Speech in the National Assembly by Democratic Alliance Shadow Minister of Finance Dr. Dion George MP, March 2 2010
The Money Bills Amendment Procedure and Related Matters Act has initiated a process that will enable an active Parliament to ensure that the people's voice is heard in the budget process, and that the people's money is applied in the most appropriate way. Whether it does actually make any difference to the people is in our hands.
The heartbeat of the Act lies in the fiscal framework. This reflects how much revenue government expects to collect; how much it plans to spend and how big the gap between the two numbers is expected to be. If revenue exceeds expenditure we have a surplus and if expenditure exceeds revenue we have a deficit. A deficit needs to be funded, usually with borrowed money, and must eventually be repaid. Parliament can amend the fiscal framework, but it needs to do this within specific parameters as set out in the act.
Parliament must ensure that there is an appropriate balance between revenue, expenditure and borrowing; that debt levels and debt interest costs are reasonable; that the cost of recurrent spending is not deferred to future generations and that there is adequate provision for spending on infrastructure development, overall capital spending and maintenance.
In October last year, the Minister of Finance presented the Medium Term Budget Policy Statement, detailing the estimated fiscal framework for 2009/10 and the next three years until 2012/13. The revenue estimate for 2010/11 was R743.5 billion and expenditure was R905.6 billion leaving a deficit of R162.1 billion - not unusual given prevailing economic conditions. The DA, in our response in parliament on 11 November 2009, stated that quote, assumptions underlying the fiscal framework may well prove to be optimistic, unquote. In February, the Minister tabled an amended fiscal framework for 2010/11 which reflected revenue at R738.4 billion, a R5.1 billion reduction on the October forecast, although the GDP growth estimate was revised upward from 1.5% to 2.3%.
At face value, this would mean that we have rising economic activity with falling revenue, thus a phenomenon of tax-less growth - not possible given the tax to GDP multiplier. In its response to the DA's enquiry on this, the National Treasury responded that, quote, corporate tax revenue since October 2009 points towards a deeper decline than expected at the time of the MTBPS and the short-term outlook for both value added tax and corporate income tax points to a stabilisation at more modest levels, unquote. In simple English this really means that the Treasury's forecast in October was optimistic and that tax collection is expected to be lower than anticipated.
A forecast is a prediction based on an assumption. If the assumption is wrong, so is the prediction. The DA has concerns arising from the fiscal framework, because it is possible for forecasts to go wrong as demonstrated in this instance. The fiscal framework before us today looks three years ahead to 2012/13 - a difficult task even for the experts. By then, our gross national loan debt, excluding that owed by the municipalities, will be R1.4 trillion or 43.1% of projected GDP. In that year, we will pay R104 billion to service our debt. Last year we paid R57 billion.
Comparing our debt level to that of the USA and the UK is not meaningful because our economy is very different to these developed economies that can withstand much higher debt levels for much longer than ours can. Highly indebted countries in the Euro zone can take comfort in the knowledge that others in the zone are unlikely to permit them to default on their debt because of the currency fallout that will ensue. We do not have a banker of last resort, other than our hardworking taxpayers. The suggestion by the Financial and Fiscal Commission that government may want to adopt a fiscal stability pact to clearly establish the level of debt and what it can and cannot be used to finance has been included in our recommendations, given that many government departments cannot maintain even the most basic principles of financial discipline.
The DA is not opposed to government borrowing money for appropriate reasons such as infrastructure development and stimulating our economy as it emerges from recession. We are, however, opposed to borrowing that yields questionable returns. The non-financial public enterprises will borrow R287 billion over the next 3 years. We have no certainty on whether this money will be appropriately spent, as these institutions lurch from one financial crisis to another, secure in the knowledge that the people of South Africa will rescue them and their overpaid executives over and over again while the people wait for basic services to be delivered.
Eskom has vividly demonstrated the reality that government cannot deliver on its own and that the concept of a Developmental State with parastatals as key drivers for economic growth cannot work. Without any incentive to become efficient, these entities never will and can only survive until their lifeline to the people's money is eventually unplugged. Not a murmur emerges from government when its parastatals, overflowing with under-performing and overpaid cadres, fund executive bonuses with bailouts and don't change their behaviour.
The DA's approach to public finance shows that it is possible to restrain public debt by attracting private investment into the parastatals. A modest private sector investment of R20 billion would reduce the need for debt escalation and help stem the bail-out haemorrhage that drains the public purse. Increasing debt to prop up the failed parastatals is neither appropriate, nor compatible with our mandate to ensure that the people receive maximum value for their money. The DA's alternative budget has demonstrated how a new financial model for the parastatals can change the debt trajectory. Our debt does not have to increase as forecast if we exercise the right choices.
The Minister has made it quite clear that government could raise taxes in the future to fund spending commitments, given the possibility of a delayed economic recovery. The DA's model is grounded on a different principle based on the knowledge that sufficient investment capital exists in South Africa and that business will invest if the environment is attractive enough. The Minister has mentioned that government, business and labour should work together, so the sentiment is there, we just need some action. Government should not rest assured that it can always just increase taxes to fund its often wasteful and extravagant spending. That is merely adding insult to the already injured taxpayer who watches in pain as their hard earned tax contribution is thrown down yet another drain filled with empty promises. The social contract will only stretch so far, and it is already strained.
A different message is needed, and the DA would suggest that it should be that "government will not increase your already heavy tax burden, we will become more efficient, less wasteful and build partnerships with business that does have money available for investment". The DA is not opposed to government spending, but we are opposed to government spending that fails to benefit the people.
Since October, the 2010/11 expenditure forecast has increased from R905.6 billion to R906.9 billion. This is not a large increase, but it does beg the question of why the minister's promise to cut wasteful expenditure and restrain the spiralling public sector wage bill is not reflected on the fiscal framework. The Minister is saying that steps will be taken to root out corruption and tighten up on wasteful spending, yet the number increases. Does the Minister not have any faith in his ability to actually cut the expenditure to the point that we will see it in the numbers on the fiscal framework because that is where, after all, it really matters. The DA's alternative budget has demonstrated how real expenditure cuts of R4 billion can impact on the fiscal framework, while ensuring that the people's money is more efficiently spent. Given that the revenue projection has been revised downward, an increase in expenditure, however small, is not the right direction.
The DA supports the counter-cyclical fiscal stance and, therefore, do not think it possible to balance the budget deficit to zero within the next three years, our alternative budget delivered a 5.2% deficit off a GDP growth of 1.5%. There does not seem to be consensus on growth expectations for 2010/11, with the Reserve Bank forecasting 2%, National Treasury 2.3%, the Reuters consensus 2.6%, the Economist Intelligence Unit 2.8% and NEDLAC, according to FEDUSA, 3%. We hope that the higher forecasts will be achieved, but government must manage our money with its eye on the lower forecast because if GDP growth dips or does not accelerate in line with National Treasury's forecasts our public financial model must be robust enough to withstand the shock.
National Treasury, in its explanation on how it calculated expected revenue, predicted that the tax to GDP multiplier, at 0.95 in 2010/11, will gather pace in 2011/12 to 1.3. Therefore, if GDP growth exceeds Treasury expectations, government revenue should increase at an accelerating pace over the next 3 years. This will provide additional fiscal space for a reduction in the currently high levels of taxation to which South African individuals and corporates are subjected.
In October, the DA stated that we would not support an increase in taxation unless it was offset by a tax reduction elsewhere. The 2010/11 budget proposes to reduce taxes on individuals and companies by R6.75 billion and increases indirect taxes by R6.3 billion, a net reduction of R450 million. We therefore support the general impact of this on the fiscal framework, although we believe that the minister could have more fully compensated individuals for fiscal drag that erodes their disposable income. The increase in the general fuel levy is excessive and will contribute to inflation. The National Treasury view during deliberation that the increase would not be inflationary has been contradicted by economists and the Reserve Bank.
The DA welcomes the proposed wage subsidy and made provision for a revenue reduction to accommodate this in our alternative budget. We look forward to its implementation next year. We also made provision for VAT zero-rating to be extended to books to improve access to this basic ingredient for quality education. In its report, the Standing Committee on Finance notes that the Parliamentary Budget Office, as soon as it is established, will investigate the VAT treatment of books, and other basic essentials, with a view to zero- rating.
During parliamentary hearings, all submissions specific to the revenue proposals suggested that the introduction of a tax ombud should be investigated. This office would ensure that a balance exists between the need of the South African Revenue Services to increase tax compliance and the right of individual tax payers to fair treatment. SARS cannot be a player and a referee in the tax collection game. SARS also needs to consider how cash businesses can be more fully captured into the revenue net and can work more closely with the business community to achieve this objective. Rather than putting a vice grip on relatively compliant taxpayers, SARS should focus on those who blatantly ignore our tax laws by remaining outside of the net. Lifestyle audits are needed, with a focus on those who are inappropriately, politically connected and feast at the expense of the poorest members of our community.
South Africa's development continues and it is time for us to reflect on the tax regime applicable to South Africa. Over the past few years, tax practitioners have consistently submitted that our tax laws are overly complex and complicated and do not do justice to our emerging economy. As we emerge from the depths of the recent recession, with SARS of the view that tax compliance has deteriorated during the recession period, now would be an appropriate time to convene a tax commission to consider our tax laws and the central question of tax incidence and its suitability to the South African context.
We have entered a new era in South Africa where the budget is no longer the exclusive domain of the executive, it belongs to all of us. Although we have chosen not to amend the fiscal framework or revenue proposals, the Committee has made recommendations and commitments that, when implemented, will have important consequences to ensure that debt levels do not spiral out of control; that we have a clear understanding of how the Reserve Bank will maintain price stability given the variables it needs to consider in its decision making process; and that the VAT treatment of essential items such as books is re-considered.
Although the Parliamentary Budget Office is not yet in place, the Committee was able to properly consider the fiscal framework and revenue proposals. It is simply not true that the Committee was not capable of understanding the implications and complexities around the forecasts. We know exactly what the numbers are saying, and the context of the message. That is why the proposals were not amended, not this time.
The DA will support the fiscal framework and the revenue proposals and will monitor the direction of the numbers, and the policies that influence them, very closely.
Thank you, Speaker.
Issued by the Democratic Alliance March 2 2010
Click here to sign up to receive our free daily headline email newsletter
