National Budget 2013: Minister of Finance briefing

Meeting report

Co-Chairperson De Beer welcomed the Minister and Deputy Minister of Finance, the Director-General: National Treasury, the Commissioner: South African Revenue Service (SARS), the Acting Chairperson and CEO: Financial and Fiscal Commission (FFC), and provincial chairpersons from several provinces. In these difficult circumstances, the National Treasury team was ‘the A team’. He noted that the country was ‘quite at ease’ with this year’s budget. 'South Africa was quite happy'. After input from the Minister, as political head of the National Treasury, the meeting would proceed directly to Members’ questions.

Co-Chairperson De Beer explained that the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009) required Parliament's financial and appropriations committees to proceed thus in studying and discussing the fiscal framework and revenue proposals and the Minister's budget speech, as they were put in the Announcements, Tablings, and Committee Reports (ATC) and referred to 'both Committees'. 

Co-Chairperson De Beer expressed the Committees’ condolences on the death, in tragic circumstances, of Mr Mkethwa Mkhize, Committee Section Unit Manager. Mr Mkhize had done excellent work. ‘We have lost a dear colleague in terms of the committee staff; let his soul rest in peace.’

Mr E Sogoni (ANC), Chairperson of the Standing Committee on Appropriations, added that some colleagues from the Committee had attended the funeral which had taken place on 24 February 2013.

Hon Pravin Gordhan, Minister of Finance, called for a moment of silence in memory of Mr Mkhize.

2013 National Budget: Minister of Finance
Hon. Pravin Gordhan, Minister of Finance, in his briefing referred to highlights of the presentation (see attached document, slide 2).

The budget highlights were: economic recovery and employment, the budget framework, tax proposals, and additional spending plans over the next three years.

Economic recovery and employment
 Growth was expected to be 2.7% in 2013, 3.5% in 2014, reaching 3.8% by 2015.
 Consumer inflation was expected to average within the 3% to 6% target range over the next three years.
 Moderate employment growth was expected over the next three years.

He noted that the rate of growth needed to be higher, and that it was important to give attention to 'the repositioning of South Africa'. If there were to be a national indaba, there would, by and large, be agreement on what needed to be done.  Key to this was, given that the private sector was the major part of South Africa's gross domestic product (GDP) and economy, to answer the question 'how do we get the private sector to begin to play its rightful role?' Members might remember his saying a few years ago, when reporting from Group of 20 (G20) meetings, that one of the phenomena noted by the International Monetary Fund (IMF) was that, how across the globe, the public sector had to step in to support growth and employment once the recession had made its impact, and at each of the meetings attended, two or three times a year, one heard the refrain that the hand-over from the public sector to the private sector had not yet happened. Therefore how to get more investment in the economy, the manner in which one utilised the opportunities available, the manner in which one could work together, as business, labour and government, and indeed citizens of South Africa, were all going to be important tests in future.  

The budget framework 
 Weaker-than-expected revenue growth was expected to widen the deficit to 5.2% in 2012/13.
 Real Annual non-interest expenditure growth was expected to average 2.3% over the next three years.
There would be expenditure reviews to increase the efficiency of spending and eliminate waste.

Estimated tax revenue for 2012/13 was revised down by R16.3 billion. He noted that this month of March was short, in tax collection terms, because the Easter holiday began on the evening of 28 March. He appealed to everyone to pay taxes due before 28 March, and asked for the Committees' support.

There would be 'an automatic increase in the deficit'. This was beyond his control, because these figures became clearer only in the middle of January once one learned the revenue information at the end of December. 

The deficit further into the three-year cycle would be managed while continuing with the medium term fiscal consolidation.  The target was still to reach 3.1% in the outer years, but adjustments had to happen, as Members would have heard. Adjustments in expenditure, adjustments in terms of moving monies around from under-performing areas to those that performed well, or rescheduling the spending of money, in order better to manage expenditure over a longer period.

There had also been a change in the amounts allocated to the contingency reserve. This meant that in the outer years, particularly when a new administration would take office in 2014, if the current trends continued – and they might not, the new administration would not have as much fiscal space as the normal contingency amounts allowed for new policy initiatives – unless, he repeated, South Africa had a different growth and revenue scenario at that time, which was quite probable, 'if our optimism plays itself out'. 

The other adjustments made as part of this process, were that, whereas in October one thought that expenditure would be 2.9%, in terms of real growth it was now down to 2.3%, and, as Members knew, two major expenditure reviews were being introduced, so that, apart from the re-prioritising, saving, 'haircutting', and other measures taken, one now went deeper into certain areas of government expenditure to look for more opportunities for greater efficiency in expenditure.  

Tax proposals
 There would be personal income tax relief of R7 billion.
 An employment tax incentive for first time job seekers and special economic zones (SEZs).
 Tax relief for small businesses, including a revision of the tax structure for small businesses.

The Minister noted that all Members looked very happy during his speech the previous day. 'So I am not going to repeat [myself] and make you happy again.' The relief on income tax was in front of Members. The package that one was trying to put together for youth unemployment was a comprehensive package which included the government programmes – such as the Expanded Public Works Programme (EPWP), and programmes in rural development, among others, and which were reinforced by vocational training. The incentives also worked through the tax system both for the youth and for the people who would be employed in the special economic zones (SEZs). The actual design was still to be determined. The concerns of labour in relation to the substitution effect were being taken into account in the design.

There was some tax relief for small businesses. One wished to have done more, but there was not the fiscal space to be more generous. It was certainly an area for review.

Additional spending plans over the next three years
 R4.3 billion was allocated to a new municipal water infrastructure grant.
 Average annual growth of 20.5% in the allocation to the Passenger Rail Agency of South Africa (PRASA) to expand rail infrastructure.
 R5.3 billion for the manufacturing competitiveness enhancement programme.
(Slide 2)

The Minister said that the spending was a fair balance between support for economic growth and programmes, and the social wage, which was an important component of spending and infrastructure - particularly the infrastructure that was funded from the fiscus.

In sum, National Treasury had found the right balance between fiscal consolidation and growth promoting a process at a fiscal level. Secondly, in terms of overall fiscal management, one was still within the parameters under which one would have wished to work. One would have preferred that the events of the previous year had not happened, and that there would not have been the forecast R16 billion loss of revenue, and that one would have had the more consistent picture that one had expected at the time of the Medium Term Budget Policy Statement (MTBPS) in October 2012. However, one did not control events, and one had to learn to absorb some shocks. Most importantly, one had to direct one's focus, not just towards the expenditure side but to the revenue side, and therefore also to the growth side of this equation.

Discussion
Co-Chairperson de Beer said that Members would have to do some preparation over the weekend for the public hearings that would take place next week. The Division of Revenue Bill presentations would be heard in the Appropriations Committees on Wednesday.

Co-Chairperson Mufamadi said that this was a briefing for Members by the Minister and his team. It would not pre-empt the public process.

Mr T Harris (DA) commented that he had seldom worked with anyone as professional and competent as the late Mr Mkhize. Thus the DA appreciated the moment of silence that the Committees had observed, and expressed its deep sorrow at what had happened. 

Mr Harris remarked that the Minister was in a tight spot – there was a growth problem, which he had acknowledged, and if one were to build up more fiscal space it would require a change in South Africa's growth path. The DA supported the Minister in his efforts to get there. He asked firstly about the Youth Wage Subsidy, which he initially thought the previous day had been ‘watered down’. However, having looked again at the figures, he thought that he was probably mistaken. He had thought that the amount of funding had declined from around R1.6 billion to around R500 million. He suspected that this was because it was now going to be implemented sometime this year, so this year's allocation would be relatively small, and it would then scale up in later years. However, he saw that there was still the suggestion that it was R4 billion, whereas in the previous budget 'incarnation' in 2011 it was R5 billion.  What was the motivation for the decline from R5 billion to R4 billion? He understood that the detail had not yet been presented, but he asked what the key differences were between what was on the table in the 2011 budget and in this present model. He asked because the newspapers were speculating that the only difference was that this new Youth Wage Subsidy would not be available to existing workers.  However, if he had read National Treasury's document correctly, in 2011, the idea that one subsidised existing workers was that it eradicated the potential substitution for young workers. Why had National Treasury apparently changed the model? If the Youth Wage Subsidy was not implemented in 2011, for various reasons, why were the political conditions different now? He referred to the 2013 Budget Review, page 60 and asked for clarity on 'employee tax incentives' under 'tax loss proposals'.

The Minister replied that what was intended was a tax expenditure (thus a tax loss) of R5 billion. So if the scheme got off the ground, one would begin to collect R5 billion less in taxation.  The details of the design were not yet available, but the figure had been mentioned in the Budget speech for appropriations purposes.
These were all employment incentives, not necessarily the youth incentive, whether the learnership scheme or the SEZ scheme. This was an estimate that National Treasury was giving for the time being. National Treasury would report to the Committees with more definite information when implementation occurred. However, he thanked Mr Harris for pointing out the table. One must treat the incentive as the product of a dynamic process that had started in the National Economic Development and Labour Council (Nedlac). As a result of that process there was now a package of initiatives that was outlined on page 23 of the Budget Review. What was good about the package was that it brought together different dimensions of training and the public sector programmes, and what the private sector could do, and even how one related these to programmes like the Industrial Policy Action Plan (IPAP) as mentioned on that page. As to what had changed in the political conditions, there was nothing that the Minister was aware of, except that the dialogue in the Nedlac process had produced an outcome, and that there was a recognition that the various elements needed to find each other in a constructive way to solve an important problem. South Africa was gradually moving in that direction.

Mr Harris noted that the entire opposition supported the National Development Plan (NDP). He asked if National Treasury would agree with the figure of R1.5 trillion for infrastructure backlog. Given that backlog, he saw that the spending this year was 8% of GDP and over the medium term it was expected to decline to 7%.  He thought that a shortfall of 30% from that National Development Plan target was probably quite significant. Would the Minister agree on the need to scale that up? How could one get from 7% in the medium term to 10%? Was it possible to have equity deals in the parastatals? Was it possible to consider privatisation of parts or the entirety of state-owned entities (SOEs) in order to fund infrastructure? This would be in a way similar to that followed by Brazil. Was there now a policy change? For the last few years, it had been clear that privatisation had been totally off the table. The credit rating agencies flagged debt as a serious concern when they downgraded South Africa. When National Treasury told Members that debt was peaking in the outer year of the medium term expenditure framework (MTEF), Members simply had to trust National Treasury. He understood that there was a long-term analysis in preparation. When would the Committee see that document? The DA warmly welcomed the package of incentives for the SEZs. What precipitated the change in National Treasury's position, as National Treasury had previously resisted 'large headline tax breaks'? Was the package, which appeared to be a 15% income tax rate, a generalised wage subsidy, and accelerated depreciation on infrastructure, competitive with the packages for similar SEZs around the world?

The Minister replied that, as to the NDP and the percentage invested in infrastructure, National Treasury had reached 10% by making the shift from consumption to investment. The bigger portion of investment was still in the public sector, broadly defined. 'Privatisation' was no longer the kind of language that one used, nor was there any intent to move in that direction, as he had pointed out in 'that press conference'. However, when one was in a constrained environment, one had to ask oneself tough questions on how to obtain funding. He gave examples. One had to ask if it would be possible to reschedule a particular area for funding to smooth the curve of expenditure. Depending on priorities, one had to decide to which entities should one allocate guarantees. The aim of these tough questions was to mobilise resources effectively for infrastructure purposes and other developmental objectives. The first draft of the long-term fiscal plan was complete. It would now go through various Cabinet processes. Thereafter it would be brought to the Committees, hopefully in a month or two. Nothing had changed in the National Treasury regarding the SEZs. Just as National Treasury offered incentives to the motor industry, so it offered incentives to the textile industry, and offered depreciation allowances to other kinds of investors. It was important to make these SEZs work, to improve South Africa's competitiveness, and to improve exports. The SEZs had been initiated by the Department of Trade and Industry (DTI) and developed in collaboration with the National Treasury. Whether it was competitive compared with similar schemes in other jurisdictions depended on what one meant by 'competitive'. Some countries gave ten-year tax holidays. South Africa was not in a position to do that.
The Minister pointed out that it was necessary 'to talk up South Africa' and this was not just the job of Government. One must differentiate between political debates and polemics on the one hand, and national interest on the other.
 
Mr S Swart (ACDP) expressed his party's condolences on the death of Mr Mkhize. He commended the Minister for the budget, which had been widely welcomed. His party would describe the budget as 'prudent'. He emphasised that a counter-cyclical prudent approach did not mean austerity. Whilst constructive criticism was very important, he thought that how Members spoke and what they said was a very important element. His party had been on record as expressing concerns about the debt levels, and appreciated the trade-off that taxes were not increased. When could the Committees expect the report to which the Minister had alluded in his speech on the fiscal sustainability from the long-term perspective?  He commented on the vital role of the private sector. Perhaps the Minister could explain further how the private sector could be brought to play a greater role, particularly as to the nature of the investments, where one would prefer to see investment in research, development and innovation as opposed to the equities market. Lastly on combating corruption, he looked forward to the appointment of the Chief Procurement Officer. As a Member of the Portfolio Committee on Justice and Constitutional Development, he had for some time believed that there was a need to capacitate especially the Special Investigating Unit (SIU). This Unit was incredibly effective, and if its budget were doubled, it would surely be able to tackle the R30 billion lost through procurement fraud. He noted that National Treasury had given additional funds to the Public Protector.

Mr M Swart (DA) said that Mr S Swart had anticipated his questions. The appointment of a Chief Procurement Officer was a good thing, as it would help combat corruption. He wondered if the functions of the Chief Procurement Officer would they be something like those of the old State Tender Board. He congratulated Mr Kenneth Brown on his appointment to this new position.

The Minister replied that Mr S Swart had made a good point about counter-cyclical prudence versus austerity. National Treasury still envisaged a real expenditure growth of 2.3%.  It was very clear that the social wage, which was so well captured in the 2013 Budget Review, chapter 6, was something that one could not afford to damage in any way. South Africa was nowhere near a situation in which this would be required. He alluded to the social damage that austerity had done in various parts of the world. He affirmed that austerity was not the way to achieve growth. There had been discussion in the G20 on how to develop collaboratively a global strategy to create jobs and growth. An economy would grow partly because government made efforts to contribute through the fiscus and invest in the economy, particularly in infrastructure. However, for the rest, it was the private sector's entrepreneurship and the private sector's willingness to back itself and its country that actually shaped the growth agenda. If we were going to break though the 3% barrier again, and indeed the 4% barrier, we would have to work as a team. It was not enough just to sit back and criticise.  On the question of corruption, the office of the Chief Procurement Officer would have both short term and long term objectives but also would have allied agencies that would be part of the broader programme to get more control over procurement practices.  SARS was examining a number of businesses that had benefited from the state but were not tax compliant.  One wanted the Commissioner to deploy many more people to ensure that many more businesses were covered much more quickly and put under the scrutiny of auditors to establish how many people who actually benefited from business with the state were actually compliant in tax terms. One could not benefit from the state, legitimately or illegitimately and still not pay tax. With the help of a group of analysts it would be possible to monitor transactions virtually on a daily basis. This was the goal that National Treasury wanted to achieve within the next few months. It also hoped to be able to stop transactions that appeared illegitimate. The system as a whole needed to be restructured. It was necessary to have fewer hubs where decisions were made in order to have better management. However, in every transaction there was a businessperson at the other end, and the focus in the media was almost entirely on what government did.  He called for a focus henceforth on the business side, as it was business that set prices too high and befitted from that overpricing. Perhaps someone in government collaborated in paying money in excess of that which should be paid over, but we in society should take a tough stance against corruption. Those who engaged in this activity must be treated as outcasts. As to allocations to the SIU, the Minister said that National Treasury did its best where it could. However, all that the SIU could do was to conduct investigations, forensic analysis and prepare a report.  The rest of the job needed to be done by other agencies. It was necessary to make more efficient the chain of processes leading to prosecution of culprits.

Mr Lungisa Fuzile, National Treasury Director-General, added that as far as the SIU allocations were concerned, the criminal justice sector was one of the functional groups that worked very well from the viewpoint of budgeting.

Mr N Koornhof (COPE) added his party's condolences on the death of Mr Mkhize. He congratulated the Minister and National Treasury. Was he correct in assuming that the projections for the debt ratio depended on inflation remaining relatively high? If that was so, could one assume that the South African Reserve Bank (SARB) would be happy with a consumer price index (CPI) inflation rate of 5.5% over the next three years? If the SARB was happy, was one entering a new era in which inflation targeting would play a lesser role?

Mr Fuzile replied that the framework of inflation targeting was in place. There was no temptation to change the framework just because of debt management. 'That would be close to gerrymandering.' The framework would play an important role into the future.

Mr Koornhof said that the budget speech was 'very brave', but one needed partners to make it work. Could the Minister give some indication if labour could be expected to assist? 

The Minister replied that it was about all members of society, including labour, being willing to assist and recognise the imperative for growth and delivering on the potential of the economy. More importantly, it was a matter of seizing opportunities. All stakeholders had to work together. 

Mr L Ramatlakane (COPE) asked what the body language of the social partners was on the strategy for regional integration. He asked about the Minister's reference in his speech to simpler rules to reduce the cost of doing business. What did the social partners think, as the proposed two-tier system was a sticky issue?

The Minister replied that South Africa was going to simplify exchange control provisions.

Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, explained further that, in the Gateway to Africa reforms, National Treasury had set up mechanisms to make it easier for South African companies to invest in Africa and other parts off a domestic base. It was mutually beneficial. There was an annexure that Members could download. He said that the Minister would meet Nedlac the next day, so one would expect to hear the response of all the social partners there to all the budget suggestions.

Mr Ramatlakane asked for the facts on under-collection of tax revenues – with particular reference to the figure of R16 billion. Normally SARS’ projection was for over-collection, not for under-collection. What were the factors involved? Was one looking at a shrinking basis for tax collection?

Mr Oupa Magashula, SARS Commissioner, explained why there had been a reduction by R16 billion of the estimate of expected revenue receipts. Four weeks in revenue collection was a long time. It was, however, hoped to surprise the Minister in a positive way. Largely the reason for the downward revision was the muted growth in the third quarter. One could only collect the revenue that was in the economy. There had also been a very bad second half in regard to Corporate Income Tax (CIT). This had been driven mainly by the disruptions in the mining industry. In December alone there was a drop of R4.6 billion because of the strikes and the disruption in the supply of minerals and products that the mining industry produced.  Also there were lower receipts of Pay As You Earn (PAYE).  This was because of some job losses at the higher level. There were job losses of about 60 000 in the financial services. Salary increases in the second half of the year were not as high as in previous years. This Minister, on page 22 of his speech, had disclosed what the previous voluntary disclosure programme (VDP) had grossed for SARS. There were 18 000 taxpayers that had applied for VDP. SARS had banked about R3 billion to date from that programme. On 01 October 2012, the Tax Administration Act (No. 28 of 2011) had commenced and SARS already had 700 taxpayers who had applied in this permanent new programme. So there would not be a need any more going forward, at least for voluntary disclosure, to have special legislation passed to enable SARS to have these special provisions. By the end of March, SARS expected to have collected already R200 million from this programme. He was not sure how many persons would apply in future, but there was a tax gap and there were some who were not compliant, and such people's tax affairs needed to be regulated. SARS hoped such people would take advantage of this provision.

Mr A Lees (DA) referred to page 24 of the Minister's speech, on infrastructure grants, where the Minister had said that the application process for the grants had been revised to improve the quality of spending.  The Minister had given an example of that revision – namely the submission of building plans as far as two years ahead of implementation. When would Members receive a more detailed analysis or proposal with regard to those changes? Provinces would be concerned and would ask what would be expected of them. He did not understand how the figure of R10.4 billion in re-prioritisation savings and drawing down on the contingency reserve was arrived at. He did not know what the starting point was. One could not reduce zero to minus R10.4 billion.  It was the same problem with the figure of R7 billion for personal income tax (PIT) relief. Clearly there had been 'a bracket creep adjustment'. There had been adjustments on the rebates, and so on. As most people received some form of salary increase, he was not sure how the relief offered translated into real relief. How was the R7 billion arrived at? He commended SARS for its excellent work. He did not like the word 'under-collection' as it made SARS appear not to be doing its job.

Mr Kenneth Brown, National Treasury Deputy Director General: Intergovernmental Relations, replied that it had been necessary to make trade-offs. National Treasury had been transferring a big chunk of funds to provinces but there had been underspending. So it had had recourse to a reallocation system. The second point was that delivery and the quality of delivery had been a problem in a number of provinces. There had also been problems with procurement and asset management. After evaluation, there had been interaction and determination on the need to build a better capacity for provinces in order to manage the infrastructure programmes. Instead of giving an indication of the available money up front, the province would be expected to do the legwork itself and then National Treasury would link the allocations to the work that the province had done. Thus a province first at the door with its plans would receive a bigger portion of those specific allocations. Thus National Treasury wanted to create an incentive for provinces.  Part of the prerequisites was that each province must have an asset management system. Currently provinces were rolling out infrastructure without proper maintenance plans. Certainly a province needed to know how its demographic profile changed. It must know its need for schools in particular localities in two years time. Two years was not too far ahead to plan. There were a number of provinces in which it had been found difficult to modernise the entire infrastructure delivery system; thus it was necessary to ensure that provinces took steps to ensure that they had an infrastructure delivery system in place before they could expect to receive the money.  This was in line with what National Treasury wanted to achieve on procurement to ensure, for example, a standardisation of pricing in the building of schools. 

Mr Fuzile explained further about the figure of R10.4 billion. If Mr Lees were to add the total expenditure for the three years, in the MTBPS, and then compare it to the expenditure for the three years in the Budget Review, one would obtain that number.

The Minister replied that the R7 billion relief that was given was indeed real relief. National Treasury had fallen short of what would be total relief.

Dr Z Luyenge (ANC) congratulated the Minister for a 'scrupulous and straightforward' Budget speech. He emphasised the importance of monitoring and evaluation, especially as it related to the implementation of infrastructure projects, and the issue of capacity, especially at local government level. He asked the Municipal Infrastructure Grant (MIG), with especial reference to young people and their aspirations of having sports facilities where they lived. He appealed to the Minister to ring-fence the allocation intended for that purpose.

Co-Chairperson De Beer said that this was perhaps a question to be followed up in the Appropriations Committees, but he noted the question. 

The Minister admired Dr Luyenge's consistency. He asked the same question every year, and the Minister expected Mr Brown dutifully to repeat the same answer.

Mr Brown explained that National Treasury had indicated to both the Department of Co-operative Governance (DoCG) and the Department of Sports and Recreation (SRSA) the sentiments raised by the House at the time. SRSA had entered into a memorandum of understanding (MOU) with the DoCG that related to that. National Treasury had also included part of the conditions of the MIG – basically the roles and responsibilities of the different departments.  SRSA needed to support the municipalities in the planning of that infrastructure. Thence the founding would basically follow for each sporting facility.

The Hon Nhlanhla Nene, Deputy Minister of Finance, replied that National Treasury, in the 2013 Budget Review, had dedicated a section to demonstrate its seriousness of intent on delivery of infrastructure. He referred specifically to Chapter 7 and especially page 104, on which National Treasury outlined all the infrastructure projects at all levels of government.

Mr D Ross (DA) asked if the pricing of carbon would have any effect on Eskom's electricity pricing. How would it filter down to consumers?

Mr Ross expressed concern about the funding of infrastructure investment. It had been reported that, since the 2010 World Cup not a single tender had been issued to companies for infrastructure. This was very negative.  He commented on the Development Bank of Southern Africa (DBSA) which initially was to champion the infrastructure programmes and to be a centre of excellence in as far as eradicating the backlogs in municipalities. He noted a new role for the DBSA in accelerating investment into the Southern African Development Community (SADC) region: the DA supported this strategy to support growth. He called for a focus on municipalities in addressing the R1.5 trillion backlog in infrastructure. Was there still a focus of the DBSA on municipalities?

The Minister replied to Mr Ross’ observation that not a single tender had been issued to companies for infrastructure since the 2010 World Cup, that the answer was simple; if one studied the ‘disaggregation’ that National Treasury had shown to Members, it would be apparent that there was some R400 billion odd expenditure that went to provinces and municipalities, but one would find that many of those contracts were in fact fairly small.  The contracts or tenders were still going out but they operated in a very different way. Big projects required particular disciplines in terms of following a project cycle. Last year Members had been shown an illustration of that cycle, from concept to pre-feasibility to feasibility and so on. This year Members were given some illustration of where the different projects that the Presidential Infrastructure Co-ordinating Commission (PICC) was co-ordinating might be. Some of those might take time.  Once the projects went through that process, Members would begin to see a rapid unfolding.  The DBSA was currently being re-orientated precisely to do what Mr Ross said, which was to focus on municipalities.  And in particular to ensure that municipalities that lacked an adequate resource base or had challenges on delivery were the ones that were supported by the DBSA with the necessary expertise. Its role in SADC was not new. For many years its role had been to invest in projects in the SADC region.

Ms J Tshabalala (ANC) asked the Minister for further detail on the NDP. How effectively would the Minister ensure that government departments and agencies would align their planning and expenditure to the NDP itself?

The Minister replied that Minister in the Presidency for Performance Monitoring and Evaluation, the Hon. Collins Chabane had explained in the post SONA briefing that his Department together with the National Planning Commission (NPC) would be preparing a medium term strategic framework. That framework would be the basis for the alignment of which Ms Tshabalala had spoken.

Mr Ross remarked that Standard & Poor, a credit rating agency, had said on television that it was concerned about the R16.3 billion shortfall, and that the deficit had widened. However, it had denied that it was considering further downgrading at present. He asked for the Minster's comment.

The Minister thanked Mr Ross for informing him what S & P had said and he would be interacting with the firm 'post the budget'.

Mr Harris asked how would National Treasury respond to the credit rating agencies' concern given that South Africa's total loan debt would appear to increase throughout the MTEF and at no point appeared to decrease?

Ms Tshabalala said that, as to the attitude of credit rating agencies thus far, there was a definite need to convince them that government had a commitment to its financial blueprint. However, how far could the Minister persuade them in terms of this particular budget speech, to avoid possible downgrading by these agencies?

The Minister replied that credit rating agencies should be satisfied with the kind of fiscal path that he had outlined. However, this did not mean that they would be satisfied. However, it was up to us as country, business, labour and government, to persuade the world that South Africa would grow its economy, and would have the resources to pay its debts, 'and that you and I are reasonably honest people who when we borrow money will repay it'. South Africa owned R1 trillion to the world at present. South Africa had a very good record over the past 15 years of repayment. That record should speak for itself.

Mr Fuzile added that no one knew what would cause rating agencies to move one way or the other. The United Kingdom (UK) had been very aggressive in cutting expenditure to ensure that it retained its rating and that it could borrow at very low cost for some time, but at a certain point that fell out of favour, as growth became an issue for the UK. The absence of growth and the long-term fiscal sustainability of the UK economy were under threat and hence the credit rating agency Moody's downgraded the UK. However, the other rating agencies had not changed their ratings of the UK. One did not know what they would do next. As far as South Africa's credit rating was concerned, sometimes there was confusion between 'levels' and shares. What one tended to talk about when one said that debt would peak before falling thereafter was debt as a share of GDP. This was because GDP grew, and at some point grew faster than the rate, at which one's debt grew, which was one's numerator. So at some point one reached one's peak and a tapering off, whereas one's level of debt never stopped increasing as long as one ran a deficit. If one ran a deficit one was always adding to one's stock of debt on a net basis. Of course the dynamics of that might change from time to time.  South Africa was not expecting to reach a level of zero debt or running surpluses soon. Two factors had resulted in the shifting out: the slowing of growth, which meant that the denominator was small; and a shortfall of revenues, which meant that the resultant addition to the total stock of debt was bigger than expected. So the point about achieving higher rates of growth became important, as did the fact that South Africa had narrowed the deficit quite fast, although there had been some deterioration this year. There were differences in the points of view of the credit rating agencies even though their ratings might be the same.

Ms Tshabalala said that the decision to reduce spending came after an upward revision of the 2012/13 budget on the fiscal year. She asked the Minister for his interpretation around the reduction of expenditure. Was one reducing the money spent because of the limit on the amount of money actually available, or was there a reduction in spending because more money was needed than was actually available? It was necessary to bear in mind the need to accommodate the infrastructure rollout.

The Minister replied that the spending cuts were undertaken in such a way as not to damage any infrastructure projects or any social delivery projects. 

Ms Tshabalala was concerned that South Africa imported many goods when the rand was weak. At the same time, exports were not growing sufficiently, even though the rand was not strong. How would the country finance sufficiently the imports that would be needed to support the infrastructure rollout?

The Deputy Minister replied that if there was export led growth, a weak currency worked in the country’s favour. In South Africa's case, it was necessary to find the right balance on what to import and what to export. South Africa's biggest import commodity was oil. 

Co-Chairperson De Beer reminded Members that it was necessary to remind constituents of South Africa’s progress since 1994. He gave figures. He referred to the previous year's State of the Nation (SONA) address.

The Minister thanked all the Members.

Co-Chairperson De Beer thanked the Minister.  He referred the Members to pages 131-138 of the 2013 Budget Review.

The meeting was adjourned.

Appendix:
Business Day Live news article

Budget 2013: S&P highlights implementation risk

Mar 1, 2013 | Transcripts service

Summit TV interviews ratings agency S&P about their view on the 2013 budget, why they think the biggest risk is on the implementation side and whether another SA downgrade is on the horizon

KONRAD Reuss is MD at Standard & Poor’s South Africa.

SUMMIT TV: A mixed reaction by the ratings agencies to the 2013 budget — Standard & Poor’s is concerned about South Africa’s fiscal performance. You appear to have a few worries .If you had to give Pravin Gordhan and the SA National Treasury a score out of 10, what would that be?

KONRAD REUSS: I wouldn’t want to use a scorecard but looking at the positives — because apparently in the media I’ve taken a contrarian view on the budget — but the positive is that the minister has confirmed Treasury’s commitment to fiscal consolidation, with targets for 2015/2016 turning the debt dynamic around, with regards bringing debt down. But what we are seeing now — and that’s where our concern is coming in — is we are seeing an increased budget deficit for 2012/2013 to 5.2%, which, to some extent, was disappointing but maybe not surprising and a slightly wider deficit for the new budget year, then supposedly we are back on track again. That’s the big question mark.

STV: That’s a big question mark because it assumes a lot of things and maybe Treasury is being too optimistic in thinking that they can bring the budget deficit back to 3.1% in the 2015/2016 tax year.

KR: The minister certainly tried to convey the message that this is a budget in challenging times and the going is getting tough but the medium term is where the question marks are and even in the near term there’s question marks about where is the growth in the economy, questions about the global outlook, that Treasury has no control over. It seems the budget for the coming year is built on a slightly generous economic outlook. What will happen if growth indeed comes in lower than expected? Would Treasury be willing to cut expenditure at some point?

STV: Do you talk to Treasury? A lot of pundits with the downgrade last year were keen to see Treasury respond to the concerns raised by the ratings agencies.

KR: Certainly, we have discussions with Treasury and they are aware of our thinking. In our announcement last year in October — when we downgraded South Africa to BBB and we kept the negative outlook from BBB + — we expressed our concern with social pressures and labour market issues. If we were to see a repeat of what happened last year with regards the labour market and these social pressures, would there be a move towards more populist policies? These are risks we are concerned about. Certainly, we have voiced this very clearly but we are not giving policy advice. It’s for SA National Treasury to make those decisions, according to what they think is politically feasible.

STV: If we look at the substance of the budget: do you feel concerns were addressed, with more spending on social services rather than construction and infrastructure? Does it concern you that in the R1-trillion more than half is going to social services?

KR: I think the concerns were certainly addressed to some degree — when you look at how Treasury has scaled back real growth in expenditure to some extent — nevertheless, there is still some real growth above inflation. That is an important message Treasury is sending to various constituencies. Social grants has increased — notwithstanding tightness on the fiscal side — and, given the social pressures, that is a move we do appreciate. The same with infrastructure spending, yet obviously Treasury is trying to keep an eye on the bottom line and is trying to keep the deficit under control, which is where we see the challenge.

STV: Certainly, they are going to have to borrow more, so for them it’s important not to have to pay more for the money they are going to borrow but that could change if we do get another downgrade. You have a negative outlook on South Africa’s rating, so when could we get some sort of certainty from Standard & Poor’s as to whether or not that will translate into another credit downgrade or whether you will remove that watch?

KR: Obviously, with the negative outlook we have kept on the rating, we are basically saying the risk is stacked on the downside and, as stated before, in this economy with the social and labour issues and the fiscal picture, a number of things are coming together. I think we will have some time now to watch how this budget is going to be implemented and, speaking about risk, this is not about how this budget is ratings negative or positive. The risk I am seeing now is implementation risk against a background of many uncertainties in the economy and in South Africa; the fact that 2014 is going to be an election year. In many ways, we see a lot of implementation risk, so the jury is out on this budget and is the government going to be able to implement this budget the way it’s being proposed? A lot in the budget now rests on efficiency gains, enhancing procurement and saving money. The good intentions are there but the jury is out in many ways.