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COSATU Parliamentary Submission:COSATU's Response to the 1998 / 9 Budget12 March 1998 |
Contents
- Introduction
- Still a GEAR Budget
- Job Creation
- Social Spending
- Public Sector
- Economic Services, Infrastructure and Capital Spending
- Provinces
- Taxation
- MTEF
- Growth
- Debt Management
- Process
- Conclusion
- Appendix - FACT SHEET – 1998 / 9 Budget and the MTEF projections
- See also: Speech by Zwelinzima Vavi on the 1998 / 1999 Budget
- The success of the budget must be measured against the key economic challenges facing our country, and its effectiveness as the critical policy instrument of government in addressing these challenges. It must not be reduced to an accounting exercise. As Comrade Trevor Manuel stated, the budget is not about figures, it is about people.
- If budgets were assessed on slogans and revolutionary language, this budget would have scored highly. For the first time in South Africa, the Finance Minister has accepted our assertion that fiscal policy should be about development, about addressing the backlogs of our society (the ‘social deficit’), and setting our country on the new growth path envisaged in the RDP. In other words, the budget is a tool for transformation.
- Unfortunately, when measured against these criteria, the budget fails the test which the Minister has set himself. Despite a lot of detail, and the technical jargon, it is clear that the budget’s overriding concern is to meet the arbitrary macro-economic targets set out in GEAR. In particular, despite the statement by the President that these figures are not cast in stone, and that we should not become obsessed by percentages, the country continues to be held hostage by the rigid adherence to the budget deficit target. With growth down, and taxation constrained by GEAR targets, it is spending in critically needed areas which is squeezed out. It has become blindingly obvious that it is not possible to have a developmental budget within an anti-developmental economic framework.
- The ideologically driven approach of GEAR results in the budget pursuing contradictory objectives. Expanding some areas of social spending, such as health and education, but cutting back expenditure on those who are expected to deliver these services i.e. teachers and nurses. This approach deepens the contradiction of building clinics which lie empty because of staff shortages, or equipping schools which have growing student : teacher ratios. Similarly, setting up a fund for job creation, but cutting back on public works, roads in rural areas, and other RDP projects would be disastrous. These inconsistencies are in large part a product of chasing the ‘magic’ deficit reduction figures of GEAR.
- It is unfortunate that the Minister wasn’t more frank with the country in assessing the performance of the GEAR strategy, and outlining measures to correct the problems. We have stated from the beginning that it was impossible for GEAR to meet some of its key targets, such as employment creation and growth, because of the contractionary fiscal and monetary policy which it pursues. It has become clear to the whole country that GEAR has missed these and other key social targets, in large part because of these inappropriate strategies. Further, the only areas where GEAR is on track is those areas which please the captains of industry (deficit reduction, export orientation, public sector reduction, and tax concessions for companies). It has failed dismally in areas concerning the poor and the working people. Yet the Minister failed to confront this harsh reality. The agreement in the Alliance, and the pronouncement after the recent ANC Lekgotla, that the strategy needs to be adapted in the light of evolving realities, and the critical question of the social deficit needs to be addressed, has largely been ignored by this budget.
- At the same time it is brazen hypocrisy, and cheap electioneering for the DP, NP et al to complain that the budget doesn’t create jobs or growth, when they are the main culprits pressurising government to pursue an even more contractionary fiscal and monetary policy, to slash government spending and public sector jobs, and reduce company taxes, whilst calling for an increase on VAT which will hurt the poor.
- A non expansionary budget in a low-growth scenario, as we have currently, is not a recipe for large scale employment creation. The broad orientation of the budget therefore, is not one conducive to attacking unemployment. Further, there is no clear strategy spelt out to tackle unemployment. While the introduction of the fund for job creation, although not directly from the fiscus, is obviously a step in this direction, the Minister gave no indication as to what the government’s strategy is, particularly to move the business sector away from its current job-destroying path, and its failure to invest in new jobs. The reality has to be confronted that all governments incentives to business to create jobs have failed, and that therefore other measures are needed. We have made a range of proposals in this regard, including linking a range of government instruments such as tax measures, prescribed assets, procurement policies, industrial subsidies, and others, to employment creation. It has to be recognised that business, without government direction, will continue to refuse to invest in our people. The budget also lacks any evidence of the large-scale infrastructure and public works programmes envisaged in the RDP. To make matters worse, the budget envisages an actual cut-back in jobs in the public sector, after the private sector has shed tens of thousands of jobs in recent months. It is therefore clear that a far more imaginative strategy is needed from government, if the Jobs Summit is to have any hope of success.
- There is a significant increase in social spending in some areas, such as education and health. We welcome this, and urge the government to revise the projections for the second and third year of the MTEF, which sees this increase in the rate of expenditure drop back. We further believe that more resources could be found to address backlogs in these areas, if different budget parameters were explored, including through restructuring the debt (see below). There are some real reductions in certain areas, such as housing, which are of serious concern to us. It is regrettable that the 4% increase in old age pensions does no keep pace with inflation. It is our view that this will continue to be the case until we abandon this obsession with a private sector-led housing policy in favour of public housing led by the state. It is clear to us that, no matter how committed this government is to addressing apartheid disparities, it will not be able to do this effectively within the current parameters of GEAR and the MTEF.
- Without an effective and properly resources public service, there is no hope for delivery of the RDP. It is therefore deeply disturbing to us that the budget takes forward the ideological war-cry of cutting back the public service. The increases in social spending will be meaningless if there are not adequate, trained public servants to deliver these services. The proposed cut-backs in workers, as well as reduction in resources made available to improve the conditions of low-paid workers, is a serious problem not only for unions, but for all communities who rely on the public sector to serve them. The amount set aside for conditions of service (R3, 375 billion) is more than R3 billion less than the amount agreed to for 1998/9 in the three year agreement for public service workers. COSATU will under no circumstances accept this attempt to renege on the agreement. It is both wrong in terms of the transformation of the public service, as well as seriously undermining trust in the collective bargaining process. Where a people's government reneges on an agreement, the private sector will exploit such approaches to ignore and undermine collective agreements. We will urgently enter into discussions with our allies to finalise a national framework agreement for restructuring of the public service. Finally, we welcome the government's commitment to root out corruption in all areas of the public service, and pledge to give our full support to this campaign.
- A worrying trend of the 1998 budget, which was also apparent last year, is the reduction of investment in capital investment, infrastructure in certain areas, and economic services (see attached figures). This lack of investment in infrastructure and industrial development is obviously linked to our concerns about employment creation. Further, the cutback in the national public works programme is extremely disturbing.
- One of the major problems with the new constitution is the operation of fiscal federalism and the role off the provinces. COSATU has always maintained that the strong element of federalism is inappropriate for the situation in our country. To that extent, we support the regulation by government of economic management in the provinces, in order to advance national objectives. It is difficult, however, to interpret the cutback in grants to the Provinces, excluding the conditional grants administered nationally. More clarity is needed as to how this system will operate, and what the conditionality will be based on. At the same time the fact that Comrade Trevor has set aside 63% of the budget means nothing since Provinces are free to determine their own priorities.
- We welcome the measures introduced to remove fiscal drag, and reduce the burden of personal income tax on low and middle income earners. We also welcome the measures being taken to improve efficiency in tax collection, and support the call for a new tax morality. However, we are not satisfied that meaningful steps have been taken to move in the direction of a progressive taxation system. Company tax continues to decline as a portion of the total revenue, while personal and indirect tax, which falls on working people continues to provide the lions share (see attached table). We remain convinced that the current VAT system is regressive and unjust and needs to be restructured, including multiple rating, and zero-rating of essentials. We are not in principle opposed to the taxation of retirement funds. However, we are extremely unhappy that government has not implemented the agreement reached with ourselves to implement a top-up system (as recommended by their own Smit Commission) to compensate low-income earners for loss of income. We call on them to urgently implement this agreement.
- We have consistently maintained that the MTEF is in principle a good method for planning, and support it as a planning tool. However, it becomes doubly problematic when it is cast in rigid macro-economic parameters, which constrain all other elements of the budget. In our view the combination GEAR + MTEF = disaster. We have put forward concrete proposals for, and will continue to promote, the adoption of a developmental MTEF with appropriate budget parameters.
- The South African economy grew at a rate of only 1,7 percent in 1997. This rate of growth is far below the projected growth rate of 2,9 percent forecast in the GEAR document and is not sufficient to solve the problems of unemployment, poverty, and delivery of basic needs in South Africa. The current policy of reducing the size of government spending and the policy of supporting interest rates at extremely high levels, despite the recent reductions by the Reserve Bank, will slow economic development and choke job creating investment. The macroeconomic impact of these policies could prevent further economic growth in the future and compromise the social expenditure goals outlined in the Department of Finance’s medium term expenditure framework.
- We find it strange that the speech makes no reference for strategies to restructure and reduce our debt, despite numerous organisations, including ourselves, having made concrete and creative proposals on how this can be done. In particular, the proposal for restructuring the public sector pension fund, and radically reducing the debt owed to the PIC which manages this fund. We believe this is a viable proposal which will not only radically reduce the debt, but also immediately release urgently needed resources for social development.
- We reiterate our view that government has to meet its constitutional obligations (section77) to submit the budget to parliamentary scrutiny, before any input into the parliamentary process can be meaningful. The failure of the Ministry to produce a Bill which meets this requirement (the 1997 Bill they produced was rejected by the committee as being defective), is a slap in the face to parliament, which has repeatedly called for this to be done. The Ministry has also failed in its undertaking, again repeated in this years budget, to produce a white paper on budget reform. If this had been done in the first instance, we may have avoided the GEAR debacle. Nevertheless, COSATU remains committed to engage in all meaningful parliamentary processes, as we are doing on a daily basis, to advance our views on a range of issues. We have also written a letter to the finance committee, explaining our decision, which we had also communicated to them in last year's hearings. We expect to maintain the close involvement which we have always had with this committee.
- No one questions the fact that the democratic government cares about the plight of our people. The real issue is whether it allows itself to be held hostage by those interests foisting inappropriate economic strategies on the country, or are prepared to take the leap of faith to embark on the bold measures which are needed to unleash the energies of our people, on whom the economic potential of the country hinges. For our part, we remain committed to engage in dialogue to deal with some of the areas outlined above. Failure to address them will make it difficult for us to succeed in eradicating poverty and inequities in incomes and wealth in our country.
Economic Services, Infrastructure and Capital Spending
Appendix - FACT SHEET – 1998 / 9 Budget and the MTEF projections
Table 1: Consolidated National and Provincial Government. Percent Change From Previous Year.
FUNCTION |
1998/9 |
1999/00 |
2000/01 |
| Gen. Government | -32.1% |
18.8% |
9.5% |
| Protection Services | 11.3% |
6.9% |
7.2% |
| Defense | 2.4% |
5.7% |
5.9% |
| Police | 8.3% |
6.5% |
6.4% |
| Prisons | 38.4% |
9.3% |
10.1% |
| Courts | 26.3% |
9.8% |
11.0% |
| Social Services | 15.3% |
4.8% |
6.9% |
| Education | 16.3% |
5.1% |
6.1% |
| Health | 24.2% |
5.0% |
6.8% |
| Welfare | 7.3% |
4.5% |
7.5% |
| Housing | -5.1% |
8.9% |
0.8% |
| Other | 53.4% |
0.3% |
15.2% |
| Economic Services | -9.5% |
8.6% |
11.0% |
| Water | 2.0% |
6.6% |
11.9% |
| Fuel/energy | -26.4% |
0.2% |
16.5% |
| Agriculture | -4.9% |
4.7% |
9.8% |
| Mining | 8.3% |
3.9% |
-0.1% |
| Manufacturing | -41.6% |
-3.3% |
3.9% |
| Regional Development | -18.6% |
-0.1% |
4.7% |
| Transport | -11.2% |
8.1% |
10.0% |
| Other | -5.9% |
23.8% |
17.7% |
| Interest Payments | 11.6% |
5.3% |
6.2% |
| TOTAL | 7.3% |
6.2% |
7.3% |
Table 2: Consolidated National and Provincial Government. Percent of Non-Interest Spending.
FUNCTION |
1997/8 |
1998/9 |
1999/00 |
2000/01 |
| Gen. Government | 8.7% |
5.6% |
6.2% |
6.3% |
| Protection Services | 19.5% |
20.5% |
20.5% |
20.5% |
| Defense | 7.1% |
6.8% |
6.8% |
6.7% |
| Police | 8.6% |
8.8% |
8.8% |
8.7% |
| Prisons | 2.5% |
3.3% |
3.4% |
3.5% |
| Courts | 1.3% |
1.6% |
1.6% |
1.7% |
| Social Services | 58.4% |
63.4% |
62.4% |
62.0% |
| Education | 26.6% |
29.0% |
28.7% |
28.3% |
| Health | 13.3% |
15.6% |
15.4% |
15.3% |
| Welfare | 12.2% |
12.3% |
12.1% |
12.0% |
| Housing | 2.7% |
2.5% |
2.5% |
2.4% |
| Other | 2.8% |
4.0% |
3.8% |
4.1% |
| Economic Services | 12.5% |
10.6% |
10.8% |
11.2% |
| Water | 1.2% |
1.2% |
1.2% |
1.2% |
| Fuel/energy | 0.1% |
0.1% |
0.1% |
0.1% |
| Agriculture | 3.0% |
2.7% |
2.6% |
2.7% |
| Mining | 0.2% |
0.2% |
0.2% |
0.2% |
| Manufacturing | 0.7% |
0.4% |
0.4% |
0.3% |
| Regional Development | 0.6% |
0.4% |
0.4% |
0.4% |
| Transport | 4.8% |
4.0% |
4.1% |
4.2% |
| Other | 1.8% |
1.6% |
1.9% |
2.1% |
Table 3: Social Spending as a percent of GDP projections
FUNCTION |
1997/8 |
1998/9 |
1999/00 |
2000/01 |
| Social Services | 14.5% |
15.3% |
14.6% |
14.1% |
| Education | 6.6% |
7.0% |
6.7% |
6.5% |
| Health | 3.3% |
3.8% |
3.6% |
3.5% |
| Welfare | 3.0% |
3.0% |
2.8% |
2.7% |
| Housing | 0.7% |
0.6% |
0.6% |
0.5% |
| Other | 0.9% |
1.0% |
0.9% |
0.9% |
Table 4: MTEF Framework Assumptions
1998/9 |
1999/00 |
2000/01 |
|
| GDP Growth | 3,0% |
4,0% |
5,0% |
| GDP Inflation | 7,5% |
6,5% |
6,0% |
| GDP (R million) | 684 920 |
758 610 |
844 340 |
| Deficit (R million) | 23 970 |
22 760 |
25 330 |
| Spending (%GDP) | 29,5% |
28,8% |
28,6% |
| Deficit (% GDP) | 3,5% |
3,0% |
3,0% |
With the slow growth rate of GDP in 1997 (1,7 percent) and the deflationary biases of the fiscal and monetary environment, it is unclear whether growth and spending targets will be met in the years covered by the MTEF.
Table 5: Capital Expenditures as a Percent of Total Spending. Decline in public investment in clinics, classrooms, roads, and infrastructure.
Year |
Percent of Spending |
1996/7 |
8.0% |
1997/8 |
7.8% |
1998/9 |
7.0% |
1999/00 |
6.9% |
2000/01 |
6.8% |
Table 6: Provinces - Change in provincial allocations
| PROVINCE | 1997/8 |
1998/9 |
1998/9 conditional |
| Eastern Cape | -1.6% |
2.2% |
9.0% |
| Western Cape | 4.5% |
-9.0% |
8.4% |
| Northern Cape | 11.6% |
-0.5% |
4.6% |
| KwaZulu Natal | 5.6% |
0.1% |
13.8% |
| Free State | 6.8% |
-2.1% |
8.2% |
| Mpumalanga | 4.1% |
8.6% |
14.7% |
| Northern Province | 11.2% |
0.5% |
6.7% |
| North West | 5.2% |
0.8% |
6.4% |
| Gauteng | 16.2% |
-9.4% |
9.2% |
Table 7: Specific Areas of Concern – Adjusted appropriations 1997/8 and budget votes 1998/99
Area |
Change |
| National Public Works Programme | -84% |
| Investment Support | -31% |
| Small business promotion and support | -34% |
| Land transport (including public) | -10% |
Table 8: Revenues. Percent of total revenues.
1995/6 |
1996/7 |
1997/8 |
1998/9 | |
| INCOME AND PROFITS | 54.8% |
56.4% |
57.5% |
58.3% |
| Individuals | 40.7% |
39.6% |
40.2% |
42.4% |
| Gold mines | 0.7% |
0.4% |
0.5% |
0.1% |
| Other mines | 0.6% |
0.9% |
0.8% |
0.7% |
| Companies | 11.2% |
12.4% |
13.0% |
12.0% |
| Secondary Tax | 1.0% |
0.9% |
0.8% |
0.8% |
| Retirement Fund | 0.0% |
1.7% |
1.9% |
2.6% |
| Other | 0.6% |
2.1% |
2.1% |
0.3% |
| POVERTY | 1.8% |
1.6% |
1.5% |
1.6% |
| Donations | 0.0% |
0.0% |
0.0% |
0.0% |
| Estate | 0.1% |
0.1% |
0.1% |
0.2% |
| Marketable Securities | 0.4% |
0.3% |
0.2% |
0.3% |
| Transfer duties | 1.2% |
1.2% |
1.1% |
1.2% |
| GOODS & SERVICES | 38.7% |
37.1% |
37.2% |
36.7% |
| VAT | 26.0% |
24.8% |
24.9% |
24.8% |
| Excise | 12.2% |
11.9% |
12.0% |
11.9% |
| Fuel | 7.1% |
7.2% |
7.2% |
7.4% |
| Financial Services | 0.4% |
0.3% |
0.2% |
0.0% |
| Other | 0.0% |
0.0% |
0.0% |
0.0% |
| INTERNAT'L TRADE | 4.9% |
4.8% |
4.5% |
3.9% |
| Customs duty | 4.2% |
4.7% |
4.4% |
3.9% |
| Surcharges | 0.4% |
0.0% |
0.0% |
0.0% |
| Other | 0.3% |
0.1% |
0.1% |
0.0% |
| Stamp duties | 0.8% |
0.8% |
0.8% |
1.0% |
| Less: SACU | -3.1% |
-3.0% |
-3.2% |
-3.2% |
| Tax Revenue | 97.9% |
97.7% |
98.3% |
98.2% |
| Non-Tax | 2.1% |
2.3% |
1.7% |
1.8% |
| Total Revenue | 100% |
100% |
100% |
100% |
Estimates taxes to be collected on retirement funds increased by 49 percent between 1997/8 and 1998/9.
