FEDUSA SUBMISSION ON THE 1999/2000 ELECTION BUDGET

PRESENTED TO THE PORTFOLIO COMMITTEE ON FINANCE
CAPE TOWN- 19 FEBRUARY 1999

Introduction

FEDUSA sees the 1999/2000 budget as another milestone for the people of South Africa. 1999 is the year of elections when South Africans cast their vote as part of the democratic process of good governance.

Fiscal and Financial Management
The lowering of the growth forecasts in December 1998 was realistic and in line with the turmoil in the world economy resulting in financial and economical crisis. The long term assumptions of the GEAR policy has not taken into consideration the adverse effects of the Asian financial crisis, the fall in the gold price and the turmoil in the weather patterns resulted in major losses to the agricultural and environment sector. The impact of the changing outlook of the world economy also impacted on our economy. The working people and the poor most acutely feel the pains of the global changes such as the slowdown in growth, increases in the interest rates resulting in mounting debts and the changed economic environment.

The success of macro-economic policies depends on Government's management of state funds. The budget deficit targets set by Government and the spending policies clearly indicate that a reprioritisation of expenditure has taken place. However, the majority of South Africans are feeling the brunt of fiscal discipline. Government is calling on South Africans to save and relieve debt, but in the impoverished environment it is just not possible. The focus on the overhaul of financial management and the budget process would prove to be key features during the 1999 process of financial and fiscal management. The detailed account of spending and service delivery by national departments and spending agencies are welcomed and would ensure the monitoring of fiscal discipline and policy.

Inflation
FEDUSA believes that the setting of the inflation rate should be done with the involvement of civil society those who have to carry the burden of the decision. Once again as during 1998 FEDUSA calls for the setting of inflation targets and the continuous revision thereof at NEDLAC level. Not to do so would lead to the same problems as the unilateral imposition of GEAR. We believe and have always believed that the South African problems can only be overcome by the joint effort of civil and political society.

Debt management:
The improvement in the collection of taxes by SARS are commendable as improved tax collection and administration is key to the income tax relief for lower income earners. The continued improvement of revenue collection and management by the Revenue Services are again called for as this would result in all South Africans required to pay taxes contributing to a better life for all. The forecasted flow of revenue has improved since 1998 but it should not be at the cost of working people. The tax evaders should be brought to book and the tax net widened as far as possible. Hopefully with the introduction of the computerised (NITS) system, Government will be in a position to track down tax evaders and broaden the base. Getting a better balance between direct and indirect taxes should even further broaden the tax base. Our tax system is still too penal towards what one earns and saves rather than focussing more on what one consumes and spends.

A focus only on the income side of the budget is unrealistic, as the spending thereof is crucial. Corruption, misappropriation of State funds and wastage must be vigorously rooted-out. Government saving is crucial to the debt management process. Overspending by the various departments and provinces should also be closely monitored to avoid the recurrence of the 1998 financial crisis of some provinces. The financial recovery of provinces should be managed to ensure better health, welfare and education in a safe environment.

Taxation:
The South African tax system needs to be drastically reformed in order to foster job creation and economic growth, ensure a healthy level of foreign currency and reserves and maintain a stable currency. The key taxation implications implemented in this budget which FEDUSA must comment on are the following:

FEDUSA applauds the relief on personal income tax. The cumulative effect of direct and indirect taxes creates an unfair burden on the man in the street, especially when one considers the available social benefits and service delivery being received in return. Through the government's efforts to aid lower income earners are met with approval, there is growing concern that the country's middle class is being taxed too much and is quickly losing the ability to create the savings required for long term growth and financial stability.

The increase in the primary rebate from R3515 to R3710 is a welcome start to the process to address the tax system. The severity of the personal income tax burden should once again be investigated. FEDUSA calls on Government to lower the fiscal burden on taxpayers even further. What is of concern to FEDUSA is that a relatively small portion of the people in South Africa contributes to State spending. Measures should be implemented to widen the tax net.

The taxation relief for low and middle income earners announced by the Minister of Finance would also result in 80% of the Public service paying less taxes on their income.

FEDUSA welcomes the adjustment to transfer duties encouraging home ownership, especially for the lower income earners. FEDUSA contends that the right to own property is an important cornerstone of individual advancement and supports benefits to workers hereto. FEDUSA would like to propose that a tax deduction for interest paid by bondholders on their mortgages are also allowed. This tax deduction would be a benefit for South Africans to rather buy property than to rent.
The aimed focus in 1999 by Government on the unscrupulous loan sharks in the micro-lending industry is a major step towards cutting on exploitation of the poor. Interest rates are abused resulting in the poor becoming exploited and human rights infringed.

Job Creation
A growing economy is the best way to solve the unemployment crisis. While economic growth was very low 1998 was characterised by job losses worsening the situation even further.

The calls from various sectors of the business and even Government to review the labour legislation during 1999, most probably after the elections, are very disturbing. This is definitely an attack on labour rights and not a call for so called" Economic Pragmatism in tackling job creation". Since 1994 workers through negotiations with Government and Business had to fight for democratic labour rights and it was achieved purely through hard core negotiations. An effective labour market and labour relations system are central requirements for growth and employment in an environment that is protecting universal labour rights. FEDUSA calls upon business and Government to encourage training and retraining of workers to meet standards of technological advancement and industrial restructuring to meet job security and - stability.

Without a co-ordinated strategy and the provision of resources, jobs will not be created. The persistent high levels of unemployment should be addressed by real measures of job creation and not simply job shedding.

The 1999/2000 budget is a positive step towards redressing unemployment and poverty. With 37 of every 100 people being out of work with little or no prospect of employment, South Africa faces imminent social disaster beyond the capacity of Government alone to redress. Labour, being the three national trade union federations, pledged a days wage towards job creation on the 3rd of March 1999. FEDUSA calls on all South African -workers and employers, civil servants and private individuals, government and all political parties in South Africa to stand together and pledge a day's wage being one day's output towards the economy for job creation and employment. For this purpose the Labour Job Creation Fund was created to combat the scourge of joblessness in the economy.

Crime and the Justice system
FEDUSA believes that if Government is serious about the tackling of the high level of crime in South Africa it must pay attention to the functioning of the Criminal Justice System and the plight of Public Prosecutors. The general lawlessness of the South African environment demands that the Public prosecutors should work in an environment which is conducive to tackling this problem effectively and efficiently. Failing to do so will have a negative impact on the socio-economic interests of all the workers and the Country at large. The decrease in real terms in the 1999 Justice budget allocation will seriously hamper the salary negotiations with the FEDUSA affiliate, The National Union of Prosecutors (NUPSA), who represents the majority of prosecutors. NUPSA has continually warned the Minister of Justice of the negative effect on the justice system should the poor working and court conditions not be adequately addressed. The failure to address this issue has prompted FEDUSA to file a section 77 Notice of Intended protest on NEDLAC to institute countrywide protest action.

The significant exodus of experienced people within the criminal system results in those left behind to deal with the crime situation. As a result crime has become unmanageable and even more violent. The net result of crime is the outflow of foreign capital resulting in the fall of the currency and economic crisis. Ordinary citizens like you and me will definitely feel the justice budget allocation as prosecutions and convictions become less frequent due to the staff capacity.

Public Service Retrenchments
Government is committed to cutting the size of the Public Service but at the same time it needs to prove more than just lip service to the extension of services to the community. FEDUSA notes Government's commitment to increase the labour intensity of Government programmes and the extension of direct employment initiatives. In 1999 it was reiterated that part of reducing a bloated Public Service would be by retrenching public servants. However, the full budget allocation for increase prior to reaching an agreement with labour makes a mockery of the collective bargaining process.

Currently the Skills Audit determining the Government's public service requirements are underway. FEDUSA realises that the public service must be restructured to be efficient and committed to service delivery. The question remains how it should be done. Merely retrenching public servants cannot result in a more efficient streamlined public service. Retrenchments of public servants can not be seen as a once off event as the process should be properly planned and Organised, after the results of the Skills Audit have been studied and the implications thereof dealt with and negotiated with all the public service unions in the central bargaining chamber. According to the FEDUSA affiliate, the Public Service Association (PSA), measures which could be included to assists the process of streamlining the public service, after the skills audit has been done, could be a moratorium on the employment of people from outside of the public service and the re-deployment of public servants to the areas or posts where needs have been identified or the process of voluntary retrenchments can be offered. By simply reducing the size of the Public Service without offering proper severance and retrenchments packages will only result in even greater job losses and more dependency on the State for pension and social relief services.

The social impact and the costs to greater society and other areas of the Budget, such as policing from the probable social disruption, social welfare and impact on the health and education systems, should also be calculated into the Budget. FEDUSA proposes that a social plan be established before any consideration of retrenchments can be done.

Education
The increase in spending on national and provincial education is welcomed, but Government should be warned that FEDUSA affiliates within the Education sector would monitor the process closely to ensure that spending takes place on real needs and that the education standards and quality of education are indeed uplifted.

The boost in the Redress fund to overcome the chasm between disadvantaged and advantaged higher education universities are welcomed. In addition to this the increase in financial aid to students will ensure access to universities and technikons by the people of South Africa.

Once again the shortage of immediate education needs, specifically the supply of textbooks and stationary necessary in providing basic education to the communities, were not sufficiently addressed. Large numbers of children were turned away at State funded schools due to overcrowded classrooms. Though the education budget allocation increased, the inflation rate at 6% or 7% would mean that in real terms no increase was allocated to sufficiently provide for the enrolment growth at schools and tertiary institutions or to eliminate the education backlogs.

Skills Development
The introduction of a 0,5% skills levy to finance skills development during the 2000/2001 financial year is part of the process of providing training and skills to the people of South Africa. During 1998 the Skills Development Bill agreed by all parties proposed that business contribute 1% of its payroll for training. By phasing in the skills levy from 0,5% in 1999 to 1% in 2000 it indicates the commitment from Government and Business to develop the skills of the workers as well as the unemployed. FEDUSA, however, calls on Government to contribute on a rand for rand basis the same amount which business is putting forward in terms of the Skills Levy bill.

Taxation of the retirement fund industry
The decision by Government not to increase the retirement fund taxation is commendable as this indicates a step towards saving of GDP. The current uncertainty on the future tax position of retirement funds is unacceptable and unfair. People need to do their long term planning in a climate of tax certainty and should be given incentives to provide for their own retirement. The increase in 1998 from 17% to 25% in taxation on the interest and rental income of the retirement funds was appalling. The Minister of Finance targeted an extremely soft target, where considerable additional income for Government are to be generated as it is means to provide for old age and not to cover deficits of government not meeting their economic targets. South Africans approaching retirement will in future have to consider whether they have sufficient funds available to retire in financial security. Uncertainty about the taxation of end benefits also leads to a situation where many close to retirement are making potential bad decisions to retire early based on continuous tax rumours. The 1998 increase reduced the returns earned by a fund and its investments, resulting in the member's end benefit being reduced by between 20-25% over a 30 year, resulting in the member's end benefit being reduced by between 20-25% over a 30-year period. Any further erosion against a members benefit would be grossly unfair and a disincentive to provide for retirement.

It appears to be very unfair in particular to persons in the low-income categories, whose marginal rates are lower than 25%. Such persons will now pay more tax on retirement fund assets than on money they own outside retirement funds.

What are of great concern to FEDUSA are the concerns on the impact of saving for retirement which have been raised with Minister of Finance but to no avail. FEDUSA has advised the Minister of its concerns and opposition to any further increases. It remains the view of FEDUSA that the average South African is overtaxed and further depleting a person's retirement provision adds insult to injury.

Increase in fuel levy
The declining fuel price prompted Government to once again increase the petrol price levy on leaded and unleaded petrol resulting in people paying more for essential transport services such as taxis which in return are now forced to increase their tariffs. The benefits to commercial road users by not increasing the fuel levy on diesel are welcomed. So in the end the poor spends more and saving is still negative.

Conclusion
The ANC led Government's election promise of a "Better Life for All" remains central but is pursued with slightly fewer resources than planned. FEDUSA welcomes the composition of expenditure and the increase in spending on health, justice, policing and education, which indicates a considerable reprioritisation in favour of social expenditure and poverty relief as well as the equitable delivery of services and addressing basic needs.

In conclusion FEDUSA would like to thank the Portfolio committee for the opportunity to submit our views during the hearings on the People's Budget 1999.