Pre-Budget briefing by Parliamentary Budget Office

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Finance Standing Committee

20 February 2018
Chairperson: Ms Y Phosa (ANC); Mr C De Beer (ANC; Northern Cape); Mr Y Carrim (ANC)
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Meeting Summary

The Standing Committees on Finance and Appropriations, together with the Select Committees on Finance and Appropriations held a pre-budget briefing with the Parliamentary Budget Office.

The Parliamentary Budget Office (PBO) indicated that the state of the nation address (SONA) had paved the way for stakeholders and set an overall positive scene for the Budget presentation. Policy and funding priorities were expected to aim at addressing the triple burden of poverty, inequality and unemployment, which is also the aim of the National Development Plan (NDP). Social safety nets which needed to be maintained within the fiscal framework constraints, and ensure that corruption is tackled were some of the key areas.

In an attempt to determine the prioritisation and funding of the NDP proposals, the PBO assessed the degree of integration of the performance indicators of the Medium Term Strategic Framework (MTSF) into departmental Annual Performance Plans (APPs). The PBO was of the view that the integration of the MTSF into the standard planning and funding processes of government was the only lever for government to ensure effective implementation of the NDP. The integration was also a requirement of the NDP.

Economic growth outlook had improved since the Medium Term Budget Policy Statement (MTBPS). After entering a technical recession between October 2016 and March 2017, the economy recorded modest growth over the following six months until September 2017, and was likely to continue this upward trend. Stronger commodity prices and the recovery in the agriculture sector have made a significant contribution to this recovery, as has the upward revision to the global economic outlook. The stronger outlook was corroborated by the latest consumer and business confidence surveys. Economic growth over the medium term, however, was anticipated to be constrained by weak household spending, poor employment growth and the effects of fiscal consolidation. While investment from the private sector improved over the third quarter of 2017, it remains to be seen whether if this momentum will be maintained.

The PBO noted that as at the end of December 2017, national government spending amounted to R1.04 trillion (73.5%) of the R1.41 trillion allocated. National Treasury had reported spending on debt service costs of 64 % of the revised estimate and payments of financial assets and liabilities of 126 % of the revised estimate. Also, the proportion of the budget over the medium term on debt service costs was estimated to increase from 10.1 % in 2016/17 to 11.5 % in 2020/21. Key risks to fiscal framework included: public sector wage settlement, financial position of state-owned entities (SOEs), a further credit ratings downgrade to domestic debt, and systemic effects of drought in the country.

While government presented a downward revision to its February 2017 projections at the 2017 MTBPS, the growth outlook for 2017/18, and over the medium term seemed to have improved compared with October 2017, and compared with its previous five year average. National Treasury was likely to improve its growth outlook for the SA economy in the Budget following other forecasters.

Members identified the need for clear synergies between the Mandate Paper, the state of the nation address (SONA) commitments, and the Budget. Some degree of integration between these documents and pronouncements had to be reflected in the Budget. They expressed concern that the presentation did not shed enough light on expenditures within provinces. Members were also not only interested in getting information on expenditure patterns at national government level, but also at provincial government level. Also, the PBO needed to be afforded the power it deserved. There was need for a stronger PBO with enhanced capacity.

 

Meeting report

Ms Phosa welcomed everyone and noted that the discussions would assist Members engage on the Budget speech the following day.

Presentation by the Parliamentary Budget Office (PBO)
Prof Mohamed Jahed, Director: Parliamentary Budget Office (PBO), said that the State of the Nation Address (SONA) had paved the way for stakeholders and set an overall positive scene for the Budget presentation. Policy and funding priorities were expected to address the triple burden of poverty, inequality and unemployment, which is also the aim of the National Development Plan (NDP). Social safety nets, which needed to be maintained within the fiscal framework constraints and ensure that corruption is tackled, were some of the key areas. Some of the choices and changes would be subject to needs, and Members should take cognisance of the trade-offs. 

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, said the main common focus areas for the Budget were as follows: economic growth, job creation and equitable distribution of income, wealth and assets; acceleration of the programme of land reform and rural development; action against corruption, collusion and other economic crimes including accounting irregularities; and faster and more meaningful implementation of the National Development Plan (NDP).

In 2016, the Speakers’ Forum appointed a High Level Panel chaired by former President Kgalema Motlanthe to assess key legislation and the acceleration of fundamental change. The Panel was mandated to focus specifically on poverty, unemployment and the equitable distribution of wealth; land reform, sustainable livelihoods and rural development and security of tenure; social cohesion and nation building. The assessment showed that poverty had increased, inequality persists and that wealth inequality was wider than income inequality. Specific failures in delivery, redistribution and restitution of land, security of tenure and spatial segregation still exist. At the same time, Cabinet identified the need to strengthen the alignment of the South African Budget, the Medium Term Strategic Framework (MTSF) and the NDP, and for budget prioritisation. In 2017 a Mandate Paper was released to establish the strategic framework for decision-making on budget priorities that were required to advance the outcomes of the NDP. It sought to establish a systematic basis for making strategic choices among competing priorities and limited resources, in order to better optimise the budget as a key lever for driving the NDP. From the mandate paper the expectation is for the learning and culture, peace and security, economic development, general public service and social development function groups to be prioritised for the strategic alignment of the budget with the NDP.

In an attempt to determine the prioritisation and funding of the NDP proposals, the PBO assessed the degree of integration of the performance indicators of the Medium Term Strategic Framework (MTSF) into departmental Annual Performance Plans (APPs). The PBO was of the view that the integration of the MTSF into the standard planning and funding processes of government was the only lever for government to ensure effective implementation of the NDP. The integration was also a requirement of the NDP.

Economic growth outlook had improved since the Medium Term Budget Policy Statement (MTBPS). After entering a technical recession between October 2016 and March 2017, the economy recorded modest growth over the following six months until September 2017, and was likely to continue this upward trend. Stronger commodity prices and the recovery in the agriculture sector have made a significant contribution to this recovery, as has the upward revision to the global economic outlook. The stronger outlook was corroborated by the latest consumer and business confidence surveys. Economic growth over the medium term, however, was anticipated to be constrained by weak household spending, poor employment growth and the effects of fiscal consolidation. While investment from the private sector improved over the third quarter of 2017, it remains to be seen whether if this momentum will be maintained.

While government presented a downward revision to its February 2017 projections at the 2017 MTBPS, the growth outlook for 2017/18, and over the medium term seemed to have improved compared with October 2017, and compared with its previous five year average. National Treasury was likely to improve its growth outlook for the SA economy in the Budget following other forecasters.

Mr Rashaad Amra, Economic Analyst, PBO, took the Joint Committee through the fiscal framework as presented in the 2017 Medium Term Budget Policy Statement (MTBPS). The PBO had come up with revised estimates for main budget revenue and Gross Domestic Product (GDP). Whereas the revised estimated main revenue number was based on historic revenue collection trends and the actual revenue collected in the past nine months, the estimated value of GDP was based on a consensus forecast. The PBO’s revised estimate main budget revenue was R3.4 billion higher than the estimation presented in the MTBPS whereas the revised estimated value of GDP was R17.6 billion higher than what was estimated in the MTBPS. The revised revenue estimate resulted in a primary balance of -R52.9 billion. This negative balance was R3.4 billion less than the previous estimate of R56.3 billion for 2017/18. The revised primary balance was R13.9 billion higher than the R39 billion estimated for 2018/19. However, it was likely that the estimated primary balance would be revised over the new 2019 MTEF. Due to the revised estimated revenue and GDP, the percentage of the primary balance in relation to GDP was estimated to result in a 0.1 per cent decline in comparison with the 1.2 per cent in the 2017 MTBPS. He noted that these were non-policy adjusted estimates.

On Total Revenue, government adjusted the 2017/18 main budget revenue by R48.9 billion from R1.24 trillion to R1.19 trillion during the adjustments budget process. The revised revenue estimate resulted in an estimated primary deficit of R56.3 billion. The five largest tax instruments contributing to the Gross Tax Revenue shortfall in 2017/18 were: personal income tax (PIT), value added tax (VAT), Specific Excise duties, Taxes on International Trade and Transactions, and Corporate Income Tax (CIT). With revenue estimation an important consideration in fiscal planning, the PBO estimated an additional R3.4 billion in main budget revenue than estimated by government in the 2017 MTBPS.

Mr Brandon Ellse, Public Finance Analyst, PBO, commented on tax revenue shares. After declining for several years leading up to the global financial crisis, PIT’s share of gross tax revenue had been on an upward trend. As of 2016/17, PIT’s share reached levels last seen in 2000/01. This was likely the outcome of under-performance in revenue collection from the more immediate growth affected taxes such as CIT and VAT. Government tax adjustments have also focused on increasing collection from PIT through some marginal tax rates increases and through limited fiscal drag relief. The relative ease of collection and progressive character of PIT were probably some of the explanations why PIT had been the favoured tax measure used to address weaker than expected economic growth. The slowdown in growth had also been reflected in who was paying PIT. The number of taxpayers earning R70 000 or less had declined significantly since 2006/07. This has driven the decline in the growth in individual taxpayers assessed. This has led to an increasing share of the tax income assessed coming from the individual taxpayers earning more than R500 000. In 2006/07, 25.4% of the taxable income assessed was derived from the group earning R500 000 or more. In 2015/16, that proportion had grown to 46.1%. Part of this was likely to be explained by the effects of bracket creep through inflation, but it did indicate a narrowing of the PIT base with lower earners falling away and an increased reliance on higher income earners to shoulder the burden of persistent fiscal deficits. 

The PBO foresaw tax revenue shortfalls for the financial year. The uncertainty around forecasts is an important consideration in fiscal planning, and it would not be unrealistic for government to realise a larger deficit than projected in the MTBPS. Planning for worse-than-expected outcomes was prudent given the tight fiscal environment. Currently, government had already budgeted for an additional R15 billion in tax revenues in 2018/19 (the details of which will be announced in the Budget). Any shortfall in 2017/18 and over the medium-term would have to be funded through additional borrowing unless significant reforms are enacted to reduced expenditure and/or raise further revenue.

Ms Gloria Mnguni, Public Finance Analyst, PBO, noted that as at the end of December 2017, national government spending amounted to R1.04 trillion (73.5%) of the R1.41 trillion allocated. National Treasury had reported spending on debt service costs of 64 % of the revised estimate and payments of financial assets and liabilities of 126 % of the revised estimate. Also, the proportion of the budget over the medium term on debt service costs was estimated to increase from 10.1 % in 2016/17 to 11.5 percent in 2020/21. Key risks to fiscal framework included: public sector wage settlement, financial position of state-owned entities (SOEs), a further credit ratings downgrade to domestic debt, and systemic effects of drought in the country.

In conclusion, Prof Jahed said budget priorities would reflect the importance of implementing the NDP by government. Based on the current performance of economic indicators, the economic outlook for South Africa was likely to be revised upwards for the 2019 MTEF. The positive outlook for the economy would also affect the fiscal framework through: increased revenue collection (PIT, CIT, VAT), which would thus provide a bigger base for spending on services and policy priorities, and deficit reduction- which would mean less borrowing and debt service costs.

Discussion
Ms P Kekana (ANC) identified the need for clear synergies between the Mandate Paper, SONA commitments, and the Budget. Some degree of integration between these documents and pronouncements had to be reflected in the Budget. She commended the PBO for assisting in informing the engagements on the Budget going forward. She asked if the declining income tax revenue was an indication that people were losing jobs.

Mr A Shaik-Emam (NFP) asked for independent views from PBO to assist Members on Budget issues. What did the PBO believe was needed to deal with the identified challenges such as the debt burden decisively? He felt the PBO was not speaking to this objectively.
 
Ms D Senokoanyane (ANC) commented that although tax revenue shortfalls were seemingly not alarming, there was room for improvement on the part of government.

Mr T Motlashuping (ANC) expressed concern that the presentation did not shed enough light on expenditures within provinces. Members were also not only interested in getting information on expenditure patterns at national government level, but also at provincial government level.

Ms T Tobias (ANC) said the PBO needed to be afforded the power it deserved. There was need for a stronger PBO with enhanced capacity. She asked for ideas and case studies on how other countries expanded their tax bases in a judicious manner without adverse effects on low-income groups within society. 

Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, agreed that there was need for some degree of integration between the MTSF and departmental APPs. Also, Members needed to insist on comprehensive APPs and force Departments to ensure everything was captured. APP indicators should be aligned with programs of action.

Prof Jahed said debt service costs were a huge concern to multiple stakeholders. The PBO had started engagements with the Auditor-General’s office which would enable it to carry out investigations on public entities and departmental spending patterns. The fruits of these engagements were expected to include deeper insights and comprehensive overviews on spending, which would assist Members in carrying out their oversight roles.

Mr Amra, in response to Members’ concerns about the debt burden, said government was likely to breach its expenditure ceilings. Part of the foreseeable breach was outside government control but some of it was due to the bail-outs to SOEs. However, there was a lot that could be achieved. Debt service costs were a huge concern and government was making efforts to bring it to a reasonable level. He indicated that income tax revenue was not declining. The shortfall was the disparity between actual and forecasted revenue estimates.

Ms Phosa asked if the PBO had possible interventions and recommendations to deal with identified challenges which it could share with the Joint Committee. What possible decisive action could be taken as per MTBPS?

Mr Amra replied that there was need for some adjustments as a means of bringing down the debt to GDP ratio. This could be in the form of revenue and/or expenditure changes. The questions would be which expenditure items within line departments could be reduced and which revenue streams could be raised. These were important questions which have an impact on income distribution and service delivery. These were discussions which needed to take place upon the budget presentation and going forward. 

Mr Carrim stated that the Joint Committee had directed the PBO to do some research on the feasibility of increasing VAT. Was there a way of introducing VAT without adverse impacts on society? Was there some leeway to increase the tax without disproportionately penalising the poor? He asked the PBO to shed some light on these areas during the next engagement. He thanked everyone for the constructive discussions.

The meeting was adjourned.       


 

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