2020 Fiscal Framework and Revenue Proposals: public hearings

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Finance Standing Committee

04 March 2020
Chairperson: Mr M Maswanganyi (ANC) and Ms D Mahlangu (ANC)
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Meeting Summary

2020 Budget Speech
Fiscal Framework and Revenue Proposals 
The Standing and Select Committees on Finance held joint public hearings on the 2020 Budget. The Congress of South African Trade Unions (COSATU); the National Union of Metalworkers of SA (NUMSA); National Council Against Smoking (NCAS); Fiscal Cliff Study Group (FCSG); Organisation Undoing Tax Abuse (OUTA); South African Institute of Chartered Accountants (SAICA); and PricewaterhouseCoopers (PwC) gave submissions.

COSATU described the 2020 Budget as underwhelming and provocative. They welcomed the commitment to increase infrastructure expenditure and efforts to revitalise industries. It welcomed the commitment to tabling legislation to grow the petroleum, gas, minerals and transport sectors. However, there was no sense of urgency about these interventions. It appeared from the budget that the government did not have clear and concrete plans to stabilise and revive key state owned enterprises (SOEs). COSATU was however pleased with the initial steps taken by the new CEO of Eskom to “begin cleaning up the mess.”

NUMSA said the 2020 Budget revealed a government which is in panic and does not have control over the running of the country. It reflects little understanding of either the depth of the crisis long experienced by poor, working class majority of South Africans. Government priorities need to be centred on the developmental needs of the country and not be reactionary to appease forces that have generally never cared or bothered about the conditions of the working class and the poor.

NCAS expressed disappointment with the “insignificant” increase of R0.74 in the tax on a packet of 20 cigarettes. This was not enough to make people think twice about their smoking behaviour. Tobacco-related harm to health was estimated to be R59 billion a year. The income from tobacco taxes averaged R13 billion to R15 billion a year. Increasing taxation on tobacco to make tobacco products less affordable, is key to addressing the critical social determinant of health. While South Africa has had consistent annual tax increases, these increases have been too small, and have therefore not impacted on the affordability of cigarettes. The Committee was strongly urged to recommend a significantly higher increase in tobacco taxation, to bring SA closer in line with the WHO recommendation of a tax equal to 70% of the price of tobacco products.

The Fiscal Cliff Study Group warned that South Africa had moved closer to a “fiscal cliff,” the point at which public service remuneration, social grant payments and debt service costs absorbed all government revenue.

OUTA highlighted that the financial collapse of key state-owned entities (SOEs) continues to affect the Budget heavily, with bailouts a major contributor to the deficit and the need to cut social spending, and the enormous burden on the state’s contingent liabilities (particularly Eskom). Considerably more oversight of SOEs was needed to improve governance and financial controls; this includes ensuring that wrongdoers are held to account.

SAICA urged Parliament to carefully interrogate budgets that show increases in expense allocations and to further scrutinise expenses within those budget for reasonability and value-add. In addition to this, Parliament needed to hold to account those individuals who have exceeded their budgets or misspent their budgets. These individuals should be black-listed and be prevented from being redeployed at other government departments.

PwC welcomed the proposal that there be no tax increases for 2020/21, and that government will not raise any taxes to collect an additional R10 billion as per its announcement to this effect in the 2019 Budget. In our view, this proposal should be strongly supported on the basis that, as acknowledged in the Budget Review, tax increases at this point will most likely serve as an obstruction to economic recovery and growth. It is, moreover, clear that tax increases in the past few years (in the form of both personal income tax increases – mainly by failing to make inflationary adjustments to the personal income tax brackets, and VAT – by way of the increase in the VAT rate from 14% to 15%) have not translated into significant additional revenues.

Members said no one wanted to see workers being exploited. However, there was now a need to protect taxpayers from exploitation. While many civil servants deserve their pay, there were many who were overpaid. The Co-Chairperson assured stakeholders that the committees would take their submissions very seriously.  Solutions to the country’s economic problems had to be found. If things go the way they are, it will end in social unrest. The fact that the country’s economy is now in recession “should be taken very seriously. For history taught us that if unemployment keeps on rising, and the poor are getting poorer, there would be social unrest.” He implored everyone to find solutions together to the situation the country was in today. “The situation we are faced with is not Treasury’s situation, it needs our collective and concerted effort”.

Meeting report

Co-Chairperson Maswanganyi welcomed everyone and highlighted the steps Parliament would follow in processing the Budget and the pieces of legislation tabled by the Minister of Finance during his Budget Speech. He invited submissions from stakeholders.

Congress of South Afican Trade Unions (COSATU)

Mr Tony Ehrenreich, Secretary: Western Cape Region, COSATU, described the 2020 Budget as “underwhelming and provocative.”

COSATU welcomed the commitment to increase infrastructure expenditure and efforts to revitalise industries. It welcomed the commitment to tabling legislation to grow the petroleum, gas, minerals and transport sectors. However, there was no sense of urgency about these interventions. It appeared from the budget that the government did not have clear and concrete plans to stabilise and revive key state owned enterprises (SOEs). COSATU was however pleased with the initial steps taken by the new CEO of Eskom to “begin cleaning up the mess.”

COSATU appreciated the inflation-linked tax relief for working and middle class families and the fact that the government had resisted the “dangerous temptation” to increase VAT. However, taxes on the wealthy should have been increased by adjusting tax brackets, and plugging tax loopholes. COSATU, though its affiliate, the Southern African Clothing and Textiles Workers’ Union (SACTWU), was working closely with the SA Revenue Service (SARS) to rebuild its customs enforcement capacity. Currently only 5 percent of import containers were inspected for customs compliance. Billions of rands in revenue was being lost and the local manufacturing sector was being damaged. 

COSATU called on the business sector to “end its investment strike.”

Mr Ehrenreich said COSATU rejected any attempt to reduce the wages of public servants. He said a unilateral decision by the government to withdraw from the current year’s public sector wage agreement was “reckless and dangerous.” The wage bill had been stable for the past 10 years at 35 percent of the budget. The public service headcount had been declining. It was badly overstretched and most public servants earned very little. Bloated executive and management posts should be reduced.

COSATU welcomed the proposal to set up a sovereign wealth fund. It welcomed allocations to ensure that all schools had sanitation. However, the budget did not tackle rising teacher-learner ratios.

National Union of Metalworkers of South Africa (NUMSA)

Ms Sharon Modiba, Research Economist, NUMSA, said workers were facing a “jobs bloodbath.”  She accused the government of taking money from civil servants to save jobs in struggling SOEs. The government was telling citizens that their taxes would not be increased and that, instead, public servants’ salaries would be cut.

NUMSA believed that increases of only 4.4% in welfare grants were not enough to compensate for rises in the cost of fuel and food. The union welcomed the proposals for a sovereign wealth fund and a state bank. The bank should assist workers who did not qualify for RDP houses, but were unable to raise bonds to buy houses. Commercial banks should work with the government in establishing such a bank.

It appeared that provision had not been made for Eskom to participate in a new power generation project. NUMSA believed that Eskom should be protected as a strategic institution.

In conclusion, the 2020 Budget reveals a government which is in panic and does not have control over the running of the country. It reflects little understanding of either the depth of the crisis long experienced by poor, working class majority of South Africans. Government priorities need to be centred on the developmental needs of the country and not be reactionary to appease forces that have generally never cared or bothered about the conditions of the working class and the poor.

National Council Against Smoking (NCAS)

Ms Savera Kalideen, Executive Director, NCAS, said the Council welcomed the tax on e-cigarettes. An estimated 1 million South Africans now used e-cigarettes, which were linked to severe health conditions.

However, the Council was disappointed with the “insignificant” increase of R0.74 in the tax on a packet of 20 cigarettes. This was not enough to make people think twice about their smoking behaviour. Tobacco-related harm to health was estimated to be R59 billion a year. The Income from tobacco taxes averaged R13 billion to R15 billion a year. Increasing taxation on tobacco to make tobacco products less affordable, is key to addressing the critical social determinant of health. While South Africa has had consistent annual tax increases, these increases have been too small, and have therefore not impacted on the affordability of cigarettes. The Committee was strongly urged to recommend a significantly higher increase in tobacco taxation, to bring SA closer in line with the WHO recommendation of a tax equal to 70% of the price of tobacco products.

The Council rejected the argument that increases in taxes led to increases in the illicit trade of tobacco products. It said evidence showed that the size of this trade was determined by non-price factors such as regulatory enforcement, the quality of tax administration and social acceptance of the illicit trade.

Discussion 

Ms M Mabiletsa (ANC) said she was concerned about suggestions that commercial banks should be involved in setting up a state bank. The state bank would have to be pro-poor and provide services that the commerical banks had failed to provide. Why should they be involved now?

Mr G Skosana (ANC) said though the public service might not be bloated, the wage bill was high. Some civil servants, such as health workers, were overworked. He suggested that civil servants should be divided into categories so that the salaries of highly paid ones could be revised whole those of more junior workers were not touched. It was claimed that austerity measures had never worked as an economic strategy. However, the government found itself in a difficult situation where it was unable to raise the revenue it needed. From the NCAS he wanted to know whether it could be shown that higher prices contributed to people quitting smoking. His experience was that people gave up smoking for health reasons, not because of price.

Mr W Aucamp (DA) said no one wanted to see workers being exploited. However, there was now a need to protect taxpayers from exploitation. While many civil servants deserve their pay, there were many who were overpaid. The present administration should not be held to a multi-year wage agreement signed by the discredited previous administration which used it to “buy complicity” of officials. Productivity in the public service had not improved and there was therefore a need for cuts. To COSATU and NUMSA, the country needed investment to stimulate growth and create jobs. However, they were advocating measures that would not attract investors.

Ms M Mohlala (EFF) said there was a need to address corruption and looting. There was also need to improve the customs operations at ports. The EFF was supportive of the budget as it was progressive.

Mr I Morolong (ANC), in response to COSATU, said he was an ardent believer in the idea of a social compact to address growth and employment.

Mr G Hill-Lewis (DA) said it was wrong for the unions to call the 2020 Budget an austerity budget. Expenditure and debt were going up. If debt was to be stabilised, more drastic expenditure cuts would be required. Very few would take any joy in the cuts to the public sector wage bill. The country needed thousands more doctors, nurses and police officers. But the fact was that in the absence of economic growth, the country had to cut its coat according to its cloth, or face catastrophic spending cuts later.

Mr S du Toit (FFP) asked whether the Minister of Finance had consulted organised labour prior to his Budget Speech.

Co-Chairperson Mahlangu said Members should do more to hold the executive and government officials to account in dealing with corruption. “We want to see orange overalls, we want to see action,” she said.

Co-Chairperson Maswanganyi said environmental issues are of importance to South Africa and there has to be collective responsibility for all shared resources. Global warming is not a theory but a reality. If the environment is not protected, what would happen to the future generations? Therefore, there was need for proper government regulation to curb levels of pollution and ensure the sustainable utilisation of resources. The same with the sugar tax. There has been a lot of opposition from the sugar and sugary beverages industry to the increase of the health promotion levy. However, health challenges relating to sugary beverages consumption are serious and need not be taken likely as they burden the entire health system and fiscus. The ripple effects of all policy choices should be well-understood.

Mr Ehrenreich, in response to Mr Aucamp, said the South African nation was built on agreements. If he wanted the wage agreement to be reviewed would he also be open to reviewing agreements made under apartheid? If the integrity of agreements was to be maintained, there could be no picking and choosing of which would hold. On problems in attracting investments, much of this was linked to the apartheid legacy of a concentrated economy and the domination of white companies. There were a range of challenges that were being addressed in a systematic way to build an attractive investment climate. Many unions were engaged in talks with management about ways of improving productivity.  One proposal was to “top slice” pension funds and require them to invest 5 to 10 percent of their total capacity in prescribed assets. There was a need to deal with an “investment strike” by companies that made their profits in South Africa. There had to be an “ecosystem” in which all played a role.

Mr Ehrenreich, in response to Mr Hill-Lewis’s comments about using the term, austerity budget, said there were two realities in South Africa. One was the reality of people who had access to private health care and whose children were taught in small classes. The other was having to get up at four in the morning to queue at a day hospital and being taught in classes of 60 learners. 17% of black workers’ earnings went to supporting relatives in poor communities. For poor people, this was an austerity budget. COSATU agreed that debt had to be stabilised, but this should not exacerbate the problem of growing poverty. He agreed with the EFF that there was massive corruption in the public sector. But this also applied to the private sector. Managers of big corporations that were guilty of corrupt practices like collusion should be in jail.

Ms Modiba said NUMSA had not been consulted by the Finance Minister about the wage cuts proposed in the budget. On measures for economic growth, she said the economy had to be re-industrialised. It had to be transformed so that the demographics of the country were reflected at the highest levels. The ports were “in tatters” and billions of rands in customs duties were being lost. Incentive programmes had been allocated R1.2 billion. These incentives should be aligned with job retention and the training of skilled workers.

Ms Modiba said workers were not being included in the business rescue plan at SAA. On the other hand, collaboration between workers and business had resulted in an effective masterplan for the automotive sector. On the proposed state bank, commercial banks should “come to the party” and see how they could assist. They should play a transformative and developmental role. It could not be “profits as usual.”

Ms Kalideen said taxation had been shown to be effective in discouraging smoking. But the tax had to be high enough. The current budget had increased the tax on one cigarette by only four cents.

Fiscal Cliff Study Group (FCSG)

Prof Jannie Rossouw, a member of the FCSG, said the country had moved closer to the “fiscal cliff,” the point at which public service remuneration, social grant payments and debt service cost absorbed all government revenue. The three categories consumed 75.1 percent of tax revenue in the February 1019 Budget. The figure rose to 75.5 percent in the current budget. In 2007/08, the ratio was 55.0 percent.

The FCSG believed personal income tax rates and VAT should have been increased, thus reducing the deficit before borrowing.

The FCSG made the following recommendations: the government should respect taxpayers; South Africa had no austerity budgets in a decade, but should consider austerity budgets owing to sustained low economic growth expectations and deficit levels. 573 000 individual taxpayers contribute some 52 per cent of PIT and some 20 per cent of total government revenue, hence there was little room for further tax increases as this tax base can emigrate. The Group further recommended that there be no increase in old age grants as it is unaffordable. The success of the budget depends on limiting the civil service remuneration increase to 1.6 per cent (only for notch increases and promotions; no general increase). Despite these drastic measures the fiscal cliff has deteriorated compared to the 2019 Budget. Lastly, personal income tax rates and VAT should have been increased, thus reducing the deficit before borrowing through raising more revenue.

Organisation Undoing Tax Abuse (OUTA)

Mr Matt Johnston, Parliamentary Engagement Officer, OUTA, said the R160 billion reduction in the wage bill would be difficult to achieve, but it was very necessary. The R100 billion cut in spending on programmes could have adverse effects in crucial areas such as health, education and public transport.

Rising debt was a big problem. Borrowings at a responsible level could bolster an economy. However, worsening audit outcomes indicated that some of the borrowings were adding to corruption. Another problem was the drop in tax revenue. The total number of registered taxpayers who were liable to pay tax had dropped by 7 percent year on year.

The financial collapse of key state-owned entities (SOEs) continues to affect the Budget heavily, with bailouts a major contributor to the deficit and the need to cut social spending, and the enormous burden on the state’s contingent liabilities (particularly Eskom). Considerably more oversight of SOEs was needed to improve governance and financial controls; this includes ensuring that wrongdoers are held to account.

Governance failures remain an endemic problem, with ongoing alarms raised by the Auditor-General. OUTA welcomed the Public Audit Amendment Act, the Public Procurement Bill and indications that the Treasury was dealing more decisively with municipal financial management.

OUTA believed health services were being diminished due to a need to prioritise the stabilisation of SOEs. The cuts also pointed to the health department's lack of capacity to deliver. They would further delay the implementation of National Health Insurance (NHI).

The Department of Basic Education’s budget had not grown in real terms.

In the transport sphere, the liabilities of the Road Accident Fund were expected to increase to R605 billion by 2022/23. Rail services were essential and funding for them should not be cut. E-tolls in Gauteng had failed and only one in five motorists paid them.

South African Institute of Chartered Accountants (SAICA)

Prof David Warneke, Chairperson SAICA Tax Committee, said the budget showed some welcome changes in thinking. There was a shift to a low-rate, broad-based fiscal policy with enhanced tax simplicity. SARS was being recapacitiated. There was an undertaking to create certainty in the macroeconomic framework and to reduce costs.

On the public service wage bill, SAICA believed it was necessary to cut compensation and benefits, starting at the top. Trade unions argued that the wage bill had remained at 35 percent of total expenditure over the past decade. However, it should be noted that government expenditure had increased significantly over that period. There had been dramatic increases in public service salaries. In 2018/19, in national government, the average monthly salary was R49 551, including bonuses and overtime payments. In the private sector it was R22 358.

SAICA was concerned about high outsourcing costs in some government departments. For example, the Environmental Affairs Ministry, which had more than 400 employees, spent R4.3 billion on outsourcing. That money could have employed 2 800 people at annual salaries of R1.5 million. An increase in legal fees seemed to be related to the competence of staff in performing their duties. Some departments incurred significantly high catering, fleet and transport costs.

Two of the largest factors responsible for SA’s economic plight were not addressed, namely the lack of a coherent overall policy framework and a significant reduction in crime. The latter requires the total rethink of our whole criminal justice system. Reduction in crime was even more important since one cannot implement policy and legislation changes to which few adhere, or that are actively undermined. Small businesses in all sectors struggle to survive in our crime- ridden country where they find it difficult to connect goods and services to customers in all areas. Children are unable to learn in an unsafe environment in which schools are looted and destroyed and funds misappropriated.

Parliament has the constitutional mandate to approve expense appropriations. SAICA urged Parliament to carefully interrogate budgets that show increases in expense allocations and to further scrutinise expenses within those budget for reasonability and value-add. In addition to this, Parliament needed to hold to account those individuals who have exceeded their budgets or misspent their budgets. These individuals should be black-listed and be prevented from being redeployed at other government departments.

PricewaterhouseCoopers (PWC)

Mr Kyle Mandy, Tax Policy Leader, PwC, said the problem was expenditure and not revenue. Weak growth meant that tax increases would not result in higher revenues, but would hamper growth. The profile of expenditure had to be addressed. The public sector wage bill was “extremely high.” Consumptive expenditure, such as wages, was crowding out other expenditure on goods and services.

PwC welcomed the proposal that there be no tax increases for 2020/21, and that government will not raise any taxes to collect an additional R10 billion as per its announcement to this effect in the 2019 Budget. In our view, this proposal should be strongly supported on the basis that, as acknowledged in the Budget Review, tax increases at this point will most likely serve as an obstruction to economic recovery and growth. It is, moreover, clear that tax increases in the past few years (in the form of both personal income tax increases – mainly by failing to make inflationary adjustments to the personal income tax brackets, and VAT – by way of the increase in the VAT rate from 14% to 15%) have not translated into significant additional revenues. This is because these tax increases have had a pronounced negative effect on economic growth, thereby placing extra downward pressures on tax revenues, and on levels of tax compliance (i.e. tax increases were effectively “self-defeating”).

PwC believed there was a need to renegotiate the agreement with the Southern African Customs Union (SACU). The revenue sharing formula was heavily weighted against South Africa. South African exports made up 83 percent of intra-SACU trade, yet South Africa received only 17 percent of the customs pool. South African taxpayers were effectively subsidising other SACU countries with R63 billion.

Discussion

Mr Hill-Lewis said Eskom was being viewed as a state-centred monopoly in discussions about dealing with its debt. If it was a private company it would be “dead by now.” In the private sector, assets were sold to settle debt. Eskom had income-generating assets of enormous value. On the civil service wage bill, there was no intention to retrench civil servants or cut their salaries. The proposal was to slow down the growth in the wage bill.

Ms Mohlala put it to SAICA that the difference between salaries in the public and private sectors could be the result of big difference between high white and low black salaries in the private sector. She described the FCFSG’s view that VAT should have been increased as an “elitist approach.”

Professor Rossouw said a VAT rate of 16 percent would be closer to international levels and bring in an extra R24 billion.  If personal income tax had not been cut there would have been an additional R14 billion. However, the “scary aspect” was that these drastic measures would only reduce the budget deficit to 6.3 percent from 6.8 percent. These figures illustrated that the capacity to tax had been exhausted.

Mr Warneke said the quality of government spending had to be improved. There had to be a change in mindset in holding people accountable for spending instead of them wasting money on the basis that it was someone else’s.

Co-Chairperson Maswanganyi assured the presenters that the committees would take their submissions very seriously.  Solutions to the country’s economic problems had to be found. If things go the way they are, it will end in social unrest. The fact that the country’s economy is now in recession “should be taken very seriously. For history taught us that if unemployment keeps on rising, and the poor are getting poorer, there would be social unrest.” He implored everyone to find solutions together to the situation the country was in today. “The situation we are faced with is not Treasury’s situation, it needs our collective and concerted effort”.

The meeting was adjourned.

 

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