People's Budget Expectations - 14-02-06

 

Expectations from the Budget
The People's Budget Campaign, February 2006

Generally, we hear a lot about business's expectations from the budget, which typically assume the benefits of tax cuts and a cautious fiscal policy. For the majority of South Africans, however, the key questions centre on how government will use its resources to drive programmes that can create employment and overcome the social deficits left by apartheid.

It is now 12 years since the establishment of democracy. Yet South Africa still faces vast economic inequalities, which - as the President has said - virtually shape two worlds within this one country. Compared to other middle-income countries, South Africa's unique history means it still has:

* Weak basic infrastructure, particularly in poor communities and regions, where households cannot afford to pay for basic services.

* A growing lack of employment opportunities, rooted in the deprivation of the majority under apartheid combined with the economy's growing dependence on capital-intensive industries, dominated by minerals and coal and the auto industry.

Given these unique challenges, what do our people need from the budget?

First, overall fiscal and monetary policy must stimulate overall growth as far as possible without increasing debt or tax burdens to the point of economic instability.

Second, expenditure must have two core aims:

* To improve social services and address poverty in ways that address the backlogs left by apartheid in ways that support social integration and democracy and create economic opportunities especially for the historically marginalised.

* To restructure the economy - that is, the structure of production, ownership of assets such as land, and access to infrastructure - in ways that support sustainable employment and raise incomes for the poor.

These broad developmental requirements shape our understanding of budgetary policy and spending priorities, and on that basis our demands.

In terms of fiscal policy, the state still seems enamoured of the GEAR targets for taxation and government borrowing relative to the GDP. Excess revenues and a degree of flexibility on debt targets, combined with lower interest rates, have meant spending on programmes increased steadily in the past six years. Actual borrowing has consistently fallen short of budget estimates as excess revenues have been used to reduce deficits rather than to increase spending on social investment.

It follows that more resources would be available to address the social deficits if the state would also accept an increase in tax targets. In the past few years, we have seen cuts in income and company tax rates that make the overall tax system less progressive. These cuts benefit the rich the most, while hampering a qualitative improvement in government spending.

In recent months, we have again heard that government must cut taxes because it does not have the capacity to spend higher revenues. Given the enormous needs of our society and the inadequate budgets still found in some sectors, this assertion is simply untrue. In our demands on spending, we identify functions that could beneficially absorb substantial sums in the course of the coming year.

A major concern remains the relatively tight monetary policy, and in particular the one-sided inflation targeting policy combined with persistent relaxation in exchange controls. In particular, in light of the rising speculative inflows of portfolio investments in recent years, which support overvaluation of the currency and add to the potential for instability in the long run, we encourage government to introduce measures to discourage short-run capital inflows.

In short, on overall fiscal and monetary policy, the People's Budget Campaign calls for

1. A still more expansionary fiscal policy in order to address social needs and support sustainable growth.

2. A review of monetary policy to ensure it does more to support sustainable economic growth and employment creation. This can be achieved through further reductions in real interest rates, on the one hand, and measures to discourage speculative capital inflows, on the other. In addition, the mandate to the Reserve Bank must be modified to ensure it takes into account the impact of its decisions on growth, investment and employment.

On expenditure, the People's Budget Campaign appreciates the efforts by the state over the past 12 years to shift funding toward social services and infrastructure, especially in poor communities. More than half the budget is now spent on the main social services and basic infrastructure.

Still, South Africa's accomplishments in this area continue to lag behind the targets set in the RDP. Even more important, current programmes do too little to meet the expectation that improvements in services to poor communities would support economic growth and social integration. In particular, there has been little effort to ensure sufficient levels of funding for health, education, housing, land and social grants to meet the new demands. At the same time, these programmes have often been designed only to improve short-term living standards, rather than investing in more integrated communities and improving the basis for economic engagement by historically deprived people.

In light of this situation, the People's Budget Campaign expects a substantial improvement in funding for the major social services and infrastructure, with a review of all these programmes to ensure they are more supportive of shared and sustainable growth.

At the same time, we have seen persistent cuts in the share of economic services in the budget in the past 20 years. These cuts must be reversed if the state is to have the resources needed to drive growth on the scale foreseen in ASGI-SA.

In the coming year, spending could increase effectively amongst others in the following areas.

1. The elimination of schools fees to improve access to all, with compensatory increases in funding to ensure improved standards of staffing, infrastructure and materials like texts and paper especially in poorer areas. School fees are major burden on the poor, and maintain an exclusive and inequitable economy. In addition, ensuring greater representivity and equity in tertiary education requires a qualitative increase in bursaries and soft loans for tertiary education.

2. Increased funding of operational costs for health, especially in the poorer provinces, to provide for adequate staffing, access to medicines and other materials, and the expansion of public works programmes for home-based care and auxiliary personnel to support medical professionals. The health sector remains one of the most underfunded services in the country.

3. Accelerated roll-out of anti-retroviral treatment, especially in provinces like Limpopo and Mpumalanga that have fallen well behind on targets. Today, some 500 000 people need anti-retroviral treatment, but only around 75 000 people get it in the public sector. The shortfall spells death for tens of thousands. At the same time, we would like to see fast-tracked training for educators, health workers and police on mass scale, which would do a lot to help eliminate stigma and improve the quality of life for people infected with and affected by HIV.

4. A major increase in the housing subsidy - say by 50% - which would make it possible to develop settlements closer to urban centres by covering higher land costs. This should be complemented by additional measures to reduce the cost of well-located land.

5. An increase extension in free basic services, based on higher subsidies for poor municipalities, as well as an extension in child grants up to age 18. In addition, investment in household infrastructure should be increased, but planning for that time of project will require more than one year.

Finally, we expect a substantial improvement in funding for land reform and post-settlement services over the coming years. These programmes cannot absorb funds urgently, but must be expanded very substantially to achieve the ASGI-SA goals of halving unemployment and poverty by 2014.

In terms of revenue, the People's Budget Campaign has been disappointed by the tendency in recent years to shift the burden from progressive taxes, like the income and company tax, to the VAT and user fees, which are regressive. The Campaign has called for

* If any tax rates are in order at all, they should affect the VAT - which imposes the greatest tax burden on poor households. In addition, South Africa should introduce a multi-rate VAT that will impose a higher tax on luxuries and reduce taxation on necessities. This type of VAT, which is the norm internationally, would ensure that VAT has a more progressive incidence.

* An end to cuts in personal and company income tax, with an increase in government expenditure on basic services instead.

Overall, the People's Budget Campaign looks forward to a budget that, in line with the promises of ASGI-SA, will take the country toward more equitable, shared growth. That requires a substantial increase in investment in our people and our communities, measures to give poor communities greater access to assets, and enhanced support for key industries and for rural development.

For Further Information please contact: