Minister of Finance on the National Budget 2011

Meeting report

The Chairperson, Mr T Mufamadi, welcomed the Minister of Finance, the Deputy Minister of Finance, the Director-General of National Treasury, the Commissioner of South African Revenue Service, Chairperson of the FFC and other delegates from various Departments. He stressed that the meeting was a joint sitting of both Finance Committees from the National Assembly and the NCOP and there were chairpersons of Finance Committees from the provinces. The purpose of the joint sitting was to ensure all stakeholders in finance were represented so that the process of public hearings and internal committee debates were synchronised to manage time efficiently. He also introduced his co- chairperson Mr De Beer who was the Chairperson of the Select Committee on Finance (NCOP).

The Chairperson congratulated the Minister on behalf of the joint Committees for an eloquent presentation of the Budget yesterday both in terms of depth and detail. The Minister had managed to give flesh to the State of the Nation Address yesterday. The Committees would interact and engage with the Budget in terms of the Minister’s presentation that morning. He apologized for not welcoming the Chairperson of the FFC because it played a crucial role in making sure that there was an equitable distribution of resources between and amongst the spheres of government.

Minister of Finance on the 2011 National Budget
Mr Pravin Gordhan, Minister of Finance, greeted the Committees and thanked them for the opportunity to take them through the Budget again. The last thing they needed was too much detail in the presentation because they had already heard it yesterday but it would be good to refresh some of the elements of the Budget Speech. He would use the first slide of the presentation as a basis and the Director-General would guide the Committees through the rest of the slides.

He stated that the President’s 2011 State of the Nation Address mentioned that jobs was the focus of Government this year and the foreseeable future. South Africa should become a Development State not a Welfare State and people needed the dignity that came with jobs. The growth of the economy should be in an inclusive way in order for all South Africans to benefit in the outcomes of growth and development of the country. Treasury was trying to achieve that in the context pointed out in the Budget Speech yesterday. The world was going through an immense transition. It was changing in terms of west to east and east to south and south to west. There was a need to understand that those changes come with risk as well as opportunities and they tried to emphasise the opportunities more than the risks but they should be aware there were risks. As long as Europe could not sort out how it was going to pay sovereign debt, they constitute a risk not only to themselves but to the rest of the world as well. Each time one of those countries looked little bit doubtful in their ability to pay their debt, the markets would begin to get worried  and send all sorts of nervous impulses around the world. They had learned that South Africa was not immune from those impulses. Similarly the events in North Africa were having an impact on South Africa and the rest of the world and when the Minister checked that morning, the oil price had climbed to more than $111 a barrel. If that continued, it would have a great impact on South Africa and they had to calculate carefully and manage carefully in fiscal terms.

But they should focus on opportunities because the other parts of the world were growing multi-pluralities and if South Africans got their act together, if they could sort out not just the content of the growth path but the implementation thereof, if they could get a united effort between business, labour, civil society and government and get a common focus - which they needed to achieve - and spent most of the time on effective implementation, then they would be able to achieve those opportunities available to them. It would not happen in a neutral environment. The countries throughout the world including the emerging markets were competing with each other and each one of them needed to sell their products on the world market. They each believed that their products were better, cheaper and more acceptable than the next one and what South Africa needed to ask was how it was going to make its products better, cheaper and acceptable and be able to market them with more muscle ability because that is what exports mean at the end of the day. It was a highly competitive world out there but it was important to note the growth path within which the economy was framed. They should ask how they could create a competitive economy.

The budget on the expenditure side indicated clearly where the money was going, if they assembled all the numbers approximately R50 billion would go to job creation and training activities and skills development in the economy, and lot of the focus was directed at young people. Too much had been made about the youth wage subsidy and that was one idea for solving a massive problem in the country and there were more ideas of that nature. All sections of society should be able to say that that was their idea of how to tackle the problem. And the R9 billion jobs fund was there in order to provide Government part of the support whilst others come to the party in terms of how to tackle the problem. The key issue was to know where to find those ideas and how they could be generated and processed in a very constructive and concise way, and more importantly was how to put those ideas on the ground and get things going sooner rather than later. It was important to note in the presentation slide there many programmes that that were supported in the growth path, such as education, health, skills development and allocations to various departments to execute their programmes as well. Infrastructure investment also played a key part in terms of the long term growth path of the economy. It was also important how government used their fiscal resources, how much they put in infrastructure development, social services, in job creation initiatives and what percentages they used to pay public servants. How they put that package together was part of the balancing that was highlighted in document before the Committees.

In terms of managing the fiscal environment, the Minister stressed that it was true that the deficit projections were slightly higher than what they thought they would put on the table in terms of the Medium Term Budget Policy Statement. He assured Members that as the revenue picture improved as the economy began to grow, when it was on growth projection, it would be that projection which needed to be utilised and the momentum they needed to build on in order to sieze the opportunities that were internal and external to the country. The Committee had asked how they were going to get a sustainable fiscal path as government went forward. That was the beginning of that conversation in the document before the Committee and in the Budget Speech of yesterday which was saying: let government talk about the fiscal principles and fiscal guidelines and have a conversation within Parliament and outside it and in a period of time they should clarify the framework they would set, and that was the framework they were working with.  The key element was that South Africa was engaging with G20 in the growth plan league for fiscal consolidation. South Africa had not implemented any austerity measures which other parts of the world had implemented but they hoped they could, with the co-operation with other stakeholders whether political or civil society, pursue a fiscal path that would not require South Africa to implement austerity measures (as in Greece and other European countries). If one looked at those countries, they resembled the real signs of what could go wrong if South Africa did not do the right thing. Members could rest assured that the Ministry was on track and Government as whole was 100% behind the economic growth path. As they already told the Committee they could not guarantee there would not be another crisis. It was therefore very important to be prepared for a market crisis and make sure there was a slight surplus that would prevent such a crisis.

He concluded that there was a mixture of policies in the South African economy which should be implemented much more assertively in terms of micro-economic changes. These policies would make sure that South Africa maintained its micro-economic stability since there was a very shaky world at the moment because of food prices, oil prices and factors that could be very destructive going forward. South Africa needed policies that would build skills and research development within the economy. The challenge was to get quick consensus so that they could implement what they were talking and get the economy to move to a 7% growth path over a 20 year period.

National Treasury Director-General on the 2011 National Budget
Mr Lesetja Kganyango, Director-General: National Treasury, summarised the highlights of the Budget. They had seen the economy continuing to strengthen and recover. The GDP was expected to rise to 3.4% in 2011 and 4.4% by 2013. The recovery in revenue and moderate growth in public spending was forecast to lower the fiscal deficit from 5.3% of the GDP in 2011/12 to 3.8% by 2013/14, and government net debt stabilise at 40% of the GDP in 2013/14. The expenditure was forecast to rise by R94.1b relative to baseline over the MTEF. A total of R150 b would go toward job creation and skills development programmes and R800b to infrastructure investment in the next three years.

In terms of the macro-economic forecast, growth was expected to rise from 2.7% in 2010 to 3.4% in 2011 and 4.4% by 2013. Inflation would remain below 6% over the MTEF. Private investment and employment would gradually recover. The current account deficit would widen as demand accelerated and imports rose.

There was an improvement in the global outlook as emerging markets grow stronger. The strong global growth which had been driven by emerging markets and although there was a recovery in the developed markets that growth was still fragile. Growth in the developed markets was still fragile because it was driven by high unemployment rate, deflation risk, bad debts and banking sector reform. Inflation and overheating was the risk in the emerging markets.

The rising share of the emerging markets in global growth contributed to the rebalancing. China had become the second biggest economy in the world after the USA.

There was a robust and durable expansion in Sub-Saharan Africa and that was driven by the following factors: High commodity prices and strong Chinese demand; Infrastructure development and cheap global financing; Prudent micro-economic management; Young and growing population. This would be strengthened by boosting regional trade: DBSA plans to invest R3.9 billion to improve SADC infrastructure (energy and transport). There was also discussion of enlarging the regional free-trade area.

Strong commodity gains supported exports, but they also push up import costs and inflation. Oil price was above US$100 a barrel and also international foods were at a record highs. Prices of South Africa’s main export commodities remain high supported by strong demand in China. Higher food and oil prices would raise inflation. The CPI inflation was projected to rise gradually to an average of 4.9% in 2011. There was a rising contribution from food and petrol, the CPI food index was up at 2.4% month to month in January and the petrol price was also up at 11.6% since September 2010. The weaker rand would boost import prices because it was feeding itself in food and fuel.

In terms of investment there were tentative signs of investment recovery because the investment ratio fell to 20% in the third quarter of 2010 from a peak of 24.6% in the fourth quarter of 2008. There was low capacity utilisation and uncertainty that would deter investment but companies were starting to invest again especially in mining and transport. There was also gradual recovery expected as capacity utilisation rose and demand strengthened - supported by low interest rates. Delayed SOE investment was expected to come on stream later that would underpin investment going forward.

With the economy strengthening and recovering, there was a stabilisation of the labour market with jobs being created in the services sector. In the fourth quarter of 2010, 157 000 jobs had been created. There was also a gradual recovery in most sectors, and the bottoming out of job losses in manufacturing and construction which suggested a moderate improvement in the job market would occur during 2011.

The burden of unemployment fell on the younger generation. Youth unemployment was acute and more than half of 15-24 year olds were jobless. The employment of young people between the ages of 15 and 24 had declined by 22% or 355 000, over the last two years. That was 40% of all job losses in that period.

There would be a package of measures for job creation and skills development. There was investment in further education and training (FET) colleges; stepped up training for job seekers under the auspices of Sector Education and Training Authorities and the National Skills Fund; Expansion of public works programme activities, including community based projects and maintenance of roads and infrastructure; Renewed tax incentives for manufacturing investment; investment in housing and residential infrastructure and services. Most of those measures had been outlined in the Budget by the Minister.

There had been a moderation of rand strength since the MTBPS. The rand strengthened by 12% in 2010 but weakened by about 10% since December. There was also a moderation of capital inflows due to global factors, actually there were more capital outflows rather than inflows in South Africa in the last three quarters of last year. In terms of domestic policies, Treasury would continue to support the Reserve Bank in its purchases of reserves. What mattered in managing capital flows was not how much money had flowed in but what mattered was what the net position was because South African institutions were allowed to take money out that cancelled the impact on the South African Financial Market and that was done through exchange control reform. There would be an ongoing monitoring of measures to offset the impact of capital inflows on currencies internationally. Measures had been implemented since January 2010 to manage capital flows and reduce exchange rate appreciation. (A comparison of capital account management tools and objectives in 16 countries was provided on the presentation slide).

The Department had released proposals to safeguard the financial sector from future crisis and those were captured in a discussion document entitled “Safer Financial Sector to serve South Africa better”. Essentially what that paper proposed was the twin-peak model of regulation and a consolidation of prudential regulation in the South African Reserve Bank to ensure systemic stability and let the Financial Services Board focus on consumer protection and market conduct. There were other issues which were dealt with in that paper that included access to financial services.

Within the consolidated government fiscal framework, the consolidated government deficit was projected to recover from 5.3% of the GDP in 2010/11 to 3.8% by 2013/14. Improvements were driven by the recovery in revenue in line with the economy and there was also stabilisation in non-interest spending with an average annual real growth of 2.8% over the MTEF.

There were baseline additions of R94.1 billion over the MTEF. Compensation of employees would rise by 6.6% per annum and that was not the salary increase of public servants but rather a government increase. The real transfers to households had grown by 3.2% per annum, and real interest costs rose by 11.4% per annum which was the fastest area of growth. Payment of capital assets would rise by 5.3% on average over then MTEF.

Public sector spending on infrastructure was worth R808.6 billion over the MTEF and of that amount R392.6 billion (49%) of spending was by non-financial public enterprises. Provinces and municipalities would  remain the significant drivers of spending, and 82% of spending was for economic services such as power plant construction, transport network expansion, and sanitation and water infrastructure. The average spending on infrastructure was 8.4% of GDP over MTEF.

The Infrastructure programme brought home the importance of the development finance institutions and the strategic role they had to play in meeting government’s growth objectives. The asset base of the major DFIs amounted to R153 billion with a lending capacity R115 billion over the next three years. There were initiatives to create or enhance capacity. The Development Bank of South Africa (DBSA) callable capital would be increased to R20 billion, the IDC was directed to leverage up to R70 billion on their balance sheet, and recapitalising the Land Bank with R3.5 billion. The National Housing Financing Corporation (NHFC) was to borrow R500m from multi-lateral development agencies, and leveraging on infrastructure grants to reduce the risk of lending to municipalities that were credit risks. Further assistance would be subject to successful and effective implementation of the strategy to increase existing lending capacity. Leveraging DFIs would assist departments with the roll-out and implementation of capital expenditure projects, in particular in education and health. The creation of a DFI Council would enhance co-ordination, strategic guidance and monitoring of delivery by the DFIs.

There were slides dealing with public sector borrowing requirement and fiscal sustainability. Tax revenue estimates for 2010/11 were up R73.5 billion compared to 2009/10 (R24.35 billion above the 2010 Budget estimate but R7.0 billion below the 2010 MTBPS estimate). There was strong growth in value-added tax and custom duty revenues. There was a modest growth in personal income tax revenues. Corporate income tax revenues were lagging. The 2011 tax proposals were captured in the Budget Review document which was highlighted in yesterday’s Budget Speech.

Discussion
The Chairperson thanked the Minister and the Director-General for their presentation and asked members to engage with the presentation but they should take notice of the important reply by the Minister and the National Treasury to the question that was put forward to Treasury and captured in the Budget Review document from page 133 to 138. It was very important for members to look at that as well as the tax expenditure statement on page 136 which was the first time they had that information.

Dr Z Luyenge (ANC) thanked the Minister and the DG for an elaborate presentation of the budget and the fact that the budget was responding to the issues that were affecting the poor people in the country. These were well responded to in terms of information. There were two issues that he needed clarity on. Firstly the payment cycle by the departments with the perpetual non-payment of those service providers for services already rendered. The second issue was a call to the Minister: if they were in a country dominated by young people, the focus should be more on the development of those young people. But with the lack of sport and recreational facilities in the rural areas, he did not think they were responding properly to that aspect. If one took into consideration that the budget allocated to provincial sport, arts and culture department was so small even the levelling of the playing fields could not be done at that level. He suggested the location of the Municipality Infrastructure Grant was actually intended to create sport and recreational facilities and it was where the mandate of the sport’s department was.

Ms Z Dlamini-Dubazana (ANC) said that there were circumstances one could not change and one of them was ensuring the country had a competitive economy and good exchange rate. However, she strongly believed that South Africa had not utilised opportunities in terms of regional trade. She proposed that for departments to have effective processes and implementation, they had to submit their performance indicators before the money was allocated. The Committee would not be able to do proper oversight without these. Implementation without performance indicators would create an unbalanced fiscal environment.

Mr M Swart (DA) was concerned that the under-expenditure in the Expanded Public Works Programme (EPWP) was very serious in that it was in the region of R800m. He asked if there were any plans in place to make sure that the EPWP funds were spent and spent properly and jobs were created by the fund.

Mr D Van Rooyen (ANC) asked for clarity about the R800m that was budgeted for the green economy, what this would entail.

Mr Murray asked how the National Youth Development Agency (NYDA) would utilise over a billion rand over a period of three years for job creation. He also asked how they would achieve the million jobs envisaged by the Minister in his Budget because the current figures did not support that. He was also not sure of the Minister’s belief in a buy-in from the private sector about job creation.

Mr D George (DA) asked if the wage subsidy would be implemented since there seemed to be too much “discussion” on it. He also asked if the Minister was convinced that spending interventions were sufficient to generate economic growth to generate the revenue that would mitigate the need for tax increases - because if spending was done in the correct places to accelerate economic growth, they would not have that problem.

Mr N Koornhof (COPE) asked what could be done to shrink the state wage bill and was there anything that could be done in the provinces - because they were the big contributors to the expenditure.

The Chairperson stressed that the objective would be to get more operational people at the grassroots level to implement things.

Mr M Makhubela (COPE, Limpopo) asked if there was a strategy in place to get the co-operation of business people in managing and monitoring the Budget. He also asked if the Minister could guarantee that skills development would lead to people getting jobs.

Prof B Turok (ANC) asked Treasury not to borrow in general terms but rather to borrow for the real economy.

Mr Van Rooyen asked why there were no major infrastructure projects in the Free State. He asked about the capacity of revenue collection in the provinces especially in municipalities where the billing systems were not up to scratch.

Mr L Ramatlakane (COPE) asked about the timeframe in the regulation of banks. When would government engage in consultation on the options for National Health Insurance? Who was responsible for job creation among the youth, was it the Department or a cluster of departments that would holding it together.

Mr S Montshitsi (ANC) asked the Minister to clarify in terms of the investment ratio that had fallen by 20%, whether it was domestic or global factors that affected that fall. If it were caused by domestic factors, what was the percentage of SPI in the investment period of 2009/10. He asked how sustainable the social development grants were, whether there were innovative initiatives that the Department was embarking on to guarantee the sustainability of the grants.

Mr E Sogoni (ANC) asked for clarity in terms of getting people off dependence on a government social grant, whether there were any small business initiatives to make people self sustainable. He also asked whether the report on DFIs was available.

Responses
The Minister of Finance referred the question on sports facilities to Mr Brown but said that getting sport facilities going depended on the discretion of each province and not just on the money the national government passed on. Each province had the right to change its budget and align it in a particular way. It was their choice where they invested money, whether in sport facilities or not and in whatever area they thought would benefit young people, and build social cohesion at a local level.

On the question about the Department not utilizing trade opportunities in the region adequately, the Minister responded that that was the area the DTI and others were looking at. In the Southern African Customs Union (SACU) context, for example, they were talking about infrastructure development which would be more regionally based. Also the President was leading major north-south projects and in the African Union context as well. It was known that 10% of trade was happening on the African continent. The logistics infrastructure on the continent and the SADC region was not  the way it should have been and there were many reasons for that. They agreed that a lot needed to be done to promote trade between South Africa and other African countries.

In terms of implementation processes, the Minster said they hoped that the Ministry of Monitoring and Evaluation together with Treasury would get both financial and performance information. As that Ministry takes off, it would begin to gather that information transparently as to whom was delivering and who was not.

Both the chairpersons made a valid point that the Treasury could not account for other departments, it could explain what it knows but Parliament as whole needed to look at those performances, not just the indicators but the reports as well to see whether delivery was occurring at grassroots level because most of the Department’s policies were always at a policy level not at delivery level.

On the question of changing financial management, the Minister stated that financial management in the public service was a serious issue. In municipalities, disastrous appointments had been made and in provinces it varied - some were excellent some were not. Also in national departments it varied and SCOPA and the Auditor-General needed to look at that in an appropriate way. Sometimes one blamed the financial managers and management capacity for incorrect political reasons. Managers should not be blamed for poor or incorrect political decisions.

On the question of managing the wage subsidy for the youth, there was a paper that would go through government processes and there was a discussion and genuine concerns that employing youth in that kind of mechanism might displace existing workers and those were genuine concerns. There was a need to sit around the table and discuss those concerns and find a way that would prevent loss of employment. The intention there was not to replace existing workers but to complement them. Treasury could not come up with ideas that would lower the employment rate. They needed to work on that and find some solution.

On whether the EPWP programme was monitored efficiently and whether people on social grants were moved on to jobs, he thought that was the new phase they needed to move to was where there were both monitoring mechanisms with assistance mechanisms and transmission mechanisms which would ensure that people were moved from grants to jobs. That was the direction they would agree with.

On the question on taxation, the Minister said they were regularising matters on the tax side. It was stated in principle that fringe benefits should be taxed. Then they should try to enforce that principle on an even handed basis. What was happening in that environment in certain quarters was that employer contributions were quite substantial and there was no harmonisation across the system in terms of the deductable part. This was why they were saying the matter needed further discussion. The whole idea was to harmonise the system. If there were unintended consequences, they would deal with those as they moved along.

On the R800m for the green economy, he stated that work in some parts was already happening in various departments. For example, there was work going on in the Department of Environment, the Department of Water, the Department of Science and Technology and in the Department of Energy. There was a whole range of areas that were either actual or potential sites of development. They would see how they could assist members with information in that area.

On the question of how the NYDA would create jobs, the Minister said he did not know but what he did know was that they had presented proposals some of which had been accepted through the budgetary process and public officials would be able to give more information.

About the conflict between a focus on growth or the 5 million jobs, he stated that that was the story they had been telling since last year. That was the gap they wanted to fill, but if they continued to focus on growth they would not meet the employment targets they wanted. They needed to increase growth levels in the economy and they also needed to do extraordinary things that the growth path was suggesting through various departments. It was therefore their intention to grow the economy and also increase the number of jobs in order to reduce poverty in the South African population. They only needed to put the instruments together to enable them to do so and there were so many areas of the growth path, including agriculture.

In terms of support to the private sector, there was an incentive scheme, for example through the DTI which was one form of support and they were willing to look at other forms of support as well. There were various means through the budgetary system and different departments that supported the private sector in creating jobs. But the key was not what supported the private sector but whether current upward trend in private sector investment would be accelerated. How to create a climate of private sector investment in South Africa in order to grow the economy and that connected with Prof Turok’s point on real economy.

Mr Kenneth Brown (Deputy Director General: Inter-governmental Relations, National Treasury) said that on the question of EPWP, it was the second year that the grant was running. It was an incentive grant where the municipality first needed to implement its programme based on the EPWP. The second phase of the grant was picking up rapidly. On the question of infrastructure in Free State, Treasury was adding R3.5 billion to all provinces to manage infrastructure and the grant would be about R25 billion for the next three years. On revenue collection, the provinces depended on road transport revenue and that should be linked with road infrastructure.

Mr Andrew Donaldson (Deputy Director General: Public Finance, National Treasury) spoke on the census budget which was about R2.8 billion over the 3 to 4 years that it takes to plan, prepare, implement and finally analyse the census results. There was lot of work that was involved in preparing the census in streamlining the capacity to deal with rural areas. Their understanding was that it would be a more cost effective census and dealt with the logistical complexities of hiring several thousands of temporary workers during the census but also cooperating with municipalities who provide technical assistance in its implementation. It was a huge logistical operation but their understanding with Statistics SA was that they had enough money to hold a successful census.

The R15 billion allocated to FET Colleges was for a three year period. The colleges were still the responsibility of provinces and the funding was largely from the Department of Higher Education in the form of a conditional grant. The colleges were under a lot of pressure to increase their flow of students but the results so far were still poor because there was a high failure rate. There should be better partnerships between the colleges and industry particularly Sector Training and Education Authorities (SETAs) because that was were the money was located.

The Chairperson thanked the Minister and his delegation for their presentation and their responses.

The meeting was adjourned.