Processing of Medium Term Budget Policy Statement: input from National Treasury, FFC and Parliamentary Budget Office

Meeting report

Briefing by Parliamentary Budget Office (PBO)
Prof Mohammed Jahed, Director of the PBO, said that resources should be allocated according to the political framework for economic allocations.
 
Ms Nelia Orlandi, Policy Analyst at the PBO, addressed the legislative mandate of the Medium Term Budget Policy Statement (MTBPS). She said the MTBPS could be seen as a draft of the Budget. She outlined the technical checks Parliament could do to ensure that the MTBPS was compliant. She spoke to macroeconomic, fiscal and monetary policy. She touched on the depth of intergenerational monetary transfers. She described risks, such as the public sector wage bill and the public sector debt, as influenced by the balance sheets of state-owned companies. She also covered the Division of Revenue and the spending priorities of national and the provinces.

Briefing by Financial and Fiscal Commission (FFC)
Dr Ramos Mabugu, Research and Recommendations Director at the FFC, gave some background and spoke to the legislative framework of the MTBPS.  The FFC had tabled its recommendations for the MTBPS in May. The economic outlook was for lower tax revenue and slower employment growth. The Medium Term Strategic Framework (MTSF) for 2014-19 was the same as the medium term goals for the National Development Plan (NDP), except that its goals were limited to a five year period. The MTSF called for a radical economic transformation and an improvement in service delivery. This thrust coincided with that of the NDP.

Referring to fiscal frameworks and the MTBPS, he said that up until five years ago the ratio of government debt to GDP had been decreasing, but was now increasing. There were emerging MTBPS issues like, for example, domestic bonds increasingly being held by non-residents. Discipline was needed in non-capital spending. The tax revenue shortfall was dominated by a decrease in company tax and the environment for the medium term appeared toxic. Greater use should be made of Public Private Partnership investments, especially in the health sector.

Mr Ghalieb Dawood, Programme Manager at the FFC, provided information on the Division of Revenue and adjustments and recommendations.

Discussion
Mr P Mashatile (ANC) wanted clarity on the statement that the bond markets were dominated by non-residents. He wanted to know whether countercyclical fiscal policy had unintended effects, like debt servicing, and asked if this policy should be done away with.

Dr C Madlopha (ANC) asked how these unintended consequences could be dealt, with as it had been understood that a countercyclical fiscal policy was the only solution. Regarding the drastically declining revenue base, she asked how government could entice the private sector be to be involved in decreasing unemployment.

Dr M Khoza (ANC) felt the FFC was not giving the full picture, and asked how the issues could be resolved.

Mr M Figg (DA) said he was unsure about comparising South Africa with other countries -- he would have preferred that the comparison be with one, similar country.  Public borrowings were not sustainable and were not helping the country out of trouble but rather into trouble, nor was it assisting in increasing intergenerational equity.

Mr F Shivambu (EFF) asked who had mandated the call for discipline in non-capital spending. From where did the notion come that, private capital was absolutely crucial? He used the example of China to dispel this idea. He said Growth, Employment and Redistribution (GEAR) and the Accelerated Shared Growth Initiative for SA (ASGISA) was supposed to open up the economy and lead to growth, but this had not happened. All it allowed was for private companies to come in and exploit South African resources.

Mr D van Rooyen (ANC) referred to the research independence of the PBO and the FFC, and said this would lead to contentious issues being raised. The PBO had emphasised what the Committee should do and look at. Would the PBO be using the same focus areas? How would the mooted retirement reforms influence investment in the bond market? How could parliament ensure increased public participation?

Ms P Kekana (ANC), said it was important, regarding the local government equitable share, that the FFC give an in depth analysis on how municipalities were faring in providing basic services given, for example, that they were receiving an equitable share.

Mr V Mtileni (EFF-Limpopo) asked the PBO about provincial conditional grants and the changes which were going to be effected to grants allocated to local government. He wanted clarity on the direct grants and how it would change. Regarding the FFC presentation, he referred to the executive powers of officials on major projects, where both houses were not participating in the decision but were responsible when there were problems, as in the case of the Post Office scandal where R21b had been wasted. Were they convinced that there were no individuals or companies owing the country billions of rands, who were doing business with government?

Regarding the 2013 indirect grants, Mr A Shaik Emam (NFP) asked whether this was not because of the mandates given to provinces. In the past five years, debt had increased. What could be done to decrease it?

Dr Mabugu replied that the bond market was not dominated by non-residents, but the growth in the share held by non-residents was growing. What was needed was a target percentage share which could be held by non-residents. This was a cheaper source of finance, and prevented the crowding out of domestic investment.

He said the countercyclical fiscal policy was to smooth out the short term for the long term, but South Africa may not have a long term problem. The opposite to a countercyclical policy was a structural adjustment which was severe on a country, and would result in lost decades of growth.

One would expect that if growth was lower, then the revenue would be less, but if one looked at the July figures, the shortfall in revenue was caused by a decrease in company tax -- an unexpected area, and one where minds had to be applied to find out why this was occurring.

He said the FFC had not held back, and had tabled recommendations in May.

He said Mr Shivambu was right, in that ideological issues were issues of contestation and if an idea fitted the South Africa situation better, it should be analysed to see if it was true and not be reliant on only one approach.

He said Mr Figg was correct regarding peer group countries.

One could control public debt by getting the economy to grow, so economic growth interventions had to be on the table. The second area was on limiting revenue expenditure. It was not about setting targets for public debt, but about addressing non-capital expenditure and about negotiating remuneration of the public service.

Prof Jahed, in response to Mr Van Rooyen’s question, said the PBO was doing a stakeholder survey to find out what labour, business and non-governmental organisations (NGOs) were saying, and would make it available to the Committee in future.

He said bonds were government debt which foreign investors or local institutions were willing to buy. The countercyclical fiscal policy was buying one’s way out of trouble and was a short term strategy related to the business cycle, and was not a long term measure. There were structural problems like poverty, unemployment and inequality in this economy that needed transformation, hence the term ‘radical economic transformation’. Economic transformation did not mean spending one’s way out of trouble -- it was about transforming the economy, and changing sectors of the economy.

Briefing by National Treasury (NT)
Ms Euody Mogaswa, Director: Budget Reform, NT, spoke about the budget process, giving an overview of the Budget and describing the Budget preparation, the role players in the budget process, the parliamentary process, the budget documents, the Adjusted Estimates of National Expenditure and the Adjustments Appropriation Bill and the Adjustment Budget.

Mr Steven Kenyon, Director: Local Government, NT, gave details of the Division of Revenue Act.

Dr Mampho Modise, Senior Economist, NT, described the budget process and fiscal policy in South Africa. She spoke about the fiscal framework and the structure of government accounts, the tax revenue and the baseline of the National Institute of Economics (NIE), the budget deficit, maintaining the credibility of the budget, the content of the MTBPS, macro projections, the economic outlook and its implications for the fiscus, tax revenue revisions, containing expenditure growth, ensuring expenditure efficiency, the consolidated fiscal framework and managing risks.

Discussion
Ms S Shope-Sithole (ANC) wanted a list of the departments which delayed transfers of grants to provinces and municipalities. Was there any difficulty in Treasury assisting the Department of Health?

Dr Khoza said she merely wanted to comment that Treasury had pointed out to the Committees that the focus should be on the cost drivers, like the wage bill, and the performance one was getting for that money.

Mr N Gcwabaza (ANC) asked if the nominal GDP was revised, would the tax structure need revision. Did it mean increasing the tax rates, or changing the tax structure? What needed to be done so that the budget deficit and consequently the intergenerational equity issues were addressed? What needed to be done regarding the R1.5tr debt transfer to the next generation?

Regarding nominal GDP, Dr Modise said that if the GDP were lower, then tax revenues would decrease. SARS had already increased the tax base to its maximum between 2000 and 2008, so a decrease in tax would be difficult to fund, as the tax base had already decreased by 5% in income tax.

She agreed on the issue of intergenerational equity. One had to shift the spending to investment sending.

Mr Steven Kenyon said that Treasury were in discussions with the Department of Health.

The Committee then discussed the draft programme of the Committees regarding the MTBPS.

The meeting was adjourned.