National Treasury and South African Revenue Service: Minister and Commissioner briefings

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Finance Standing Committee

22 June 2009
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Minister of Finance gave a brief overview of National Treasury’s main functions and programmes. The purposes of the state entities under the Ministry’s auspices were also outlined. He sketched the most important challenges faced by government, referring to the global economic crisis, and explained how South Africa should respond to the current unfavourable conditions. The Director-General of National Treasury and the Acting Commissioner of the South African Revenue Service briefed the Committee on the respective entities’ objectives and strategic plans for the period 2009/10 – 2011/12. The Committee were informed about the the various programmes National Treasury was embarking on. In his turn, the Acting Commissioner of SARS pointed out that there would most likely be a sharp decline in tax revenue collected for the current tax year, and told committee members how SARS would respond to the shortfall in income.

Meeting report

Mr Pravin Gordhan, Minister of Finance, discussed the National Treasury’s responsibilities and key priorities and summarised the current economic environment in which government had to try to achieve its objectives. South Africa was in a recession for the first time since 1992, employment was dropping, economic growth contracted to -6,4% in the first quarter in 2009 and exports decreased rapidly. Moreover, tax revenue was R10 billion behind its original target which posed serious challenges for the implementation of job creation initiatives and so forth. For those reasons National Treasury would have to strengthen regulatory systems and evaluate public spending by ultimately ensuring that departments exercised financial prudence. In addition, he touched on National Treasury’s plans to establish a Tender Compliance Office to oversee supply chain management procedures, while stronger emphasis would be placed on public private partnerships to speed up infrastructure development.

National Treasury Director-General, Mr Lesetja Kganyago, spoke about the entity’s role of co-ordinating departmental spending by aligning the respective budgets with government’s priorities, thus improving service delivery and ensuring government got better value for money. More work would be done towards reforming the social security and retirement industries. Treasury planned to align a preferential procurement framework with the Broad Based Black Economic Empowerment (BBBEE) Act. Moreover, proposals would be considered on how government could better support Development Finance Institutions (DFIs), while there would be endeavours to reduce government’s debt service costs to 2,2% of the Gross Domestic Product (GDP). Mr Kganyago elaborated on the establishment of a proposed Supply Chain Management Monitoring Unit to curb procurement-related corruption. National Treasury’s key projects over the next three years included increased support to local government, introduction of initiatives to increase domestic savings as well as enhancing individuals’ access to financial services.

Mr Oupa Magashula, Acting Commissioner of SARS, stated that the body’s revenue target for the current financial year was R659 billion, but warned that the objective would be hard to achieve due to the existing outstanding R10 billion in tax revenue. He outlined the strategic plan for the next three years, pointing out that SARS planned to increase the awareness of tax payment and tax compliance among small, medium and micro enterprises, as well as the informal economic sector. Similarly it would aim its sights at high revenue-generating tax payers. He further shed light on how SARS would respond to the current financial crisis, declaring that risk management and audit capacity would be strengthened, additional experts would be employed to unravel tax schemes, while opportunities would be provided for individuals and corporations to voluntarily disclose non-compliance with tax payments.

Discussion
Dr D George (DA) asked how National Treasury would co-ordinate economic development and how the Minister of the new Economic Development Department would interact with the various structures within National Treasury. The mandate of the Finance Ministry was to promote the governance of the fiscal framework, but he expressed concern about the fact that the Governor of the South African Reserve Bank (SARB) was under considerable strain due to pressure from trade unions. He asked if the Governor should not get more support from the Finance Ministry.

Mr S Swart (ACDP) remarked that he had noticed a degree of tension among officials of the Department of Trade and Industry and National Treasury and asked how this edgy relationship could be avoided. He wondered if the new governmental departments and structures would not cause delays in the implementation of economic policy. The recent intervention of Icasa with the Vodacom share deal was also cause for concern and could have an adverse impact on fiscal policy.

Mr M Oriani-Ambrosini (IFP) asked who would be responsible for developing South Africa’s industrial base before it was too late. He wanted to know from National Treasury if it was indeed confident that it had the necessary means of cutting interest rates even though the decision lay with the SARB.

Ms N Sibhidla (ANC) requested more detail on National Treasury’s statement that they would increase support of DFIs. She asked if a proper risk analysis was done, following National Treasury’s remark that it was considering allocating more funds to South African Airways (SAA). More detail should be disclosed regarding the Finance Ministry’s contingency plans in view of the current economic crisis.

Mr S Radebe (ANC) wanted reassurance that there would not be any duplication of functions with regard to the Ministry of Finance and the newly established Department of Economic Development. He wanted to know if there would be sufficient resources to fund both departments.

Mr Gordhan responded that members should bear in mind that the new administration had only been in office for six weeks. He pointed out that economic policies were formulated in various departments, like Mining, Water Affairs, Local Government as well as at provincial level. It was therefore only natural that overlaps would exist. Discussions were currently taking place to ensure closer co-operation among the different departments. According to the Public Finance Management Act, all stakeholders’ viewpoints had to be taken into account and he assured members that South Africa would never be left without a fiscal framework. He continued, saying that the Finance Ministry’s planned expenditure review would indicate where a lack of funds existed. The current financial crisis was a wake-up call and afforded government the opportunity to consider ways in which matters could be handled differently. He cautioned that South Africa was a young democracy and members should bear in mind that building institutions in a developmental state could take time. With regard to the country’s current fiscal policy, he said people had the right to question if inflation targeting was indeed the appropriate policy for South Africa. He assured members that the Reserve Bank Governor had the Ministry’s full support to fulfil his mandate.

Mr Kuben Naidoo, Head: Budget Office, National Treasury, explained that the funding of the new departments would take place in phases. Funds were earmarked for the establishment of ministries and deputy ministries and, once the departments had been established, budget requests would be handled. He pointed out that new departments were not necessarily engaging in new activities, as some of the departments had split in two, while others had merged.

Mr Kganyago stressed the importance of repaying the country’s debt as soon as possible. The appeals from various stakeholders that government should borrow more money to achieve its objectives showed lack of consideration because that would mean higher interest payments resulting in fewer resources to meet governments’ objectives.

Regarding the risk involved in providing financial aid to SAA, Mr Kganyago assured members that National Treasury would first look at the airline’s sustainability and would only provide the intended funding once SAA had shown a proper financial plan.

Mr Gordhan briefly interjected, saying that the above measures applied to all state-funded entities. He added that entities should stop using the fiscus as back-up as soon as they experienced financial difficulty. With regard to whose task it was to determine the country’s industrial policy, he responded that the responsibility lay with the Deputy Minister of Finance who would also be liable for maintaining price stability.

In response to the question about interest rates, National Treasury economist, Mr Chris Leonard, cautioned that economic growth should not be estimated in terms of economic growth, as it was not possible to assess the impact of interest rates on GDP and economic activity. Similarly, a country’s exports had nothing to do with the exchange rate. A weaker exchange rate would only have an impact on exports over the long term.

Mr N Koornhof (Cope) referred to Mr Gordhan’s comment on public private partnerships and asked if National Treasury would play an active role, ensuring that all departments would be watchful regarding their involvement in public private partnerships.

Ms Z Dlamini-Dubazana (ANC) pointed out that National Treasury should set targets that were measurable, reachable and sustainable and that the current objectives were merely a wish list. She added that the fact that Members of Parliament were not able to query the draft budget posed questions about Treasury’s accountability to members.

Ms J Masilo (ANC) asked how the increased support to DFIs related to programmes in the rural areas.

Mr S Huang (ANC) wanted to know if National Treasury would work in conjunction with the new Department of Economic Development and how the finance cluster would increase its skills pool. He requested that National Treasury give an indication of the economic outlook for the second quarter of 2009.

Mr S Ngonyama (Cope) asked if SARS had a contingency plan in place to counter the loss of revenue in the current tax year. He wanted to know if there were any controls in place to monitor the unfavourable financial predicament at some local governments.

Mr Neil Coleman, Special Advisor to the Department of Economic Development, confirmed that the Department was engaging with Treasury about its budget vote and said a strategic plan would be finalised by September, while the budget would be dealt with during the appropriation period in October.

Ms Sibhidla (ANC) asked if SARS could elaborate on the nature of receivables and which percentage of debt could be recovered from tax payers. She wanted to know to which degree SARS’ modernisation agenda was compromised by the lack of skills shortage and how the entity planned to address gender equality within the organisation.

Dr George (DA) asked if SARS was planning on tightening controls on the movement of goods between South Africa and its neighbours.

Mr Gordhan confirmed that National Treasury would play an active role in overseeing public private partnerships in other departments. He responded that there were plans underway to establish DFIs in rural areas. With regard to comments that National Treasury’s objectives were merely a wish list, he responded that the reports indicated that good work had been done. In addition, SARS had succeeded in bringing the message across that paying tax was the right thing to do. With regard to the financial state of affairs at some local governments, he urged political parties to play a more active role in assisting such local governments with their budget issues.

Mr Kganyago did not want to comment on the economic outlook for the second quarter of 2009/10, but said that the economy would probably only recover slightly towards the fourth quarter.

Mr Gordhan agreed that tightening controls over the movement of goods across borders would be a good way of minimising risks. With regard to the representation of women at SARS, he responded that the entity was mindful of the gender issue and that there were attempts to address that.

In respect of the proportion that would be ultimately recoverable at SARS, he explained that a clear response at that stage would be difficult. SARS would only be able to give a clear indication in a few months’ time once corporate tax had been collected.

Ms Beatrix Coetzer from SARS responded that, according to the debtors’ book, 15 – 17,5% would be collectable by SARS.

Ms Busi Coleman (ANC), in her capacity as chairperson of the Portfolio Committee on Economic Development, commented that the newly established committee required help from the Ministry of Finance. She also had a number of questions, but decided to pose them at a follow-up meeting.

Mr Mufamadi remarked that the loss of tax revenue was a serious matter, but commended the Ministry of Finance for the work they had managed to do during a mere six weeks in office.

Mr Gordhan concluded by thanking all members for interacting with the entities and undertook to help empower committee members so they could be accountable to the people of South Africa.

The meeting adjourned.

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