Budget 2004 hearings: Organised Business

Meeting report

FINANCE PORTFOLIO COMMITTEE
24 February 2004
BUDGET 2004 HEARINGS: ORGANISED BUSINESS

Chairperson: Ms Hogan (ANC)

Documents handed out:
Business Unity South Africa (BUSA) submission
Chambers of Commerce South Africa (CHAMSA) submission

SUMMARY
Both BUSA and CHAMSA were positive about the budget while highlighting some negative aspects and areas for concern. The merits of direct and indirect taxation to increase the revenue were discussed along with other factors that are of importance to produce a higher growth rate than the current one.

MINUTES
Business South Africa (BUSA) submission
BUSA was represented by Connie Motshumi and Roger Baxter. The submission outlined what BUSA saw as the positive and negative aspects of the Budget. It also raised the following concerns:
· the low savings and investment rates
· the company tax rate after Secondary Tax on Companies
· large BEE deals are tax unfriendly
· little progress on exchange controls relaxation
· the budget deficit being used to fund recurrent expenditure.
· lack of progress on restructuring of state assets
· a gross revenue royalty for the mining sector is out of sync with global practice and will undermine investment, empowerment and growth

Discussion
Mr Moloto (ANC) asked what would be the required level of investment from government and the private sector to enable South Africa to reach the 25% alluded to in Slide 4 of the presentation.

Mr Baxter replied that the quality of investment was very important. Artificially raised investment would not really be in SA's interest. An investment rate of 25% of the Gross Domestic Product would do no good if the quality of the investment was poor. There were structural problem to deal with such as the availability of skills and human capital to sustain a high growth rate.

Mr Hanekom (ANC) said that he found it interesting that in their list of negative aspects they included the move away from indirect taxes. What was BUSA's comment on the fact that South Africa was different from the countries with which they were comparing it? He also questioned the relevance of the graph in Slide 22.

Mr Baxter replied that they do understand that in the short term South Africa differed a lot from the countries that they had highlighted and that the indirect taxation side was not as regressive as the direct tax side. One had to be cautious that if the direct side became too regressive, one might stifle investment. On the budget deficit side they are not too concerned at the moment but were merely highlighting it as one of the issues.

Ms Taljaard (DA) commented that when one looks at the direct tax debate there had been some interesting research done recently. She added that there are a number of reasons that could explain the low level of foreign direct investment. In reply to a question about this the Minister had said last week that there would not be a full-scale review of corporate taxes but that there would be a review of certain sectors of the economy where the effective rates have been quite low due to legislation - mining being a case in point. Is BUSA aware of other sectors where the rate is so low?

Mr Baxter replied that one has to be careful about looking only at the nominal tax rates as there is a need to look at the effective tax rates. They are aware of certain studies that had been done on effective corporate tax rates in South Africa. In terms of the different sectors he said that there are still a lot of taxes and levies on input costs in the economy. This is all part of the indirect tax burden. They would like to look at it on a broader scale and not concentrate on certain sectors.

Mr Mohlala (ANC) asked for more clarity on the lack of progress on the restructuring of state owned enterprises.

Mr Baxter replied that in their view over time South Africa will have to go the route of much higher private sector participation in a number of key markets. At the moment too many of the parastatals have underinvested in their capital stock. That is impacting on the growth rate of the economy and has a huge impact on the private sector's ability to deliver growth. The state assets have to produce the goods.

Mr Ralane (ANC) commented on the two economies in South Africa. What can government do to address the gap between the two?

Ms Taljaard noted BUSA's comments on regulatory impact assessment. She stated that there are concerns about the archaic provisions and remnants of the Companies Act as it currently is and the need for a redrafting. She added that she knows there is something being done about this by the Department of Trade and Industry. Could BUSA elaborate on their concerns?

Mr Tarr (ANC) commented on administered prices. He lamented the state of the railway system in South Africa and the burden on the roads. He also mentioned cell phone prices as being much higher than in other countries.

Ms Motshumi replied that business acknowledges the two economies. In terms of the sector she represents (financial sector), they are trying to make financial services accessible to the ordinary South African. Lots of attention is given to small enterprises. The need to level the playing field is clear.

Mr Baxter explained that the regulatory impact assessment strategy enables policies to come through over time. It allows for more robust policy formulation. On the railway system, he said there has been a definite shift towards roads. Spoornet should have been the first choice for the transport of bulk products. He added that business must accept a portion of the blame for this. Hopefully this would change over the next couple of years.

Chambers of Commerce South Africa submission
CHAMSA was represented by Mr Jac Laubscher (Chief Economist, Sanlam), Adv Abri Meiring, Mr Ken Warren and Mr Lennox (CEO, SACOB). CHAMSA congratulate the Minister of Finance and the National Treasury on a very sound Budget.

Mr Laubscher presented their thoughts on the economic side. He made three main points regarding the economic side of the budget. First of all he commented on the macro-economic assumptions on which the budget is based. On the projections for 2004, they believed that they were basically fine except to note that, from government side, the acceleration of economic growth seems to be quite conservative. It was very disappointing that the growth rate did not go above 3% despite a stimulating monetary policy with interest rates having been cut by 5.5 percentage points in the second half of last year, an expansionary budget and the global business cycle that was working in SA's favour. They were concerned with the projections for 2005/6. They looked to be on the optimistic side.

The second point was the issue of the revenue budget. The fact of the matter is that there is not much room for things to go wrong this time around. If we have an under recovery on the revenue side again it might push the budget deficit to mote uncomfortable levels. The revenue projection relies on a strong recovery of corporate taxes. On the positive side investment analysts have been making the same projections as the government.

The third point Mr Laubscher wanted to address was the issue of exchange controls. A gradual approach to exchange control relaxation was evident in the budget. They support that but have to warn that it might be time for a more comprehensive declaration on which direction we tend to move.

Adv Meiring presented the CHAMSA's concerns regarding the tax proposals for individuals and corporate taxation, tax administration and sectoral tax issues such as querying the correctness of adopting revenue rather than a profit based tax instrument for mining (see submission)

Discussion
Mr Moloto asked about the international comparison done on direct taxes. If one increased indirect taxes, would it hit the retail sector in terms of lowered consumption?

Ms Taljaard asked if there was a concern about how much new municipal bonds issuance the bond market could absorb. Did they believe there was merit in creating a formal agreement between the Reserve Bank and specific sectoral regulators on the implications of the inflation targeting policy framework for administered pricing. Was such an agreement feasible?

Adv Meiring explained that the worldwide trend was to rely more and more on indirect taxes because the base was wider. From an economic perspective there was a fine equation balance act where you look to find a trade off between direct and indirect taxes which would lead to the maximum revenue without affecting consumption adversely.

Mr Laubscher added that perhaps one did need to hurt consumption a bit to raise SA's savings performance.

Mr Tarr commented on the people who did not fall under the tax net. These were people who the Receiver of Revenue did not know about. The estimated figure was 3 million people. It would seem that indirect taxes (VAT especially) would be a way to increase revenue. If VAT was raised, social welfare grants could also be raised.

Ms Taljaard commented that this highlighted the debate about the pressures that are starting to be placed on the take-up rates of social grants and the implications of social security for tax policy. This was something that was being discussed in government but not at the legislature. She proposed that this was a debate for the new parliament.

Adv Meiring wanted to clarify the observation of the 3 million people not known to SARS. They are within the base of 11 million economically active people which was in itself a very narrow base for the direct taxation side. He stressed that it was critical that integration took place between tax thinking and social security thinking. Therefore any possible increase in the VAT-rate had to be based on robust poverty relief systems being in place.

Ms Hogan commented that the issue was about whether social security was affordable in a developing country.

Mr Laubscher replied to Ms Taljaard's question on the bond markets. If one looked at institutional investment portfolios in South Africa at the moment the allocation to fixed interest (bonds) was between 15 and 17%, which in international terms was quite low. The more one moved into a low and stable inflation environment the more the appetite for the bond component would grow. In that sense there was a capacity to absorb a higher borrowing requirement but time frameworks have to be taken into account in terms of expected returns in the near future. The expectation in the asset management industry was that over the next year one would get a higher return from equities rather than from bonds. Bonds would have to offer a higher yield to create interest. They would have to wait and see how the municipal bond market develops. On the question of inflation targeting, he said that such an agreement would not be normal practice. Whether it might work was an interesting question. The Governor of the Reserve Bank had been trying very hard to persuade everybody to adhere to inflation targeting in their pricing decisions. Mr Laubscher would rather not see such formal agreements.

Mr Hanekom clarified that BBBEE in their submission stood for broad based black economic empowerment. He then commented that sustainability (referring to the Public Works programmes) was probably overemphasised. There were sustainable components and that had been identified. There was no pretence that the Public Works programmes were necessarily intended to create sustainable jobs. They were intended to create temporary relief to the huge unemployment problem and in the process provide required infrastructure and maintain it. Perhaps the sustainability lay in the maintenance of infrastructure but new infrastructure had to be provided in the process and those jobs might not be sustainable. This would lay the foundation for further growth which would lead to sustainable employment.

Adv Meiring stressed that their overall view was not to ask for tax relief in the general sense. They believe the individual and corporate tax rates are appropriate for South Africa. Treasury has indicated over the last three years that specific allowances to encourage specific kinds of business activity are the route they want to go. One of these targeted relief measures was the 15% of the first R150 000 of a small business. They believed that was an important level for growth in one of the most under utilised sectors of the economy (small business). Increasing the limit to R250 000 would be a positive. He stressed that better collection of taxes would raise revenue. Changes to the system would help make it easier for taxpayers and collection.

Ms Mabe (ANC) asked about their comment that Capital Gains Tax was ill-advised. She wanted to know what they expected Treasury to do about it.

Adv Meiring replied that Capital Gains Tax was part of the system. The undertaking by Treasury was that rates would be kept low and therefore the thresholds would be adjusted from time to time. Since the inception of CGT on 1 October 2001 there had been no adjustments to the R1 million exemption for gains on private dwellings. More importantly there has been no adjustment of the R10 000 per annum for ordinary individuals. CHAMSA remains unconvinced that CGT was a productive tax in the South Africa tax system.

Mr Moloto asked the presenters whether they had made any proposals to government to deal with the lack of expenditure on the skills level of the country.

Ms Taljaard asked whether business and Treasury were engaging about the R12.4 billion apportioned for the combating of HIV/AIDS. Was there a possibility of crafting an exemption for this as part of a real partnership between government and business to relieve the crisis? She also asked whether they had a view on an amnesty for small businesses that are currently not under SARS radar.

Mr Lennox replied that with regard to skills development they have had discussions with the Department of Labour and individual Sector Education and Training Authorities (SETAs). They did propose to the Minister of Labour that until such time as full delivery capacity was entrenched that there should be a moratorium on the skills levy that was recovered by SARS. At the moment they have engaged with the SETAs as have most of the industries with the view of trying to make it work.

Adv Meiring stated that the members of organised business feel strongly that when business put robust plans in place to deal with HIV/AIDS, the environment should not in any way undermine that. Particularly the tax system should add to the environment.

The Chair thanked BUSA and CHAMSA for their submissions and adjourned the meeting.