Madam Speaker, the DA wishes to congratulate the Minister on the presentation of his tenth budget to this House. Under his tenure we have seen the introduction of prudent macroeconomic policies, which appear to have a sound base for economic growth. This we applaud.
Yet, despite the sound base, we have seen our economy struggle to reach GDP levels comparable to other emerging markets, and more importantly, to grow at a level that not only absorbs the annual entrants into the labour market but also makes a dent in our stubbornly high rate of unemployment.
It is in this context that we welcome the Deputy President's growth initiative, Asgisa, aimed at projecting our GDP growth to 6% and above. We are supportive because growth in economy brings growth in jobs and alleviates poverty. The Deputy President reflected correctly that our recent growth has been unbalanced based on strong international commodity prices, strong capital flows and strong consumer demand.
We agree with the Minister of Finance that commodity prices will one day retreat and investment flows can, as they have done in the past, swing away from emerging markets.
Sustainable growth cannot take place on the back of consumption demand alone. What is needed is growth on the investment and the production side if South Africa is to be placed on a more sustainable growth path.
We need to turn the current low-inflation, high-consumer growth momentum into a high-fixed-investment, high-employment-growth environment.
In respect of investment, government is to be commended on the R372 billion infrastructure roll-out over three years. But even - and this is the point - if government does succeed in spending all of this allocation it will only raise fixed capital investment by between 1% and 2%. At present, fixed capital investment is at round about 16,5% of GDP, up on the recent low of 15% in 2000, but still well behind the 23,6% of emerging market countries and even further from the 25% target we have set ourselves if we are going to hit the 6% growth level.
So, my simple point is this: Where is the rest of the fixed investment going to come from? The answer is obvious: the private sector. Government itself has acknowledged that the private sector is the main engine room for sustained economic growth. Their participation is key. Yet, where are the incentives in the budget to induce the private sector to be part of government's growth initiative? Where are the measures to boost the supply side of the economy and enhance South Africa's attraction to foreign and local investors? Despite a good deal of rhetoric, a few key figures evident in the Treasury's Budget Review tell a revealing story: Firstly, net foreign direct investment inflows for the first nine months of 2005 reached about R35,7 million, a great improvement on the stagnant levels of 2003 and 2004, but if you strip out the Barclays-Absa deal, which constitutes the bulk of that amount, we are back to the stagnant levels of before. The truth of the matter is that we are just not attracting our rightful share of foreign direct investment.
Secondly, the growth of fixed capital formation in 2005 grew by 8%. However, if you focus on the private sector component of that figure, it fell to 6,7% for 2005, off the high of 9,7% realised in 2004.
Thirdly, an analysis of government's R372 billion infrastructure roll-out invites the question: what is the private sector's part in this roll-out? Almost 22% is allocated to municipalities, 38% to national and provincial government, 33% to parastatals and a mere 5% to public-private participation.
So, here is where we have to register a disappointment that the budget, we believed, failed to show that ours is a government that is business friendly, and not just business tolerant. We wanted to see bolder steps in the budget: a budget embracing the role of the private sector, challenging it; a budget that incentivises the private sector to create jobs and makes it an integral part of the Deputy President's growth initiative, not just a peripheral player.
And in this, fiscal or tax policies do play a key role. Let me welcome the reduction in tax on retirement from 18% to nine per cent. This move has long been called for by the DA and will positively affect retirement funding and increase the worryingly low savings rate. Secondly, let me also welcome the range of fiscal measures aimed at stimulating small business.
Thirdly, there can be no complaint that the budget's main impact will be on enhancing the spending power of lower-income groups both directly and through incentives for skills development. But this raises a basic dilemma - we also need to encourage savings and investments, and this is predominantly done by the corporate sector and top-income individuals. And this is where the budget fails. The tax burden and therefore the cost of doing business in SA is high in comparison to our competitor nations in other emerging markets.
I know that the Minister is sceptical, if not cynical, about the role of taxes in encouraging investment. In this he is sometimes joined by Professor Katz, but with respect to the Katz commission, when it sat it faced a completely different investment world, in and outside South Africa.
I would, quite frankly, far rather listen to Business Unity South Africa, Busa, which believes that the time has come for a critical review of corporate tax structure, including the secondary tax on companies. This follows their own research, as well as that of others such as Merrill Lynch and KPMG, which place SA on the high side in respect of international corporate tax rates and very high when one adds in the secondary tax on companies.
The Minister published in response in the portfolio committee a note that at an effective rate of 36,9%, we compared favourably with a whole list of companies. Well, I could not help but notice in respect to the whole list that he produced that these were mostly developed countries that we were comparing ourselves with. What we need to do is compare ourselves with developing countries, more particularly those in the so-called emerging market club against which we are competing for that highly mobile investment capital.
Let me deal with a few points raised by the Minister in the meeting. Yes, looking at the effective corporate tax rate in isolation is meaningless. What has to be added in is state and other taxes that our competitors may in addition need to apply, but then so too do we have to add in our municipal taxes, skills levies and who knows what the costs of BEE and other costs are in that context.
I also hear the Minister's argument that if he lowers the corporate tax rate unaccompanied by a reduction in the maximum marginal tax rate of individuals, it would result in unhealthy tax arbitrage. Here I think the Minister is being disingenuous. Firstly, the costs of corporatisation are not taken into account.
Secondly, but more importantly, the Minister knows that if he had not raised the threshold to R400 000 in respect of the top marginal rate, but lowered the marginal rate itself, it would have had the same effect as far as revenue is concerned but eliminated the arbitrage potential.
Finally, in respect of STC, Busa indicates that this form of double taxation does not go down well internationally. The objective of STC was to encourage companies to retain earnings and invest as opposed to taking those earnings out. I think we have to critically examine that. The trade- off the Minister makes of saying that shareholders will prefer the tax paid in companies' hands as opposed to taking the dividend in theirs, wrongly places the purpose of this tax. Secondary tax on companies was never intended to be a tax on dividends, nor was it intended to be a trade-off. The tax on dividends was abolished in 1990; STC was brought in with a different objective in 1993.
We recognise that a scrapping of the RSC levy does positively impact on certain companies. Firstly, the RSC levy is deductible against tax and therefore it is not a R7 billion tax write-off, but closer to a R5 billion tax write-off. Secondly, the RSC levy, as I made the point, is turnover- and employment-based and therefore only high turnover and high employment companies will really benefit. Now, Minister, let us understand one another as far as this is concerned: Our plea is not for a race to the bottom but for a competitive rate.
We believe that committing SA to a 25% corporate tax rate, by say 2010, would have brought the tax rate down to the nominal international norm, sent out a strong signal of confidence in the economy and provided business with an incentive to commit to expansionary projects; and most importantly, create jobs and alleviate poverty.
And here we would have liked to see the Minister use the tax system more creatively and encourage the private sector to create jobs by introducing wage subsidies for persons employed on a full-time basis. We give incentives for investments of a capital nature, why not of a human employment nature?
Now let me concede: Fiscal policy is both complex and integrated. We might be wrong, Busa might be wrong. But I think the time is right, as part of the growth initiative, for a critical review of our tax structure. And so I ask the Minister - if he is listening - is it not time for him to constitute a task team of all stakeholders to address this issue?
In a similar vein, we are disappointed by the slow progress of privatisation, which, besides other positive spin-offs, would significantly reduce government's public sector borrowing requirements.
Eskom's recent indication that its plans to build a power station in Lephalale may be put on hold, because a Canadian consortium plans to build one across the border in Botswana, has a logic all of its own. We are happy to buy electricity from the private sector across the border but reluctant to buy electricity from the private sector within our own borders. That does not make sense.
On skills, while we welcome the extension of learnership advances to 2011, as well as the raising of limits, the budget does little, in our view, to address our capacity and skills crisis. The Setas have failed SA miserably and yet their cost to the SA taxpayer is R5 billion and rising. The money, we believe, could have been far more usefully spent on further incentivising the private sector to do the job.
Finally, another area of debate that needs to be opened up is that around the level of the budget deficit. Government is now projecting a deficit of 1,5% before borrowing for 2006-07 and which, in all likelihood if overruns continue, will come in again well below projections, below 1% with even a possible surplus. Such prudence may gain praise for a developed country, but for a developing one such as ours, levels closer to 3% would have been sustainable and provided a flexibility regarding increased employment incentives and other categories of spending.
As indicated Minister, we will be supporting the budget. But let me close by quoting the Financial Mail of 17 February:
On the whole this is a steady-as-you-go budget: Prudent, sound, but unimaginative and not innovative. But that is no small feat; and back in 1994 few could have predicted the revolution we have seen for the better in the handling of our public finances by government. The Minister has now delivered 10 budgets and is entitled to take much of the credit for this.