Minister of Finance on the 2010 Budget

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Finance Standing Committee

17 February 2010
Chairperson: Mr T Mufamadi (ANC), Mr E Sogoni (ANC), Mr C De Beer (Northern Cape, ANC), Mr T Chaane (ANC)
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Meeting Summary

The 2010 Budget focused on increasing economic growth and employment with a focus on the youth, reducing the budget deficit to more sustainable levels, without increasing the tax burden while looking at improving the quality of government spending.

Members’ questions addressed debt levels, why focus was given to the Expanded Public Works Programme instead of Small, Medium and Micro Enterprises, rationalising State Owned Enterprises, inflation targeting, impact of SADC nationals on the country’s expenditure, financial management skills and budgeting within the three tiers of government. Other topics were youth “languishing” in correctional facilities where they were not being educated; senior government officials suspended for lengthy periods on full pay. Members disagreed that money not spent on infrastructure in the previous financial year could be regarded as “savings”. Postponing such projects would mean that greater costs would be incurred in the future

The Committee expressed its appreciation for the non-increase of personal taxes; however, they noted that there was a strong indication that it could become a consideration later in the year. Members asked about the CO2 motor vehicle emission tax only being implemented in September 2010, the recapitalisation programme in place for the country’s Development Finance Institutions, the skills development plan that would accompany the youth employment subsidies initiative and when Treasury would install IT systems that gave effect to the prescribed manner in which they wanted annual strategic plans to be developed. The Committee also focused on land reform and land purchases, the government’s refusal to speak to foreign countries on investment in Eskom’s electricity plans and if the increase in electricity tariffs could be delayed. The Committee noted that South Africa was currently at the “bottom of the pile” of emerging markets in terms of growth and wondered how long it would be until the country reached a point where it was comparable to emerging markets.

The
Minister of Finance stated that there was a clear policy framework that addressed many of the matters raised by Members. He was aware that there were many concerns that had to be tackled carefully. He assured Members that there was a sustainable fiscal framework and that he was very sure of the country’s fiscal path. 


Meeting report

2010 Budget presentation
The Minister of Finance, Mr Pravin Gordhan, commented that he was there with people from the National Treasury to engage with Members and to listen to their comments and questions.

Mr Lesetja Kganyago, Director General: National Treasury, stated that there were five key messages in the budget. The budget aimed to raise economic growth and employment, it set out proposals to increase employment with a focus on the youth, it focused on reducing the budget deficit to more sustainable levels, it did not increase the tax burden and it looked at improving the quality of government spending.

He discussed the key aspects of the new growth path that supported faster growth and job creation, the macroeconomic forecast, risks to recovery and the improved outlook for global growth (see document).

There were a range of indicators that showed economic recovery in South Africa. Indicators revealed that there was improvement in manufacturing and mining output, the manufacturing capacity utilisation was above 80% in the fourth quarter, house prices were increasing and 89 000 jobs were created in the fourth quarter. Infrastructure investment supported the economic recovery.

Employment growth was likely to be weak in the short-term. The employment challenge therefore demanded a comprehensive policy framework. Improving education was a key priority in the long term. The National Treasury's approach to this was to step up implementation of the Expanded Public Works Programme (EPWP), invest in further education and skills development, and focus on creating youth employment.

Weak economic activity reduced revenue; therefore, the government increased debt to sustain spending. Over the Medium Term Expenditure Framework (MTEF), the consolidated government deficit was projected to recover from 7.3% of the Gross Domestic Product (GDP) in 2009/10 to 4.1% by 2012/13. In terms of debt, the national net loan debt was forecast to increase from 22.7% in 2008/09 to 39.8% of GDP by 2012/13. To support fiscal sustainability, the government would need to reduce borrowing and debt as the economy recovers. If revenue does not recover sufficiently, tax rates would need to be adjusted and the tax base broadened. Forecasts indicated that the debt ratio would peak between 43% and 48% of GDP in 2015/16, before gradually declining over the long term.

Mr Kganyago briefly focused on public sector infrastructure spending, main tax proposals for 2010/11, proposals on exchange control reforms, and social security and health care financing (see document).

In terms of government saving, the increased saving was due to decrease in spending on non-core goods and services, rescheduled expenditure, reduced transfers to certain public entities, improved financial management and reduced expenditure on administration. The Government would be shifting to target outcomes in order to increase efficiency and improve performance. Over the next three years, expenditure would be channelled towards improving quality of life, upgrading health, promoting public safety, supporting rural development, creating decent jobs, building sustainable human settlements and encouraging efficient local government.

Discussion
Mr D George (DA) congratulated the Minister on the budget. He thought it was a good budget; however, he was concerned about the debt levels of the country. The presentation clarified some of these concerns. He stated that it was projected that national debt would be approximately 43% of the Gross Domestic Product (GDP). This was a significant risk. He knew that mention was made of managing the debt and specifically reducing the primary debt. He asked what steps would be taken to mitigate risks and reduce debt. There seemed to be quite a lot of attention given to the Expanded Public Works Programme (EPWP) and the jobs it would create for the youth. He asked why focus was not given to Small, Medium and Micro Enterprises (SMMEs). The EPWP seemed to create temporary-type jobs. Was not SMMEs and entrepreneurship a better way to create more sustainable jobs? He said that the Minister’s statement that thought had been being given to rationalising parastatals was a good idea. He was interested to know if there really was a plan to do so. He noted that the fuel levy was inflationary. He asked if this contradicted efforts to manage inflation to within a target range. GDP growth for 2010 was estimated at 2.3% in the presentation. The South African Reserve Bank (SARB) estimated it would be 2%, the Reuters Consensus said it would be 2.6% and the Economist Intelligence Unit said it would be 2.8%. He wondered how the Minister arrived at the idea that it would be 2.3%.

The Minister addressed the issue of the EPWP and SMMEs. He said that there were a number of programmes in place supporting SMMEs, however, the medium-sized enterprises needed help in becoming more competitive. One of the legacies of the Apartheid era was the question of entrepreneurship and taking up opportunities. All people should be committed to improve young people’s abilities to take on their own leadership roles and create economic opportunities.

The Deputy Minister, Mr Nhlanhla Nene, stated that there was a process underway in which parastatals or State Owned Enterprises(SOE) would be reviewed; this did not automatically translate into rationalising as it would depend on the outcome of the review.  The review would look at the exposure of the SOEs, the funding model and many other things. 

Mr Christopher Leowald, Head: Economic Policy: National Treasury, stated that the fuel levy percentage was 3.4%, which was well below the expected inflation rate and should not contribute to inflation.

Regarding the estimated growth forecast, he was not sure as he did not have SARB’s information. If National Treasury's estimate was compared to the Bureau of Economic Research's forecast, it was very close. The main difference lay on the household consumption side.

Mr B Mashile (ANC, Mpumalanga) stated that it looked as if the budget was based on “the behaviour of South Africans” in terms of collecting revenue and spending it on the needs of the people. He wanted to understand the impact of the Southern African Development Community (SADC) nationals on the country’s expenditure.

The Minister stated that he could not estimate the number of SADC nationals in the country; however, some numbers were already factored in based on services that were used such as schools and hospitals.

Dr Z Luyenge (ANC) asked about the financial management skills and budgeting within the three tiers of government. Did the Minister have a way of ensuring that the allocated budgets were spent accordingly? He stated that education was one of the key priorities of government; however, he worried about the youth that were in conflict with the law and “languishing” in correctional facilities where they were not being educated. It was the government’s duty to rehabilitate this group of youths. There was some confusion about which department was responsible for educating these youths. He asked the Minister to clarify the matter. He raised the issue of suspending senior government officials for lengthy periods on full pay. He asked if there was a mechanism that could be employed by National Treasury to ensure that departments suspended officials for good reasons. This would mean that officials could be charged straight away and suspended without pay. In terms of savings, he disagreed that money that was not spent on infrastructure in the previous financial year could be regarded as “savings”. Postponing such projects would mean that greater costs would be incurred in the future.

Mr Kuben Naidoo, Head: Budget Office, National Treasury, stated that there was a function shift for youth in conflict with the law from the Department of Correctional Services (DCS) to the Department of Social Development (DSD). Funds had been moved from the DCS to the DSD.

In terms of suspending people with full pay, the Public Service Act and the Public Service Regulations specified a detailed timeframe in which misconduct hearings had to be completed in. In terms of the law, people should not be on paid leave for longer than three months; it was a violation of the Act. The regulations were quite clear.

In terms of financial management skills in the three tier government, it was the responsibility of each line function to have the skills that were needed to deliver on the programmes of government. This would apply to each sphere of government. The National Treasury was providing training for financial management skills and budgeting skills. It was also putting together a framework that would create a coherent approach to deal with the management problem going forward. There was a Financial Management Grant that was made available to municipalities in order to address these issues.

Mr N Koornhof (COPE) concluded that the national debt was inclusive of the debt from State Owned Enterprises (SOEs). He wondered if the national debt included municipalities’ debt and why the Minister only thought the situation would stabilise in 2015. He asked when the Minister expected the next downward economic cycle.

Mr Lungisa Fuzile, Acting Head: Intergovernmental Relations (NT), stated that the national debt did not include that of municipalities. It was not national government debt; therefore, it did not fall under contingent liabilities as municipal debt was not guaranteed.   

Mr S Swart (ACDP) noted that the consolidated government deficit for 2009/10 was 7.3%, which was a lot less than what was predicted in October 2009. He asked if there was hope that next year’s deficit would be lower depending on the revenue. He asked what the reasons were for the deficit decreasing in the present year. There was appreciation for taxes not increasing; however, there was a strong indication that it could become a consideration later in the year. He asked when this would become a reality. As far as monetary policy was concerned, inflation targeting would be subject to criticism due to the fact that the band was not increased and a flexible inflation targeting regime was being applied instead. He asked the Minister to comment on this.

Mr Naidoo stated that the budget showed that there was a reduction in the tax-GDP ratio as a result of a decline in economic activity. National Treasury thought tax revenue would increase over the next few years as the economy recovered. It may or may not return to the level it was in 2007 and 2008. Fortunately, the country was in a “luxurious” fiscal position where a decision did not need to be made immediately as to whether taxes should be increased or not. If tax revenue did not return to 2007 or 2008 levels, the government would have to adjust its spending and taxation plans. However, the economy was in a good fiscal position and a decision did not have to be made immediately. For now, the government would have to watch the economy and the revenue trends, and a decision would be made at a later stage. 

The Minister commented on the question about monetary policy, saying that he should leave it to the Governor of the SARB to answer, as inflation remained the Reserve Bank's focus.

Mr M Swart (DA) addressed environmental reforms. He asked why the CO2 motor vehicle emission tax was only being implemented in September. Many parastatals, especially Eskom, contributed a large amount of CO2 . Would the discussion document about carbon tax address this issue?

The Minister replied that a legislative framework still had to be created for the tax that would be implemented on 1 September 2010. There was also a change as far as the base was concerned. Last year it was a “sort of” percentage based tax. It was now being converted to fixed base. Treasury also needed preparation time from an administrative point of view plus they thought it was fair to give industries time to prepare for the tax as well. 

Ms N Sibhidla (ANC) asked what the contingency plan was in case the economy did not perform the way it was expected to. She noted that the Minister had stated that there was a recapitalisation programme in place for the country’s Development Finance Institutions (DFIs). Her worry was that most of the DFIs had received “red cards” from the Auditor-General over the past few years. There was no report put before Parliament that spoke of addressing the challenges that the DFIs were facing. Were there corrective measures in place to deal with the challenges? She asked if there was a skills development plan that would accompany the youth employment subsidies initiative. She was glad that there had been savings; however, from where did the savings come? Did the savings came from programmes that were supposed to address service delivery problems in communities? Were service delivery programmes being compromised so that the money could be used for other initiatives?

Mr Naidoo stated that there was a Fiscal Framework that was accepted by the whole of government and Cabinet that was committed to reducing the budget deficit from 7.3% in 2009/10 to 6.2% in 2010/11 and to 4.1% by 2012/13. Government expenditure as a % of GDP would continue to rise until 2015/2016. Thereafter it would start to decline. Chapter 4 of the Budget Review presented the study of the probability of the decline. If the economy could recover at a faster pace then the deficit could be reduced at a faster pace. If the economy did not recover as fast as possible, the best thing to do would be to continue reducing the deficit at a slower pace.

Mr Fuzile answered that there was one DFI that would receive capital over the next few years. This was the Land Bank. In the past, the bank experienced serious financial difficulties; it was making losses and was unable to recover loans. Since then several things happened and their recent annual report reflected a substantial turnaround financially.

Mr Andrew Donaldson, Head: Public Finance, stated that the youth employment subsidy proposal was still under development. There would be more information available in March when it would be tabled for discussion. He acknowledged that linking skills development with the subsidy was an important consideration. Labour market studies showed that young people that took a long time to find employment ended up entering the employment sector later than other people and their career prospects were also much worse. The employment experience itself was a learning experience. The fundamental idea behind a youth subsidy was to get youth into employment early after leaving school. Being in the work place early improved people’s job prospects. There were tax incentives in place to encourage formal learnership.

Mr Naidoo stated that National Treasury found R25.6 billion worth of savings over three years that were added back into Department’s budgets. Some of this money was simply from contracts that had been cancelled. He assured the Member that Treasury’s objective was to save money on the “frills” and administrative expenditures, and move money to important frontline services. The budget was a reflection of government’s priorities.

Mr G Snell (ANC) noted that IT systems gave information to managers to manage, prudently, both human and financial resources. This was a tool that could be used for oversight. He wondered when the NT would install IT systems that gave effect to the prescribed manner in which they wanted annual strategic plans to be developed and adopted.

Mr Freeman Nomvalo, Head: Office of the Accountant-General, stated that the information was available and helpful in planning processes. For that information to be available for every department, information had to be captured regularly. There may be people in the some departments that lacked understanding of how to use the tools; however, National Treasury would be able to help if they were approached.

Mr M Swart stated that there was no mention made of land reform and land purchases. He wondered why this was so as it was an issue that the Department of Land Affairs always complained about, saying there was never enough money.

Mr Donaldson replied that rural development was made a priority in the budget. It was one of the faster growing budgets. The greatest priority in the budget was the complementary spending programmes that were necessary to make land reform and land redistribution work and contribute to productive agriculture. There was a new grant programme that would receive R1.2 billion over the next three years for household infrastructure, water and sanitation.

Mr M Oriani-Ambrosini (IFP) noted that the Minister had not taken into account carried over tax losses in projecting future tax revenues. He wondered if this was a fair concern. He asked why the government refused to speak to foreign countries regarding investment in Eskom’s electricity plans and wanted to know if the increase in electricity tariffs could be delayed. What was the argument was for transforming the chronically mismanaged and perpetually recapitalised Land Bank into a special division of the Industrial Development Corporation (IDC) where it could be reorganised?

The Minister stated that, unfortunately, the increase in electricity tariffs could not be delayed. He had looked at Eskom's figures and knew what its fiscal situation was and what it was borrowing. If there were an easier way to go about the tariff situation, they would have gone that route. The idea was to have a fair and equitable tariff system.

Mr T Harris (DA, Western Cape) thought that the budget was not very strong on growth issues. South Africa was currently at the “bottom of the pile” of emerging markets in terms of growth. He understood that the Minister spoke of a new growth but wondered how long it would be until the country reached a point where it was comparative to emerging markets. He noted that the Minister’s speech covered fiscal and monetary policy. It also provided an excellent overview of economic policy. What would Minister Ebrahim Patel be left to cover?

The Minister replied that there was a virtual circle between growth, employment and innovation. It was about getting the circle moving and intervening in the economy in order to initiate growth. He shared Mr Harris' sentiments. He wanted the country to grow faster, to improve potential growth and to ensure that the country had all the levers available to it to improve the economy.

The Minister said that economics was a broad topic with a range of policies. All the ministers involved in economics sat together to work out what the total integrated economic policy was and what the new growth would look like.

The Minister stated that there was a clear policy framework that addressed many concerns raised by Members. He was aware that there were many concerns that had to be tackled carefully. He assured Members that there was a sustainable fiscal framework and that he was very sure of the country’s fiscal path. 

Chairperson Mufamadi stated that there was a limited amount of time for Members to interact on the budget before they had to go back to the House and make their recommendations. He reminded Members that they were on a very tight schedule. He thanked the Minister for helping Members to understand and resolve certain issues they had with the budget.

The meeting was adjourned.

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