Medium Term Budget Policy statement (MTBPS) 2017: public hearings

Meeting report

Introduction by the Chairperson and Co-Chairperson
Mr C De Beer (ANC, Northern Cape), Chairperson, welcomed the opportunity for public participation. He explained that due to the fact that the Finance and Appropriations Select Committees consisted of the same Members, some Members were deployed to the Appropriations Select Committee meeting.

Mr Y Carrim (ANC), Co-Chairperson, asked the entities to summarise their submissions in half a page, or 500 words. It could not be expected of the Committees to do so. The entities had to capture what it wanted included in Committee reports, as Committee recommendations. Summaries had to be submitted to the Committee Secretaries. Given the gravity of what the Minister had stated in the MTBPS, he was surprised that there were so few submissions.

Cosatu submission on the MTBPS
Mr Matthew Parks, Cosatu Parliamentary Coordinator, said that to Cosatu it was clear that the nation was in the midst of its worst governance and economic crisis since 1994, and the MTBPS did not speak to that. There was no meaningful plan to arrest the collapse of the economy and the looting of the state, and to spur economic growth to create jobs. The MTBPS revealed a crisis of leadership and a dearth of ideas. Unemployment had nearly doubled since 2014 to a real rate of 36.2%. The Department of Labour had failed to deliver on the Unemployment Insurance Fund Amendment Act. More than R100 billion of the state’s trillion rand budget was alleged to be lost to corruption, irregular and fruitless and wasteful expenditure. There was collapse of good governance and widespread looting at SOEs like SAA, Eskom and others. SA was on its way to being downgraded at the end of November. Government had to increase taxes on luxury goods and raise tariffs on imports. State debt levels needed to come down urgently. Salaries of SOE CEOs and political office bearers had to be reduced. The payment of social grants had been outsourced to a foreign monopoly at a cost of R6 billion per annum. Cosatu welcomed the Finance Minister’s statement that the expansion of nuclear energy was unaffordable and unnecessary. It was shocked that the DBE had only built three out of a target of 115 new schools. Cosatu recommended the drafting of a parliamentary Bill to protect the integrity of the Public Investment Corporation (PIC).

Unicef on the MTBPS 2017 and implications for children
Mr Herve Ludovic De Lys, South African Director: Unicef, called on the government to continue its long standing commitment to serve all children, and the most marginalised and poorest in particular. It was recommended that rights based and equity focused service delivery for children be expanded, and that targeting systems for children be harmonised. Spending on basic education, child health programmes, social grants and social welfare services had to be preserved. Primary health care and accelerated infrastructure spending in rural areas had to be expanded, with targeted interventions to reduce opportunity costs for the poor. It was recommended that the Extended Child Support Grant be implemented. Predictable transfers of funds to NPOs needed urgent attention, as well as the elimination of exclusion errors in the social grants programme. Reductions in budget revenue forced a consideration of spending effectiveness and efficiency.

Public & Environment Economics Research Centre (PEERC) Johannesburg University submission
Dr Sean Muller, Senior Lecturer, cautioned against mystification of the obvious. The hands of MPs were tied by political and bureaucratic failures at the highest levels. Vulnerable citizens on both revenue and expenditure sides had to be protected. It was misguided to insinuate that the fiscal situation was due to fiscal consolidation. Inappropriate fiscal expansion would lead to a rapid debt spiral requiring international assistance. 2017 budget submissions supported fiscal consolidation. The countercyclical policy was becoming increasingly unfeasible. The issue of civil service remuneration had become even more critical. There were concerns about revenue collection and administration, and contingent liabilities, especially those of SOEs. Deficit and debt had substantially breached approved levels in Budget 2017. There was a negative relationship between high debt levels and long term economic growth. There was a populist commitment to new expenditures without corresponding revenue sources. There was evidence in the public domain of abuse of state resources at the highest levels. There was significant under resourcing in frontline public sector posts, and a large growth in bloated bureaucracies. Old and new tax instruments were delivering less revenue than expected. SARS failed to provide detailed information for analysis. Higher education was admitting students that the state could not adequately fund. It had to be ensured that student numbers were appropriate.

Update on South Africa’s fiscal cliff by the Fiscal Cliff Study Group (Witwatersrand University)
Prof Jannie Rossouw, Head: School of Economic and Business Sciences, said the definition of a fiscal cliff was the point at which social assistance payments, civil service remuneration and debt service costs would absorb all government revenue. Underperforming government revenue would move the cliff closer. Subdued economic growth would cause continued underperformance of government revenue. The government debt burden and government guarantees for SOEs were challenges. The expected revenue shortfall for the 2017/18 fiscal year was R50 billion. It was advised that government get rid of underperforming SOEs like SAA. Limited additional tax revenue sources were a challenge. Recommendations included that deficit before borrowing had to be contained; fiscal prudence, including both expenditure and debt ceilings; abandoning of bonus payments for executives at SOEs; reconsidering of SACU assistance; increased disclosure about civil service employment and remuneration; the reduction of Cabinet, and a moratorium on civil service employment.

Discussion
Ms D Mahlangu (ANC) referred to the effect of the non-availability of water on disadvantaged and disabled workers. She was from Mpumalanga, where workers at police stations, regional offices and clinics were affected by those conditions. She asked what Cosatu was doing about the situation. The conditions impacted on performance. Cosatu had proposed an amendment Bill to protect the integrity of the PIC but Cosatu and Nedlac had the power to demand that working conditions be addressed. She asked how Cosatu would respond to the proposal by the former Minister. Cosatu had to be part of the solution, and had to say from where the money had to come. She would have expected Cosatu to speak with a stronger voice to say how eradication of the infrastructure backlog in schools had to be dealt with. She liked the last statement by Cosatu that it was ready to engage with government and business for solutions. Prof Rossouw always referred to the size of Cabinet. But it was not possible to get quality service from an unhappy public service. The Professor had stated that the civil service was overpaid. She had previously been a civil servant for long, and she could not agree with him. Before 1994, the only increment that civil servants received was 0.5%. What was really needed was consequence control. The Professor had talked about measures aimed at the public service. She asked what was to be done about the private sector. On bonuses, she remarked that it was a democratic country, and basic conditions of employment was fought hard for. CEOs of SOEs were also taxpayers. Relevant skills were needed, and had to be paid for.

Mr D Maynier (DA) commented that the Cosatu recommendations referred to the public sector wage bill. Cosatu accepted that it was unsustainable. He asked how it could be contained or reduced over the medium term. He asked Unicef what the most effective instrument and expenditure would be to protect social spending. Dr Muller had stated that the government had abandoned fiscal consolidation. He agreed, but asked what it would be replaced with. He asked about the distinction between the revised and proposed fiscal framework, and for Dr Muller to expand on provincial liabilities, and the debt trap. He asked at what point the debt trap would be reached, and what the indicators were.

Mr A Lees (DA) asked Cosatu about the SAA bailout. Everyone was on the same page about using the Government Employees Pension Fund – there had to be payment to members, and there was no option but to do so. To suggest that good money had to be taken and thrown into the backlog was wrong. Money was already thrown into the backlog, it was just borrowed from interest. He asked what Cosatu saw as a source of income, and whether the sale of Telkom shares was a reasonable way of meeting obligations, as opposed to increasing debt or other solutions. Foolish as it had been to enter into such obligations in the first place, they were there and had to be met. He asked Prof Rossouw if the skewing of taxation towards Personal Income Tax (PIT) was the right way to go. He asked if the ratio had to be the current 38%, or whatever it was, or somewhere in between. He asked Dr Muller to expand on slide 22 that dealt with the distributional effect of indirect taxes.

Mr D Hanekom (ANC) noted that labour had spoken of a Bill to protect the integrity of the PIC. One had to consider producing a Committee Bill to strengthen shortcomings in the PIC Act. They had to suggest where the Act could be amended. Spending more without generating more revenue would cause trouble. The economy had to be stimulated. The question was how to expand revenue without increasing tax. He asked Dr Muller what he would do if he were the Finance Minister, given that revenue could not be produced through economic growth. The challenge was how to reduce expenditure without compromising on basic needs and infrastructure. If infrastructure spending was discontinued, there would be investment problems in the future. Critical expenditure was not to be reduced, as that would affect future growth, and cause the poor to grow poorer. It was important to consider reducing the size of Cabinet, even though it would be to some extent symbolic. Ministers could do well to tighten their belts. It was unacceptable for a Minister in a fancy car to be followed by bodyguards in another fancy car. He asked the presenters what the two or three most important things would be that they would do, if they were the President. He asked Cosatu about its first point, and what it would do, without it having impact on investor confidence.

Mr O Terblanche (DA, Western Cape) commented that there was agreement about the real fiscal situation. The Cosatu stance on current developments was a sober one. He agreed that the integrity of PIC was an important matter, and worthy of concern. He asked if Cosatu was taking a countrywide look at basic education. He agreed with Unicef that children were not to go hungry, but there was limited money. He asked what areas could be singled out for spending. He asked Dr Muller and Prof Rossouw how similar problems were managed in other countries. The Select Committee had visited Mexico and Malaysia, and learned lessons there. Prof Rossouw recommended the use of locally made vehicles for government. He asked how tender processes would be dealt with.

The Chairperson recalled that SA had produced the Ranger vehicle locally in the past.

Ms P Kekana (ANC) was concerned about revenue collection. SARS performance was a function of economic performance. When the economy was well, revenue collection was good. If the economy fared badly, revenue collection was not up to expectations. In February the Minister had focused on economic growth and stated that growth was at 1.3%. It was since revised down to 0.7%. She wondered if the initial estimate had been too optimistic. Private sector companies were reporting lower profits. Mines were closing in Limpopo, and Lonmin was cutting down on workers. SARS could not perform miracles. SARS wanted to deliver but the question was if expectations were realistic. Stats SA was reporting the highest unemployment figure ever, at 27.7%. She was worried about the fact that all the presenters were hard on government. Government had to intervene, as SA was a developmental state, but the private sector was not spoken about. Cosatu had said nothing about the private sector. The Competition Commission had revealed collusion and profit shifting. A firm stance had to be taken on that. The private sector also paid bonuses. She asked why there had to be legislation to protect the PIC. Trade unions had the power to direct how money was spent. She could not agree with Prof Rossouw about SAA. It was not advisable to give away the national carrier, although a private sector element could be introduced. New people had to be given space. SA had opened up too much to international competition, the Minister of Transport had to be talked to about reviewing of international licensing. Other airlines were gaining ground at the expense of SA. She asked Cosatu about a jobs mitigation and creation plan. Cosatu had to say what was happening in Nedlac, and what the private sector was saying about job security.

The Chairperson mentioned that the Finance Minister had had meetings with CEO representatives. It had to be done once every quarter to restore confidence. It was good to feel proudly South African, and to board an SAA plane in another country. There was a model to emulate in Air Malaysia, which had made a successful turnaround, with the government as the main stakeholder.

Ms T Tobias (ANC) remarked that she would have liked to see Prof Rossouw structure his arguments around macroeconomic and fiscal policy. Prof Rossouw had stated in February that people who earned above R5 million had to be taxed 50%. But it was mostly CEOs, and if one looked at the numbers, it would not tilt revenue collection. The Professor had to provide a template in the following year, to show how to turn the balance. In terms of a macroeconomic policy framework, changing tax brackets suggested two modalities. The question was whether to focus on VAT or Companies Income Tax (CIT). There had to be concrete suggestions about which tax bracket would be most effective. The Professor advised that government spending be curbed, but the Statistician General had said that 95% of the economy was within 5% of the population. The question was how unemployment would be dealt with if government did not spend. It had to be shown how the health promotion levy and carbon tax could contribute to revenue collected. The Minister had said that stakeholders had to be involved. In terms of macroeconomic policy, the question was how the private sector was to be engaged. She asked about the shape of the consultation mechanism proposed by the Minister, whether it was to be in the Presidency or whether it had to be a stand-alone committee of experts, and how that would relate to the executive.

Ms B Mathebula (EFF, Limpopo) referred to only three out of 115 schools built. Government was stalling on this. She asked if Cosatu had tried to engage with the Minister, and what the response was.

Mr Maynier asked about the new definition of a fiscal cliff proposed by Prof Rossouw, which was when social assistance payments, civil service remuneration and debt service costs were equal to 100% of revenue collected. He asked when it would occur in SA.

Mr Carrim commented that Parliament was aware of the gravity of the situation. There had to be resilience and the ability to do multi-tasking. The situation might look dire and bleak, but SA was not over the cliff. Things could be done to prevent the fiscal cliff. Civil society, trade unions, government and Parliament had to join forces. Some of the statements made today had been too sweeping. The executive had to be held to account. Parliament was an organ of people’s power. It was stated that the civil service was not performing, but it was unfair to make sweeping statements about the salaries of teachers, for instance. Social workers were not getting sufficient salaries. He supported performance bonuses to provide incentives. It was not fair to say that public servants were not to take increases while Parliament did so. The question was whether Members of Parliament were productive, and earned their salaries. He asked Dr Muller to provide a page by the following week to advise what should be done about the Money Bills Act. He agreed that an economic shortfall caused a drop in revenue collected by SARS. But there were issues to be addressed in SARS. The Minister had stated that there were administrative problems in SARS. He did not see a problem with bonuses as such, but rather with who received them. He agreed that there was not sufficient attention to the part played by the private sector, but that was not to prevent criticism of the public sector. A draft PIC Amendment Bill had to be resolved before the end of November. Letters had to be sent to the trade unions to propose amendments. He agreed with what Prof Rossouw was saying, and issues would be addressed. But the ANC would not agree about SAA. The Minister repeated that in the previous week. The airline could be commercially viable and also aid development. It was agreed that there was underperformance, lack of governance, mismanagement and inadequacy of staff. But given that there was not to be privatisation, critics had to say how there could be equity partners. The question was how to bring in managerial expertise apart from privatisation, how to second people and who to second. It could be agreed that 51% would be in state hands, and the rest could be negotiable. It was not on the ANC agenda to privatise, and it was a big issue. But a variety of private sector participation forms could be proposed for SAA and other SOEs. The Finance Committees needed to be advised by experts on how the problem was managed in Malaysia.

Dr Muller, PEERC, replied to the question by Mr Maynier about revised and proposed fiscal frameworks. The revised fiscal framework was covered under the adjustment of the Budget. The Committees had nine days to report on that. The proposed fiscal framework was for the following three years, and was covered by a section of the Money Bills Act, and Committees had 30 days to report on that. No amendment to the Act was required. The revised fiscal framework applied to whatever changes were presented.

Dr Muller replied to the question about what fiscal consolidation had been replaced with. The answer was nothing. There was no clear fiscal policy. The response to the revenue shortfall was to increase debt. There was no clear alternative to increasing debt. Concerning provincial liability, in annexure A on page 53, Treasury noted that liability was R4 billion, which was a 30% increase from the previous year. There had been accrual over the preceding five years. There was debt to the National Health Laboratory Services. Provinces were holding back on paying bills, and the more Treasury gave, the more the debt escalated. A debt trap occurred when increasing debt service costs necessitated further borrowing to pay debts. Interest costs increased and it could not be matched by higher revenue or lower expenses. Some expanded the definition to include the use of unreasonably higher taxes or cuts in expenditure areas.

Dr Muller replied to the question by Mr Lees to expand on slide 22, dealing with the redistribution of the impact of indirect taxes. Studies were done by the Davis Tax Committee (DTC) and the World Bank, who used household surveys and other means to determine on who the tax burden fell. Tax was regressive when lower levels of the income distribution had to carry the burden of tax. If one looked at the table on slide 22, the disposable income of the first decile was 0.5%, but they paid 3.4% of excise tax. The studies came to definite conclusions about the progressivity or regressivity of taxes. The evidence was available and had to be taken into account by committees that dealt with tax proposals, coming up to the 2018 budget.

Concerning effective tax collection, Dr Muller said the tax system was being abused as some taxpayers were not paying taxes, it was not necessary to increase tax rates to offset that. The question was if the skills levy was effectively utilised. He answered Mr Terblanche about comparisons to other countries. It was not necessary to look too hard. Political and institutional factors had to addressed. If those were not addressed, it did not matter what was done on the technical side. He answered Ms Kekana about collusion and profit shifting in the private sector. It was not clear that those issues had contributed to the decline in the fiscal situation. He agreed that the Competition Commission played a difficult role in trying to break cartels and address profit shifting. There had been desirable interventions, but it was not clear what the contribution of that would be. People who avoided taxation had to pay.

Ms Tobias asked if Dr Muller could suggest how SA could have a progressive tax bracket. Imposing an expenditure ceiling would not necessarily do this, an alternative collection method had to be found. She asked which tax bracket could be progressive in the SA context, for increased GDP growth over the following three years, in terms of macroeconomic policy.

Dr Muller responded that the people who could best reply were the DTC. It was possible that they could not talk too much, but the impact of different tax options could be discussed. Studies were done some years back going back to the 90s about the consequences of political mismanagement billeted on the general public, but there could be income tax measures that could raise revenue.

The Chairperson asked the Parliamentary Budget Office (PBO) to comment.

Mr Fatsani Banda, Economic Analyst, responded that the PBO did not follow the practice of suggesting a proposal and then putting up an alternative view. It was important to recognise the poor state of fiscal policy debate in the country. Mr Hanekom had pointed to frustrations with microeconomic issues like spending and saving that fell outside the ambit of the macroeconomic context. It was hard to disagree with talk about institutional and political factors in SA. SA was not the only country with problems of big corruption and institutions that did not work. There were institutions that did not work. East Asia succeeded in managing debt, and by the 1980s did not have the problems other countries had. Their public debt was in a good position. Other countries could be looked at to understand the impact of fiscal expansion and fiscal consolidation on growth. People were needed who could understand that within a macro economic framework, from different perspectives. The PBO was not pontificating, as Dr Muller claimed, it was saying what had to be thought about. Fiscal consolidation was not being contextualised within the global economy, and responses to the global fiscal crisis were not being considered. There were monetary policies in other countries where negative interest costs were borne by the central bank. Experiences of fiscal expansion had to be looked at. In thinking about debt levels, there were no magical solutions, even though economists had done a huge amount of work. One of the most famous recent papers, by Ken Rowland, the chief economist at IMF, looked at the impact of the debt to GDP ratio on real growth, across a huge number of countries. There were hugely important academic issues, but macro economic and fiscal policy discussions was not based on theory, but on experience. Problems at the micro level could not be solved if the macroeconomic environment was not supportive.

Mr Tengo Tengewa, Parliamentary Coordinator, Nehawu, replied about fiscal consolidation and the wage bill. Care had to be taken that key strategic service centres were not affected. He gave the example of Home Affairs, where one would find that out of seven service desks only three were functional. At the airport it would be three out of five. The Home Affairs DG reported that there was a lack of critical posts at frontline desks, which was the face of government. Cosatu had tabled in the Finance Committee that departments had reneged on conditions of employment. Government agreed in bargaining councils, but agreements were not implemented. Broader agreement was needed. One size fits all was not good for the public service. There had to be sustainable finance to fill vacancies in laboratory services, and the National Health Insurance infrastructure had to be improved. The Labour Relations Act was an Act of Parliament that stipulated conditions of employment. Issues had to be raised on appropriate platforms, lest the impression was created that government negotiated by other means, in bad faith. There were important issues related to investment in infrastructure. There were problems in small towns where water pipes had to be renewed and there were time lapses. If there was no rapid investment in social infrastructure, it could cause severe problems. Investment in the PIC had to drive industrialisation. A special purpose vehicle had to be linked to the PIC to finance housing.

Mr De Lys responded that the key question was where to focus expenditure. There was global and local evidence that child support grants worked. In SA, as elsewhere in the world, children were confronted by a multitude of deprivations. Very important progress had been made in SA, such as the elimination of mother to child transmission. It showed that Parliament and government were addressing issues, and that there was impact. He was glad that water and sanitation were prioritised as critical issues. He visited different regions, like Langa and the Northern Cape, to see how water and sanitation were addressed. When there was the Ebola crisis in Liberia, villages where hands could be washed were not hit by the disease. Such information had to get through to the school system. Nutrition was a problem in SA, with 25% of children stunted. Investment had to be influenced by the large number of stunted children. He was concerned about the quality of expenditure. It had to be ensureed that the right children were targeted and that NPOs could provide the necessary services. He had enjoyed the debate about the private sector. SA law required of corporates to do social investment. It could be asked how vast corporate amounts were spent on sustainable action and it could also save resources on the government side. He was impressed in the previous week by what he had seen in the school environment. There was attempts by a school principal to integrate services like environmental protection, health, and water and sanitation. Integration could make expenditure more effective.

Prof Rossouw asked in jest if he could have the protection of the Chairperson, so that he would be allowed to speak again in February, if he dared to be honest. He was married to a school teacher who taught at a special needs school for the cerebral palsied. He was not arguing against adequate remuneration for the likes of teachers.

Prof Rossouw  said he was obliged to argue for government stepping away from SAA, as long as SAA had to be helped every year. Concerning remuneration and employment, Cosatu had referred to understaffed service centres at SAA and Home Affairs. Annexure B of the Budget Review stated that at the levels of Director to Director General in the civil service, employment numbers had increased from 9 500 to 19 700 since 2008. At the level just below that, the numbers increased from 168 000 to 210 000. The problem was bureaucratic oversupply, and not at the level of people who worked at frontline desks. There were too many bureaucrats and too few people doing the work. He had been misunderstood about civil service remuneration. Civil service adjustments were calculated annually. The CPI had to be the guideline. The cost of notch increases was 1.5% per annum. It had to be included in that calculation. If remuneration increases were brought to the level of the CPI it meant that annual increases added 1.5 points to the CPI, which meant that the civil service kept becoming a burden to the economy. The cost of civil service increases had to be deducted from the CPI.

Prof Rossouw  answered Ms Tobias that when he referred to bonuses he did not mean thirteenth cheques, but executive bonuses at SOEs. He had heard that ghost shares at Eskom formed a basis for bonuses. He had never heard of such nonsense and rubbish. The risk they took were not commensurate with executive bonuses because if they got into trouble, government and taxpayers bailed them out.

Prof Rossouw  said he gave tax proposals every February. He had mentioned three years before that those who earned above R1.5 million had to be taxed 45%. If that could be increased to 50% above two million, and 55% above five million, R9 billion could be added, which would be 2% of the total tax amount. He was not in favour of VAT increases. People could not afford that. There were some who claimed that VAT was not really regressive on the poor. He was not willing to go out on the street and tell people that they had to pay more VAT. Ministers could walk or ride bicycles, rather than increase VAT. He replied to the question on whether more revenue could be created without increasing tax. He asked if an alcoholic could be sober and keep on drinking. By selling Telkom shares, government was giving away some non-tax revenue, but it did not calculate the effect of losing those dividends. If more revenue was wanted, there had to be more tax.

If he had the power to do so, Prof Rossouw said he would institute legal action on 783 charges of corruption against President Zuma for corruption, and against the Gupta family on the basis of leaked e-mails. It would be a massive demonstration that action was being taken to get rid of corruption. He would pass a law that tax returns of all political executives, the President and the Deputy President and Cabinet Ministers, had to be published every year.

Prof Rossouw  responded about what other countries had done to get out of trouble. The Irish Republic was in trouble after the financial crisis of 2008. It reduced its embassies abroad and cut civil service remuneration by 19%. Executive level remuneration was reduced by 28%. SA had to avoid a situation where such measures would be called for. Problems around tendering for a government fleet consisting of locally produced vehicles could be solved by changing legislation, so that imported vehicles would be excluded. His opinion about the MTBPS was that it was not a good one. If it were an honours paper submitted by a student, he would fail it.

The Chairperson asked National Treasury to respond.

Ms Debra Makwiramiti, Treasury Senior Policy Analyst, replied that she was not mandated to respond. Treasury would respond on the coming Friday.

Mr Carrim was not satisfied with that. Treasury was expected to respond in full on the Friday after submissions, but there had to be a 10 minute preliminary response on the day of the submissions. All stakeholders would not be present on the Friday. Those who could be in Cape Town on the Friday, could attend the meeting to respond to Treasury. He told Ms Makwiramiti that it was not acceptable. It was not required of the Treasury DG to be present on the day of submissions, but there had to be a 10 minute preliminary response. He told Unicef that the Committees had noted what was said, and that its input would be referred to the Appropriations Standing Committee.

Chairperson de Beer strongly agreed with Mr Carrim. He adjourned the meeting.