Chairperson of the parliamentary portfolio committee on finance - Dr Davies,

Members of the committee,

Political party representatives,

Distinguished invitees and dear attendees,


Chambers of Commerce and Industry South Africa, CHAMSA – the national umbrella body of South Africa’s premier national chambers of commerce and industry: AHI, FABCOS, NAFCOC, and SACOB, is pleased to deliver before this Public Hearing its balanced view on the Budget in tact with its official public, i.e. media briefings on the Budget.

The announced tax changes are poised to support economic growth and employment in a sustainable manner by strengthening the economy structurally. The tax measures to bolster small and medium enterprises are to be welcomed. This also applies to the reduction in the company tax rate although a larger reduction relative to a refrained tax relief grant on personal income may see to economic growth accelerating at faster pace.

Such technical reservations aside, given the present buoyancy in household consumption expenditure the decision to provide tax relief to individuals over and above that required to alleviate the effects of ‘bracket creep’ is appropriate. However the proposed changes to the treatment of motor vehicle allowances and medical aid contributions will increase the effective tax burden on the taxpayers in higher income groups.

As the Budget Review of 2005 (page 25) observes "Following a decade of prudent macroeconomic management, the economy has averaged growth of over 3 per cent a year since 2000. The economy will continue along this path in the medium term, with an expected average growth rate rising to 4.2 per cent in the period to 2007". The projections reflect an optimistic view of the future path of the economy, with a non-inflationary acceleration in growth at its heart. The credibility of Government’s revenue projections is particularly dependent on these forecasts, and as usual, they might be somewhat optimistic rather than reserved. The South African Revenue Service (SARS) has however succeeded admirably in exceeding budgeted revenue in recent years, and it is therefore premature to doubt the feasibility of the current budget.

CHAMSA unequivocally supports tax policy and reform complementary to economic growth and development, concomitant to preserving the progressive nature of the tax system prevalent in the country.

Fiscal prudence, consistency and a conservative approach to the Budget has served South Africa well for the past decade in many respects - particularly maintaining business and investor confidence locally and abroad. The National Treasury's drive towards tax reform, the continuation of which we urge, has improved efficiencies in the functioning of the tax system and done much for raising household consumption expenditure, boosted economic development, targeted fixed investment growth in conjunction with rising
levels in real savings, and promoted small and medium size enterprise development. The thrust towards lower tax rates on work, savings, and investments will further strengthen the resulting gains in economic performance such moves bring about by virtue of the productive behaviour they encourage in addition to keeping a check on the escalation of the general price level. This is quite apart from any additional gains that a
continued liberalisation in exchange controls under circumstances of rigid market flexibility stands to yield, which a relaxation in the latter is poised to magnify. Recent financial trends embedding the witnessed appreciation in currency, and the more enabling regulatory environment in existence involving relaxation in the forex market justify the continuance of exchange control liberalisation albeit the restrained stance adopted here in the present Budget Review. The faster it is possible to normalise the foreign exchange market the greater the chances of having the encountered residual volatility of the Rand minimised, which a move towards a more competitive exchange rate holds. Piecemeal policy attendance to this in light of already partially carried out reform merely preserves the referred to undesirable volatility.

In the context of international trade, although modest in relation to the reduction in the tax burden jurisdictions elsewhere pursue CHAMSA welcomes the lowering of the corporate tax rate from 30% to 29%. In direction but not in magnitude such move adheres on the one hand to the set stepwise precedent in the lowering of tax rates since 1995, and on the other is coherent with international tax competition. Reflecting on the impact of this last one the Organisation for Economic Co-operation and Development (OECD) notes in its 1997 report Taxation and Economic Performance (page 11) that "…reductions in … tax rates on investment … raise domestic investment and …attract foreign savings…. Furthermore, lowering statutory corporate tax rates and rates on personal capital income in countries where these are particularly high, may increase the domestic tax base as there are less incentives to shift taxable profits and capital income abroad." Simply put the National Treasury’s objective of a broader tax base stands to be fulfilled as continued lowering of tax rates and rates on personal income promotes greater reporting of earnings or income in addition to making possible the discharging of otherwise unduly withheld potential investments. In such light the phasing off, of the secondary company tax should be considered and practical steps taken for this to be accomplished. The tax - applied to paid out dividends – inherently leads to the accumulation of large cash balances within companies either unwilling or unable to pay the additional tax commitment as in one or another way the prospect of making a potential investment is de facto perpetually penalised.

In the context of easing the tax burden, CHAMSA welcomes the tax relief provisions designed to facilitate Broad Based Black Economic Empowerment initiatives. The provisions should enable more corporate restructuring to qualify for tax abatements as well as allowing companies to dispose of less than 30% of their shares in a restructuring exercise and still claim relief on the income accruing.

CHAMSA commends the provisions in the Budget Review of 2005 for the empowerment of small businesses. These include the extension of relief to a broad range of service companies, the raising of the turnover limit from R5 million to R6 million, and the introduction of a graduated rate structure for qualifying small businesses. Absolving small enterprises from the skills development levy, offers encouraging signs for the complete rebate of this money to businesses in general keeping in mind that the otherwise collected amount, just as in the case of small enterprises, is what individual businesses on the aggregate can invest in new factories, tools, and any other venture that promotes both labour productivity and employment. On the one hand training is not a panacea for lack of productivity or economic growth, and on the other, the most effective training is within a working environment, as part of a real job.

In addition there will be benefits accruing from the relaxation of sundry compliance burdens associated with Value Added Tax (VAT) payments like the halving of the filing returns, as well as the various assistance measures to be provided by the South African Revenue Service. The envisaged assistance to small businesses by the South African Revenue Service like fielding of country-wide community tax assistants, installing small business help desks, providing small businesses with accounting and payroll packages, and supplying VAT packages to small retailers are all steps in the right direction the handling of which is as much a matter of administrative prudence as it is of expediency.

It is to be advised however that a splintered tax arrangement preserved through a maintenance of pronounced tax treatment between small and other categories of business, i.e. medium or large, should be carefully monitored for policy revisions in the instance that it begins serving as a barrier to smaller enterprises graduating into larger ones.

Notwithstanding the Progress achieved on easing the tax burden in general, tax reform remains paramount in due cognisance of the fiscus collecting in total the equivalent of what business spends on reinvestment and dividends to shareholders - these being key to encouraging entrepreneurial activity including a transparent black economic empowerment process in the transformation of equity or proprietorship. At present, the figures in the Statistical Tables of the Budget Review of 2005 indicate that Government consumes nearly 29% of the country’s gross domestic product (GDP), in addition to Government debt amounting to 36% of GDP and costing the country R53.1 billion in interest repayments, all with a corresponding budget deficit of 3.1% of GDP. The expansionary nature of the Budget is furthermore reflected in the projected increase of 7.5% in real non-interest expenditure in 2005/06, exceeding the real GDP growth rate by a large margin.

Recognising the imperatives of social delivery and welfare tied to a dedicated public works programme Demands the close observation of budget deficit neutrality to fulfil at least two counts. One is to hold off pressure on interest rates decisive in the making of investment and consumption decisions over time. The other is to contain expenditure pressure on public goods and services delivered solely by the State.

On the first count, the soundness of the budget is marred in the last two years by the increasing use of long-term loans to finance current State expenditure. Government dis-saving has increased from 0.8% of GDP in 2002 to approximately 3% in the first three quarters of 2004, largely to finance the increased payment of social grants. Over the long term high rates of dis-saving by government can put undue strain on the balance of payments, thereby putting pressure on the currency, inflation and by implication also interest rates. Importantly the early signs of keeping up such an unhealthy picture are unravelling with the financing of this deficit playing its part in consuming away private sector savings. It is respectively advised that prospective Budgetary reform dully address itself in parting with such a crowding out effect with a swifter reglamentation in the easing up of taxation on retirement savings. CHAMSA holds the view that the present taxation of these funds is not in consonance with the general policy environment geared to promoting a lighter tax burden. A hard to reconcile tax incidence on savings rests on those members of society at the lower income level whose tax rate falls below 18% or are all together generally tax exempt to begin with. Accordingly a reduction of the 18% rate is warranted. This boils down to recognising as acknowledged in the 2001 OECD report Surveillance of Tax Policies: A Synthesis of Findings in Economic Surveys, that:

"...increased taxation and public spending …have been important contributing factors to the OECD area-wide trend decline in private savings. Reasons why this may have occurred are that higher taxation reduced the incentives to save (by reducing the rate of return on saving or providing public insurance against loss of income) and the income stream from which savings are generated (because it increased the tax wedge on wages and salaries)" (page 39-40).

Such undesirable social outcome need not be repeated with the same force in South Africa. The current mix of an expansionary monetary policy and a relatively strong exchange rate stands to be pulled further out of balance by a continual expansionary fiscal policy, all of which appears to work to keeping in place a rising trend in the current account deficit of the balance of payments. Under conditions of a stable inflationary environment – fostered by the Reserve Bank’s policy of inflation targeting, and international capital mobility, lower interest rates could also result in a somewhat weaker currency should it be that real interest rate differentials or returns on capital augment in favour of countries other than South Africa. This however is not assured as other fundamentals drive the value of the currency as well, and if it were to occur it might provide temporary breathing space to some exporters and domestic producers who compete with imports.

On the second count lowered taxation frees people with resources that could for example be used to buy private medical cover or put down a deposit for a car, both lessening
the provision of medical and transportation services the State is to render, and heightening its ability to better target the indigent and poor members of society.

The additional funds made available for education and the police force are seen by CHAMSA as complimentary to the public policy drive for a knowledge-based economy and improvements in the protection of person and property. Other increases reflect political or practical priorities like land reform. With much of the promised increase in spending on infrastructure to be executed by the major parastatals the main Budget reflects a limited shift of resources from current to capital expenditure. Overall however CHAMSA concurs with the Budget’s common standpoint that the improvement of the efficiency of spending rather than increasing the allocated amounts is the main issue with regard to government expenditure. Civil service expediency is the operative word here commanding policy attention with respect to efficiency and capacity, especially in provinces and municipalities. CHAMSA is thus mindful to suggest a separation of the State's role as provider and funder irrespective of its structure nation-wide to allow enterpreneurship to set in, in competing for the provision of goods and services in the public sector as prevails in the private sector. This subscribes to the expressed policy call in the National Budget Speech of 2005 (page 6) for an "…expanded envelope of public services to citizens". Devices such as the transparent auctioning of markets and the existing tender system process have a key role to play here to secure the efficient or competitive functioning of the Government’s Preferential Procurement Regulations, its Code of Good Practice for Black Economic Empowerment, and Public Private Partnerships.

On this last note it is worth mentioning that the government's move to increase the exposure of certain parastatal sectors to competition is to be supported, and doubtless is an alternative expression to the general policy direction of freeing markets and
adhering to privatisation, revenue provisions for which are made for in the Budget, although the prospects as to its materialisation are left open. The soundness of this is questionable as it has an intimate bearing to administered prices (i.e. prices set by organs of the State either directly like license fees or indirectly through public policy as in telecommunications) if competitive price flexibility is to direct them at all in light of them growing at levels above the CPIX inflation rate and thus posing a threat to the National Treasury’s assumed stability in inflation. The reservations expressed in the 2003 Administered Prices report for National Treasury, funded in large part by the United Kingdom’s Department for International Development, are thus worth quoting at length:

"while a case can be made that prices for some services in some sectors may have been held at too low a level, notably in relation to retail water tariffs, the overall picture is one of weak incentives towards productivity improvement and administered price levels that will consequently tend on average to exceed efficient levels. To this extent, weak institutions and inadequate processes in relation to administered pricing can be argued to be inflationary. It is sometimes suggested that a blunter control, in the form of a simple inflation target-linked cap on prices in the sectors under review, would prove … effective…. Such an approach would, however, fail to address the key issue that administered pricing is … unlikely to lead to price levels and structures that are reflective of efficient costs. It is likely that a blanket inflation target-linked control would result in increasingly distorted pricing levels and structures and impose a significant cost burden in terms of inefficiency and wasted resources" (page 44).

Bottom line, it is key to recognise that where competition is the prerogative in the provision of public goods, broad based participation from within and outside the newly emerging classes will be unequivocally ensured.

The committed expenditure on HIV/AIDS underscores the government's fiscal commitment to addressing the country's health crisis with the disease. In contradistinction, it appears that no accommodation is offered in respect of the tax burden imposed on those HIV/AIDS sufferers who are financially assisted by their employers but treated off-site at clinics. It is respectively recommended that this be corrected.

In conclusion tax reform that is conducive or geared to advancing or fostering freedom of choice is to be supported. There is a noticeable pattern of such reform in South Africa, which appears to have taken place cautiously. Its considerable influence on increasing savings and investment, employment and productivity, and State revenue collection, whilst also helping keep prices and interest rates down, is in evidence and overall is embodied for its part in repeated economic growth.

Additional gains can be secured in a greatly simplified tax system. Summing on the economic significance of this the Institute for Policy Innovation expressed in its 2002 Report Tax Reform: The Key to Preserving Privacy and Competition in a Global Economy, that: "tax reform is a way of boosting economic growth. Lower tax rates … improve incentives to work, save, and invest ... and …encourage people to invest resources for wealth maximisation instead of tax minimisation. Simplification will free up resources that are being wasted to comply with a convoluted tax code" (page 17).

With this in mind while CHAMSA welcomes the Budget proposal to do away with Regional Service Council (RSC) levies, there is danger that such positive steps could be undermined if by distinction local and provincial governments exercise executive powers to raise taxes as is presently proposed in the Cape Province in the process working against the National Policy Agenda of minimising the tax burden.