IFP RESPONSE TO BUDGET SPEECH

BY

DR GAVIN WOODS, MP

        

CAPE TOWN: FEBRUARY 23, 2000

OVERVIEW

As expected, the basic structure and proportions of the 2000/2001 budget have been largely informed by the 1999 Medium Term Budget Policy Statement - with a few notable exceptions on the expenditure side where changes have been introduced. Thus the predictability which the Minister's approach has developed is apparent.

The Minister's usual attempt to inject some spice into the budget seems somewhat muted this year. It is difficult to spot any aspect which was completely unexpected.

This is however not to say that the budget's detail does not hold some of its own surprises. Given the complex and varied factors contained in the budget, unexpected movements and changes are inevitable. This year a number of the more interesting of these relate to tax changes.

At a general level, the budget has leanings towards the key areas of economic growth and poverty relief. To be questioned however is whether it has gone far enough given current circumstances. The IFP believes that the Minister had more room to manoeuvre than in has been available for the past 25 years. While he did take advantage of this situation through a number of new moves, we feel that he has been unnecessarily cautious which could have cost the economy some productive initiative. See comment under "Economic Growth".

Without exception, all the fundamental macro-economic assumptions used in the budget appear realistic if not a little conservative. This has obviously been helped by the renewed stability in the wider economy and its international relations. Of some interest, is the 3.5% GDP growth figure. Two weeks ago the Minister predicted a figure of 4.5% . Some economists have gone as high as 6%.

All in all, the budget is positive in that it is able to give attention to most of the pressing economic and social questions in the country and in so doing clearly provides for overall economic progress. The soundness of the economy is not disturbed, some structural problems such as low savings receive some help, public finances are strengthened a little and the effectiveness of spending on services is being looked at more closely.

The economy - post East Asian crisis - stable and an emerging market that emerged with its credibility intact.

If growth potential is to be smartly harnessed, then in the medium term we will be in a position to do more and do it more sustainably for the poor - by way of a welfare system which has integrity and is practically viable.

ECONOMIC GROWTH

The budget narrative takes note of the current growth potential of the economy and the possibilities for increased trading activity, but in our opinion stops somewhat short of taking significant advantage of the promising economic environment.

In acknowledging the particularly strong positioning of almost all key economic fundamentals and the growing international recognition of the economy's emerging potential and growth prospects, the IFP feels the Minister should have been considerably more entrepreneurial in his use of the budget towards seizing the moment through greater use of strategic stimulants. Done sensibly, this is what could really have moved the economy out of its hesitant and sluggish mode. In fairness, the Minister has taken a number of welcome steps in this direction, but his focus on the current possibilities for providing the necessary degree of impetus seems not to have been sharp enough.

It remains too passive and does not reach out far enough to entice the investor and business communities into accelerating the growth of productive activity. Specific ideas on this will be mentioned amongst the expenditure issues commented on below.

The savings which are a vital ingredient of the growth equation will gain a little from governments further reduction of its contribution to dissavings and also through the modest rise in the exempt savings limit having been increased to R3000. Also pleasing is the decision not to increase the 25% taxation of the retirement industry interest and rental earnings. These decisions are clearly not nearly not enough to move our national savings level up from its 16% of GDP) to the required 25%. Tax relief on the middle and lower income groups is likely to be used to pay off debt and improve living standards as opposed to be put towards personal savings.

Tax free or deferred tax arrangements for retirement savings would have helped.

EXPENDITURE

The drop in total expenditure from 27.7% to 27.5% of GDP in the budget is disappointing - especially in the light of improved growth projections. 

It is hoped that expenditure over runs (which are usually not noticed due to even greater revenue overruns) will be tightened up on in the new budget year.

Generally, there was only a marginal reprioritisation of expenditure in the 1999 Medium Term Budget Policy Statement - the overall distribution of which the IFP accepted. The budget however has introduced some increases to particular departments. In so far as these increases are meant to further prioritise the areas of crime, social welfare and the AIDS/HIV problem, the IFP is in agreement. The increase in the Defence budget is however an area we would wish to study further before making a judgment.

Spending on interest (debt servicing) has decreased by just over half a percent to 19.1% of the total budget. This is appreciated and should be lower faster with the privatisation intentions of the new budget.

Spending on Key social services - The increases across Education, health, housing and other social services is gratefully acknowledged by the IFP. 

Projected R4.0 billion in 1999/2000 Spending on particular economy related aspects of education have been under provided for. The IFP feels strongly that the expected upturn in economic growth could be undermined by the non-availability of sufficient skilled human resources. Far greater initiative was needed to achieve this. This type of spending which is also aimed at the unemployed youth would help with the crime situation and the general despondency we see in this large part of our society. A co-ordinating and monitoring system should be put in place to see that all skills training type education is achieving the desired results - including the proceeds of the new skills levy. 

Spending on Capital projects and infrastructure - Another disappointing area. The deteriorating state of vital parts of the country's economic infrastructure is going to impact heavily in future budgets if we continue to ignore this obvious need to spend. In addition, the message sent to the outside investor community by a government which is reluctant to commit to such fixed investment is very negative.

Spending on Personnel - the IFP appreciated the difficulties of introducing plans at this stage to reduce the states wage and salary bill. It accepts the stated commitment to introduce measures in the short to medium term to achieve such a reduction.

The budgets claim to be exercising a greater value-for-money approach regarding spending practices are not immediate apparent. As in past years, the IFP places much importance on this as it is convinced that great savings can be made. In this regard, the IFP asks the Minister to ensure the speedy and full implementation of the new Public Finance Management Act. The IFP had hoped for about R4bn is such efficiency gains in the budget.

REVENUE

The IFP does not contest the tax to GDP ratio of 25.2%. The 0.5% decrease is acceptable for the moment, but will need to be brought down by a further 2% odd over the next three years.

The pivotal feature of the budget, as with the previous two years, is the tax overruns made by the more efficient SARS. Without this, almost every positive initiative would not have been possible. Given SARS introduction of its new computer system (NITS) to cover personal income tax, and given the successes of the drive to bring elusive business into the tax net, the IFP feels the Revenue side of the budget will once again prove to be understated. The R3.1bn efficiency gain budgeted for appears much too cautious.

Tax changes

Income Tax - corporate. The continued employment of STC is unfortunate as its removal would have sent a warm message to business - and the loss of about R1.7bn per year to the fiscus would not have given the fiscus a serious problem. The existence of STC gives a picture of a corporate rate of 42.5% which is off-putting and discouraging to business. STC has also become problematic to a number of companies's because of the new transfer pricing rules.

As already mentioned, the tax concessions made to small and medium sized businesses is to be welcomed.

Personal taxes - this is possibly the most welcome aspect of the budget - especially in so far as it gives relief across the entire income spectrum. 

The distribution is also fairly appropriate in that lower and middle income earners are given some reprieve. From the economies point of view however, the higher earner who is more able to save, more likely to emigrate, more likely to create business activity perhaps the marginal rate could have been brought down to 40% as opposed to 42%. This would have gone that little bit further towards discouraging the incidence of high-income earners now steering their earnings through the lower tax rated companies and closed corporations.

The concession to the elderly is particularly pleasing to the IFP.

The Minister's disregard for the irresponsible calls for an increase in the VAT rate is also worthy of the IFP's gratitude.

The introduction of a Capital Gains Tax in the future comes as a shock, and the IFP intends to study these proposals in order to assess their merits. Our initial reaction is one of strong disapproval.

Further signs of base broadening and appropriate burden distribution in the budget are seen as necessary developments.

THE DEFICIT

It is somewhat of a surprise to see that the deficit is planned to rise - even if only by 0.2 of a percent. To be fair, this does represent a stable situation.

The picture of government borrowings (again thanks mostly to SARS collection success) continues to improve. The improvement could be significantly better if government approach towards its privatisation programme was more assertive.

 

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