Speech by Ken Andrew MP, Democratic Party Spokesperson on Finance, Budget Debate, National Assembly, Tuesday, 7 February 2000: 14H00

Budgeting for failure

"Poverty and unemployment cramp individual lives and present major dangers to society. Poverty breeds despair and despair breeds extremism, intolerance, crime and aggression. The central question in poverty alleviation is how to provide people with the means to fight poverty themselves, to lift themselves out of poverty."

(William Wallace : "The Quality of Liberty in an Open Society".)

Minister Zola Skweyiya has warned that : "South Africa is sitting on a time bomb of poverty and social disintegration" and that we have "persistent and increasing levels of poverty" and "low economic growth". What can be done about it?

The Minister of Finance in his Budget Speech, confirmed that : "The underlying goals of fiscal policy remain economic growth and job creation, improved public services and reduced inequality".

Let us look at those goals of economic growth and job creation.

South Africa’s economy is something of a paradox : many monetary and fiscal fundamentals are in place – for which the government deserves credit – yet unemployment, poverty and inequality increase year after year.

More than a million jobs have been lost in the formal sector since 1994; average living standards have fallen to below what they were in 1969; and income inequalities grew during the 1990’s. This is a recipe for disaster.

Job creation : the top priority

The Democratic Party believes that sustainable job creation should be the Number One priority of economic policy in South Africa today.

South Africa can and must get its economic growth rates up to 6% or more per year, otherwise we will not succeed in reducing unemployment and poverty.

We dare not settle for less.

The Governor of the South African Reserve Bank, Mr Tito Mboweni, last week told the Portfolio Committee on Finance that an economic growth rate of about 3½ per cent in 2000 "is still too low to have any significant effect on the creation of employment opportunities", and that "serious attention will have to be given to improve the economy’s ability to grow at a more rapid and sustainable rate in order to reduce unemployment."

How to get 6% p.a. growth

The questions, then, are "How can South Africa’s economy accelerate to grow at 6% per year or more" and "What can we do to sustain that 6% growth rate for as long as possible?"

If we cannot find the answers, we are doomed to have to contend with growing unemployment and increasing poverty.

To accelerate our growth rate, we have to make it possible and attractive for both domestic and foreign investors to make fixed investments in South Africa.

Generally speaking, foreigners are not going to make fixed investments unless they see South African’s doing so first.

The problem is that our domestic savings are so low. Part of the problem is the lack of a culture of saving – although domestic savings as a percentage of gross domestic product were 50% higher at their peak in the 1980’s – but the primary cause is the low level of disposable income which has hardly changed in real terms for nearly 30 years.

We must have lower personal income tax for savings to improve. Despite the very welcome and frequently trumpeted reductions in personal income tax in the budget, government is taking 9,9% of GDP in personal income tax compared with an already high 8,5% in the year before it came to power.

This difference of R12,4 billion in current values is extra tax taken from individuals. No wonder their savings are so low.

To add insult to injury, government is now taking R5,8 billion from retirement funds which will reduce people’s pensions when they retire. Over 5 years, government will have taken no less than R22 billion additional tax on people’s retirement savings.

The Democratic Party believes that personal income tax should continue to be reduced substantially; that government should stop raiding people’s pension funds indiscriminately; that there should be greater incentives to save, for example by increasing the interest exemption to R12 000 per year; and that small and medium businesses should receive more encouragement and assistance.

At this time, in this country, introducing a Capital Gains Tax is most unwise. The claimed benefits, both direct and indirect, are limited and suspect. We are introducing one of the most complex taxes ever invented - capital gains tax laws run to hundreds of pages in other countries – at a time when SARS is improving but hardly coping, and will have to recruit and train an estimated 400 additional employees just to handle Capital Gains Tax, while a proper cost-benefit analysis has not been done.

As Prof. Lynette Olivier, one of the tax experts who gave evidence before the Portfolio Committee said, "a study should be undertaken as to the compliance cost for taxpayers and SARS. It does not make financial and economic sense to introduce a tax that will not collect much revenue, but which will require considerable effort by SARS and taxpayers to comply with."

"It may be argued that the introduction of the tax will discourage foreign investments. As South Africa is not an investment country of first choice for foreign investors, one of the few attractions is the absence of capital gains tax. If gains realised by foreigners were subject to the tax, a major incentive to invest in South Africa is removed."

Foreign Direct Investment is essential to supplement domestic investment. Faster economic growth, rapid privatisation, labour market flexibility and less crime are the critical elements, and my colleagues will expand on the DP proposals during the course of this debate.

Sustaining a 6% growth rate

Taken together, these steps can propel us to a 6% or more growth path: but how can we sustain it?

Bottle-necks on our growth path are shortages of foreign reserves and skilled labour. Neither are insurmountable obstacles. What we need is more foreign direct investment, growing exports and rapid privatisation to reduce government debt and to increase our foreign reserves by billions of Rands, and a deliberate campaign to increase the supply of skilled people in our country by going out and attracting skilled immigrants and by channelling resources into developing skills within our society ranging from basic literacy through artisan training to tertiary education.

The Democratic Party has specific proposals in regard to each of these essential initiatives. We must stop pussyfooting around with privatisation and set as our target an amount of R20 billion per year to be raised in each of the next 4 years, prioritising price, foreign investment and technology transfers. The days of thinking that half-hearted privatisation dominated by attempts to retain control, overloaded with conditionality and often incorporating phoney black empowerment are over if we want to achieve the 6% growth rates which we require.

The DP proposes a vigorous immigration policy to attract skilled people from other countries, tax incentives to assist people to make tertiary education affordable, and efficient skills development programmes which include special opportunities for the unemployed, youth and rural populations.

There are many South Africans making fixed investments and creating jobs. The tragedy is that too many of them are doing so in other countries because, for one reason or another, they have left our shores.

We must make South Africa more attractive to domestic and foreign investors alike. It can be done. It must be done if we are to reduce unemployment.

Balance required

The DP recognises that in the Budget, one has to balance the need to create an environment conducive to economic growth and job creation with the need to meet the legitimate demands of people for service delivery and poverty alleviation.

In addressing service delivery and poverty alleviation, inefficiency, wastage, corruption and unspent funds are often greater impediments than a shortage of money from the Budget.

Hardly a day goes by at this time of the year when a new scandal or administrative collapse is not exposed. This represents billions of Rands of taxpayers’ money which has been wasted, and it is about time that government got its house in order.

Short-term poverty alleviation is essential – and the DP will be setting out some of its proposals during this debate – but only sustained growth will enable South Africa to tackle unemployment and poverty successfully.

If the economic goals referred to by the Minister of Finance in his Budget Speech are to be met, he needs the active and high profile support of the President and the whole Cabinet, in word and deed, in driving the economy forward.

It is not good enough that we simply move in the right direction. It is not good enough that we pat ourselves on the back for being better than the appalling apartheid era economic managers. It is not good enough that we create new elites while unemployment spreads like wildfire.

Budgeting for failure

A 6% growth rate is necessary and possible.

Government should not confuse the "decisive action" which President Mbeki has called for with "the illusion of easy solutions". Don’t confuse the opportunity to make rapid progress in reducing unemployment with illusions of quick fixes. It will require hard work but, above all, it will require courage to take decisive action.

This Budget tells us that government is resigned to failure. Its own goal of job creation will not be met. The Governor of the Reserve Bank, most economists and government itself in its Budget Reviews have told us that.

Government projections of an average growth rate of about 3,4% per year for the next few years add up to more poverty, more hunger, more homelessness and more crime. South Africa can and must get its economic growth rates up to 6% or more per year.

South Africa has the potential

South Africa has the potential to alleviate the poverty of millions of its people, to substantially reduce unemployment and to provide for rising standards of living for all its people – but that potential is not being realised. We must turn the tide against rising poverty and growing unemployment in our country, both of which will have disastrous consequences for our fragile democracy if they are not alleviated soon.

DP cannot support

Tackling unemployment is probably the biggest individual challenge facing South Africa today. It is a challenge which will not be met by being faint-hearted or by kowtowing to vested interests, whatever they may be. The future of peace and prosperity in this country are at stake and the Democratic Party calls on the government to summon the courage to do what we all know is necessary.

The Democratic Party cannot support a budget which is an integral part of government’s economic policies and which government itself predicts will lead to rising unemployment and growing poverty for the foreseeable future.

Issued by the Democratic Party, 7 February 2000