Medium-Term Budget Policy Statement 2010: Minister of Finance & National Treasury briefings

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Finance Standing Committee

27 October 2010
Chairperson: Mr T Mufamadi (ANC), Mr C De Beer (Northern Cape, ANC), Mr T Chaane (North West, ANC) & Mr E Sogoni (ANC)
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Meeting Summary

The Minister and Deputy Minister of Finance and National Treasury officials attended the meeting of the four Committees, sitting jointly, to discuss the Medium-Term Budget Policy Statement 2010 (MTBPS). The MTBPS overview discussed the six broad themes of economic assumptions, fiscal framework, spending priorities, division of revenue, changes to conditional grants and the mid-term report on spending. The broad theme was to lift the economy on to a more labour absorbing growth path and to achieve improvement in the management of public services. The economy had gained strength since the budget and the growth outlook had improved moderately. Gross Domestic Product (GDP) was expected to grow by 3% in 2010, up to 4.4% by 2012. The macroeconomic forecast projected that inflation would remain below 6% over the Medium Term Expenditure Framework (MTEF), that private investment and employment would recover gradually and the current account deficit would widen as demand accelerated and inputs rose. There was an improved global outlook as emerging markets grew strongly. This was driven by strong growth in China, India and Germany, although recovery in other developed countries was still fragile, due to problems with high unemployment, rising debt levels, deflation risk, bad debts and banking sector reform. The global environment was supporting high commodity prices and South Africa’s terms of trade. Prices of export commodities had increased more than import commodities, and strong growth in China and India supported demand commodities.

National Treasury informed the Committees that the recession had caused a sharp decline in private and general government investment, leading to a drop in the investment ratio to 20.9% of GDP in the second quarter of 2010. Private investment was expected to recover gradually as capacity utilisation rose and demand strengthened. The over valued rand exchange rate posed a risk to balanced and sustainable growth. National Treasury therefore was proposing financial and regulatory measures to moderate pressures on the rand, including efforts by the South African Reserve Bank to purchase foreign exchange reserves, amending exchange control and offshore investment limit on individuals. Government’s borrowing fell significantly as fiscal stimulus was removed. The gradual decline was a result of a number of projects being shifted out over the Medium Term Expenditure Framework. There was need for more value for money within public expenditure. A dedicated Technical Support team would be established to address under-spending in capital projects by government entities. The 2010/11 National Budget had been adjusted from R815.6 billion to R818 billion, representing an adjustment of R2.4 billion, mainly due to roll-overs of R1.8 billion and personal remuneration increases of R6.2 billion.

Members welcomed steps to eradicate corruption in the procurement process and asked if there was a time frame both for this and the dedicated support team addressing expenditure issues. They asked whether the youth wage subsidy or assistance to others to enter the labour market would be implemented, whether details of the macroeconomic implications of the New Growth Path would be made available, whether there was any guarantee of success of interventions around the currency, and what was considered a comfortable level of foreign exchange reserves. Members enquired about transfers to municipalities on recreation and culture, queried if the R2 billion to be added to the land reform programme was adequate, and asked what remedial steps were needed before economic recovery. National Treasury conceded that it needed to look into the issue of increasing revenue collection in provinces. Members asked how the policy reserve funds would be allocated, on what basis the contingency reserve was being established, whether the surplus would be used for expenditure, and what policy instruments could be used for various targets. They enquired about other alternatives to meeting the job targets, how South Africa could become more competitive against emerging markets, and how further salary increments would be dealt with. Members also asked if interest rates on income for pensioners would be examined, whether there was any intention to review the retirement age, and how resources would be synchronised to align with the New Growth Path.


Meeting report

Medium Term Budget Policy Statement (MTBPS)
Minister of Finance’s introduction
Mr Pravin Gordhan, Minister of Finance, informed the Committees that National Treasury had adopted a different approach to funding, and that it had set aside a policy reserve of about R22 billion, to cover the next three years. This reserve would be committed to priority areas such as jobs and economic development. He noted a correction to what was presented in the budget speech about the numbers of people entering South Africa between 1 May 2010 and 11 July 2010. The correct figure was that 2.387 million people had entered South Africa. This had been part of the benefit of a well-hosted World Cup.

Overview of Medium-Term Budget Policy Statement 2010
Mr Leslie Kganyago, Director General, National Treasury, presented an overview of the Medium-Term Budget Policy Statement (MTBPS) for 2010. This covered six broad themes, of economic assumptions, fiscal framework, spending priorities, division of revenue, changes to conditional grants and the mid-term report on spending.

The Committee was informed that the broad theme was to lift the economy on to a more labour absorbing growth path and an improvement in the management of public services. The economy had gained strength since the budget earlier in the year, and the growth outlook had improved moderately. Gross Domestic Product (GDP) was expected to grow by 3% in 2010, by 3.5% in 2011 and by 4.4% by 2012. The macroeconomic forecast projected inflation to remain below 6% over the Medium Term Expenditure Framework (MTEF), and expected private investment and employment to recover gradually, and the current account deficit to widen as demand accelerated and inputs rose. The Committee was informed that there was an improved global outlook as emerging markets grew strongly. This was driven by strong growth in China, India and Germany, although recovery in other developed countries was still fragile due to problems with high unemployment, rising debt levels, deflation risk, bad debts and banking sector reform. The global environment was supporting high commodity prices and South Africa’s terms of trade. Prices of export commodities had increased more than import commodities, and strong growth in China and India supported demand commodities.

Mr Kganyago informed the Committee that the recession had caused a sharp decline in private and general government investment. As a result the investment ratio fell to 20.9% of GDP in the second quarter of 2010, compared to 22.5% in 2009. There was a gradual recovery in private investment expected as capacity utilisation rose and demand strengthened. The over valued rand exchange rate posed a risk to balanced and sustainable growth. In response to this, the National Treasury would put up financial and regulatory measures to moderate pressures on the rand. These would include efforts by National Treasury and the South African Reserve Bank (SARB) to purchase foreign exchange reserves. There would also be some amendments to exchange control and offshore investment limits on individuals. The Committee was informed that general government’s borrowing fell significantly, as fiscal stimulus was removed. The gradual decline was a result of a number of projects being shifted out over the MTEF. There was need for more value for money within public expenditure. Therefore, a dedicated technical support team would be established to address under spending in capital projects by departments, agencies and municipalities.

Mr Kganyago concluded his presentation by informing the Committee that the 2010/11 National Budget had been adjusted from R815.6 billion to R818 billion, representing an adjustment of R 2.4 billion. The adjustments were mainly due to roll-overs of R1.8 billion and personal remuneration increases of R6.2 billion.

Discussion
Dr D George (DA) asked if the plan to implement the youth wage subsidy had been shelved.

Mr Gordhan replied that the programme had not been shelved. There was a discussion document developed by the National Treasury and other departments that was currently going through the cluster process.

Dr George asked what programme was available for other entrants to the labour market, apart from youths.

Mr Gordhan replied that the National Treasury was making efforts to create jobs that would be available to all groups of people. This needed to be a bi-partisan agenda, open to any one with ideas.

Dr George asked if the details of the macroeconomic implications of the New Growth Path would be made available, as had earlier been stated.

Mr Gordhan replied that some of these implications were already contained in the Medium-Term Budget such as the measures to take a tighter monetary and fiscal approach, although some of these areas still required more work.

Dr George welcomed steps to eradicate corruption in the procurement process. He asked if any time frame had been set.

Mr Gordhan replied that the National Treasury understood that there was some scepticism about the anti-corruption move, with some people saying that they had heard such promises before. The anti-corruption campaign was part of a national project that needed to be supported by everyone.

Mr D Van Rooyen (ANC) asked if there was any guarantee that the interventions around the currency would yield results. He also asked what would be considered a comfortable level of foreign exchange reserves.

Mr Gordhan replied that there was no guarantee on the interventions around the currency and there was also no target as far as reserves were concerned. This would be done as and when National Treasury could afford to fund the Reserve Bank’s purchase of dollars and accumulation of reserves.

Mr Van Rooyen asked if transfers to municipalities on aspects of recreation and culture had been phased out.

Mr Nhlanhla Nene, Deputy Minister of Finance, replied that this was part of the Money Bills Amendment Procedure and Related Matters Act, which would be decided through Parliament.

Mr N Koornhof (COPE) asked if the National Treasury was considering reviewing the retirement age, as had been done in Europe.

The Minister replied that this had not been an issue in South Africa as public pension funds had been fairly managed.

Mr Koornhof asked if the R2 billion to be added to the land reform programme would be adequate.

Mr Kganyago replied that the money was meant for land reform policies being carried out after the land restitution programmes.

Mr Koornhof said that the Minister had stated on radio that there was an expected rate cut. He wondered how low South Africa could afford to go.

Mr Kganyago replied that adjustments were made in response to prevailing situations, and if the conditions changed, then a response would be made accordingly.

Mr M Makhubela (Limpopo, COPE) asked what remedial steps would be taken before economic recovery.

Mr Kganyago replied that these would be informed by the risks. There was an external risk, as growth was expected in China, and also the risk of a double dip recession. The new fiscal approach was meant to build a defence in case of a possible recession and also in case growth in China and India did not occur.

A Member asked if there was a time frame for the dedicated support team that was meant to curb incorrect expenditure.

Mr Gordhan replied that the dedicated support team would look at infrastructure spending. The Department of Public Service and Administration and the National Treasury would try to do more to assist provinces in this area.

A Member asked the views of the National Treasury on increasing revenue collection in provinces.

Mr Gordhan replied that the issue had not been given much attention, but needed to be looked into. The point was well taken.

Mr M Swart (DA) asked how funds would be allocated from the policy reserve.

The Minister replied that more clarity on how funds would be allocated from the policy reserve would be given in the 2011 budget.

Mr Swart asked what National Treasury’s stance was on using surplus for expenditure.

Mr Nene replied that this was always a policy contestation. What was seen as a primary surplus was what was there before debt service costs. Revenue needed to be above non interest expenditure.

Mr J Gunda (Northern Cape, ID) asked if the deregulation of the exchange rate would not make the economy vulnerable.

Mr Kganyago replied that the Treasury needed to have policy instruments for each target that it had set, as several targets could not be met with one policy. He said that it was not possible to “kill three birds with one stone” when dealing with monetary policy.

Dr P Rabie (DA) asked if there would be adequate money after the wage bill to retain infrastructure.

Mr Nene replied that this was a normal economic trade-off. Once resources were exceeded there was need to reprioritise.

Mr S Marais (DA) asked if there were other alternatives to meeting the job targets that had been set.

Mr Nene replied that growth at 7% would achieve five million jobs, if the labour absorption capacity was enhanced.

Mr Marais observed that South Africa’s GDP growth was lagging behind other emerging economies. He asked how South Africa could become more competitive against emerging markets.

Mr Kganyago replied that there was need for concern if South Africa was going below the average growth of emerging markets, and that was why the National Treasury had set an aspirational growth rate of 7%.

Mr A Lees (DA) asked how the government would deal with further salary increments, as the current increment had already resulted in inflation.

Mr Nene replied that the MTEF had partially addressed this issue. There was a need to strike a social compact. The National Treasury was committed to ensuring that the wage settlement was better handled in future.

Mr Lees asked on what basis the contingency reserve was being established.

Mr Nene replied that R22 billion had been reserved for three years over the MTEF period and this was reported with the contingency reserve.

Mr Lees asked what sterilisation of funds was and if National Treasury had any contingency liability.

Mr Lungisa Fuzile, Deputy Director General: Asset and Liability Management, National Treasury, replied that sterilisation of funds was done after reserves were purchased from the market, in order to ensure that there was a balance between goods available and money held.

Mr Lees asked if there was any intention to look at interest rates on income for pensioners.

Mr Oupa Magashula, Commissioner, South African Revenue Service, replied that there were a lot of tax options that were under consideration for the February 2011 budget, but it could not be stated, at the moment, whether tax on interest for pensioners was being considered.

Mr Lees asked how resources would be synchronized to align with the New Growth Path.

Mr Nene replied that the New Growth Path did not require new funding but did require reprioritisation in terms of service delivery agreements.

Mr Nene then thanked the Committee for the opportunity to interact, and the Committee expressed its thanks to National Treasury for the good work it was doing.

The meeting was adjourned.

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