Prepared text of a speech to be delivered in Parliament by Dr Dion George, MP, Democratic Alliance Shadow Minister of Finance, March 8 2011:
Fiscal framework and revenue proposals
Thank you, speaker.
The fiscal framework details the impact of fiscal policy on the economy over the medium term.
In my address to this House in March last year, I said that the Democratic Alliance will support the fiscal framework and the revenue proposals for 2010/11, but that we would closely monitor the direction of the numbers and the policies that influence them.
In October, my budget tip for the Minister was that government intervention was required to increase economic activity rather than the size and influence of government and its associated cronies. The Democratic Alliance has set out the choices that South Africans can make. We can choose a society centred on the so-called developmental state that pursues economic activity along a supposedly New Growth Path.
As an alternative, we can choose a society centred on people where the state facilitates economic activity to achieve job-rich growth, promote competition and competitiveness, attract investment and lift our people out of poverty along a path of increasing prosperity over successive generations. Effectively designed fiscal policy can contribute significantly to this Open Opportunity Society that enables all of the people to become everything that they are capable of being.
Mixed signals from government on economic policy continue to harm our growth potential and drive jobs out of our economy. In its annual survey on the attractiveness of government mining policies, the Fraser Institute has steadily dropped our ranking from 49 in 2008 to 67 today - only four places above Zimbabwe.
It is clear that noise about nationalisation and incoherent policy statements drown out investor confidence and certainty and make South Africa a less attractive investment destination. Our economic growth rate will not nearly match our potential as we emerge from the recession. This is a result of the regulatory failure of a government making poor policy choices that get in the way of job creation and perpetuate the consequent grinding poverty that drains hope while it shatters lives and dreams.
In crafting our alternative budget for 2011/12, the DA considered how to address poverty. The answer is not simple, requires creative thought, will take time and effort and points to the need for bold and decisive government action. Consequently, our key policy priorities are creating jobs and growing the economy; education and skills development; social security and fighting poverty; housing and land reform; increasing savings; preventing and fighting crime and corruption; promoting efficiency and eliminating wasteful and unnecessary expenditure and developing a greener economy.
Given our support for counter-cyclical fiscal policy, and current macro-economic conditions, the DA believes that fiscal policy must stimulate economic activity, now. Increased economic activity will generate jobs, more people in employment will increase revenue and decrease dependence on social security. Increased revenue will mitigate the need for tax and levy increases, reduce the deficit and relieve pressure on interest payments for debt.
The fundamental difference between the DA's alternative and the ANC budget is the role of the state. The DA has proposed a series of interventions designed to stimulate private sector employment through a wage subsidy for newly-created full time employment; export promotion; support for small enterprise development; tax exemptions for newly established small scale enterprise; opportunity vouchers for enterprise development and strengthening the competition commission.
The ANC's focus for job creation relies on public sector employment, inefficient state owned enterprises, failed SETAs, a nebulous jobs fund, further expansion of the public works programme and, under a programme that neither the Minister of Finance nor the Minister of Economic Development can explain, more than a billion rand for employment activation by the so-called National Youth Development Agency that recently spent R100 million on a party.
It is, therefore, not surprising that the National Treasury has revised its GDP growth estimates downward to 3.4% for 2011/12. The ANC budget does not stimulate labour absorbing growth and will not realise our upward growth potential. The DA believes that our alternative budget interventions will stimulate economic growth to at least 3.75%.
The DA welcomes the personal income tax adjustments to compensate for fiscal drag and the increase in tax-free interest income. Our alternative budget proposed several interventions to encourage higher domestic savings so that South Africa can be less dependent on the ongoing influx of foreign capital and less vulnerable to the long-term risks associated with a sustained current account deficit. Fringe benefit taxation on employer contributions to retirement funds contradicts the development of a savings culture. A tax reduction on interest on deposits of twelve months or longer would be far more beneficial to our economy.
Immediately after the budget announcement, the DA welcomed the Minister's focus on creating jobs and we still do, but we believe that the ANC's delivery mechanism won't work and that there is insufficient progress on the implementation of the promised wage subsidy. At the Committee meeting on the day after the budget speech, the Minister declared that tax policy is an executive prerogative. This implies that a wage subsidy could be implemented if the executive wanted it - we can only conclude that it doesn't.
We cannot consider the numbers on the fiscal framework in isolation, particularly those for revenue and expenditure because they are derived from numbers attached to policy choices. The DA's alternative budget generates revenue of 28.34% of GDP and expenditure of 34.33% of GDP, with a deficit of 5.99% of GDP. The ANC budget generates revenue of 28.3% and expenditure of 33.6%, with a deficit of 5.3%.
In expanding our deficit from 5.2% last year, the DA has adopted an expansionary fiscal stance. This is aimed at productive spending on the supply side to accelerate economic activity as we emerge from recession. The ANC's expansionary fiscal stance, as reflected in its higher than expected deficit, arises for the wrong reason to fund unproductive and inflationary increased expenditure on the demand side, including the public sector wage bill that, according to the Minister, has doubled in five years, without service delivery improvements - the result of too many overpaid and unproductive deployed cadres in unnecessary jobs.
The DA's Every Rand Counts campaign has revealed that the Zuma administration has misspent R3.8 billion on unnecessary and self-indulgent expenditure. We commend the Minister for his commitment to counter wasteful spending and corruption. He needs to go further and deliver on the promise to review the financial model applicable to the state-owned enterprises. The DA proposes that a 10% stake in Eskom, SAA, SABC and Denel should be offered to private investment. This will improve efficiency and the proceeds can be invested into a Sovereign Wealth Fund to provide venture capital for entrepreneurial job creating activity, especially in the emergent green economy.
Our social security spend continues to increase on the back of rising unemployment. The DA believes that the problem with our social security net is not that it is generous, but that there are too many recipients. As our alternative economic policy lifts more people into employment it will be possible to consider the implementation of a working tax credit for individuals who earn below a particular threshold and income support for the unemployed. The ANC's unsustainable social security model alleviates rather than reduces poverty to ensure that individuals remain dependent on the state and loyal to the party.
The DA welcomes the additional spending on infrastructure, but not enough is available for road maintenance, improving water treatment, addressing acid mine drainage and disaster management support. The DA's investment in additional expenditure in these areas will yield significant economic reward over time.
During the committee hearings, concern was raised over the increasing tax burden through stealth taxes and levy increases. The DA is focused on the future and our alternative budget has demonstrated that economic activity can be accelerated without tax and levy increases if the people's money is more efficiently and effectively managed and allocated. Closing unnecessary departments in the bloated cabinet and superfluous district municipalities would be a useful place to start. Levy increases drive up inflation and impact most heavily on the poor.
The DA's projected increase in GDP will mitigate the cost of a larger deficit that must return to surplus as the pace of economic activity accelerates. The Minister has clearly signalled a pending increase in taxation to fund the National Health Insurance. We agree with the Director General of the National Treasury that there is no fiscal space for additional taxation. Government should first fix the broken healthcare system and efficiently apply the people's money already available in the public health system before it demands more, especially more of the regressive VAT that impacts disproportionately on the poor.
Given that we do not support tax and levy increases at this point of our economic recovery or the fiscal policy structure of a low growth path that underlies the numbers, the DA will not support the fiscal framework or the revenue proposals as tabled.
Thank you, speaker.
Issued by Democratic Alliance, March 8 2011
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