BUSINESS UNITY SOUTH AFRICA (BUSA) Presentation to the Parliamentary Portfolio on Finance on the subject of the 2004/05 National Budget 24 February 2004 Cape Town

“From fiscal stabilisation to a commitment to government delivery” An assessment of the 2004/05 National Budget by Connie Motshumi Roger Baxter

Minister Manuel’s Budget Speech p.5 The Budget recognised the critical imperative of higher levels of investment, economic growth, broad based empowerment and employment creation in the years ahead: “But we recognise that the pace of economic growth has to be accelerated. Investment in industry and infrastructure and an expansion of job opportunities are critical challenges for the decade ahead – both to underpin growth and expand room for broad-based empowerment.” Minister Manuel’s Budget Speech p.5

“Our task is, simply put, to accelerate the pace of growth and job creation and extend the scope of development and empowerment. Our approach has four key priorities for the decade ahead (Minister Manuel’s Budget Speech p.7.): We aim to increase the share of investment and saving out of national income, to provide the infrastructure and industrial capital formation required for sustained output growth. Our policies must aim to raise the level of investment in the economy from its present 16 per cent to 25 per cent, and to halve the unemployment rate by 2014. We will improve the quality of education and access to training opportunities, to ensure that skills development and productivity enhancement contribute to expanding participation in social and economic development.”

Our task is, simply put, to accelerate the pace of growth and job creation and extend the scope of development and empowerment. Our approach has four key priorities for the decade ahead (Minister Manuel’s Budget Speech p.7.) cont. We will reduce poverty by creating work opportunities and building sustainable communities, alongside consolidation of the social security system. Over time, we will diminish the inequality and economic divisions that characterise our society through broad-based empowerment. And we must continue to build sound institutions – competitive markets, support for emerging entrepreneurs, better governance and regulation, rigorous monitoring and measurement of public service delivery.

POSITIVE ASPECTS OF THE BUDGET: No new changes to the systemic tax system (after CGT, Source to residence, etc.). Small and appropriate widening of the deficit. The evidence of lower debt costs is in the extra resources made available for delivery of government services. There are no real prompts that will make the SARB change its monetary policy stance. There is a positive emphasis placed on improving the efficiency of key infrastructure. There will be further institutional reform on the tax collection side (I.e. the tax payer charter by SARS).

POSITIVE ASPECTS OF THE BUDGET cont.: Some details on the proposed Mineral and Petroleum Royalty Bill, including the phase out of the lock-in premium and the 5-year exemption period on royalties until mining companies have converted to the new minerals system. The focus on lowering the compliance costs to small business. The move to make ESOPS more tax friendly. The extension of the Public Finance Management Act in the form of the Municipal Management Act on local government. The Budget sets a platform for further deliberations on economic growth, development, empowerment and the restructuring of state assets.

NEGATIVE ASPECTS OF THE BUDGET: The Budget was not bold enough in tackling the key savings, investment, growth and empowerment issues. There was little concrete progress made on the taxation of retirement funds and addressing incentives for promoting much higher savings rates. The company tax rate after STC remains too high and has become globally uncompetitive. There was little detail provided on how the National Treasury intends promoting black economic empowerment (large BEE deals remain tax unfriendly). There was little tangible progress on the further liberalisation of exchange controls - even given the forex amnesty process.

NEGATIVE ASPECTS OF THE BUDGET cont.: There is an increasing skewness in tax collections away from indirect taxes towards direct taxation which is out of synchronisation with global trends. The capacity of provincial and local government to effectively and wisely spend on priorities is questioned. The budget deficit is again being used to fund recurrent expenditure. There appears to be a lack of progress on the restructuring of state assets front. The adherence to a gross revenue royalty for the mining sector is not only out of sync with global practice but will undermine investment, empowerment and growth as well as sterilise a portion of the national patrimony.

SOUTH AFRICA’S LOW SAVINGS AND INVESTMENT RATES REMAIN SERIOUS CAUSE FOR CONCERN: There was little progress on the taxation of the retirement fund industry and few extra incentives to promote discretionary savings. No moves on the corporate tax front. Little long-term foreign direct investment to boost South Africa’s low savings rates.

THE COMPANY TAX RATE AFTER STC REMAINS TOO HIGH AND HAS BECOME GLOBALLY UNCOMPETITIVE.

THERE WAS LITTLE DETAIL PROVIDED ON HOW THE NATIONAL TREASURY INTENDS PROMOTING BLACK ECONOMIC EMPOWERMENT (LARGE BEE DEALS REMAIN TAX UNFRIENDLY).

THERE WAS LITTLE TANGIBLE PROGRESS ON THE FURTHER LIBERALISATION OF EXCHANGE CONTROLS - EVEN GIVEN THE FOREX AMNESTY PROCESS.

THE CAPACITY OF PROVINCIAL AND LOCAL GOVERNMENT TO EFFECTIVELY AND WISELY SPEND ON PRIORITIES IS QUESTIONED. Every rand spent unwisely by these tiers of government will be growth reducing! The MFMA may help address some of the problems here.

THE BUDGET DEFICIT IS AGAIN BEING USED TO FUND RECURRENT EXPENDITURE.

THERE APPEARS TO BE A LACK OF PROGRESS ON THE RESTRUCTURING OF STATE ASSETS FRONT: Business does not only view ROSA as a useful source of funding debt write-offs. There are infrastructural and service constraints that are holding up growth in many key export industries. The lack of competition in many parastatal areas not only compounds poor service delivery but also results in high administered prices. The poor net investment performance of state parastatals (they are not even investing enough just to maintain the existing fixed capital stock).

THE ADHERENCE TO A GROSS REVENUE ROYALTY FOR THE MINING SECTOR IS NOT ONLY OUT OF SYNC WITH GLOBAL PRACTICE BUT WILL UNDERMINE INVESTMENT, EMPOWERMENT AND GROWTH AS WELL AS STERILISE A PORTION OF THE NATIONAL PATRIMONY.

ADOPTING AN APPROPRIATE REGULATORY IMPACT ASSESSMENT FOR SOUTH AFRICA: Over the past decade over 1000 new Acts of Parliament, thousands of regulations and by-laws have been passed as the country has transformed into a democratic non-racial society. Some of the convoluted “old order” regulation remains - such as the complex of regulations required to register a company. This needs to be assessed to reduce the compliance costs of operating in South Africa. BUSA remains of the view that the government should adopt a Regulatory Impact Assessment Strategy that would assess all future legislation and regulation for the impact on investment, employment and nation building.

CONCLUSION Overall the budget does deserve praise in relatively difficult circumstances. Obviously the efficacy of provincial and local government expenditures will be a key to the performance of this budget. Business does support the 4 key challenges alluded to by Minister Manuel for the decade ahead. With government having recognised the key investment, growth, skills development, institutional improvement and empowerment issues, it will be necessary in the next budget to effectively boost these priorities.