead it favours creating a stable investment environment with attractive accelerated depreciation allowances. With the proposed increased depreciation regime, effective tax rates faced by companies in the first year could effectively be zero, with subsequent tax rates for South Africa companies being as low as 5-15 per cent.

* Investors, whether domestic or international, prefer predictability. Where some countries dropped company tax to unsustainable levels, only to increase it again, investors recoiled - consistency is investor-friendly.

* There is a also a premium willingly paid for the business environment: South Africa has an excellent banking regulatory environment and profit opportunities relative to the developing world.

Prof Lester also took the view that lower company tax was not the biggest drawcard for investment. He felt that investors are not scared away by taxes as much as by the economic climate of a country.

(viii) Revenue estimates and increased collections
The Committee enquired whether South Africa has reached a plateau in the rising trend of its revenue collections. SARS believes not, noting that some 48 hours after the amnesty provision was announced, almost R3 billion was already on the table, indicating a significant amount of unreported money still extant.

The Tax Gap Project has given SARS a much better understanding of where the revenue leaks are, enabling a more targeted approach this year. The Commissioner responded that SARS does hold a view on the actual quantum of the tax gap, loosely estimating it at R30 billion.

The Committee asked why SARS continued to have a problem with overruns on its revenue estimates. The Commissioner replied that it was due to the unpredictability of economic endeavour, citing the effects of unexpected inflation, fuel, the resources sector and war on 2002's estimates.

While forecasting of corporate tax is most difficult because of all the external factors impacting on it, Treasury believes that South Africa has a good record when it comes to indirect taxes, and in many cases South Africa is out R30 million on a tax base of R16 billion.

(ix) Ringfencing of secondary trade losses
The Committee raised a number of points and concerns about the ringfencing of secondary trade losses, and asked if this would not unfairly penalise certain taxpayers who have a legitimate secondary trade, notably in agriculture.

SARS emphasised that the proposed legislation would not impact on someone who is in the business of farming, but would impact on someone who is in the secondary business of farming. In the second case, SARS argues, they could use tax write-offs unfairly to compete with people who not able to exploit the tax system. The fiscus was being undermined by people who used secondary trade tax for a tax write-off. It was these people who were the target of the ringfencing.

(x) Complexity and coherence of the tax system

The Committee asked for comment on how coherent the tax system is as a macroeconomic instrument. Prof Lester's view was that SARS had never worked as effectively as now, to the extent of generating taxpayer paranoia and terror.

Asked whether the system was over-complex, Prof Lester noted that he was not sure that the law could be simplified. By international standards, it is relatively simple. It had increased in complexity in order to align itself with international standards. The cost of compliance on the government side has shown a positive return, but has become much harder for businesses - an unfortunate effect of the use of best practice.

(a) The Black Business Council (BBC)
The BBC was represented by Ms Futhi Mtoba of Deloitte & Touche, Mr Mandla Maleka, Chief Economist: Eskom Treasury, and Mr Veli Ntombela, Director Taxation: Sizwe Ntsaluba.

The BBC broadly endorsed the Budget, specifically referring to the child support grant, government's position on inflation targeting, relaxation of exchange controls and the proposed amnesty and the 4% increase in government consumption. A major element of their presentation involved SMME-friendly proposals to be taken into account in the 2004/05 budget.

(i) Small business support measures
The BBC felt that the tax dispensation of SMMEs requires review, specifically:
* Redefinition of "small business" in the Income Tax Act, as the BBC felt this was too narrow.

* Further simplification of tax compliance requirements.

* Further extension of the turnover ceiling.

The accelerated depreciation provisions for urban development areas would help small business in these areas. It went on to call for extension of these concessions to other sectors, such as tourism.

(ii) Black Economic Empowerment
The BBC believes that the proposed R10 billion BEE support funding will foster economic participation for the deprived sector of the economy. It awaits details of the funding strategy, and requested that it be consulted on the process of disbursement.

The moves to promote corporate reorganisation should include BEE transactions, and the BBC proposed:

* A shareholding test of at least 50% (and not 75%) for BEE companies.

* That inclusion of community trusts should also be considered.

(iii) Poverty relief and social support
The BBC appreciated the increase in transfers to pensioners and disabled people. It put forward the following proposals:

* Reducing the pensionable age for women by 2-5 years (from 60).

* Next year's tax bracket adjustment should concentrate on lower earners, enabling savings from this to support a lower pensionable age for women.

* Rather than considering increasing the eligible age for child support grants above 14 years in a future MTEF, equivalent funding should rather be allocated to ensure that primary education is genuinely free.

(b) Die Afrikaanse Handelsinstituut (AHI)
Mr Jac Laubscher (Chief Economist: Sanlam) and Ms Anne-Marie Wiehahn (Sasol Economist) presented Die Afrikaanse Handelsinstituut's (AHI) submission to the Committee.

The AHI feels that the Budget enhances South Africa's appeal to international investment through the proposed urban areas depreciation allowances; exchange control relaxation; the strong increase in infrastructure expenditure; and increased spending on policing.

The AHI foresees that:
* Inflationary pressure could come from an increase in the government wage bill and a pickup in domestic demand.

* A short-term depreciation of the Rand will follow exchange control relaxation, with medium-term stabilisation. An IMF study suggested an optimal value of the Rand at R8,80 to the US Dollar.

(c) South African Chamber of Business (SACOB)
Karl Muller, Des Kruger, John Lewis and Adv Meiring presented on behalf of SACOB.

SACOB called for simplification of the tax system and reduction of the administrative burden on taxpayers. It asked for a familiarisation period for business people to implement tax regime changes, and clarify new developments in foreign dividend taxation and capital gains tax.

Some upward pressure on inflation is expected from this Budget's tax relief measures, but SACOB emphasised the negative impact on price stability of large public enterprises' annual tariff increases.

Recommendations and representations by SACOB included:

* The present depreciation allowance discriminates between suppliers of goods on the one hand and services on the other. SACOB proposes that this be equalised.

* Adjustments to personal income tax effectively offset bracket creep, and this should become a standard policy for the national budget.

* SACOB called for further increase in the expenditure on transport infrastructure, to promote international competitiveness.

* SACOB questioned SARS' decision to regulate "tax practitioners" and to clamp down on tax avoidance, as minimising one's tax burden was well within the law, and taxpayers should be allowed to employ the services of advisors not linked to the SARS in any way.

* On ringfencing of secondary trades, SACOB argued that owners of a legitimate second business would be penalised for the sins of a few. It added that the distinction under tax law is usually between active and passive incomes, and not the different sources of income.

(d) Federation of Unions of South Africa (FEDUSA)
Ms Gretchen Humphries (FEDUSA Parliamentary Officer) presented the submission.

FEDUSA raised concerns about the trend of unemployment in South Africa. It welcomed increased social spending by the State, seeing this as a vehicle for increased development, especially where it is labour-intensive.

FEDUSA feels that the Budget did not adequately address HIV/AIDS, and feels that greater provision should be made to fund the prevention and treatment of HIV/AIDS.

FEDUSA recommends:
* That a detailed and specific budget be outlined for HIV/AIDS treatment/prevention.

* Intensification of HIV/AIDS awareness campaigns.

* That Government should implement a treatment strategy outlining the availability of anti-retrovirals.

* That funds should be specifically allocated for the empowerment of Health Care Professionals, for the training of lay counsellors and for community upliftment programmes.

* A legislative framework should be established by Government to ensure all employers negotiate and adopt workplace policies on HIV/AIDS.

(e) Focus areas of discussion in Committee

(i) Support for SMMEs and BEE
The Committee focused on the issue of SMME support, endorsing the fact that the BBC put forward proposals for future budgetary policy, and the extension of the legal definition of SMMEs, and enquired about further action to remove obstacles here.

The BBC is investigating a number of legal and other changes that will increase SMMEs' success rate, feeling the economic environment opens opportunities for employment creation.

The BBC also said it was preparing submissions to SARS on the problems that SMMEs have with paying VAT, since the current lump sum affects their liquidity.

(ii) Women's pensions

The Committee queried the constitutional implications of reducing the pensionable age for women only. An additional concern was whether it would have the effect of shortening women's careers, which generally start later than men's. The BBC responded that the retirement age for men is 65 and for women is 60, an existing differential. In South Africa's unique circumstances it could be an effective addition to social spending.

He added that to stimulate savings the government would have to allow for more disposable income.

(iii) Skills levy
Responding to a request for feedback on the skills levy, the BBC said it found that not very many people are making use of it. Part of the problem was lack of public awareness, due to a lack of information and education on the levy.

(iv) Targeted child benefits
On the BBC's proposal not to extend the child support grant to children over 14, but instead use the money for free primary education, the BBC said in response to a question that their motivation was that intended beneficiaries often are not the ones receiving the benefits. Ensuring free schooling would be one method of ensuring that the funding reaches those it was intended for.

D. 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 J Josie, Deputy Chairperson: Finance and Fiscal Commission.

2. Mr B Khumalo, Finance and Fiscal Commission.

3. Dr H Fast, Manager: Parliamentary Office, Finance and Fiscal Commission.

4. Mr C van Gass, Finance and Fiscal Commission.

5. Mr I Momoniat, DDG: Intergovernmental Fiscal Relations.

6. Mr V Khahle, Legal Services: Intergovernmental Fiscal Relations.

7. Prof M Lester, Rhodes University, Tax Expert.

8. Prof P Le Roux, University of the Western Cape, Tax Expert.

9. Dr I Abedian, Macroeconomist: Standard Corporate Merchant Bank.

10. Prof C Okeahalam, Wits University, Macroeconomist.

11. Ms S Gordan, Macroeconomist.

12. Ms M Mtomba, Black Business Council.

13. Mr V Ntombela, Black Business Council.

14. Mr M Maleka, Black Business Council.

15. Mr J Laubscher, Die Afrikaanse Handelsinstituut.

16. Ms A Wiehahn, Die Afrikaanse Handelsinstituut.

17. Mr Karl Muller, Chairperson: SACOB Taxation Committee.

18. Mr Des Kruger, Member Taxation Committee.

19. Mr John Luss, Deputy Chairperson: SACOB Economic Affairs Committee.

20. Adv Abri Meiring, Chairperson: SACOB Parliamentary Committee.

21. Mrs Peggy Drotskie - SACOB Director: Policy.

22. Ms G Humphries, Parliament Officer: FEDUSA.