Submitted to the Joint Budget Committee

Table of Contents

1. Introduction
2. The People's Budget
3. Overall comments on Medium Term Strategy Framework
4. Fiscal Policy
5. Taxation
6. MTEF Expenditure Framework

6.1 Overall Expenditure
6.2 Expanded Public Works Programme
6.3 Comprehensive social protection
6.4 Health Care
6.5 Land and rural development
6.6 Housing
6.7 Trade and Industry

1. Introduction

The People's Budget Campaign [PBC] appreciates the Joint Budget Committee's invitation to make a submission on the 2004 Medium Term Budget Policy Statement. To date, this is our fifth submission, since our first submission in 2000.

As the Committee will be aware from our previous interventions, the People's Budget Campaign consists of the South African NGO Coalition (SANGOCO), the Congress of South African Trade Unions (COSATU) and the South African Council of Churches (SACC). It represents the three key pillars of civil society, namely the church community, non-governmental organisations, and trade unions.

Our organisations work to develop common perspectives on national budget issues of concern to our respective constituencies, and we are committed to expressing these perspectives jointly. As a result, we would respectfully request that if the Joint Budget Committee wishes in future to solicit the views of any of the Campaign's members on matters related to the national budget, an invitation to that effect should be directed to the People's Budget Campaign as a whole, rather than to any of its members individually. The Campaign may be contacted through any of its members, and contact details for each of the organisations are listed on the cover of this submission.

Whilst the invitation and format of the hearings are largely aligned to the 5 clusters of Government's Programme of Action, and we were specifically invited to do a brief oral and written presentation on a specific theme, we have commented on various key aspects of the MTBPS, as we have done traditionally. We trust that all the aspects of our submission will be considered accordingly.

In an earlier press statement, dated 26 October 2004, and appended to this submission, the People's Budget Campaign responded to key aspects of the Minister of Finance's 2004 Medium Term Budget Policy Speech. In this submission, we also comment on the Medium Term Budget Policy Statement 2004 and to a lesser extent on the Adjusted Estimates of National Expenditure 2004.

Notwithstanding ongoing concerns and recommendations, we welcome the fact that the MTBPS states that it is based on Government's Programme of Action which strongly commits government to reducing poverty and creating jobs. This submission presents our perspective regarding the extent to which the current MTBPS can realise this programme of action.

2. The People's Budget

Most members of the Joint Budget Committee would by now be familiar with the history of the PBC. To the honourable new members of this Committee serving in the third democratically-elected Parliament, we attach with this submission, a copy of the 2005-6 People's Budget Proposal. This was first published just prior to the tabling of the February 2004 Budget.

Importantly, this fourth budget framework proposal "does not seek a populist alternative, but rather an alternative that is credible and evidence-based. The proposals presented ... are for the 2005/6 financial year."

These proposals stand, but Members should also consider these in light of this submission and the adjustments and new initiatives contained in the MTBPS of 2004. Essentially the People's Budget Campaign, whilst acknowledging significant shifts in the current MTBPS and Budget towards a more expansionary fiscal policy framework with elements of redistribution, continues its Campaign to:

• locate fiscal policy within an integrated developmental perspective;
• make proposals for job creation and rapid poverty eradication, particularly in rural areas; and
• provide revenue and expenditure proposals that translate our vision into practice.

In this regard, the People's Budget Campaign Proposals 2005-6 made recommendations in four subheadings, namely, a broad approach to poverty eradication, spending proposals, building participation and financing an integrated development strategy.

This submission specifically responds to the 2004 MTBPS, and has as its format the various chapter headings of the MTBPS, as outlined in the table of contents. Our response takes into account a number of factors acknowledged in the 'Towards a Ten Year Review' document published by the President's Office earlier this year:

• the poor became poorer between 1995 and 2000;
• the racial character of income and expenditure remains unchanged;
• gender and race still correlates closely to poverty and provincial disparities persist;
• unemployment remains high, having risen rapidly in the last decade. The official unemployment rate increased from around 16 per cent in 1995 to 27,8 per cent in March 2004, whilst the current expanded unemployment rate now tops 41,2 per cent.

We also engage a number of important new initiatives by government that seek to address these concerns, in part by fine tuning fiscal policy to support growth and broad-based development. Briefly, these include microeconomic strategy reforms, increased public sector borrowing by state-owned enterprises to fund new capital investment and consolidation of the NEDLAC Growth and Development Summit agreements, such as policy and draft legislation on corporate law reform, credit law, consumer legislation and other matters.

3. Overall comments on Medium Term Strategy Framework

Whilst economic growth has indeed gained momentum over the past year, the MTBPS makes several claims that require further analysis and debate. For example, the overly optimistic claim that 'job creation has quickened', needs to be contextualised. What kind of job creation and economic growth is it we speak about? To what extent can it be quantified in terms of the impact on reducing poverty, inequality and unemployment? Within the South African context, with the persistent legacies of apartheid, these should be the minimal tools to evaluate our progress.

By the expanded definition, unemployment stands at 40% and must be considered a crisis for any middle-income country. Therefore, claims of jobs created, should first and foremost define what a 'job' is, whether it is short-, medium- or long term and how this compares to the rate at which jobs are being lost. For example, SACTWU, a COSATU-affiliate, reports that 20 000 clothing, textile and leather jobs were lost in 2003 alone. Do the survivalist 'jobs'; created in this sector compromise for the loss of these fulltime jobs? Clearly, it should be a priority to ensure that our investment, our capital and our money are not used to promote a growth path which destroy jobs.

If the 'reduction of poverty and creation of jobs' form the core basis of government's programme of action, then future Treasury publications, including the MTBPS should have a least a chapter devoted to this primary concern.

One of the key problematic provisions has been the decision to abolish exchange controls for South African corporate direct investments offshore. Whilst this decision may have been proposed by the Treasury and sanctioned by Cabinet, there has yet to be a broad national debate about the implications of this move. In the past, several other decisions were made without adequate participation, including those relating to:

• the relaxation of exchange controls to attract foreign direct investment, and
• the adoption of inflation-targetting.

Previous untested and uncoordinated initiatives, introduced in this manner, have had very problematic outcomes. There is therefore a critical need to review the linkage of economic growth with job creation in order to realise the objectives of government's programme of action.

The accolades of business and government notwithstanding, we are concerned that the abolition of exchange controls on outward foreign direct investments by South African companies and the decision to permit companies to retain foreign dividends offshore will undermine gross domestic gross fixed capital formation and accelerate job losses. We are also concerned that this is part of a continuing series of changes that will contribute to the 'footloose' nature of capital. Already, statements in the media ask whether the next step would be to 'eliminate remaining exchange controls in coming years'.

The People's Budget Campaign has argued instead for measures to check the mobility of big capital. In particular, we have called for the introduction of a 'Tobin Tax', which would act as a 'speed-bump' to stave off mainly speculative investment and capital flight. This tax has been introduced in countries like Canada and Chile with a fair degree of success, and was recently adopted by Belgium. We regret that the Treasury does not appear to have seriously considered this proposal.

The People's Budget Campaign is concerned that the notion of 'economic growth', with an emphasis on spending on infrastructure, is now seen as a strategy that takes pre-eminence above other integrated strategies. In particular, we question the recent statements and perceptions in the media that the current social security provisions are creating a welfare state and that social security provisions need to be reviewed. We comment extensively in the section below entitled 'MTEF Expenditure Framework';. Whilst the Campaign supports infrastructure spending in needy areas in particular, we object to the argument that this priority focus should crowd out the much need rollout of a comprehensive social security system.

We retain our ongoing objection to the lack of meaningful public participation in fiscal policy formulation. It appears that the 'Tips for Trevor' initiative is now an official part of the MTBPS, as listed on p.12 of the document. We believe that this makes a mockery of Parliament's Constitutional right to amend the budget once an acceptable Money Laws Amendment Bill has been enacted. Through Parliament, civil society and the public at large should have an opportunity to debate the implications of the MTBPS in a context that permits carefully considered adjustment of the budget. We again call for the tabling of this critical Bill.

On the more positive side, we note that the Treasury has begun to describe the extent of the growth and development challenge and has correctly outlined the dimensions of inequality.

Table 1: Dimensions of Inequality

The above table illustrates the ongoing challenges with respect to inequalities determined by race, gender, age and location.

We believe that this kind of feedback should be more comprehensive and sustained, since it is a critical indicator of the extent to which government's commitments to reducing poverty and creating jobs are being realised. However, clear definitions and a frank acknowledgement of gaps and challenges would be welcome.

4. Fiscal Policy

The 2004 MTBPS sustains the modestly expansionary trend of recent years. Non-interest spending is expected to increase by 4,3 per cent in real terms over the next three years. However, this increase is 'front-loaded' since non-interest spending will grow by 6,5 per cent next year, dropping back to 3,2 per cent for each of the two outer years. We would like to know why the Minister characterises this as 'necessary to achieve a "sustainable" trajectory'. We believe that if the MTBPS achieves the higher rates of social investment, gross fixed capital formation and economic growth envisioned, government would be able to sustain this moderately expansionary trajectory.

We welcome plans to permit additional borrowing during the current period to give government greater capacity to drive development. The 3,5 per cent target for the main budget deficit in 2005/06 is consistent with levels that the People's Budget Campaign has been calling for during the past four years. This means that, during the next three years, government will gain a total of R13,3 billion more than was projected in February. This shift of direction since 2001 is vital to promote recovery after the austerity of the late 1990s.

We commend government's commitment to increasing investment in public enterprises and infrastructure, particularly municipal infrastructure, during the life of the MTEF. However, we are concerned that the Treasury predicts that investment in state-owned enterprises will be funded in part by the sale of current assets. This is a source of concern, reintroducing the notion of privatisation that was halted in the last couple of years. Similarly, we remain concerned about the implications of the growing share of the infrastructure expenditure through public-private partnerships. Issues of affordability to the poor remain our key concern, although it is claimed that this will be controlled through administered prices.

As part of our perspective on parastatals, the People's Budget Campaign believes that much more can be done within the electricity sector to address usage and energy efficiency. Several sectors, particularly mining, can do much to save on electricity usage. Alternative sources of renewable energy should also be explored more aggressively.

The Unemployment Insurance Fund continues to operate with a large annual surplus, averaging around R3,5 billion per annum. This situation is projected to persist throughout the MTEF period. Although this effectively lowers the deficit of the consolidated national budget relative to the main budget, it also indicates that there is considerable spare capacity in the fund. Whilst the surplus is favourable, it raises the questions of whether the fund is meeting its primary objective which is to provide short term social security for beneficiaries. Within the context of high unemployment and concerns raised in the 2004 Budget, where claims paid out had decreased, this development highlights the need for UIF reform, including increasing the frequency and duration of benefits for eligible beneficiaries, the amounts, increased cross-subsidisation and finally, extension of the fund's coverage to those currently excluded, in particular public servants and workers who have resigned.

We have concerns about the statement that government has to relook at 'appropriate funding levels'; for the UIF, in view of the surpluses made. International trends have shown that the nature of this type of fund is that it is unstable and fluctuates, as reflected in the Taylor Committee Report which called for State underwriting of the UIF. In line with the Committee's recommendations, we reiterate our call for government underwriting of the Fund.

We note with interest the commitment to moderate inflation targeting of around 5,1 per cent over the MTEF period. This is against the backdrop of previous attempts to stay within the 3-6 per cent inflation target range through increases in the interest rate. Often inflation targeting has been used to justify low wage increases and has the potential to make working people more vulnerable to economic and social burdens, in addition to its contractionary effect on the economy. Indeed, the weighting of factors to determine the CPIX has without fail had higher percentages for transport, food and medical expenses -- these factors indicate the manner in which increases have disproportionately disadvantaged working class and poor people. An inclusive discussion of all economic policies, in order to develop more appropriate and broadly supported strategies for social and economic development is required to contextualise the role of inflation targeting and its merits.

5. Taxation

In his MTBPS speech last week, the Minister of Finance warned that 'tax relief will not be a prominent feature of the 2005 Budget'. If this turns out to be so, we applaud the Treasury for kicking the tax cut 'habit'. The cumulative impact of the tax cuts made over the past decade accounts for a total of R75 billion in foregone revenue annually, or nearly a quarter (22,3 per cent) of the tax revenue the Treasury expects to collect this year.

In this context, we are encouraged by the Treasury's plans to allow a modest increase in the tax to GDP ratio over the life of the MTEF. The tax to GDP ratio is set to rise from 24,5 per cent last year to 25,0 per cent this year, to a target of 25,5 per cent in 2007/2008.

Table 2: Ratio of Tax to Gross Domestic Product, 2003/04 - 2007/08

This is a welcome change from the 2004 Budget, which foresaw an essentially fixed tax to GDP ratio through 2006/07. Total tax revenue between 2004/05 and 2006/07 is now expected to be R11.4 billion more than was predicted in February. However, there is still scope for a bolder fiscal approach. Research commissioned by the People's Budget has shown that it is possible to achieve a tax to GDP ratio of close to 29 per cent without causing substantial economic distortions.

Whilst the People's Budget Campaign welcomes the MTBPS enhanced revenue projection, we remain deeply concerned about the composition of revenue. Company tax revenues were R4,9 billion less than projections in 2003/04, and the shortfall seems likely to be even greater this year: R6,2 billion. In 2004/05, the loss of company taxes will be more than offset by increased personal income tax revenue (R3,8 billion more than projections) and extra VAT collections (R4 billion more than projections).

Table 3: Composition of Revenue, 2004/05

The low effective corporate tax rate means that the poor and the working poor have to assume a larger share of the revenue burden. Future revenue projections foresee that company taxes (including secondary taxes) will consistently generate roughly two-thirds of the revenue from personal income tax and significantly less than VAT. This makes little sense from the perspective of building a developmental state.

Whilst the Treasury has quite correctly moved away from generous annual income tax cuts for individuals, there appears to be a willingness to allow companies to continue to enjoy a comparatively favourable tax regime. At the same time, there is little or no pressure on these firms to adopt more labour-intensive production strategies. Previous experience has shown that companies, who were supposed to be the 'engines of development in a post-apartheid South Africa', did not come to the party, even when given the best opportunities to do so. We should not forget that they paid high taxes prior to 1994. Now, many squabble over the GDS agreement requiring 5 per cent of investable income.

The People's Budget Campaign reiterates its call for a progressive restructuring of the tax system to alleviate the burden on the poor. In the past, we have proposed both a 1 per cent reduction in the rate of VAT - a 'people's tax cut' - and the introduction of a tiered VAT system that would minimise the cost of basic commodities whilst imposing a higher rate of tax on luxury goods, and the introduction of a minimum effective tax on companies? We urge the Joint Budget Committee to endorse these proposals and to request a detailed response from the Treasury.

Finally, these developments all point to an alarming trend, namely that government is allowing big business an unduly lax tax regime, whilst imposing an increasingly harsh tax environment for low-and middle income earners.

6. MTEF Expenditure Framework

6.1 Overall Expenditure

The MTBPS projects growth of 4,3 per cent in overall non-interest government spending in real terms over the next three years. The People's Budget Campaign welcomes this extension of the moderately expansionary trend of recent years. The table below shows the annual real growth in consolidated national and provincial expenditure by type of service over the life of the MTEF, using the indicated GDP deflator data (p. 30 - MTBPS).

Table 4: Real change in consolidated expenditure by type of service: 2004/05 - 2007/08

Thus, from the table above, most areas of the budget will grow in real terms during the next three years, with expansion especially pronounced in the first year. However, we are concerned that the relatively slow real growth in the education budget, particularly in the outer years, will be insufficient to keep pace with population growth, resulting in reduced spending per capita.

This year, social services spending surpassed 59 per cent of the budget. The MTEF projections indicate that spending will remain at this level through 2007/08 (see Table 4). This is vital to addressing poverty and inequality.

Table 5: Relative shares of departmental budgets

Insofar as the government has sought to realise its objectives happens through public-private partnerships, we are concerned that there continues to be a problematic assumption that this relies largely on such partnerships should primarily be with large commercial companies. The People's Budget Campaign believes that a range of other partnerships needs to be seriously considered, including public-CBO/NGO partnerships and the rollout of labour-intensive broad based black economic empowerment projects. Broad-based BEE projects should not only include the historically disadvantaged in ownership, but should also be focussed on job creation and human resource development strategies. In the financial services sector in particular, there are opportunities for investment that include community development elements that can create jobs and entrepreneurial opportunities critical to our economy.

6.2 Expanded Public Works Programme

We continue to support the Expanded Public Works Programme (EPWP), announced last year as a result of the agreements emerging out of the Growth and Development Summit. Regrettably, this year's MTBPS provides little additional information about the progress or impact of the EPWP. In fact, it is only mentioned once or twice in passing. At one point (p. 15), we are told that the EPWP created 37 995 jobs between April and June 2004, with no further explanation of what this means or how this number was attained.

The EPWP must be viewed as an urgent priority by all government departments. Since the funding for the EPWP is channelled through a number of departments, we urge the Treasury provide a comprehensive and consolidated review of the programme's resources, progress and impact. This should include a detailed analysis of its contribution to job creation and its impact on GDP, along the lines of the studies done by researchers.

6.3 Comprehensive social protection

Welfare spending will be the fastest growing area of the budget for the next two years, with a substantial 11,7 per cent real growth expected in 2005/06. We applaud the continued expansion of the social security system - especially the extension of the Child Support Grant to children under the age of 14 - and the allocation of additional resources to direct income support. We note that the draft Ten Year Review highlighted the effectiveness of direct transfers as a strategy to combat poverty. Yet, the recent HSRC Report, based on 2001 Census data, reveals that 25,7 million South Africans (57,5 per cent of the population) were living below the poverty line. Even though government has done much to address access to social security, the fact that the majority of the population is living below the poverty line is a source of great concern.

Table 6: Number of people receiving social grants

However, we are concerned by a growing emphasis on restricting access to social grants or, in the Minister's words, 'keeping out everyone who is not entitled to them'. Again, although we appreciate government’s eagerness to stamp out fraud, we are dismayed by the dubious speculation that the dramatic increase in disability and foster care grants can be substantially attributed to administrative deficiencies and misuse of the grant system.

Instead, we see this primarily as a reflection of the pervasiveness and depth of poverty and the impact of HIV/AIDS. In this context, a grant system that seeks arbitrarily to distinguish between the 'deserving' and 'undeserving' poor is doomed to experience problems. Why, for instance, does a poor child cease to be 'deserving' of social assistance on his or her/his 14^th birthday?

We therefore feel that this problem could be addressed most efficiently through the introduction of a universal basic income grant as part of a larger comprehensive social protection package. This would help to meet the basic needs of poor households that currently have no access to social assistance, without requiring the introduction of complicated new anti-fraud measures that could create insurmountable barriers for otherwise eligible applicants.

Specifically, the Minister of Finance referred to the unsustainability of growth rates of social grant spending. Within the South African context of massive poverty, and shifts in the grant system these concerns are misleading - insofar as it is a necessary and obvious phenomenon when the rollout of grants to beneficiaries is a deliberate product of government policy, particularly, but not only in relation to the child support grant.

Of course the growth rates will be very high, as grantees are taken up and the system reaches people. When there is full take-up - the growth rate would be equal to the population growth rate. Since the rollout of grants was embarked on as a national initiative, the average growth year on year was well in excess of 50 per cent.

Even previous National Treasury studies stated that social security grants represent the most pro-poor intervention and that education, social, and health care grants are the most effective forms of targetting. Economists in the National Treasury were unambiguously supportive of social grants as a fundamental aspect of sustainable development. Even business acknowledges the developmental role of social grants.

We therefore would like clarity on the reasons behind this rather unusual statement. The term 'not sustainable' in this context is highly inappropriate. We note with interest the allocation of R40 million (as unforeseeable and unavoidable expenditure) allocated to the Department of Social Development for improving the integrity of the grant system, in particular for implementing immediate steps to 'stem unwarranted growth in access to disability grants.'

Such rhetoric is alarming, particularly as it seems to be preparing the way for a policy decision to deregister people from the disability grant. Whilst government has every right to curb fraud and ensure proper allocation of social security funds, we find such tactics outrageous and unacceptable. It appears to be a deliberate attempt to 'crowd out' social security allocations, whilst awaiting the outcomes of recommendations or evidence-based reasons for this uptake. It also stifles the debate necessary to such a sweeping decision.

It also reraises the need for a national debate on the appropriate size of the fiscal envelope required to address our national developmental challenges, including issues raised above, around an appropriate tax:GDP ratio, and a sufficient flexible deficit policy to release necessary resources.

6.4 Health Care

We support the Treasury's desire to make basic health care benefits more affordable to low income earners and look forward to studying these proposals in greater detail.

The People's Budget Campaign welcomes the real projected growth per capita in health spending in 2005/06 and 2006/07, although we are troubled by the much slower growth expected in 2006/07. We also applaud the deepening of the hospital revitalisation programme that started in 2002/03. However, we are disappointed that the MTEF provides very little information on government's plans to provide vital medications to combat HIV/AIDS. We join with those who call for the publication of a comprehensive delivery plan that includes targets and timetables for action.

We will monitor with interest the rollout of primary health care (excluding environmental health) that is now the responsibility of the provincial sphere, as promulgated in the newly enacted National Health Act.

We also request urgent clarity with regards to the mechanism by which the current distinction between taxation of off-site anti-retroviral therapy and tax-benefits afforded to treatment provided in the workplace will be resolved.

6.5 Land and rural development.

Spending on land redistribution and rural development will grow slightly over the next three years. However, underfunding in the past has left the programme with a relatively small base. As a result, substantially more resources must be invested in the land reform programme if it is to have any hope of achieving the goal of redistributing 30 per cent of South Africa’s commercial agricultural land by 2015.

Land redistribution, tenure reform and agrarian development are critical to transformation and the reestablishment of a stable and thriving economy in rural areas. It is not sufficient to 'maintain the momentum' of land restitution and reform initiatives; they must be given higher priority and linked to appropriate support programmes that can assist land reform beneficiaries to use land productively and sustainably.

Moreover, we are anxious that additional funding not be used simply to bring the land restitution process to a hasty conclusion so that it can be moved off the agenda. Increasing the capacity of the DLA must be coupled with a review of the objectives and impact of current land reform policies that actively involves affected communities.

6.6 Housing

We commend the review of the national housing programme and the resulting emphasis on ensuring that housing provision is supported by the development of related infrastructure designed to ensure the security, well-being and sustainability of settlements, and the 'introduction of new housing subsidy mechanisms to satisfy a more diverse range of housing needs, such as alternative tenure options and affordable rental housing' (p.60 - MTBPS 2004). However, we are concerned by indications that government will increasingly be looking to the private sector to take on a greater role in housing delivery, and we remain perplexed about the status of the Community Reinvestment Bill.

We look forward to seeing this renewed commitment to housing delivery translated into larger resource allocations in the 2005/06 budget. It is not possible to tell definitely from the MTBPS whether future budgets will expand the share of resources allocated to housing delivery from the current rate of 1,4 percent to something closer to the 5 per cent target set by the Reconstruction and Development Programme. However, the indications from the Adjusted Estimates, which provides for a R22 million decrease in the current housing budget, are not auspicious.

6.7 Trade and Industry

We are alarmed that the Adjusted Estimates of National Expenditure allocates half a billion rand to finance the experimental Pebble Bed Modular Nuclear Reactor. Two issues motivate our concern. First, the decision to fund the experimental nuclear reactor suggests that a controversial matter of policy has been settled by stealth. Members of the People's Budget Campaign have lodged objections to this initiative. Until now, there has been no indication that government had reached a policy decision on the matter. Second, we are dismayed that government is stepping in to bail out a scheme that even potential financing partners deemed non-viable. We believe that the development of safe, renewable energy resources should be given priority.

7. Provincial and Local government

We note the major change in the provincial fiscal framework for the 2005 MTEF due to the shift of the social security grant function from the provincial to the national sphere of government. This shift has impacted significantly on the division of revenue between the three spheres of government. Our understanding of these shifts is that there are no significant additional overall changes in the allocation of resources to the three spheres of government, once the recalculations involving the shifts due to the National Social Security Agency has been taken into consideration.

We look forward to the outcome of the review of the local government fiscal framework. The reforms that will emerge from this review to 'improve the performance of the local government sphere' to take into consideration the new property and valuation system and assessment of the impact of the restructuring of the electricity distribution industry in municipal finances is a critical outcome that will determine whether most citizens will be able to afford and have better access to municipal services.

So too, would be the outcome of the review of the formula for allocating the local government equitable share, aimed to 'develop a simpler formula that balances demand for basic services and takes more explicit account of variations in the revenue raising capacity of municipalities'. It is regrettable that, once again, community participation in this review is less than ideal.

These restructuring initiatives and related reviews of functions and powers have exacted a considerable toll on jobs in the local government sphere, as with parastatals. Thousands of jobs are to be shed in Cape Town Municipality. We believe that whilst restructuring may sometimes be necessary, jobs should be saved as far as possible. This has not been the case over the past few years during these processes.

8. Recommendations and conclusions

The People's Budget Campaign has commented extensively on a range of issues that extends beyond the theme of today's hearings. We trust that the Joint Budget Committee will continue to consider our proposals that are both substantive and procedural.

The Committee would notice that, as before, our submission contains both support and criticism of government's decisions and direction. We are broadly supportive of the allocations made in the MTEF to realise the Constitutional obligations of government, and have for a long time called for a prudent relaxation of macroeconomic targets to enhance government's capacity to meet these challenges.

A main concern has been the recent statements by the Treasury about the future affordability of social security and the implications associated with it. A lot of progress will be made when economic growth is linked to job creation and promotion of economic equity. For this to happen, and for the RDP principles and commitments to be satisfied, the State must make bold decisions.

However, the procedural concerns with regards to the role of Parliament in amending budget allocations seems to have stalled, and we urge the Committee to exercise its influence in providing a way forward on the matter.

We remain supportive and committed to the role of the Joint Budget Committee and hope that your influence would be expanded and consolidated to further empower members of Parliament.

Appendix: Press Statement on the MTBPS - 26 October 2004

People's Budget Response: 2004 Medium Term Budget Policy Speech

The People's Budget campaign welcomes key aspects of the Minister of Finance's 2004 Medium Term Budget Policy Speech. We are pleased that the MTBPS is based on government's Programme of Action which strongly commits government to reducing poverty and creating jobs. At the same time, we raise concerns about certain elements of the Minister's speech.

Fiscal Policy

This year's MTBPS sustains the expansionary trend of recent years. We commend the Minister's decision to further relax the deficit to GDP ratio, thereby releasing more money for development and investment. The 3,5% target for 2005/06 is consistent with levels that the People's Budget Campaign has been calling for during the past four years. This shift of direction since 2001 is vital to promote recovery after the austerity of the late 1990s.

Although it elicited no cheers from Parliament, the People's Budget Campaign applauds the Minister's move away from offering a generous annual cut in personal income taxes. More importantly, we note that the Treasury will allow a modest increase in the tax to GDP ratio over the life of the MTEF from the 2003/04 rate of 24,3% to 25,1% in 2007/08. This is a welcome change from the fixed tax:GDP ratio envisioned in the 2004/05 budget. However, it still falls short of the 29% ratio that the People's Budget has calculated is possible without causing substantial economic distortions.

At the same time, we are concerned by the Minister's acknowledgement that the contribution of companies to tax revenue remains be low target. The Treasury has relied on personal income tax and VAT receipts to make up much of the shortfall. The low effective corporate tax rate means that the poor and the working poor have to assume a larger share of the revenue burden. This underscores the need to cut VAT, to reduce its share in the composition of revenue, and to move to a tiered system of VAT that would minimise the cost of basic commodities.

Growth, investment and jobs

The People's Budget campaign questions the vision of economic growth that informs the Minister's policy proposals. We welcome the more balanced emphasis on gross fixed capital formation over a narrow focus on foreign direct investment. At the same time, we are very alarmed by the Minister's announcement of the abolition of exchange controls on new outward foreign direct investments by South African companies and new provisions for the retention of dividends offshore. This approach is contradictory. Whilst it may result in a more competitive exchange rate in the short term, it might also undermine capital formation in the domestic economy. The efforts of South African companies to reintegrate into the global economy have already generated substantial capital outflows.

The Minister of Finance correctly acknowledges the need to pursue economic growth as a means to "create work and improved opportunities for ... millions of South Africans". But growth alone is no guarantee of new employment. Abolishing exchange controls for companies may lead to further job losses, as did earlier GEAR initiatives intended to attract foreign direct investment.

Although the Minister claims that 400 000 jobs were created between March 2003 and March 2004, this represents a very selective use of statistics. Clearly, a common platform is necessary to pursue this urgent debate. We must acknowledge the massive job losses of recent years and establish a shared definition of what constitutes a job. More importantly, there is a need to establish the kind of economic growth that would be labour-intensive, labour-friendly and able to contribute to sustainable growth and economic equity. Furthermore, the People's Budget Campaign believes that investment should be designed to create employment - a primary challenge, by government's own admission.

In this context, the People's Budget campaign was perplexed by the oddly peripheral references to the Expanded Public Works Programme in the Minister's speech. We trust that the additional documentation released today will provide more insight into government's plans in this regard.

Poverty eradication

The People's Budget Campaign shares the Minister's view that long-term development requires both investment in human capital in poor communities and direct income support. We therefore welcome new initiatives to promote accelerated housing delivery, to extend banking and credit facilities to previously underserved sectors of the population, to enhance the primary school nutrition programme, to improve safety and security, and to commit more funds to land reform. We are eager to review the plans for implementing each of these commitments in greater detail. In the case of land reform, for example, additional funding should not be used simply to bring the land restitution process to a hasty conclusion so that it can be moved off the agenda. Increasing the capacity of the DLA must be coupled with a review of the objectives and impact of current land reform policies that actively involves affected communities.

The dramatically increased take up of disability and foster care grants reflects the continuing depth of poverty in our society and the ongoing need for direct income support in many households. Whilst we understand the government's eagerness to prevent fraud and misuse of grants, we continue to believe that a universal basic income grant would use public resources more efficiently. It would extend direct income support to the many families who have little or no access to income without requiring the introduction of complicated anti-fraud measures. Such "safeguards" often curb programme costs by excluding otherwise eligible applicants who do not have the resources or know-how to surmount new bureaucratic obstacles.

We are surprised that the Minister did not devote more attention to HIV/AIDS prevention and treatment as key priorities for the coming three years. We are disappointed also by the failure to provide urgent tax-relief for off-site provision of anti-retroviral treatment by employers.

Division of revenue and local government

We note the adjustments to the division of revenue that have taken into account the 2001 Census data and other factors. We welcome the real increase in transfers to provincial and local government by 4,0% and 4,3% respectively.

The restructured equitable share formula with larger allocations to education, health and addressing backlogs in infrastructure are welcomed and appear broadly progressive. However, the effective R2,8 billion for local governments through conditional grants, rather than equitable share components seems prescriptive and deserves further analysis.

We note that the allocation of the local government equitable share allocations are under review, and would take into consideration the demands for basic services and the variations on revenue raising capacity of municipalities. The members of the People's Budget Campaign would be keen to make further inputs on this process.

The People's Budget Campaign plans to make a more detailed submission on the full MTBPS to the Joint Budget Committee next week.

FOR MORE INFORMATION CONTACT:
COSATU Parliamentary Office (021 461 3835)
SACC Parliamentary Office (021 423 4261)
SANGOCO Head Office (011 403 7746)