2020 Fiscal Framework and Revenue Proposals: response to public hearings

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Finance Standing Committee

06 March 2020
Chairperson: Mr M Maswanganyi (ANC); Mr Y Carrim (ANC, KwaZulu-Natal)
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Meeting Summary

2020 Budget Speech
Fiscal Framework and Revenue Proposals 
2020 Fiscal Framework and Revenue Proposals: public hearings

The National Treasury stated that discussions with stakeholders were centred on the fiscal consolidation versus stimulus debate, the wage bill and other baseline proposals, and tax proposals. The government had proposed a tough budget, as the fiscal outlook was unsustainable. Budget reductions reflected lower growth in spending, relative to baselines founded on more optimistic forecasts of revenue and growth.

Wage bill growth had to be reduced. Higher interest rates made investing more expensive, reducing the potential for gross domestic product (GDP) growth. The government’s view was that growth problems were largely structural. The budget supported reforms to lower the cost of doing business. The Treasury and the Department of Planning, Monitoring and Evaluation (DPME) would undertake expenditure reviews to identify cost savings and improve efficiency. The government had decided not to raise additional tax revenue due to the weak state of the economy. It agreed with comments that advised the review of tax incentives to raise revenue and improve progressivity of the overall tax system.

In discussion, there were comments and questions about corruption in the procurement process; the Moody downgrade; the possible impact of the Corona Virus; the boosting of investment and small business; corruption in SOEs; the possibility of borrowing out of debt; the debt to GDP ratio; e-tolling; plastics tax; the National Economic Development and Labour Council (NEDLAC) and management of the wage bill; monitoring of government spending; teacher/learner ratios; and Treasury engagement with fund managers.

Meeting report

The Chairperson announced that the meeting would comprise a response by the National Treasury (NT) to public hearings on the budget 2020. Some of the stakeholders who had made submissions were present, and would be allowed to make comments. Apologies had been received from the Minister and the Deputy Minister, and Ms M Mamaregane (ANC, Limpopo).

Budget 2020: National Treasury Response

Mr Dondo Mogajane, Director-General: National Treasury (NT), said that discussions with stakeholders had centred on the fiscal consolidation versus stimulus debate, the wage bill and other baseline proposals, and tax proposals.

The government had proposed a tough budget, because the fiscal outlook was unsustainable. The budget reductions reflected lower growth in spending, relative to baselines founded on more optimistic forecasts of revenue and growth. Wage bill growth had to be reduced. Higher interest rates had made investing more expensive, reducing the potential for Gross Domestic Product (GDP) growth.

The government’s view was that the growth problems were largely structural. The budget supported reforms to lower the cost of doing business. The NT and the Department of Performance Monitoring and Evaluation (DPME) would undertake expenditure reviews to identify cost savings and improve efficiency. The government had decided not to raise additional tax revenue due to the weak state of the economy. It agreed with comments that advised a review of tax incentives to raise revenue and improve progressivity of the overall tax system.

Stakeholder comments

Parliamentary Budget Office

Dr Seraj Mohamed, Deputy Director: Economics, Parliamentary Budget Office (PBO), said that the PBO and the Financial and Fiscal Commission (FFC) had done a budget analysis, and had focused on the effect of the engagement process.

He thanked the NT for the insights offered about expenditure and taxation. Stakeholders were talking past each other about macro issues, because the definition of “budget” was inadequate. It had to be understood that it was context related. He questioned the assumption that increased debt was unsustainable, whereas it had to be acknowledged that fiscal consolidation could be a drag on the on the GDP.

Thinking about the budget had to change. 150 years ago, doctors had commonly resorted to the practice of blood-letting, whereas it was no longer accepted as sound medical practice. It had to be questioned if adhering to mainstream practice necessarily would lead to doing the right thing. It was recognised that there were demand problems in the economy, but there also had to be an approach that stressed the supply side. The NT had stated that there were structural problems in the economy. Was it possible to stimulate the economy over the short term? It might be necessary to borrow more at some point. Sectoral reforms were needed, with the emphasis on addressing the structural problems specific to each sector. Was it possible for the State to spend its way out of a recession? Public sector expenditure had to be aligned to spending in the rest of the economy. The State had to commit to real structural transformation.

Dr Dumisani Jantjies, Deputy Director: Finance, PBO, directed attention to slide 6, where it was stated that slower spending growth would have an impact on the GDP, everything else being equal. However, an unsustainable fiscal outlook increased the cost of capital and lowered investment. Government programmes had to be closely monitored, and government had to work within the Organisation for Economic Cooperation and Development (OECD) framework for governance of infrastructure. Other countries responded to unilateral incentives to raise revenue. The question was how corporate tax had to be structured, to make taxation optimally effective. The NT had to think reform. The SA corporate tax system had some of the lowest tax rates, compared to other countries.

Organisation Undoing Tax Abuse

Mr Matt Johnson, Organisation Undoing Tax Abuse (OUTA), commented that it had to be considered how government savings were transferred to state-owned entities (SOEs). Money that properly had to go into the health infrastructure was going to Eskom and South African Airways (SAA). What were the budget implications for conditional allocations?

Fiscal Cliff Study Group

Prof Jannie Rossouw, Head: Fiscal Cliff Study Group, stated that the fiscal cliff barometer was deteriorating. Government debt had assumed such proportions that a fiscal cliff was looming, where it would become necessary to borrow for the purpose of repaying existing debt.

National Treasury response

Dr Boipuso Modise, Acting Chief Director (CD): Modelling and Forecasting, NT, responded that with reference to fiscal spending, it was important to know what was being bought with the money. There had to be more engagement about structural problems and impediments to growth. The question was what constituted a sustainable stimulus to the economy.

Mr Ian Stuart, Acting Deputy Director General (DDG), NT, said that spending and revenue had to be balanced. Spending as a proportion of the GDP would be 36% in the following year. Consolidation would fall on revenue, not expenditure. Debt currently amounted to 28 or 29% of the GDP. Major structural deficits had to be addressed. Such defects dated back to 2009/10. Spending was growing, and growth was down. He responded to the PBO that government spending could not get the country out of the trap. In the interests of balancing the budget, it was not advisable to close the deficit too rapidly.

Mr Mogajane referred to the inefficiency of SOEs. SAA needed R16 billion to pay off its debts. The SOE environment was problematic. R23 billion per year was committed to Eskom to repay its debts. The NT met with Eskom once a week about it. There was close monitoring of Eskom to ensure that conditions pertaining to government support, as set out in the Special Appropriations Bill, were adhered to. The NT was willing to report to Parliament about what it was doing for SOEs. The NT would not address structural reforms in isolation, and would engage with the PBO specifically about critical structural reforms that were not being implemented. Monopoly interventions were called for. Under-collection of revenue amounted to R70 billion per year.

Mr Stuart responded about the fiscal cliff, that debt was increasing because of poor management of public finances. Government debt could increase from the current 1.8 trillion to 2.2 trillion in the following two years. There had to  be a change in emphasis from consumption to investment. The budget on its own could not accomplish structural reforms.

Mr Chris Axelson, CD: Economic Tax Analysis, NT, said that the OECD framework for infrastructure management could provide consensus. It was advisable to take taxation into the digital economy, through value added tax (VAT) on digital services. Exemptions to corporate income tax (CIT) had to be removed, and tax increased. There would have to be variability across different sectors.

Dr Modise called for a reduction in government consumption. As the cost of borrowing increased, it became harder to repay debt.

Discussion

Mr I Morolong (ANC) referred to oversight on procurement, especially as regards legitimate under-spending. Proposals were needed to make procurement easier for service delivery. More detail was needed on how to safeguard against corruption in the procurement process, and where things could be done differently to achieve cost-cutting.

Mr S du Toit (FF+, North West) asked if the Moody downgrade was taken into consideration.  How would the Corona Virus affect South Africa? It could affect the economy, jobs and schooling.

Mr M Moletsane (EFF, Free State) opined that an ailing economy had to be corrected through slowing the growth of the wage bill, and boosting investment and small business. The Auditor General (AG) had reported on corruption in SOEs. Innocent citizens had to carry the burden. He had expected that the NT would say more about that. Government had to have teeth and bite to address corruption. The SOEs were not able to correct themselves, and no action was being taken against corruption, with no arrests or money recouped.

Mr D Ryder (DA, Gauteng) commented that the way in which public consultation was conducted had to be reconsidered. Time was limited, and some stakeholders abused time granted to them at the expense of others. Still, it was important that everyone be given a fair hearing.

He disagreed with Dr Mohamed of the PBO about the possibility of borrowing out of debt. He commended the fact that the NT had changed its tone, and had become more consultative. He was concerned about the fact that the Congress of South African Trade Unions (COSATU) was not present at the current meeting. It had presented as a stakeholder, but was not taking the trouble to hear a response to its submission. He agreed that the unions had to prevent exploitation, but exploitation of the taxpayer also had to be prevented.

Mr Stuart had pointed out that the debt to GDP ratio was out of control. The deficit had widened to 6.8% of GDP, and that was based on a best case scenario. If growth figures could not be realised, was there a plan B? A short term response was needed. OUTA could provide more clarity on e-tolls, which was failing as income generator.

The removal of corporate tax exemptions and incentives had to take the time factor into account. He commended institution of tax for single-use plastic products. He could not understand why Parliament had resorted to using plastic plates, as was being used for the meeting of the day.

Ms P Abraham (ANC) shared the concern of Mr Ryder that COSATU was not present. It could have benefited from the engagement of the day. What had happened at the National Economic Development and Labour Council (NEDLAC) concerning the wage bill? Public hearings had pointed to the role of the private sector in fighting unemployment, poverty and inequality. Monitoring of the funds that were given to departments like Education had to include exorbitant charges to government by service providers. The NT had to walk a tightrope between taxpayer interests and other demands. The Fiscal Cliff Group was saying that the taxpayer was being disrespected. The NT had to take all stakeholders on board.

Ms D Peters (ANC) agreed that stakeholders had to be present on the day, to pose follow-up questions. Teacher-pupil ratios caused concern, as well as corruption in the procurement process.

Co-Chairperson Carrim responded to Mr Du Toit that the Corona Virus would have an impact on all economies. The time had become for the NT to engage with fund managers. Managing the wage bill was a critical issue. It was an appropriation, and the ANC as the ruling party would have to say how it had to be managed. The question was what Members of Parliament (MPs) were doing to cut costs. Prof Rossouw, of the Fiscal Cliff Group, had asked the Presidency for three years to consider buying cars produced in South Africa for state use. The Presidency had to reply to that. The problem was that the NT could make proposals, but could not implement them. It could not account for reckless spending in departments.

National Treasury response

Mr Mogajane responded that accountability had to be pinned to where it belonged. Departments like the Mpumalanga Education Department were far removed from the National Treasury. The NT could not overstep its mandate as defined by the Public Finance Management Act (PFMA) and Municipal Finance Management Act (MFMA). The NT tried to coordinate the efforts of the DGs in different clusters.

Regarding communicating the budget, that there had been an international road show in that week, local road shows the week before, and an investor road show to come. The NT was aiming at a year round engagement on the budget, and would make relevant data available. The question was how to be consultative in the crafting of a budget.

The Procurement Bill had to address corruption and supply chain management (SCM) defects. The NT needed oversight committees at the provincial and municipal level to identify and deal with problems at those levels. Tenders were awarded, and one month before the end of a three-year contract, an extension would be applied for. If it were not granted, it could contribute to the collapse of the economy. Better contract management was essential, and the internal audit sections in departments had to up their game to address corruption.

There had been post-budget engagement with NEDLAC on a weekly basis, with a focus on the wage bill. The role of the private sector had to be defined. The NT would make the necessary allocations to improve the teacher/learner ratio. It would engage with provinces about their budget spending. The NT could provide oversight, but DGs had to account for where the money went to. Small schools in Limpopo were the responsibility of the provincial education department, with the head of the provincial department being held to account.

He responded to Mr Ryder about a “plan B,” and said that there were three options -- further cuts to the budget, increased tax, or looking to investors for debt relief. Increased tax could impact negatively on the economy. The 6.8% debt to GDP was cause for concern, but a country like Japan had a higher ratio. 

The Moody downgrade was not considered in the crafting of the budget. The NT had met with the agency in that week. Government priorities were to address structural changes, and the wage bill. Progress had been made in the electricity environment. The NT was ready to defend the budget.

Dr Modise said that the NT was considering the impact of the Moody downgrade. The increased cost of borrowing was causing growth stagnation. It was not as yet possible to predict the impact of the Corona Virus on the economy. It could affect manufacturing output, and posed risks to an external environment supportive to growth. However, the cost to the SA economy could not as yet be predicted. The Moody downgrade could result in less support from the global environment. It was essential that the Competition Commission extend its influence into the retail space.

The Chairperson concluded that the secretariat and the PBO had to prepare a report for the following Tuesday, which could be adopted and tabled in the National Assembly (NA) on the following Wednesday. The Standing and Select Finance Committees were not to duplicate what other bodies did. It had to stick to challenges to the fiscal framework, within the context of the national and global situation. The Moody downgrade need not be a concern, but matters like retrenchment and load shedding deserved urgent attention. Government had to think unemployment, poverty and inequality. The fact that it fell to citizens to bail out SOEs had to be addressed.

The meeting was adjourned.

 

 

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