FEDUSA SUBMISSION ON THE BUDGET 2014
The FEDUSA Submission on the 2014 National Budget was presented to the Select Committee on Finance 04 March 2014, by Deputy General Secretary, Gretchen Humphries.
Twenty years, since the advent of democracy in 1994, South Africa as a Rainbow Nation has made steady progress in the areas of education, health, fighting the scourge against Vid/Aids, economic growth widened, employment creation, income distribution, rural development, and housing, access to water, sanitation and electricity. However, not extensively has changed in the townships. The World Bank argues that during the apartheid period, slum clearance, harsh licensing, and strict zoning regulations rid cities of black-dominated informal sector niches.
Two decades after the end of apartheid, spatial segregation remains, and investment in black-dominated areas is low. The legacy of separation also results in high transportation costs for the unemployed, who tend to live far from where the jobs are. South Africa’s job creation problems may stem primarily from urban issues according to the World Bank report.
On the education front, Grade R enrolments has increased to 705 000 in 2011 and is facilities for early childhood development has increase by 18.4 percent in 2011. The total of graduates increased to numbers of 160 300 in 2011, up from 95 940 in 2001, and science, engineering and technology graduates increased to 45 841. The country can only improve the educational system if all stakeholders work together and provide support for teachers and principals, resort discipline amongst learners and encourage commitment from all, including parents. It is also important for government to strengthen and expand the number of Further Education and Training (FET) Colleges and to provide opportunities to young people to enroll in learner-ships as well as apprenticeships to reduce the high levels of youth unemployment.
The economy has grown by over 80 percent since 1993, the national income per capita has increased by 40% in real terms and the value of the country’s gross domestic product (GDP) is over 83% more than it was in 1993 at R3.2 trillion. Fixed investment increased from 15% of GDP in 1993 to an average of 20% over the past five years and total employment has increased by more than 3.5 million. The Expanded Public Works Programme created 941 593 work opportunities for the 2012/13 financial year (273 938 Full Time Equivalents), up from 550 000 work opportunities in 2009.
FEDUSA remain concerned that the unemployment rate according Statistics South Africa persist to be high at 24.7 percent in the third quarter of 2013, with youth unemployment which stand at 55 percent. It is critical for the country to create for opportunities by increasing exports, to develop a more competitive infrastructure, reducing the cost of living for low-income and working people, support for small businesses and the creation of a labour market that is more responsive to new economic opportunities. The commercial diplomatic services should be enhanced to foster greater exports and to expand the global market share globally.
Budget figures for the 2014/15 financial year was already fixed in the October 2013 MTBPS. As such not any major surprises were expected, at least not from the expenditure side. All the different programs are in place to attain government's objectives of making inroads into our serious economic and social challenges of low and jobless growth coupled with structural problems and reflected in Budget figures. Budget estimates were however fixed in October 2013 based on assumptions regarding economic growth and inflation. Since October 2013 important global economic as well as domestic economic social and political developments taking place effected our growth and inflation and therefore necessitated certain adjustments in the 2014 Budget figures.
The so-called Deep Depression that started in 2008 is still playing havoc with countries, especially developing countries via lower export demand and disruptive capital movements.In its update in January 2014 of its October 2013 World Economic Outlook (WEO), the International Monetary Fund (IMF) forecasts that global growth would be stronger than anticipated in October 2013 WEO. It is expected that growth in the USA and Central Europe would be higher. There is some uncertainty of growth in Japan, while in China growth will pick up during 2014. These developments will have a favorable influence on our growth. Domestically the serious service delivery protests and riots in townships as well as wildcat strikes in mines resulting in the resultant lower export earnings however effects growth negatively.
According to the IMF in its World Economic Outlook, the tapering of the USA's quantitative increase in global liquidity is still having severe negative consequences on developing countries including South Africa. The expectation of tapering by the USA Federal Reserve since May 2013 resulted in significant outflows from emerging economies domestic bond and equity markets, putting pressure on exchange rates and long term bond yields, particularly in those countries with sizeable current account deficits.
The IMF's forecasts that the South African economy would grow by a projected 2.8 percent in 2014 and 3.2 percent in 2015. The net effect of global and domestic developments is therefore somewhat slower growth and increased inflation for South Africa. The Reserve Bank downscaled its growth projections in line with that of the IMF for South Africa in 2014 and 2015 to 2,8 percent and 3,3 percent respectively, down from 3,0 percent and 3,4 percent in the previous forecast round.
The estimates of Government are therefore more or less in line with this. The actual outcome will however be affected by both domestic and global developments such as the pace of tapering in the USA of its provision of providing liquidity to markets.
The forecast of average inflation rate of the Reserve Bank for 2014 is 0,6 percentage points higher at 6,3 percent, and 0,6 percentage points higher at 6,0 percent in 2015, with inflation expected to average 5,9 percent in the final quarter of that year. Inflation is expected breach the upper end of the target range in the second quarter of 2014, and to reach a peak of 6, 6 percent in the final quarter of the year, before declining to 6, and 0 percent in the second quarter of 2015. Government's estimates are 6.2 percent and 5.9 percent for 2014 and 2015 respectably. As is the case of the growth rate there is some risk involved. The inflation rate may well be higher because of larger than expected increases in fuel prices and movements in our exchange rate.
At a growth rate of 3 percent for 2014 and inflation rate of 5.9 percent Government and holding real non-interest expenditure growth to an annual average of 2.2 percent in real terms, Government budgeted for a deficit of 4.2 percent for 2014/15.
From a fiscal policy perspective the higher than expected revenue coupled with a re-allocation of expenditure and the usage of unspent funds gave Government some policy options, such as a somewhat smaller deficit of 4 percent against 4.2 percent and some tax relief for especially the lower income group and the re-allocation of its Budget to bring it in line with the National Development Plan (NDP) and to address urgent social and political needs.
Governments in power worldwide, rightfully or wrongly, are usually accused of using the Budget for political gain specifically when it is electioneering time. This could take place by deliberately re-allocating funds to gain votes or merely by concentrating on aspects that could boost their image. In the light of the above, it is understandable that abundant election “campaigns” were included in this year's Budget to illuminate Government's achievements as was also done in the State of Nation 2014 address. In almost all of the previous budgets Government's policies to address our serious economic and social problems and its achievements with different programs to accomplish this were echoed. This year's Budget was not being much different. Considerable attention was given to Government's achievements. Nevertheless little was said about corruption and fraud which had a major impacts in the year under review.
3) ALIGNMENT WITH THE NATIONAL DEVELOPMENT PLAN (NDP)
As expected the NDP received considerable attention in this year's Budget. Elements of the NDP that was launched in August 2012, was already included in the 2013 fiscal framework and even in the 2013 MTBPS it was more aligned with the NDP. At this moment in 2014 the focus is on a range of policy areas, especially infrastructure, education, health care, social protection, building a capable state, and promoting accountability and fighting corruption. The NDP campaigns for a new approach to addressing the policy challenges that constructs on extended cooperation between the public and private sectors, labour and civil society. The Budget Review of 2014 utilizes various examples in this regard focusing on infrastructure, partnerships and education as backbones with a specific example the Renewable Energy Programme launched in August 2011. (Budget Review 2014, Chapter1, p 5). FEDUSA believe that the approach is the correct course to create a job trajectory but will not happen instantaneous.
The Minister announced the introduction of the Employment Tax Incentive Act in 2013, also known as the youth wage subsidy, which came into effect on 2 January 2014. This piece of legislation is a significant step towards decreasing unemployment as it offers employers incentives to hire people between the ages of 18 – 29 years.
The Act was unlikely to cause immediate stability or even instability in the labour market in the short term. FEDUSA expect that businesses are to start their planning processes with regard to the benefits that they can get in the long term, as it will take some time so it's without a doubt not going to have an immediate effect. Typically, wage subsidies of this nature take up to nine or 12 months before they take effect in the labour market according to economic experts. Given the severity of youth unemployment the youth scheme received high priority in the MTBPS in 2013. In previous year's Government treated this program with some caution, given the differences between Government alliances. FEDUSA want to commend Government on this bold step to include this program despite some opposition in its own ranks. The Youth unemployment crisis is a universal phenomenon and was subjected to various in depth discussions at the International Labour Organisation (ILO) annual Conference in June 2013.
Under the current economic circumstances economic advice from supra-national organisations to developing countries is to maintain their expenditure programs but also to give serious attention to lower the budget deficits. For countries experiencing serious capital outflows with an adverse influence on their exchange rate and therefore on their inflation rate, the advice is to take steps to counteract these flows. The recent increase in the bank repo-rate was a timely step in the right direction.
FEDUSA is of opinion that from a fiscal policy perspective the current lower real increase in expenditure of 1.9 percent of GDP over the MTBPS period is the correct approach. For the 2003/04 to 2011/12 it amounted to an annual average of 8 percent. A part of these large real increases was for the appointment of large number of administrative Government officials and large salary increases. Part of it was also for investment expenditure which would be beneficial for future employment opportunities.
At hindsight, although it helped to upkeep our growth rate, the increase could have been lower, especially compensation expenditure. This would have given Government some scope to lower the budget deficit faster which would have helped our international credit rating.
The Budget provides for an expenditure level (including interest payments) of R1 252.3 billion and revenue of R1099.2 billion, leaving the budget deficit at 4 percent, the same level as 2013/14. Government plans to lower the deficit further to 2.8 percent by way of strict expenditure control and larger revenue income as the economy picks up its growth rate.
A positive development in this year's Budget is the further shift of its expenditure from current to capital expenditure. This will have a favorable effect on future employment opportunities. FEDUSA also commend Government on the priority given to Education and Health. Also on the steps (forensic reviews and investigations) taken to improve the quality of public services and cutting wasteful expenditure by proper controls developed by the Office of the Accountant-General.
4.1 Specific expenditure allocations
FEDUSA welcomes the specific expenditure measures announced, namely the increase in social grants. Old age grants will increase from R1 270 to R1 350 per month from 1 April 2014. Child support grants will be increased from R300 to R310 per month in April 2014 and to R320 in October 2014.
It is also noted that it was necessary to reprioritise across departments and to draw down on the contingency reserve to make additional allocations to priority areas and for the upward adjustment of the public sector wage bill, while maintaining the expenditure ceiling. FEDUSA would caution that this option would not always be open to Government.FEDUSA is therefore concerned about the sustainability of compensation expenditure. Compensation expenditure is a large component of Government's spending. For the current MTBPS period large increases in compensation expenditure is again envisaged. The Minister also admitted that a further deterioration in the inflation outlook would add to the wage bill and place additional pressure on the budget.
The medium term expenditure priorities as set by Government allows for an average annual real growth in non-interest spending of 1.9 percent over the 2014/15-2016/17 MTEF period. The investment in line with the NDP strategic objectives (Budget Review Chapter 2014 (p 13-30) are welcomed by FEDUSA.
5) REVENUE TRENDS AND INCOME TAX RELIEF
Tax proposals for the 2014 Budget continue to prioritise economic growth, job creation and generating sufficient revenue to finance government spending in line with the National Development Plan (NDP) and the objectives of expanding the economy and reducing unemployment. Tax proposals for 2014/15 include personal income tax relief of R9.3 billion; steps to encourage enterprise development and household savings; measures to address acid mine drainage; and design adjustments to the proposed carbon tax.
The first report of the Tax Review Committee, which examines how the tax system affects small and medium enterprises, will soon be published for public comment and FEDUSA look forward to the recommendations of the report specifically the aspects pertaining to the justifiable balance between direct and indirect taxes and the role of wealth taxes.
Tax relief measures announced in the 2014 Budget which is regarded as positive are the following:
Taxpayers will also find some tax relief on medical schemes contributions. Monthly tax credits will be increased from R242 to R257 per month for the first two beneficiaries and from R162 to R172 for each additional beneficiary with effect from 1 March 2014. The medical cost escalation has however been eroding benefits made in this provision;
As was expected the proposed carbon tax and its alignment with desired emission-reduction outcomes were adjusted which is seen as a blow to dealing with emission reduction;
The employment tax incentive amounting to an estimated R1 billion, introduced at the beginning of 2014, which will help unemployed youth gain skills and experience in the workplace is welcomed by FEDUSA.
On the personal tax front, FEDUSA welcomes the personal income tax relief of R9.3 billion which will go largely to the lower income groups. The effect of this tax relief will however partly be neutralised by the increase in the fuel levy where Government will take back R2.6 billion by way of an increase in the fuel levy.
6) MEDIUM TERM EXPENDITURE PLANS
FEDUSA welcome the balance between real growth in expenditure and fiscal consolidation. The prioritisation of resources within the NDP framework is welcomed by the federation. The FEDUSA submission will focus on the Health and Retirement provision aspects of expenditure.
7) FINANCING OF THE NATIONAL HEALTH INSURANCE (NHI)
It has become widely accepted that the public health sector is in a state of crisis and the mass exodus of public health workers to the private sector as well as abroad is leading to a staffing crisis in public hospitals. Just like in many other sectors, healthcare in South Africa reflects a two-tiered system of first-world and third-world standards, respectively. Generally, public facilities tend to be underfunded, bureaucratic, inefficient and hopelessly over-subscribed, whereas many private facilities are excellent.
However before talking about implementation of the NHI [proposed National Health Insurance], there needs to be a general raising of standards in the public healthcare system. This is the only way to ensure that South Africa has a world-class public healthcare system that can cater for all its citizens. The Department of Health has been hard at work in this regard but the progress is seen as minimum in this regard. In terms of the NDP the Department of Health aims to implement a revised health system over a period of 14 years. It is imperative to recognize that the country has also made progress with regard to improvement of the public health, as the TB cure rate has increase from 54 percent in 2000 to 73. 1 percent in 2010. The estimated overall HIV prevalence rate is approximately 10% lower than before. The total number of people living with HIV is estimated at approximately 5, 26 million in 2013. For adults aged 15–49 years, an estimated 15,9% of the population is HIV positive.Fewer children suffer from severe malnutrition, the number of children under years has decreased from 88 971 in 2001 to 23 521 in 2011. More children are immunized against diseases and the malaria cases were reduced by 85 percent from 64 622 in 2000 to 9 866 in 2011. At the ICASA AIDS 2013 Global conference in Cape Town it was estimated that 2.4 million children and adults take antiretroviral medication and more than 1 million men and boys were medically circumcised as part of the HIV prevent campaign. About 20 million people were tested for HIV in a 20 month HCT campaign.
FEDUSA calls for more reforms to the health system focused on improving the management at institutional level, for more and better trained health professionals, better patient information system and home-based care models to reduce cost and patient care.
The Minister mentioned that the Department of Health’s White paper on NHI and a financing paper by the National Treasury have been completed and will be tabled in Cabinet shortly during 2014. Further that NHI pilot districts have been established in every province, supported by funding for NHI as a conditional grant. In addition to hospital and clinic building and refurbishment programmes, R1.2 billion has been allocated for piloting general practitioners’ contracts. Not plentiful information on the cost of the proposed insurance is available at this stage. The NHI is treated within the envelope of the National Department of Health, which makes it difficult to determine its cost at this stage.
To strengthen the health system, Government announced that an Office of Health Standards Compliance will be launched in 2014/15 as an independent public entity responsible for inspecting health facilities and improving the quality of health provision. The new office receives funding of R369.5 million over the medium term.
In its 2012 Article IV report, the IMF pointed out that the approach of the NHI is to pool the risks and the funds so that equity and social solidarity will be achieved through the creation of a single NHI fund. As the Minister also indicated, the NHI will be implemented gradually over 14 years in three stages.
The first phase (2011-15) will mainly include organisational changes to build capacity and pilot projects to assess the preliminary design. In the second and third phases from 2016-2020 and 2020-2024 the NHI will gradually take over the administration of the health functions.
According to the IMF the cost is difficult to predict. In 2012 National Treasury estimated the cost of the NHI at 2 percent of GDP, going up to not less than 6.2 percent of GDP in 2025. Financing options include a payroll tax, payable by both employers and employees was considered, higher VAT, a surcharge on taxable income, or a combination were considered.
The Minister mentioned that the Department of Health’s white paper on NHI and a financing paper by the National Treasury have been completed and will be tabled in Cabinet shortly. Further that NHI pilot districts have been established in every province, supported by funding for NHI as a conditional grant. In addition to hospital and clinic building and refurbishment programmes, R1.2 billion has been allocated for piloting general practitioners’ contracts.
To strengthen the health system, Government announced that an Office of Health Standards Compliance will be launched in 2014/15 as an independent public entity responsible for inspecting health facilities and improving the quality of health provision. The new office receives funding of R369.5 million over the medium term.
It can therefore be accepted that the cost will be high. The implementation will therefore require that strict control on expenditure will have to be applied as well as a reprioritising of expenditure between functions to afford such a program.
It is noted that in his 2013 MTBPS the Minister indicated that authorities will proceed cautiously with pension reforms and the implementation of the national health insurance to ensure their affordability and consistency with fiscal sustainability
When it comes to the National Health Insurance, one simply cannot ignore the glaring chasm between what government wishes to implement and what it is currently delivering. FEDUSA’s affiliate health sector trade union, Hospersa, is constantly required to intervene not only on behalf of vulnerable workers in state hospitals, but also on behalf of patients whom government is failing.
It must be underlined that the true viability of the national health insurance (NHI) scheme will be measured on the government’s ability to improve the delivery of medical services to the general public.
Human resources and infrastructure development need to be approached with a sense of extreme urgency. No policy on paper – no matter how honorable its intentions – without the proper management, skills and resources to implement it, will amount to anything more than an exceedingly expensive misadventure.
The problem of budget under-spending remains prevalent in a country where we have rural citizens in dire need of essential services. Indeed, we have seen most of the NHI pilot sites underspending their allocated funds. Furthermore, it’s not simply about getting officials to spend the money, but having the capacity to spend it wisely. Sound corporate governance in public health care has to enter the fray. We cannot only think of infrastructure development and forget about the skills utilizing it.
Hence, our message to government is to get the basics right first before introducing more bureaucracy to a system in which the administrators are already not coping. FEDUSA would like to reiterate the need for the following aspects to be included in the health reform system:
ii) The placement (and retention) of doctors and professionals; and
iii) Enhanced revenue management.
Finally, FEDUSA is also calling for vast improvements in infrastructure in rural areas – particularly in the form of roads, bridges and communications – as many of our country’s citizen’s battle to gain access to health care facilities.
8) SOCIAL PROTECTION AND RETIREMENT PROVISION
It was announced that tax-preferred savings accounts, first mooted in the 2012 Budget Review as a measure to encourage household savings, will now proceed. The lack of personal savings remains a serious problem in South Africa. The Social Protection spending plans in line with the NDP focus on the introduction of tax-free savings accounts in 2014 which will create a mechanism to increase household savings and support financial inclusion is applauded by FEDUSA. The encouragement to save in tax-preferred savings accounts, tax exemptions for interest, dividends and capital gains will be granted for investment of not more than R30 000 per annum per individual. Investments in bank deposits, collective investments schemes, and exchange traded funds and retail savings bonds will be allowed to be offered in these savings accounts by banks, asset managers, life insurers and brokers.
FEDUSA also welcomes the adjustment of lump-sum pension payments, which would help individuals to save for their retirement. Pre-retirement withdrawals, mainly because of resignation will be tax-exempted up to R25000, while lump-sum receipts of up to R500 000 at retirement will be tax-exempted. The rates for these lump sums are to be adjusted to limit instances where lower income taxpayers are required to pay tax on lump sums even though they did not benefit from a deduction for contributions to the retirement fund because their taxable income was below the tax threshold. The adjustments will have the effect that a lump sum payable on retirement will be tax free if the amount is R500 000 or less.
The Finance Minister indicated that Government will seek to improve coverage and preservation of retirement funds and lower costs in the system. They are currently consulting with NEDLAC on measures to cover the six million employed South Africans who do not enjoy access to an employer-sponsored retirement plan. Government indicated that it will move progressively towards a mandatory system for retirement provision for all employed workers.
The Minister also indicated that a document that briefly describes
the retirement reform changes up to this point and sets out anticipated future reforms will soon be released by Government.
FEDUSA naturally welcomes any policy initiatives that would improve the material well – being and quality of life of workers and would therefore in principal support the retirement fund and the NHI. Government however is cautioned that both schemes could have far reaching financial and other implications, both for the public and private sector. At this stage an important goal of Government is to bring down its deficit by keeping its expenditure level at a sustainable level. Any large program such as the NHI would therefore have to be tackled with caution.
It is noted that in his 2013 MTBPS the Minister indicated that authorities will proceed cautiously with pension reforms and the implementation of the national health insurance to ensure their affordability and consistency with fiscal sustainability.
The Minister indicated that Government will seek to improve coverage and preservation of retirement funds and lower costs in the system. Government is currently consulting with NEDLAC on measures to cover the six million employed South Africans who do not enjoy access to an employer-sponsored retirement plans. Government indicated that it will move progressively towards a mandatory system for retirement provision for all employed workers.
The Minister also indicated that a document that briefly describes the retirement reform changes up to this point and sets out anticipated future reforms will soon be released by Government.
The formula used to estimate the taxable contribution amount in defined benefit funds was legislated in 112013. The methodology of calculating the formula will be detailed by way of regulation in 2014.
In addition, the policy approach for the timing of accrual of retirement fund benefits will be reviewed to provide certainty and ease practical application. It would appear that what the Finance Minister has in mind is a review of the requirement that taxpayers must annuitize when they retire, even if they embark on a second career and do not need a pension at that time.
Agreement has been reached with the Association of Savings and Investment of South Africa (ASISA) on a way forward to reduce the level of charges for retirement savings products. Draft regulatory reforms will be published shortly.
The Finance Minister announced adjustments to the retirement fund tax tables with effect from 1 March 2014. The tax tables were introduced in 2007 and have not been adjusted since, with the exception of the retirement / death tax table which was adjusted by 5% in 2011.
It is proposed that the lump sum brackets be increased by about 10%. The single biggest adjustment is the increase in the retirement / death tax table of the tax-free amount from R315 000 to R500 000. The tax-free amount in the withdrawal tax table has also been increased from R22 500 to R25 000. The large increase in the bottom bracket of the retirement / death tax table is to avoid instances where low income workers may be required to pay tax on their lump sum, even though they did not benefit from a deduction due to their taxable income falling below the tax-free threshold.
FEDUSA naturally welcomes any policy initiatives that would improve the material well-being and quality of life of workers and would therefore in principal support the retirement fund and the NHI. Government however is cautioned that both schemes could have far reaching financial and other implications, both for the public and private sector. At this stage an important goal of Government is to bring down its deficit by keeping its expenditure level at a sustainable level. Any large program such as the NHI would therefore have to be tackled with caution.
FEDUSA commended the Minister on a well – balanced Budget under challenging global economic as well as domestic economic, social and political circumstances. The current fiscal stance of keeping a secure reign on expenditure and lowering the deficit as economic growth and therefore revenue picks up.
In the beginning of his Budget speech the Minister said that he received, what is called in rugby terms, a hospital pass. When a player receives a hospital pass, anything can happen. He can score a try or be run down by big forwards and be replaced by one of the reserves. FEDUSA is of opinion that the Minister scored.
Budget 2014 Budget Review National Treasury RSA 26 February 2014
Budget 2013 Budget Review National Treasury RSA 22 February 2013
