Budget 2002: an Overview by Minister and Director General

Meeting report

FINANCE PORTFOLIO COMMITTEE
21 February 2002
BUDGET REVIEW: BRIEFING

Chairperson: Ms Hogan (ANC)

Relevant Documents
Presentation on Budget by National Treasury: A brief overview
Budget Review 2002
Estimates of National Expenditure 2002

SUMMARY
With the Minister, Deputy Minister and the Director General present, the National Treasury highlighted features of the Budget. The Minister described the year 2002 as a year of consolidation. The non-mention of the Basic Income Grant in the Budget was brought up in discussion. The Minister was criticised for not introducing it. The Minister replied that the grant was unsustainable and that he had not seen a proposal that indicates to the contrary.

MINUTES
Before handing over to Ms Ramos (Director General) to do the presentation, the Minister of Finance, Mr Trevor Manuel, made a few introductory remarks. He asked the Committee to identify and support the consistency of the policy that influenced the Budget. The Minister then touched on a few features of the Budget:
On small business, he said that the raising of the threshold to R3 million effectively alters the definition of small business. A commitment was expressed to simplify the compliance procedures for small business. At the moment there are many different separate registrations that small businesses must do and the simplification of the compliance procedure will be aimed at encouraging compliance.

On VAT, the Minister said that a conscious decision was taken not to tamper with VAT. Work was done to study the impact of the zero rating of paraffin and it was found that the money was not going back to the poor. The lesson is that the VAT system works.

The tax on soft drinks has been reduced over time and now it is tax-free.

There are big increases for local government in support of the fact that local government is maturing. There are also increases to provinces to help it deal with social responsibilities and infrastructure.

The Minister called this year one of consolidation and simplification.

The Director General continued with the main presentation (see Powerpoint presentation) and said that the content only dealt with the main part of the Budget Review.

She said that assumptions had been made about the economy and that it had influenced the Budget. It is assumed that there will be an economic recovery. GDP growth is currently slow at 2.3% but will increase to 3.3% in 2003 because of the following:
- growth will be driven by investment in infrastructure
- the balance of payments is healthy
- exports are good.
For those reasons, Treasury has a more optimistic outlook for the next three years.

She said that SA had had a positive growth rate since 1995. There has never been negative growth and this is underestimated by critics. The growth rates are not headline-breaking but a whole bunch of reforms need to be completed and it is better to complete all the reforms. Argentina is an example of a country that did not complete all the reforms.

The global economy is difficult to read and nobody knows how quickly the US and Europe will recover. Since the large part of our economy is now exports, the state of the world economy is important for any assumptions on growth. Treasury thinks that the global economy will not show strong growth for 2002 but a recovery is expected in the latter half of the year and this will benefit SA.

SA continues to diversify exports and Chapter 2 of the Budget shows how it is diversified. The depreciation of the Rand gives SA the opportunity to improve the competitiveness of its economy and the gain will be big if there are no price increases. Brazil experienced great depreciation with a small impact on inflation and therefore the economy benefited.

The balance of payments was identified as one of the most important structural changes. A very moderate balance of payments deficit of 0.5% is expected and this will remain stable.
The next big change is the Net Open Forward Position that was reduced from $4.8 billion to $2.9 billion. The NOFP is expected to come down in the next 12 - 18 months. The liability position of SA is therefore improved.

In essence what Treasury is saying is that a global recovery is expected in 2002 and the Budget was crafted to allow for robust growth.

The 2002 / 2003 Budget estimates the revenue base upwards. The debt service costs decline from 4.8% of GDP in 2001/02 to 4.1% by 2004/05. The DG said that it is important to note that this is coming down strongly. Consolidated non-interest spending increases to 6.7% this year and 4.1% in real terms over the next three years.

The correlation between debt service cost as a % of GDP and real non-interest spending is if the debt service cost % goes down, spending increases.

Ms Ramos pointed out that the share to local government in the division of revenue is up to 4% over the 3-year period.

On the R15 billion personal income tax (PIT) relief, the DG said that the potential for growth of this measure should not be underestimated.

The DG explained that the fuel levy had not been increased by the inflation rate as per normal because transport costs wanted to be maintained.

One of the ways that Treasury is going to finance the deficit is through the Telkom IPO (Initial Public Offering). The DG said that she could confidently say that it is possible for the IPO to take place in 2002/03. There will be a lot more foreign borrowing this year because there is a conscious attempt to reduce the NOFP.

In conclusion the DG said that the 2002 Budget supports poverty alleviation and growth. There is real growth in spending on social grants, infrastructure, local government and fighting crime. There are large tax cuts to support economic growth. She said that the Budget builds on the foundation and goes beyond that. She said that the 'building' is now going up and the pace at which the building goes up must now be focussed on.

Discussion
Mr Andrew (DP) commented that due to the depreciation of the Rand, the forward book of the Reserve Bank would be in a loss position. He asked if provision has been made to start paying off the loss since it is their intention to close this account after next year.

Ms Ramos replied that over the last few years forward losses were dealt with in agreement with the Reserve Bank. Over time and as of when the Reserve Bank needs bonds; Zero Coupons will be issued to the bank. The discussion on how to deal with the loss continues.

Mr Andrew asked what the cost was for administering the means test for the childcare grant and the social grant. He also commented that surely at some point an underestimate of revenue income stops being good news and starts to be bad planning. Finally he asked why were members not given copies of the Minister's speech during the lock-up session.

The Minister replied that the means test does not apply to the child care grant and that he did not know the cost of the test for other pensions.

On underestimation of revenue, the Minister said that the overruns must be examined in detail. There have been big increases from the corporate side, PIT and excise. Platinum prices also increased significantly and resulted in a big gain. STC (Secondary Tax on Companies) contributed greatly due to the high level of liquidity of companies who rather distributed dividends than investing. The banking sector netted R792 million. The Minister said that it is safe to assume that this is not a windfall gain but a permanent change. Also SARS was establishing itself and had succeeded in prosecutions at a rate never known before. In short all the windfalls are operational and not policy and therefore difficult to predict.

The Minister added that he did not know why the speech had not been distributed as he does not get involved in the distribution of documents.

Mr Andrew said that he specifically asked for the speech and two officials replied that they would get back to him. He said that many other members did not receive the speech.

The DG apologized and said it would not happen again. The speech should have been in the pack distributed to committee members.

Mr Moloto (ANC) asked what factors influenced the scrapping of the tax on soft drinks and mineral water.

The Minister replied that the total revenue from 6 cents / litre was R135 million and the cost benefit analysis questions the need for this.

Mr Mguni (ANC) said that SA has now been given a better credit rating and asked if this does not encourage more borrowing and maintaining the debt balance.

Ms Ramos replied that Treasury has a good track record of not being reckless when it comes to borrowing. Chapter 5 shows the change between domestic and foreign borrowing and the change is to bring down the NOFP that is part of the liability of government.

Mr Mguni noted that the fuel levy had remained the same and wanted to know how the Road Accident Fund is affected.

The Minster replied that the fuel levy was not increased but the Road Accident Fund did get an increase of two cents per litre. The fuel levy is merely the source for RAF funding. The levy was not raised because petrol is important for commuter transport and Treasury did not want to place people in a worse position.

Mr Mguni commented that the Economic Report stated that small companies were pushed off the JSE when merging with larger companies and wanted to know the effect thereof. Finally, he noted that the economy is stimulated in various ways and was concerned that SA could experience a boom / bust effect.

The Minister replied that there is a disjuncture between profitability and listing as many companies trade at a big discount. One cannot draw inferences on the profitability of a company because it is listed.

Mr Manuel said that SA is not in a boom/ bust situation. SA is maintaining sustainable growth. 6% growth can easily be achieved but is it sustainable. Treasury must stimulate growth and there is no connection with that and the currency volatility.

Dr Koornhof (UDM) pointed out that there are unspent funds in the Skills Development Fund that could be spent on developing skills. He asked what could be done to unleash the funds and increase the skill levels of South Africans. He wanted to know how the parliamentary committee, the Joint Budget Committee, would fit into the parliamentary process this year.

Ms Ramos replied that the Skills Development Fund is an important issue. There is R3 billion in the fund this year. During the first two years, the focus was on setting up infrastructure. She said that the programme will only work if there is a close relationship between the firms and the SETAs (Sector Education and Training Authorities). The new programme must bring jobs, the procedures must be simplified and the training programs must be properly implemented and monitored. This is only the second year of the program but "we must be careful to plan properly or else the money will not go where it is intended".

The Minister added that business sees the skills levy as a tax. He said that each SETA determines its own rules but there are obstacles to spending in a number of instances. It is very easy to spend money wrongly. The Minister said that the Umsobomvu Fund is spending on a few projects and it will try to find a balance between capital spending and projects. The Skills Development Fund will follow the IDT Fund and invest the money and live off the interest. The initial input into the fund of R860 million can grow the fund and it can do well but it is just not looking at living off the gains. A briefing will be made to the Labour Portfolio Committee on this issue.

In answer to Dr Koornhof asking how the parliamentary committee, the Joint Budget Committee, would fit into the parliamentary process this year, Ms Hogan replied that last year the Budget Committee had been an Ad Hoc committee to see what issues are involved in establishing a permanent one. Legislation and regulation would be needed for the establishment of a permanent Budget Committee.

Mr Louw (DP) commented that the number of people benefiting from tax cuts is small because most people have no jobs. He said that growth is one thing, but if government is serious about poverty relief, the unemployed needs to be targeted. He submitted that a Basic Income Grant is missing from what is otherwise a good budget. He asked why they cannot look at making money available to people who are not part of the tax net.

The Minister invited Mr Louw to present him with the economics of the basic income grant (BIG). If one is to say that each person will get R100 as a right then R46 billion is needed in the budget. The R100 will also have to go up each year and more money would be needed. Where will the money come from? The Minister said that the concept of a basic income grant is unsustainable. He added that he had tried to read as much as possible on the BIG and a mechanism is needed of getting the money to the poor that is sustainable. Some people say that VAT must be increased by 4 - 6% but this will result in an untold burden on the poor. Implementing the BIG on a sustainable basis is an enormous challenge. If it is to be administered, the very same public service that fails to sort out pension applications will be responsible for getting the money to the poor. The Minister said that the proposals he has seen, are not viable.

Ms Joemat (ANC) said that the more debt you have, the more creditworthy you are. She asked how the decrease in the debt position affects the long-term creditworthiness of SA.

Ms Ramos replied that it is not true that the more debt you have the more creditworthy you are. One just needs to look at Argentina and Japan. A lower deficit means a lower borrowing requirement and one cannot just borrow for no reason.

Mr Kannemeyer (ANC) commented that the deficit last year was 2.5% and this year it is 1.4% because of the increase in revenue collection. He asked to what extent the current patterns of expenditure have been worked into the current deficit and to what extent can the current deficit be lower because of underspending.

The Minister replied that there are strict rules for rollovers and that the department must apply for rollovers to be approved. The PFMA is the biggest change because departments have to report actual expenditure. There are few places to hide and the trend is that underspending is on the decline.

Mr Kannemeyer commented that there is a release of R10 billion for spending based on projected growth. What if the projected growth does not materialise?

A member (ANC) referred to the sharp increase in maize products and asked what measures are being taken to ensure that the poor are not hit hard by this.

The DG replied that the R10 billion referred to is largely from the proceeds of the Telkom IPO. On the maize price, the Minister replied that there is nothing in the Budget that provides for the maize price but agreed that it was a major tragedy. It could be useful to track prices over the past decade. When all the agricultural boards were abolished and the market was freed, prices came down drastically. In 1999/2000/2001 the price increases were lower than the general inflation rate. There are therefore clear benefits when the market is freed but it is not without negatives. The world trend is that the world food program is buying all the available maize and they pay in dollars. It is therefore better to sell to them than in SA, resulting in the prices in SA being so high.

The same is true for fish. SA fish reaches high prices in Europe so when it is sold here, the prices are high.

The Minister identified this as a difficult problem that requires a complex set of measures. The Minister of Agriculture and the Minister of Trade & Industry have been asked to look at this and submit a report.

In some countries seeds are improved genetically and maize that is sweet with big kernels is harvested. You can eat the product but there are no seeds to replant. Seeds therefore have to be bought. This is another issue that needs to be addressed.

Mr Mguni said that the Municipal Finance Management (MFM) Bill encourages entities but at a national level a privatisation of state entities is taken place. He asked for the Minister's comment on this.

The Minister replied that entities like Johannesburg Gas for example provides a service but at the same time the entity cannot be treated as someone's private company. The MFM Bill ensures that the accounting practices are in place to increase accountability.

Due to time constraints, the Chair closed the meeting.