Medium Term Budget Policy Statement, Adjusted Estimates of National Expenditure 2009 & Adjustments Appropriations Bill [B13-2009]: Address by Minister Pravin Gordhan

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Finance Standing Committee

26 October 2009
Chairperson: Mr T Mufamadi (ANC), Mr E Sogoni (ANC), Mr C De Beer (ANC; Northern Cape)
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Meeting Summary

The Medium Term Budget Policy Statement 2009 (MTBPS) responded to the economic crisis, the change of administration and the necessity and desire to do things differently in government. The key short-term challenges were to support the economic recovery and direct public spending towards key priorities. The medium to longer-term objectives were to build a more labour absorbing economy and to transform public service delivery to meet the aspirations of all South Africans. A budget deficit of 7.6% of Gross Domestic Product was projected for 2009/10, falling to about 4.2% by 2012/13. A growth rate of 1.5% was projected for 2010, rising to 3.2% by 2012. Additional spending of about R78 billion was allocated to the key priority areas (excluding significant resources identified for re-prioritisation at national and provincial departments). National Treasury had also found total net government savings of R14.5 billion at national level and R12.6 billion at provincial level.

Members queried the steps taken to root out corruption and manage wasteful spending. National Treasury was asked to comment on the increasing trend in the public sector wage bill. Members asked where the proposed borrowing would be done and whether an increase in taxation was possible. In regard to the various estimates given, Members wondered whether these estimates were optimistic or conservative. The Committee asked when it could expect the revision of the Ministerial Handbook and what progress was made with the Land Bank. Members explored the merits of inflation targeting and Public Private Partnerships as policies. Other questions concerned South Africa's unsigned Economic Partnership Agreements, school leavers vouchers, how the MTBPS addressed the five key deliverables of government, the accuracy of the macroeconomic forecasts, the absence of support for Small Medium and Micro Enterprises and how the fiscal and monetary expansion in China and India would contribute to South Africa's economic recovery. The second round of discussion queried the sustainability of South Africa's social grant support system. National Treasury was asked to elaborate on incentives for Foreign Direct Investment in South Africa as well as the progress of the Doha round of the World Trade Organisation talks. The National Health Insurance scheme was queried, both as to its cost impact and how it would be phased in over time. National Treasury's projections for oil prices after January 2010 were queried, as were the possible uses of Public / Private Partnerships at local government level. The inflationary effects of collusive practices in South Africa's product market (especially on food prices) was highlighted for discussion.

The presentation on the Adjusted Estimates of National Expenditure (Adjusted ENE) reviewed the adjusted national budget for 2009/10 as well as the departments for whom unforeseen and unavoidable expenditure and roll-overs had been recommended. Declared savings for 2009/10 amounted to R1,5 billion, and underspending was projected at R3 billion. In-year adjustments resulted in an expenditure increase of R13,9 billion. Clause 6 of the Adjustments Appropriations Bill, pertaining to the appropriations and spending arrangements of the new and newly split departments, was explained. Members queried the municipalities' ability to raise additional income, and the possibility of using the money allocated to respond to the H1N1 pandemic; for other seasonal communicable diseases. Members asked whether the new departments' population of their organograms could begin sooner than April 2010 and whether outstanding land claim payments could be included under unforeseen and unavoidable expenditure. Members also asked for a thorough explanation of the arrangements around the new and newly split departments, specifically whether the money was allocated to the larger vote, how the departments' funding would be split and who the accounting officers would be.

Meeting report

The Medium Term Budget Policy Statement 2009
Hon Pravin Gordhan, Minister of Finance, stated that the Medium Term Budget Policy Statement 2009 (MTBPS) responded to the economic crisis, the change of administration and the necessity and desire to do things differently in government. The National Treasury's key short-term challenges were to support the economic recovery and direct public spending towards key priorities. The medium to longer-term objectives were to build a more labour absorbing economy and to transform public service delivery to meet the aspirations of all South Africans.

He reported that there were signs of an improvement in the economic environment, but the recovery was likely to be slow and gradual. Gross Domestic Product (GDP) was expected to decline by 1.9% this year with growth of 1.5% projected for 2010. There was a  budget deficit of 7.6% of GDP projected for 2009/10, falling to about 4.2% by 2012/13. Additional spending of about R78 billion was allocated to the key priority areas (this excluded significant resources identified for re-prioritisation at national and provincial departments).

The South African macroeconomic forecast was currently set at a growth rate of 1.5% in 2010, rising to 3.2% in 2012. The decline in GDP growth would be affected by weak consumer spending and moderate global growth. Arising from the global growth outlook, it was expected that commodity prices, public investments and private investments would support South Africa's recovery. The Minister noted the upward trends in the graphs depicting fiscal sustainability and the net loan debt outlook, as well as the changes to exchange controls and spending priorities over the medium term. National Treasury had found total net government savings of R14.5 billion at national level and R12.6 billion at provincial level. The savings would be added to the resources available for new priorities over the Medium Term Expenditure Framework (MTEF). Further steps to achieve further savings would be taken. The additional R78 billion available for allocation would be split between national, provincial and local government.

Discussion)
Dr D George (DA) referred to the Minister's remarks on rooting out corruption and managing wasteful spending and commented that this was probably easier said than done. He asked what concrete steps were being taken in practice to achieve this goal, and particularly how this would pertain to the expenditure of the State Owned Enterprises (SOEs).

Dr George also noted the increasing trend in the public sector wage bill. He asked what measures would be taken to manage the size of the public sector wage bill and whether this would lead to an increase in the taxation.

Mr N Koornhof (COPE) referred to the government savings plan, and noted that National Treasury had mentioned a revision of the Ministerial Handbook. He asked when the Committee could expect a report on this.

The Minister replied that government had achieved some of these aims and had some idea of what had to be done. Far more important was the way in which Parliament and the other role players shared a common commitment to fighting corruption, and what would be done by all South Africa leaders to spread the same message. He asked all leaders to promote consensus on the issue, irrespective of their political parties.

He noted that the National Treasury (NT) had set up a task team of about eight agencies, meeting on a weekly basis, to look at individual cases of tender fraud, and to identify the weaknesses in the Supply Chain Management System. Generally this was a matter of culture and if government did not root out the culture of pick-pocketing the State, it would not be able to succeed. Everyone had to commit to fighting the wrong culture and promoting the right culture. The same rationale would apply to the promotion of savings.

In regard to the Ministerial Handbook, Mr Gordhan noted that the Minister of Public Works, Geoff Doidge, and Minister of Public Administration, Richard Baloyi, planned a press conference on this and he could not anticipate what they would say.

In regard to the savings, the National Treasury had already found billions in savings and this process would continue. Apart from the issue of cash, there was also the need to address the mindset. A common political message would help to foster the right mindset in the public sector. This was also important for the private sector because businesses sold goods to the State. A conversation was necessary on what norms and values business would promote to complement government's efforts. Cabinet wanted savings and value for money and did not want the State exploited in any way. The message was the same for State Owned Enterprises. The government would not compensate for the blatant mismanagement in some State Owned Enterprises (SOEs). He complimented the Minister of Communications, Siphiwe Nyanda for his decisive action with the SABC. The Minister added that where SOEs were well managed, this should be acknowledged and promoted.

He noted that in regard to the public sector wage bill, government had to maintain a balance between what they spent and the service delivered. The National Treasury would keep a watchful eye on that and apply the value for money principle. Minister Baloyi would be engaged with this issue, particularly the focus on hiring more front line staff to improve service delivery in the public sector, and having less people on the administrative side.

Mr Gordhan said that there was no immediate decision to raise taxation. In future, if the economy did not progress as government had thought it would, then increased taxation would be an option. If the National Treasury changed its mind, this would be contained in the budget tabled in February.

Dr George referred to the Minister's remarks on the borrowing to accommodate the budget deficit (the R285 billion public sector borrowing requirement) and he asked where this would be done. If the borrowing was done on the domestic market, domestic credit extension would be impacted. If the borrowing was done on the international market, there was possibility of currency fluctuation if the Rand depreciated. He asked if the National Treasury planned to take steps to intervene to devalue the currency.

Mr Lesetja Kganyago, Director-General, National Treasury, replied that the R 285 billion was a consolidated figure that included the SOEs. He responded that the domestic capital market had been able to absorb these kinds of figures relatively easily, due to the fact that foreigners had returned to South Africa's domestic capital market, and that the domestic bond yields were still relatively attractive. He asked Members to note that National Treasury proposed a winding down of the deficit over the next three years. The MTBPS clearly acknowledged the big budget deficit this year and stated the intention to run a tight ship, decrease the debt over the next three years and return to a more comfortable fiscal position.

Regarding the exchange rate, Mr Kganyago noted that South Africans had an obsession with the exchange rate. South Africans had registered extreme reactions to both strong and weak currency positions. In some cases, there had been calls for a commission of inquiry into the possibility of conspiracy to devalue the currency. The exchange rate was a very important price in the economy. South Africa was striving for a stable and competitive exchange rate and this was not equivalent to the spot rate (being the rate that tracks second to second fluctuations in the exchange rate) quoted in the media. A stable and competitive exchange rate took into account the inflation differentials between South Africa and its trading partners, which was the real effective exchange rate. It was this real effective exchange rate that determined whether the exchange rate was stable and competitive, not the daily gyrations on the markets.

Mr Kganyago then posed the question what policy choices would be available other than devaluing the currency. He noted that South Africa could purchase foreign reserves, to influence the nominal exchange rate, and over time to influence the real effective exchange rate. South Africa would need significant resources to sustain this approach. South Africa had been able to do this by using the budget surplus over the last two financial years. With a deficit, South Africa would have to issue bonds to raise the capital to buy the foreign reserves, thus increasing debt to acquire reserves. The second choice was that rising inflation actually appreciated the currency. Interestingly, the proponents of continued high inflation were the same people who called for a depreciation of the currency. The gist of this argument was that a low inflation rate was vital to a stable and competitive exchange rate.

Mr Koornhof pointed out that the income estimates were for the 2010/11 figures for national income to be 12% higher than the previous year. He wondered whether this estimate was optimistic or conservative. Given that the inflation forecast was placed, and that the nominal GDP increase was set to be over 8%, it became important that the 12% income growth was reached.

The Minister responded that the income estimates were optimistic and that everyone in government should live up to that commitment. The South African Revenue Services (SARS) had several plans to optimise revenue.

Mr Oupa Magashula, Commissioner, South African Revenue Services, responded that several measures were planned to broaden the tax base. This meant that all the people and income that were not previously part of the tax base should be brought into it. Undeclared income was a major component of this. Through the SARS robust third party reporting and verification system, it was able to accurately determine undeclared income by using the databases and algorithms at its disposal. Another aspect was the unregistered taxpayers, such as about 4 000 employers who deducted tax from their employees but never paid the tax into the fiscus. About 680 000 employees were not registered for tax, even though they were above the registration threshold. He noted that in regard to tax avoidance and evasion, SARS was now on the Global Steering Mechanism that would enable it to access information on tax evasion schemes emanating from outside the country. Through the Organisation for Economic Co-operation and Development (OECD) and the G20, South Africa had also signed information sharing agreements with tax havens, such as the Grand Cayman Islands and Mauritius. In addition, SARS also had a more effective penalties regime to bring in outstanding returns. As a result, SARS was now seeing unprecedented volumes of returns that were helping to grow the tax base.

Mr S Swart (ACDP) asked if an economic growth forecast of 1,5% was conservative. In view of the high deficit, he asked about a possible increase in taxation by introducing new taxes, and whether National Treasury was considering an individual corporate tax.

Ms Z Dlamini-Dubazana (ANC) referred to the National Treasury's macroeconomic forecast and the GDP revision information on slides 5 and 6 of the MTBPS presentation. She asked how these figures were arrived at and whether the model needed to be reviewed.

Ms Marisa Fassler, Chief Director: Macreconomic Analysis, National Treasury, responded that the Treasury had a rigorous forecasting process. The macroeconomic model was constantly being fine-tuned and benchmarked against other institutions' models, for instance the Bureau for Economic Research. National Treasury only had two opportunities to publish Budget forecasts: the MTBPS and Budget. The wide range of assumptions that fed into the model were constantly being fine-tuned, including the assessments of the global economic situation (obtained from the G8, USA, UK, Japan and China among others), commodity price projections, exchange rate projections and inputs from the International Monetary Fund (IMF) and World Bank, all of which informed the macroeconomic forecast. This was a very comprehensive approach and National Treasury spent a lot of time to ensure that the estimates released on these two occasions were reasonable. The forecast was approximately half a percentage point lower than the Reuters Survey consensus forecasts, but this survey reflected a high degree of uncertainty still in the markets. South Africa had a prudent forecast that was reflective of the economic times. It also reflected South Africa's concerns about employment dynamics, household debt and credit extension. The "green shoots" were taking time to feed through, and National Treasury would rather err on the side of caution than be over-optimistic. South Africa was also less optimistic than the IMF because of concern about what would happen once the effect of stimulus measures began to fade.

Mr S Swart stated that he appreciated the steps taken to recapitalise the Land Bank, but it seemed that the recovery of funds from the official involved with the Land Bank remained an issue. He asked how the National Treasury would proceed to urgently address the recovery of funds and to bringing the erring officials to book.

The Minister assured Members that the situation was under control. The new CEO, Mr Phakamani Hadebe, was on top of the demands of the Land Bank. The National Treasury planned to re-orientate the Land Bank and ensure that Minister of Rural Development and Land Reform, Gugile Nkwiniti, and the Minister of Agriculture, Forestry and Fisheries, Tina Joemat-Petersson, were on board to work more appropriately on government's rural development strategy to support small farmers and to create jobs in agriculture. There was also a voluntary Joint Mandate Committee where the three Ministers would sit together in shaping the mandate of the Land Bank. He also thought that the questions on whether the Land Bank was hiding something were inappropriate, and that all concerned should wait for the investigation process to take its course. If this process took too long, the Minister would intervene to bring the offenders to book.

Mr M Swart (DA) referred to the R78 billion available for allocation to key government priorities and noted that 13% of this went to local government. In the documents given to the Committee the figure was quoted as 16% of the R78 billion. He asked which was correct.

The Minister responded that the 13% figure in the presentation was an error and should be 16%.

Mr Z Luyenge (ANC) referred to the envisaged savings and improvement of spending patterns, especially in Health and Education. He asked if there were clear mechanisms regarding how this would be applied, specifically, which line functions would be affected in departments. He felt that the administrators would be tempted to underspend and present this underspending as savings. Savings must not be equated to underspending and there should be mechanisms to ensure that savings were genuine.

Mr Kuben Naidoo, Deputy Director-General (Budget Office), National Treasury, assured Members that savings would not be equated with underspending as this would be dishonest. Spending plans for the next three years within departments were reviewed to see where the possibilities for savings were. The areas where spending had been trimmed were in administrative costs, entertainment, travel and accommodation. Where National Treasury picked up sharp increases on line function budgets, these expenses would be cut. This was just the first cut and the first step to reduce wastage and inefficiency in government.

Ms N Sibhidla (ANC) congratulated the National Treasury on the balance evident in the MTBPS 2009. She noted that South Africa had been unable to attain an inflation rate within the target band of 3-6%. In light of this she wanted the Minister's opinion on whether inflation targeting was the best option for South Africa.

Mr Nhlanhla Nene, Deputy Minister of Finance, replied that inflation targeting was introduced to anchor monetary policy. Managing inflation was also a matter of managing expectations. He felt that abandoning an approach because of inability to achieve the target would be incorrect. National Treasury was open to a debate on this approach.

Ms Sibhidla referred to the proposed school leavers/matriculants voucher. She asked for an explanation of how that programme would work in relation to the call for free education.

Ms Dlamini-Dubazana referred to the possibility of using income tax to provide employers with incentives to employ more people. She asked if there was a programme in place and how this would work in practice.

Mr Naidoo responded that the voucher and using income tax to incentivise employment was one proposal. The National Treasury was challenged to put ideas on the table on how to improve employment. These ideas arose from the International Growth Advisory Panel (IGAP) in order to smooth the transition from school to work. School leavers would get a voucher to access a training opportunity or this voucher could be presented to an employer. It would then lower the cost to the employer of employing the matriculant, without lowering the wage to the matriculants. This was not an attempt to deviate either from the government's no fee schools policy or from attempts to lower the cost of higher education. Tax incentives were used in other sectors of the economy. This tax incentive was aimed an encouraging the employment of matriculants.

Ms Sibhidla referred to the new proposal on how to deal with the skills shortage in the country. Year after year government had developed numerous strategies to deal with the skills shortage, through programmes such as the Joint Initiative for Priority Skills Acquisition (JIPSA), but Parliament had never been presented with the output.

The Minister responded that this was the purview of the Minister of Higher Education, Mr Blade Nzimande. Minister Nzimande had to be given the opportunity to address this. He felt that there was a lot of money available for skills development but it needed to be focused in a better way.

Ms Sibhidla referred to the interim Economic Partnership Agreements (EPAs) with the European Union (EU). South Africa had not signed the EPAs, but as some of the other members of SACU had signed the EPAs, this caused conflict within SACU. She asked if this decision by South Africa was based on the reduced revenue from the SACU countries and the proposal to review the formula.

The Minister replied that this had been a subject of engagement when the SACU Ministers of Finance met. There was an understanding between South Africa and the European Union that, as SACU members approached the final EPAs, they would try to solve the shortcomings that had led to problems. He felt that the diplomatic and trade level negotiations should be given a chance to proceed as planned.

Ms Sibhidla referred to the use of the Public Private Partnerships (PPPs) and asked whether this could be employed to deal with the current economic situation in the country. She asked if this was the best option for South Africa.

The Minister responded that this was one way to approach the government's goals. The State did not always have the skills or resources to achieve its aims. The private sector could complement the State's efforts and reinforce delivery. PPPs should not apply on a universal basis in any country. Chile and Argentina had experienced problems that had eventually led to the privatisation of basic resources, such as water and electricity. Fortunately PPPs had now improved beyond this point.

Ms Z Dlamini-Dubazana (ANC) noted that key policy issues in South Africa were economic transformation and the promotion of accountability and responsibility in the public service. She asked how much of the content of the MTBPS addressed these issues.

Mr Naidoo responded that the National Treasury would take these considerations into account.

Ms Dlamini-Dubazana referred to the MTBPS section on the role of counter-cyclical fiscal policy and asked how this would contribute to the developmental state and the mixed economy envisaged for South Africa.

Mr Nene replied that it was designed to avoid the boom-bust cycles and to ensure that spending and taxation decisions were still affordable when the economy weakened. These were the interventions used to protect citizens from a volatile domestic and world economy.

Ms Dlamini-Dubazana referred to the departmental priorities in the Adjusted ENE. She asked how these priorities related to the five key deliverables in the ANC's manifesto. She also wondered how these priorities would be balanced against the available resources in the budget and how the implementation of the departments would be assessed.

Mr Nene replied that the five priorities in the manifesto had been translated into the Medium Term Strategic Framework (MTSF) and the MTBPS addressed the MTSF in its focus on employment, education, health, rural development and fighting crime and corruption.

Ms Dlamini-Dubazana noted that the document did not talk to the support of the Small Medium and Micro Enterprises (SMMEs). She felt that supporting SMMEs was important for growth.

Ms Dlamini-Dubazana asked how the fiscal and monetary expansion in China and India would contribute to South Africa economic recovery, and whether this would assist the growth of emerging contractors. She asked if there was a programme in place to monitor this. She felt that if borrowing was necessary, it was far better to borrow within than to go outside.

Mr Naidoo responded that most of the spending (fiscal and monetary expansion) in China and India went into infrastructure projects such as roads and rail. Infrastructure projects demanded the kinds of commodities South Africa exported, such coal, iron ore and steel. South Africa's export earnings would contribute toward its recovery.

Ms Dlamini-Dubazana referred to slide 19, which contained the statements: "Allow SA corporates to invest in SADC through offshore intermediaries" and "Do away with the 180 + 30 day rule for the conversion of foreign currency amounts held on-shore" and asked for an explanation of this. She also queried the monitoring tool used to monitor the increase of Foreign Direct Investment (FDI) application limit from R50 million to R500 million.

Mr M Swart asked how long South Africa would be able to sustain the social grant support system if this was not supported by the required economic growth. He asked National Treasury to elaborate on welfare proposals in the Adjusted ENE.

The Minister replied that South Africa was not building a welfare state. Entrepreneurs would be supported in their ability to create employment to give workers decent jobs to support their families. A certain percentage of the population would never be able to support themselves, therefore the State ultimately wanted a balance between the welfare and work. This was the core of the job creation debate. He stated that the National Treasury had referred to several studies in the crafting the MTBPS. The MTBPS speculatively offered ideas on how to do things differently and served as an agitator in this debate and the preface to a more serious debate.

Mr M Swart noted that the exchange controls were aimed at limiting speculation on the markets. He asked National Treasury to elaborate on foreign investment in South Africa.

Mr Kganyago replied that South Africa had to relax exchange controls further to lower the cost of doing business. He felt the some of the things currently contained in exchange controls would be better addressed through prudential regulations. South Africa was in talks with the G20 on protecting the economy from external vulnerability. This was particularly pertinent to real estate speculation. National Treasury proposed that foreigners should buy property in South Africa with cash. This would be beneficial to the domestic market, as foreigners often used domestic credit to purchase South African property. When they were no longer able to service the debt, they left the country and South Africa was unable to enforce the debt obligation. This was speculative and should stop. There were also limits to how much South Africa fund managers could invest offshore. This was meant to protect South Africa investors from imprudent offshore investments, as there was a historic tendency among fund managers to invest offshore as a default.

Mr R Lees (DA; Kwazulu-Natal) noted that he could not see any great effort to attract foreign investment and asked for an explanation of this.

The Minister replied that this was better placed as a question to the SARS and the Department of Trade and Industry. The National Treasury met with investors, often to provide direct answers to the investor community, give insights and provide reassurance where appropriate. He said, in regard to the number of incentives in the system, that incentives often gave rise to a “race to the bottom” where competing governments provided ever-larger incentives to private companies, in a bid to attract investment. South Africa had refrained from this form of bidding in the past and had lost investments as a result, but this prudence had also helped South Africa avoid some investment disasters in the past.

Mr Lees asked for the National Treasury's view on the costs attached to the proposed National Health Insurance scheme (NHI), and what its impact would be on future budgets, given the State's intention to begin introduction of the NHI in 2010.

Ms Sibhidla asked how the government planned to phase in the NHI.

The Minister responded that Minister of Health, Dr Aaron Motsoaledi, had a very clear plan for and costing of the NHI, arrived at in conjunction with the Department of Health and the National Treasury. He was not ducking the question but they were not ready to present the information. The Committee could invite Minister Motsoaledi to discuss the plans.

Mr Lees referred to the Minister's call for an end to political point scoring and stated that ruling party cadre deployment made it difficult to deal with corruption and promote transparency. He felt that this would require an additional commitment from the ANC with the challenges at local government level and tender transparency.

The Minister replied that the ANC had acknowledged that financial management was not working. The President had met with Premiers, Finance MECs and top officials at municipalities to begin to engage on these matters. The point was that South Africa could not carry on as it was currently doing, by continually imposing costs on the following financial year.

Mr Kenneth Brown, Deputy Director-General: Intergovernmental Relations, National Treasury, added that there was a known debt figure. National Treasury was busy categorising the last chunk of the debt. It had found that national government owed the municipalities R2,5 billion. Part of the problem was that national and provincial government did not respond to bills issued, and in other cases municipalities' billing systems failed them. National Treasury was engaged in solving the specific issues around the billing systems.

Mr Lees noted the response given earlier on the Land Bank and asked whether the Minister could respond on the action taken against the Ithala Development Finance Corporation. He stated there had been serious events in that bank over the last few years that involved huge loans to MEC's wives for the purpose of buying farms.

The Minister replied that Ithala Bank was not a national government responsibility, but he shared Mr Lees’ concern about bringing the offenders to book.

Mr Lees referred to SARS's third party verification that enabled it to accurately determine undisclosed income. He felt that while this was important from the point of view of SARS, taxpayers should have more transparency on what undisclosed income entailed. At present taxpayers were issued with a letter, asking them to disclose undeclared income, but taxpayers often did not know what they had not disclosed. He found it very difficult to understand this approach.

Mr Lees recalled the Minister’s comment on value for money when it came to the growth in the wage bill. He commented that although there were some well-run State institutions, a generally poor work ethic prevailed in the public service.

The Minister agreed with these sentiments. He asked the Members to test the service of some of the bigger private sector companies. He felt that running a good service in a large organisation was generally a tough job. However the public sector did need to try harder to achieve consistency.

Mr M Makhubela (COPE; Limpopo) asked if there was anything in place to alleviate the increased unemployment and achieve a better standard of living for all South Africans.

Mr Kuben Naidoo replied that Treasury did not have to adjust the social welfare system. It was currently sufficient to phase in the extension of the child support grant, but there was a need to add funds in the outer years. Accordingly there was no revised estimate.

Mr L Ramatlakane (COPE) asked the National Treasury to elaborate on Slide 11 of the presentation.

Mr Ramatlakane asked if lowering the cost of hiring matriculants was a return to the two-tier system.

Mr Naidoo responded that this was aimed at lowering the costs of employing matriculants. The other ideas in the MTBPS was subsidising the social insurance contributions of workers and taxpayers, to reduce this burden for employers, to further lower the cost of employment.

Mr Ramatlakane referred to the 3,2% growth projected for the outer years of the MTEF, and asked whether South Africa would see the investment in the 2010 World Cup Soccer Tournament in real terms, and how this would be related to job creation.

Mr T Chaane (ANC; North West) referred the contingency reserve plan and asked how people who were retrenched would be catered for, especially in terms of training.

Mr Naidoo replied that the R2,4 billion was for the Training Lay-off Levy scheme and this was a contribution to help companies avoid retrenchment and instead provide training. This was funded out of the Unemployment Insurance Fund and the Skills Development Levy and the Sector Education and Training Authorities (SETAs). This was not on the main Budget.

Ms M Tlake (ANC) asked what the National Treasury projected for oil prices after January 2010.

Ms Fassler replied that the oil price assumption had been extremely volatile in recent years, seeing big upswings and downswings. It was difficult to make projections. National Treasury projected a quarterly figure and used this to determine an annual level. In 2008 the annual level was just below $100 a barrel. This year it was estimated that it would be at $60 a barrel, because the oil price started the year at a very low level. Over the medium term, there were projections for a gradual rise to $75 in 2010, $82 in 2011 and just below $90 in 2012. It was accepted that the demand for oil would rise in the global recovery, to have a consistent model.

Ms R Mashigo (ANC) asked about the use of PPPs at local government level. She asked if there were measures to ensure synergy in this interaction and whether it would be possible to monitor this. Members needed this information to convey to their constituencies.

Mr Andrew Donaldson, Deputy Director-General (Public Finance), National Treasury, referred to conventional economic models where there was limited interaction between the three players of individuals, firms and government. This was a model that said that firms were meant to be competitive and governments were meant to provide the service that firms could not, and regulate in instances of market failure. The model stated that firms and governments should not compete and they did not duplicate services. It was not so simple in the modern economy. There were industries where there was considerable scope for interaction. The world was having to rethink PPPs, in terms of co-ordination and regulation. When discussing PPPs in the PFMA, government was referring to long-term contracts in large-scale infrastructure projects, which were done under very strict rules. There was another broader category that could involve NGOs and community services. National Treasury was beginning to develop that kind of partnership, like the Neighbourhood Development Grants.

Mr J Gelderblom (ANC) asked for a progress report on the Doha round of the World Trade Organisation (WTO) talks.

The Minister responded that this was really the brief of the Minister of Trade and Industry, Dr Rob Davies. This WTO round (Doha round) had lasted for eight years thus far. These were essentially trade negotiations that were to do with compromise and market access. The bigger countries were often not willing to compromise. South Africa’s classification as a developed country during the previous Uruguay round created limitations. He did not think there would be any answers in the next six months.

Mr S Montsitsi (ANC; Gauteng) queried the extent to which South Africa companies contributed to increases in inflation and the negative consequences, especially regarding rising food prices, and how this was related to collusion. He stated the actions taken by the Competition Commission did not seem effective, since many companies now seemed simply to budget to pay the penalties. He asked if the measures were under review, as the fines did not seem to be beyond companies. He asked if it was possible to use the fines to improve service delivery, such as building schools and clinics.

Mr Naidoo agreed that South Africa had an uncompetitive product market, with collusion in some sectors and a lack of competition because there were, in some markets, simply too few players in the market. Instead of competing, bringing prices down and delivering better service, they could choose to set prices, and divide trading territory. An OECD report had listed collusion as one of the reasons for uncompetitive markets in South Africa. The Competition Commission, in conjunction with the Department of Trade and Industry, was doing a good job in curtailing collusion and cartels. The fines flowed into the National Revenue Fund (NRF) and were then used in the usual Budgetary process. The National Treasury was reluctant to earmark these funds for a particular purpose because of the uncertainty of these fines. Certainty was needed for key spending priorities.
The public wanted to feel the benefit of a fine on a bread company, for instance, and National Treasury was willing to engage on and explore ideas about how to achieve the objectives of lowering prices, specifically the price of food, without causing uncertainty.

The Minister concluded that the National Treasury message was to do the basic things correctly, and run government departments, schools and clinics properly. Other improvements would flow from this. There was a need to concentrate on whether these basic things were done well, to acknowledge the successes and build on the positives.

Adjusted Estimated National Expenditure (Adjusted ENE) and the Adjustments Appropriations Bill 2009
Mr Kuben Naidoo, Deputy Director-General (Budget Office), National Treasury, presented the Adjusted Estimated National Expenditure (Adjusted ENE) according to the 2009/10 adjusted national budget. Unforeseen and unavoidable expenditure amounting to more than 150 million had been recommended in the respect of the Departments of Public Works, Basic Education, Health, Communications, Rural Development and Land Reform, Co-operative Governance and Traditional Affairs, and Public Enterprises.

Roll-overs amounting to more than R150 million had been recommended for the Departments of International Relations and Co-operation, Home Affairs, Health, Co-operative Governance and Traditional Affairs, and Water and Environmental Affairs. Mr Naidoo also noted those departments using self-financing expenditure, such as the Department of Transport.

Declared savings for 2009/10 amounted to R1,5 billion, while under spending was projected at R3 billion. In-year adjustments resulted in an expenditure increase of R13,9 billion. Clause 6 of the Adjustments Appropriation Bill 2009 was explained, as it pertained to the budgetary arrangements of new and split departments.

Discussion
Mr Swart noted that a large percentage of municipalities used taxes to fund day-to-day operations. He felt that this pointed to financial viability of municipalities. He asked if municipalities had any other options to raise additional income.

Mr Brown responded that under the Municipal Fiscal Powers and Functions Act, a clear process was laid out for a municipality to initiate a tax to raise revenue. There was further scope for this, but municipalities had to initiate the process.

Ms Tlake noted that under unforeseen and unavoidable expenditure, an allocation for the H1N1 virus was made to the Department of Health. If the H1N1 virus receded, and spending was not necessary, she asked if this money could be allocated to other seasonal communicable diseases.

Mr Naidoo replied that the money had already been spent on an awareness campaign and purchases of vaccines. The vaccines were stockpiled for use if the virus re-emerged.

Ms Tlake asked if a vaccine had been developed for the H1N1.

The Minister clarified that in fact it was not a vaccine, but an anti-viral drug that the Department had stockpiled, and that it was called Tamiflu.

Mr Luyenge noted that the new and split departments’ budgets came into effect in the 2010/11 financial year. He asked if this meant that their organograms would only begin being populated by the hiring of staff in April 2010, and whether it was not possible that the process could begin sooner.

Mr Naidoo responded that there was no restriction on hiring staff or filling the organogram. National Treasury hoped that this process would be simplified when the votes were individually appropriated, as it was complex at present.

Ms Dlamini-Dubazana referred to the unforeseen and unavoidable expenditure under the Department of Rural Development and Land Reform, and asked if it was possible to include outstanding land claim payments under this heading. Large amounts of interest had accumulated on these claims.

Mr Donaldson replied that Treasury was aware of the outstanding land claims, but that the Adjustment Appropriations Bill was not the place to make this payment. The Land Reform Programme was under review and the resultant changes could be applied as soon as the 2010/11 Budget.

Ms Sibhidla stated that Clause 6 of the Bill was very confusing. She referred to Vote 13: Education. The Department had been split into Basic and Higher Education. She asked if the money was allocated to the larger vote, how the departments' funding would be split and who the accounting officer would be.

Mr Naidoo apologised for introducing a confusing Bill, but this was a confusing situation. He responded that Mr Duncan Hindle was originally the Director-General of the Department of Education as also the accounting officer. When the Department split, he became the Acting Director-General and Accounting Officer of the Department of Basic Education, and Ms Mary Metcalfe became the Director-General and Accounting Officer of the Department of Higher Education and Training. The Budget was currently the total budget applied to both departments and the Ministers had to come to some agreement on how to spend.

Mr Sogoni pointed out that three responses to Western Cape disasters were recorded in the Adjusted ENE. He wondered why the amount was not consolidated.

Mr Naidoo responded that the Western Cape figures were not consolidated because they sat on the votes of the national departments, as the allocations were for different kinds of damage handled by different national departments.

Mr Brown added that the cost was reflected on the budget of the sphere of government that undertook the repairs.

Mr Mufamadi commented that this had been a very informative session. Making the Budget work was not the sole responsibility of the National Treasury and the Executive. Parliament had an important role to ensure that National Treasury succeeded. The Budget was presented in the context of fiscal discipline. State spending on infrastructure would continue and although the State had to borrow, this was for the purpose of development, not consumption. The area of revenue collection was critical and Parliament should assist in this regard. The Finance committees were geared up to complete their work on time. Parliament was quite satisfied with the national and provincial savings identified. Local government savings, however, were not explored fully, and he felt that a lot of the money at this level could be redirected. He thanked the National Treasury for responding fully to the questions posed by Members.

The meeting was adjourned.



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