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IFP
RESPONSE TO THE 2004 BUDGET SPEECH
Cape Town: 18 February 2004
General Comment
As was expected, the Budget this year is largely a non-event insofar as it
conforms strongly with the MTEF framework made public in November 2003. In
particular the predicted slow down in revenue flows has proved to be correct
and this has largely negated the fiscal options the Minister has had in
previous years. In real financial terms the Minister has factored the lower
revenue situation into an increased budget deficit rather than introducing
spending cuts or increasing tax rates. We support this approach.
Taxation/Revenues
We are pleased with the modest tax relief given to individual tax payers -
especially insofar as these affect lower income earners and the elderly. We
had however hoped to see a raising of the entry threshold for individual
taxpayers.
Regarding specific areas of taxation there is little change of significance
in this years budget. We would however make the following observations:
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Sin Taxes. We are in support of these increases which are proportionately
consistent with those of recent years.
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Fuel Levy. This as with last year is a negative action, which will have some
economic consequence.
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Retirement Industry. It is a pity that the Minister has delayed the review
of taxation in this industry. Against a worrying national saving
performance, and the influence of this industry on savings, this should be
dealt with urgently.
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Interest Earnings. We acknowledge that the raising of the interest exemption
level is a positive for savings.
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Small Business. While agreeing that the small business sector has received
tax concessions over the past two years there should have been further
incentives given in this budget when considered that this sector is still
struggling to realize its job creation potential. We are pleased that the
Minister has proposed a few initiatives to help small businesses cope with
their tax affairs. These would however seem to fall considerably short of
the high cost of compliance small businesses have to contend with in our
complex tax system and accompanying law.
Concerning the slow down in tax collections, Governments indecision
regarding Privatization initiatives becomes a more a pressing issue. While
we urge caution given the mixed experiences of other countries, there is
every reason to proceed carefully with privatization programmes in order to
realize the considerable sums of money which could be forthcoming. These
proceeds could help reduce the national debt burden (and therefore debt
servicing costs), increase social distributions and promote the economy.
Finally, the overall taxation levels (without deducting SACU payments) is
well in excess of 25% of GDP. This takes South Africa to the outer limited
of what is internationally considered too high. We would want to see an
incremental decreases in this figure back to levels of 5 years ago. There is
little doubt as to the effect on foreign investor perceptions of comparatively high tax obligations.
Expenditure
The IFP is largely in agreement with the general spending patterns and
redistributive proportions aimed for in the budget. This applies both to the
vertical division of revenue as well as the sectoral/department allocations.
Our major concern however, which we have raised for the past six years, is
the inability of government to spend effectively. We are of the opinion that
billions of rands are forfeited through inefficiency, waste and corruption
each year. Clearly, lack of adequate initiative on the part of Treasury and
lack of will on the part of government institutions has prevented the
implementation of the financial management systems prescribed by the PFMA,
which would otherwise ensure higher value-for-money spending.
In real terms there is little change to the general patterns of expenditure
as compared to the previous budget. There are however a few areas of
increased expenditure allocations which are especially appreciated. These
are the areas of Police Services, HIV/Aids treatment, the Department of Home
Affairs, Child support grants and Provincial social grant programmes.
The Estimates of National Expenditure unfortunately continue to describe
expenditures in terms which are vague and continues to offer Measurable
Objectives which clearly have no basis of measurement. One example is the
Department of Defence - where the IFP made queries at the time of last years
budget. To date, notwithstanding six requests the Department is unable to
explain what millions of rands in that budget is actually being spent on.
Economic Growth/Job Creation
Very significant is the budgets modest contributions towards economic growth
and job creation. Much was anticipated in this regard - but little has
materialized. Beyond the increased allocations to infrastructure spending
and the Public Works programmes there is not anything worth mentioning.
Relatedly, the various allocations of money given to skills training remains
poorly directed and weakly administered. This explaining the poor return on
this investment thus far, and why it is likely to continue to remain low.
Regarding the infrastructure allocation for the job creating Public Works
programmes. The IFP argues that these have limited value - other than
offering a small number of people very temporary employment. These jobs are
not sustainable and the actual infrastructure of marginal value to the
economy. The capacity problems that exist with the many other skill training
initiatives are likely to also exist in the skills training dimension of
these programmes.
While supporting the thrust of increased infrastructure spending - there
seems little by way of studies and arguments to support the areas of
spending decided upon. It is unclear as to the direct value to economic
growth of the specific projects being chosen. The country has many examples
of expensive infrastructure developments which, while maybe not white
elephants, have added no impetus to economic growth. The Government must
make their cost-benefit-analysis thinking available to the public.
The size of the real increases in expenditure indicate there to be little
new expansionary impetus coming from the budget. And given the failure of
the expansionary claims of the two previous budgets to stimulate growth -
this too will detract from the hope of this budget adding stimulation to
economic activity and job creation.
Foreign Exchange Controls
The strength of the rand, by most accounts, should retain most of its recent
gains over the year ahead -meaning that the risk of currency outflows is at
its lowest in many decades. There was therefore a rare and yet fairly
assured opportunity to accelerate exchange controls reduction with out too
much risk to our balance of payments situation. The budget indicates a
missed opportunity in this regard.
Debt/Deficit/Borrowings
The IFP is not unduly alarmed by the increased deficit at this stage. This
does not disturb the downward trend of the country's overall debt obligation
and debt servicing costs (as percentages of GDP). The additional borrowing
required to finance the situation is not onerous. The IFP agrees with
National Treasury's domestic/foreign mix of financing sources.
The SA Inc. Balance Sheet remains sound and the IFP gives the Minister much
credit for this state of affairs.
Concluding Comment
The IFP compliments Government on a generally well crafted budget which
displays appropriate sensitivity to the country's main problems and needs.
The weakness being the budgets' very low key initiative concerning
stimulation of the main driver of economic growth - i.e. the business
sector.
The IFP accepts that the budget, by way of its comparatively quiet nature,
allows for a period of welcome consolidation.
The biggest issue however remains Governments inability to convert the
intentions of the budget into value-for-money reality. The levels of waste
and inefficiency brought on by poor planning and weak capacity continues to
seriously hold social development and economic growth back in South Africa.
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