International Monetary Fund (IMF) on its Article IV Consultation findings; Taxation Laws Amendment Bill [B34-2012]; Tax Administration Laws Amendment Bill [B35-2012]: adoption

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Finance Standing Committee

06 November 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

IMF Article IV Consultation briefing
The International Monetary Fund (IMF) briefed Members on its Article IV Consultation in June 2012, the main points of which were discussed with the IMF board in August 2012. The IMF had agreed with National Treasury, the South African Reserve Bank, and other stakeholders in the Government, that labour and product market reform would be key to reduce high structural unemployment in South Africa. Even before the crisis, South Africa had a relatively high unemployment rate of about 20% or so. This increased during the crisis and still remained relatively high at over 25%. The IMF continued to believe that the high wages for some sectors of the economy contributed to some of the structural unemployment and prevented new entrants to the labor market from gaining active employment. There was a need to improve the competitiveness of the South African economy for the medium term, to reduce unemployment, to strive for more flexibility in the wage setting process, more flexible labour and product markets regulations to improve the business environment, and, where needed, active labour market policies to create employment opportunities for the young. The IMF thought South Africa's projected health care reforms desirable. South Africa and the IMF had agreed on the need to stress greater investments in infrastructure to remove bottlenecks and to support growth.

Over the past few months the global environment, which had deteriorated further, continued to be rather unkind to South Africa. The IMF's own October world economic outlook revised downward world economic growth from 3.5% (as announced in July 2012) to 3.3% for 2012. The impact of South Africa's strikes, the somewhat weaker fiscal position, as well as the continuing difficult situation in the global environment, strengthened the case for the IMF's policy advice in the 2012 Article IV Consultation Report. The main thrust of this policy advice was:
▪ maintain investor confidence in the SA economy through continual fiscal consolidation;
▪ contain growth in public sector wage bills in order to create space for infrastructure spending;
▪ rely increasingly on monetary policy to support economic recovery, if conditions in the global environment continued to deteriorate further; 
▪ continue the push for reforms in product and labour markets over the medium term.

The IMF delegation would be discussing all these issues with the National Treasury over the next week, also with the South African Reserve Bank, as well as with other stakeholders such as banks and representatives of the private sector in order to update the IMF's assessment of developments and prospects going forward.


Members found the IMF's briefing incisive and very informative. They interacted with the delegation on the impact of global recession on South Africa; infrastructure investment - should South Africa borrow to avoid further backlogs in its economy? Debt to GDP ratio and debt sustainability; credit ratings - did the IMF think that it would have been wise Standard and Poor and Moody's to have waited before changing their ratings? President Obama's re-election and the upcoming leadership change in China – would these have a positive effect on world economic recovery? Ideological constraints to implementing labour and product market reforms; capacity of state owned entities (SOEs) to implement infrastructure projects; South Africa's trade competitiveness and growth - what could South Africa do to boost its trade with the rest of the continent and become more competitive? Resistance to austerity measures – what lessons could be learned from Europe? Unsecured lending - was South Africa late in addressing this problem? Electricity, administered prices, and inflation-related increases in tariffs; and liberalisation of exchange controls - what would be the appropriate time-frame for full liberalisation?

The IMF's responses included lessons from Brazil, which, over the past 16 years, had undergone a very deep transformation. Previously it had very high structural unemployment, very high inflation, and very low investment. Now it had inflation of only 5%, a record low unemployment rate of around 5%, and a record low level of 'underground' jobs; now most of the labour force was in the formal sector. There had been a profound shift in the exports portfolio. Brazil had a highly credible fiscal and monetary framework, with fiscal discipline to not allow the debt to rise – in fact it came down. Secondly, there were purchases for capital projects which had helped Brazil to avoid supply bottlenecks; thus the country had fiscal targets, but some special budgets for capital projects. These projects included public-private partnerships. These kinds of projects could be exploited in South Africa. Thirdly there was a set of policies directed at very poor and marginalised citizens. Over the past ten years Brazil was able to remove from below the poverty line about 40 million people. The USA and Europe had been Brazil's main trading partners. Now the main trading partner was China.

The Chairperson said that there were political challenges, but as one attempted to fix certain problems, one must examine the sustainability of the new policies and be sure that they did not lead to greater instability. It was necessary to find a common ground in which everyone could participate. Unemployment, poverty and inequality were the key issues. It was necessary to find a balancing act to keep society together with a common objective. The Chairperson pointed out that the IMF had heard the views of the Committee, not party political positions.

The Committee adopted Taxation Laws Amendment Bill [B34-2012]. After final deliberations, it also adopted the Tax Administration Laws Amendment Bill [B35-2012]. In the final deliberations, it agreed to investigate the pros and cons of statutory legal privilege for tax practitioners, with a view to possible future amendment. It decided, by a majority, not to change the word 'must' to 'may' in Clause 15 (draft Bill) / Clause 23 (in the Bill as introduced) on provisional tax penalties. National Treasury and SARS' motivation for the provision was equity. The Senior Parliamentary Legal Adviser agreed with SARS and National Treasury. Moreover, the Constitution required public officials to be development-orientated in their approach. The Committee was satisfied with Clause 58 (draft Bill) / Clause 83 (in the Bill as introduced) as it was. A DA Member registered his objection. The Senior Parliamentary Legal Advisor said that the issue of professional standards for SARS officials was a separate issue – a human resources (HR) issue for Government. It was not a tax administration issue. The Committee reached agreement on 01 July 2012 as the implementation date for the registration of tax practitioners with a recognised controlling body. SARS clarified that this would be an amendment to the legislation, rather than a commitment from SARS to specify the new date in the regulations. The original wording of proposed Section 240 did not include a date. The Bill as introduced would have to be changed. It would be necessary to prepare a 'B Bill' and correct a few typographical errors. The Committee reported that it had agreed to the Bill with amendments.

Meeting report

International Monetary Fund (IMF) on its Article IV findings: oral briefing
Mr Calvin McDonald, IMF Mission Chief: South Africa, and Assistant Director/Division Chief in one of the two Southern African divisions in the African Department of the IMF, gave an oral briefing. He said that the 2012 Article IV Consultation had highlighted a number of points. He highlighted six or seven. Firstly, he noted the context in which the Article IV Consultation took place. The main context, of course, at the beginning of June, was a global slowdown which, in the IMF's view, delayed South Africa's recovery, which had started in the worst days of the crisis in 2008/09/10. Thus the global environment was still not very kind to South Africa. He would say more about current developments. This of course increased the risks for South Africa. However, the main conclusion at the time (the beginning of June) was that vulnerabilities in the South African economy remained relatively low, largely because the external debt of South Africa was moderate, and about half of it was rand denominated, and this reduced the exposure of South Africa to changes in global risk sentiment. In addition, South Africa has a very flexible exchange rate, which provided a natural buffer against external risk, and the IMF was very happy at that time (the beginning of June) to report that the banking and financial sector of South Africa was very resilient to the global economic crisis, and was adequately capitalised, and had sufficient cushions to absorb further external shocks. The second point was that the IMF had concluded at the time (the beginning of June) that South Africa's fiscal and monetary policies were appropriate in view of the slowdown and provided adequate stimulus in the face of weak external demand and what the IMF called a 'negative output gap' (meaning that South Africa's output was below its potential); the IMF also advised that, if things were to get worse, in the global economy, that monetary policies should play a more active role in continuing to combat the global economic downturn, given that the authorities had used up much of their fiscal space in the earlier phase of the crisis. The fiscal stance that the Minister of Finance had announced in his budget speech in February 2012, was, in the view of the IMF, appropriate, and the IMF felt that it would emphasise the re-building of buffers, and the need to re-balance spending away from a growing wage bill which one had observed in the early days of the crisis in 208/09/10, and towards a greater emphasis on capital and infrastructure spending.

The IMF had discussed with the authorities during that Article IV Consultation some of the key medium term policy challenges facing South Africa, and agreed at the time with National Treasury, the South African Reserve Bank, and other stakeholders in the Government, that, going forward, labour and product market reform would be key to reduce high structural unemployment in South Africa.

He did not have to point out that South Africa, even before the crisis, had a relatively high unemployment rate of about 20% or so. This increased during the crisis and still remains relatively high at over 25%. The IMF thus felt that over the medium term there needed to be greater emphasis on reducing the structural unemployment that existed even before the onset of the crisis. The IMF emphasised the need to address the very high margins that many firms 'make' in product markets, and the high wage settlements in the larger economy, which the IMF felt had resulted in uncompetitive cost of domestic production, and was threatening South Africa's external competitiveness. The IMF believed at the time, and continued to do so, that the high wages for some sectors of the economy contributed to some of the structural unemployment and prevented new entrants to the labor market from gaining active employment. The staff of the authorities therefore agreed on the need to improve the competitiveness of the South African economy for the medium term, to reduce unemployment, to strive for more flexibility in the wage setting process, more flexible labour and product markets regulations to improve the business environment, and, where needed, active labour market policies to create employment opportunities for the young. The IMF had also discussed with South Africa the need to have improved service delivery in health, and had discussed at great length the Government's plans to reform health care, which the IMF thought was desirable. The IMF had also discussed with South Africa the topic of social security reform. Finally, South Africa and the IMF had agreed on the need to stress greater investments in infrastructure to remove bottlenecks and to support growth. These were the main points that emerged from the Article IV Consultation in June 2012 and eventually discussed at the IMF executive board in August 2012.


Over the past few months the global environment continued to be rather unkind to South Africa. There had been a further deterioration in the global economic environment. The IMF's own October world economic outlook revised downward world economic growth from 3.5% (as announced in July 2012) to 3.3% for 2012. For 2013 the expected growth was revised downward from 3.9% to 3.6% compared to what was projected earlier in July. Conditions in the Euro area deteriorated further in the northern hemisphere's summer and there were renewed concerns about the viability of the Euro area. Outflows from many so-called peripheral countries in the Eurozone to the core countries of the Eurozone tended to increase 'sovereign spreads' on bonds in many of these countries. Also growth in the Euro area was actually revised downward by the IMF from an already low rate to barely growth for 2012/13. However, to the credit of the Europeans, the IMF felt that their policy response in some areas was relatively positive. For example, the Eurozone announced a Euro 100 billion programme with Spain to restructure banks. There had been ongoing work on a banking union and a single supervisory authority in the Eurozone area. Also the European Central Bank announced its plan to have outright purchases of bonds under the so-called European stability mechanism.

In other parts of the world, the United States, for example, whereas the second quarter growth was disappointing, the third quarter growth was somewhat better, and there were some signs of stabilisation in the housing market, but there were still major risks from the USA's economy unless the various branches of the USA's government could agree on how to improve the fiscal position.

In the emerging markets, there had been some tightening of policy, in China, Brazil, and in Turkey. Weak global demand had also affected growth in other parts of the world, such as China and India. Thus the global environment generally had not been as favourable as one would have wished for South Africa.

Added to that were the strikes in the mining and other sectors in South Africa itself. The result was an adverse effect on growth. The Minister of Finance had reflected this in his recent Medium Term Budget Policy Statement (MTBPS) on 25 October 2012. There had also been some downgrading of credit ratings by Standard and Poor, and by Moody's Investors Services, which had taken its toll on South Africa's international reputation, and had had some weakening effect on the rand, primarily because of a worsening growth outlook and some loss of confidence in terms of the ability to maintain the kind of fiscal policies that were needed out of the medium term for economic stability. The result was that the MTBPS expected lower revenues and higher fiscal deficits over the medium term. The Government, however, restated its commitment to try to reduce public debt over the medium term, as was originally intended in the budget announced in February 2012.

The IMF thought that these two major developments in the South African economy – the impact of the strikes, the somewhat weaker fiscal position, as well as the continuing difficult situation in the global environment, strengthened the case for the IMF's policy advice in the 2012 Article IV Consultation Report. (See relevant documents)

The main thrust of this policy advise was, firstly, to maintain investor confidence in the South African economy through continuous fiscal consolidation; secondly, to contain growth in public sector wage bills in order to create space for infrastructure spending; and, thirdly, to rely increasingly on monetary policy to support economic recovery, if conditions in the global environment continued to deteriorate further; and, fourthly, to continue the push for reforms in product and labour markets over the medium term.

South Africa clearly continued to be adversely affected by the global economy. In addition it faced some internal economic shocks. These two developments had certainly weakened the fiscal outlook, and created a greater urgency for Government action to restore and maintain investor confidence in the economy.

This was the delegation's first day of business in South Africa. It would be discussing all these issues with the National Treasury over the next week, also with the South African Reserve Bank, as well as with other stakeholders such as banks and representatives of the private sector in order to update the IMF's assessment of developments and prospects going forward.

Discussion
The Chairperson found Mr McDonald's summary very incisive and informative. He asked for Members' questions, and comments too, as it was not merely a session for questions and answers, but for interaction.

Impact of global recession on South Africa
Dr Z Luyenge (ANC) welcomed the IMF's comprehensive report. In the early phase of the global economic crisis, one had been told that the recession was not affecting South Africa as severely as it did many other countries. What was the IMF's view? Was South Africa now in a worse position than before? Did the IMF have particular suggestions for the future of South Africa's economy?

Infrastructure investment
Dr Luyenge asked if, as a response, the IMF would suggest going ahead with infrastructure investment, rather than postponing it. Should South Africa borrow to avoid further backlogs in its economy?

Debt to GDP ratio
Mr D Ross (DA) noted that to a certain extent South Africa was not in danger in terms of the debt to GDP ratio. However, that could change if South Africa began an infrastructure build programme. He hoped that the Committee would consider the spending on the wage bill and investments in terms of the social grants, and to see how one could balance that very delicate act.

Credit ratings
Mr N Koornhof (COPE) noted the downgrading of South Africa's credit ratings by two credit rating agencies (Standard and Poor, and Moody's) in October. One credit rating agency had opted to wait. In terms of its assessment, did the IMF think that it would have been wise for the first two agencies also to have waited before changing their ratings?

Mr D van Rooyen (ANC) also wanted to know if it the IMF thought it would have been wise for Standard and Poor, and Moody's to have waited before changing their ratings of South Africa downwards.

Regime changes
Mr Koornhof asked if, with the election of President Obama for a second term, and the forthcoming regime change in China, the IMF saw a positive effect on world economic recovery?

Ideological constraints to implementing labour and product market reforms
Mr T Harris (DA) saw little divergence between the views of the IMF and those of the National Treasury. There was also little difference from the views of the official opposition. However, there was clearly an ideological constraint to implementation. The IMF talked about active labour markets that could help in the short term, and labour and product market reforms. So did the Minister of Finance. Did the IMF agree that there were some constraints that prevented implementation of these, despite the National Treasury's best intentions? How did other emerging markets deal with these kinds of political constraints to the implementation of policies that were generally accepted as the right approach?

Capacity of state owned entities (SOEs) to implement
Mr Harris noted that the IMF's recommendation of shifting expenditure from the public sector wage bill towards spending on infrastructure was fine, but was confronted by another constraint in the South African economy. The Minister of Finance had referred to this in February 2012. The State Owned Entities (SOEs) had, in 2010, managed to spend only 60% of their infrastructure budgets. Would the IMF agree that this was a significant additional constraint - namely the capacity of SOEs to implement projects for which they had been allocated funds? How would the IMF recommend improving that capacity?

South Africa's trade competitiveness and growth
Mr Harris said that the policy reforms for the labour market were by far the most important, but the IMF also talked abut reforms to promote inclusive growth and social cohesion. In general, South Africa's growth was disappointing when compared with other emerging markets, including those elsewhere on the African continent. South Africa's major trading partner was Europe and had been affected significantly by its slow growth. However, it had to be asked why South Africa was dragged down by Europe's slow growth rather than buoyed up by Africa's growth, which was relatively strong compared to that of the rest of the world. The figure which perhaps explained the situation was that South Africa was only the tenth largest exporter to the rest of the African continent. Countries like the Netherlands and Spain exported more to Africa than did South Africa, even though South Africa was Africa's largest economy. This explained South Africa's relatively poor growth. What could South Africa do to boost its trade with the rest of the continent and become more competitive?

Resistance to austerity measures
Mr Harris said that there was a strong resistance to the austerity measures being introduced in Europe currently. Were there any lessons to be learned from this?

Unsecured lending
Mr Ross, with regard to monetary policy's playing a more active role, said that recently, South Africa had seen the development of unsecured lending. The Banking Association of South Africa had made some significant submissions. Was South Africa late in addressing this problem, and could it have done more to stop South African consumers going into a spiral of debt? The banks, he thought, were responsible for 91% of unsecured lending to South African consumers.

Infrastructure
Mr Ross added his concern on the 60% of SOEs budget for infrastructure that was not spent in 2010. This was the vehicle that could take South Africa out of its problems on infrastructure spending but there had been very little participation from the private sector. Since the 2010 World Soccer Cup no tenders had been issued to one of the biggest construction companies in South Africa. The proposed target was R4 trillion to be spent within 15 years and R844 billion within the next three years. Was the participation of the private sector something that the IMF could advance in its discussions? Also how would the proposed infrastructure spending be funded? He was concerned at the state of readiness of SOEs in terms of the fiscal space to embark on infrastructure spending.

Electricity and administered prices
Mr Ross said that electricity supply in South Africa was hugely problematic as to reserve margins and pricing. He believed that one should encourage more electricity to be sold rather than, as Eskom wanted, to use less electricity. He was not talking about the concept of saving electricity (using electricity efficiently) but the concept of selling more electricity to enhance economic growth and improve investments in the economy. However, there were pricing constraints. Currently consumers were paying in terms of the Eskom pricing formula of costs for the new build programme. This was reflected in the cost of replacement of assets. There was also a return for the investment to the SOEs of 8.1%. This was a kind of double taxation of investors in South Africa.

What were the IMF’s views on the global picture as to the administered prices? Should we not move to more inflation-related increases in administered prices? Currently Eskom warned that consumers could not expect inflation-related price increases until after 15 years. One accepted that Eskom worked on the model of cost-reflective prices but the model was highly inflated, and Eskom's formula needed to be questioned. Perhaps the IMF could discuss this issue with the South African Reserve Bank whose Governor had expressed considerable support for inflation-related increases in tariffs.

Liberalisation of exchange controls
Mr Ross welcomed the gradual liberalisation of exchange controls. However, what would be the appropriate time frame for full liberalisation?

Responses
Mr McDonald combined some of his responses as several questions overlapped.

South African exports and growth
From the very early days of the global slowdown, it was clear that there would be an impact on South Africa in terms of low growth, and lower exports. South Africa exported much to the European Union and in recent times its trade deficit continued to increase because of soft demand for many South African exports to the Eurozone area in particular, so there was obviously a trade channel effect. The IMF had discussed a number of issues related to the diversification of South Africa's trading relations. The National Treasury, and Government officials, had recognised that South Africa needed to export more to the rest of sub-Saharan Africa and to rely less on Europe as an export destination. The IMF had supported that point in its Article IV Consultation report. Also it noted that the Government was intent on strengthening trade relations in the Southern African Development Region (SADC). This further trade integration in Africa south of the Sahara would lead to much more diverse trade relations with the rest of the world. It would also be good for the rest of Africa in terms of increased opportunities to export to South Africa. Further trade integration would generally be positive for the continent. Already the IMF noted a rise in South African exports to the rest of Africa. This was a trend that was already taking place, but clearly more concerted action in this area could improve South Africa's growth prospects; this was already happening with the introduction of one stop border posts, for example, between South Africa and Mozambique. It was a case of replicating this in the rest of the region.

Competitiveness and growth
The IMF would continue discussing improving the competitiveness of the South African economy vis-a-vis the rest of the world. This was where the infrastructure investments came in. Many of the infrastructure investments could improve the external competitiveness of South African firms. However, the IMF shared concerns about implementation capacity as a constraint. There should certainly be greater efforts to involve the private sector if that was feasible to improve on the delivery of infrastructure services, and to improve on the implementation rate which, at 60% for 2010, was low. Obvious bottlenecks needed to be addressed over the medium term to address external competitiveness of South African firms and to improve South Africa's growth prospects.

Credit rating agencies
The IMF did not have an opinion on what credit rating agencies did per se, and was not in the business of 'second guessing' whether or not to issue a downgrade. The IMF had somewhat to respect its own judgment, as this was part of the global architecture in which one worked. The agencies made their own judgments, while the IMF had its own view. The agencies had issued the downgrades on the basis of their lack of confidence in the South African Government to deliver on its fiscal outcomes. Meanwhile, the IMF continued to support the South African Government in its efforts to deliver on those outcomes, and believed that it had the fiscal and monetary institutions to deliver on them and that it was the IMF's job to support that process. If the credit rating agencies thought otherwise, the IMF could not change that. However, if the Government could improve on its fiscal credibility, one hoped that the credit rating agencies would change their opinions.

President Obama's re-election, the fiscal cliff, and global prospects
One could only hope that the result of the election in the USA and the change in leadership in China would improve global prospects. Many were hopeful that President Obama, newly re-elected for a second term, would work with the new Congress to try to agree on future fiscal policies. The looming fiscal cliff, which would lead to automatic cuts in expenditure and increases in tax rates could be quite significant in terms of contraction of the United States' fiscal position, and this contraction could spill over into the rest of the global economy and lead to a greater slowdown. The IMF Managing Director had been saying over the weekend in Mexico at the Group of 20 countries (G20) meeting that this was one of the most important challenges that the global economy faced now. One was hopeful that one would not go over that fiscal cliff in the United States, but one would have to wait and see. A good outcome in the United States would be reassuring for the global economy.

Political constraints to difficult structural reforms
There were always winners and losers in any kind of structural reform of this type. The big questions was whether it could be done in such a way that the overall welfare of the economy increased, and with amelioration of the condition of those who might not get everything they wanted as a result of these reforms. The challenge was to do this in a way that was politically feasible. This was easier said than done. It was to be noted that South Africa had very high structural unemployment. With the possible exception of Brazil, It was not easy to find any examples where structural reforms as mentioned above had been carried out successfully.

Lessons from Brazil
Mr Roberto Perrelli, IMF Economist: Emerging Markets Division - Strategy, Policy, and Review Department, explained in detail. Over the past 16 years Brazil had undergone a very deep transformation. Previously it had very high structural unemployment, very high inflation, and very low investment. Now it had inflation of only 5%, record low unemployment rate of around 5%, and a record low level of 'underground' jobs. Now most of the labour force was in the formal sector. There had been a profound shift in the exports portfolio. Brazil had a highly credible fiscal and monetary framework, with fiscal discipline to not allow the debt to rise – in fact it came down. Secondly, there were purchases for capital projects which had helped Brazil to avoid supply bottlenecks; thus the country had fiscal targets, but some special budgets for capital projects. These projects included public-private partnerships. These kinds of projects could be exploited in South Africa. Thirdly there was a set of policies directed at the very poor and marginalised citizens. Over the past ten years Brazil was able to remove from below the poverty line about 40 million people. This was done mainly through conditional cash transfers, especially for the children so as to reduce child labour and allow children to go to school; through government programmes of retraining, to address the concern about 'the lost generation', whose members lacked the skills to participate in the modern economy; thirdly there were attempts to diversify external trade. Until the middle of the first decade of the present century, the USA and Europe were Brazil's main trading partners. Now the main trading partner was China. Brazil's reforms involved both the private and the public sectors. The situation now was better than two years ago, but the global crisis continued to have an effect.

Lessons on social security reforms
Mr McDonald said that this was also a very difficult area, and it was a challenge faced in the USA as well – how to improve on the solvency of social security benefits. There were obviously issues to do with the contribution rate in terms of sharing the burden between the employer and the government or private insurer and the employee. One could also consider the retirement age and the formula for determining contributions to make social security more affordable. However there were no easy fixes. In France the raising of the retirement age had been highly contentious. However, other countries had phased in changes over a period of time to cushion their impact. The IMF was willing to share these comparative experiences.

Higher inflation targets
The IMF had argued in the Article IV Consultation report that one of the benefits of inflation targets as followed by the South African Reserve Bank was that such targets had served their purpose well and improved on the credibility of monetary policies. The IMF did not see a need at present to raise the inflation target. The South African Reserve Bank had a band of targets in which it operated and this had served well.

Full liberalisation of exchange controls
The IMF in its Article IV Consultation did not advocate any acceleration towards full liberalisation of exchange controls. The South African Government had been doing it at its own pace. The IMF thought that this was to the benefit of South Africa and supported it, while seeing no urgency to move faster.

Investment, infrastructure, and electricity
Mr Jorge Ivan Canales-Kriljenko, IMF Senior Economist, responded that the IMF's view was that pricing should reflect cost recovery, including the cost of generation and investment in generating capacity. It was also important that electricity should be generated efficiently. The price of inefficiencies should not be passed onto the consumer. The IMF understood that South Africa had started from a very low base that did not allow for the investment that should have been made.

Consumer credit
The IMF and the World Bank had conducted an exercise a few years ago, to which there was a follow-up in 2010. The growth in unsecured lending, although high, was from a low base and was not systemic. There were measures being undertaken to address the risks. The IMF's view of the South African supervisory and regulatory framework was positive.

Follow-up discussion
Brazil's special budgets for capital projects
Mr Harris asked about Brazil's special budgets for capital projects. How would such an approach be reflected in South Africa's current fiscus?

Debt sustainability
Mr Harris said that South Africa's debt to GDP ratio rose over the three-year period of the MTEF. National Treasury spoke of this peaking at that point. However, Parliament had no figures beyond the MTEF's three years. Did the IMF have a view beyond that MTEF three-year period? Had National Treasury shared with the IMF any figures that it might have for the years beyond the current MTEF? Was there any assurance that the debt to GDP ratio would decrease after three years?

The Chairperson asked if South Africa, compared with other countries, was doing badly in its debt: GDP ratio or was still within manageable limits, or could do better.

External and domestic shocks to South Africa's economy
The Chairperson asked the IMF to focus on these critical areas, which related to labour productivity issues. In the last four years, particularly in Europe, the economic crisis had led to several changes of regime. However, despite those changes, the economic situation had not changed. It was not an ideological thrust that underpinned those changes. There was something more fundamental that needed to be addressed. Those who had come into power would have articulated a new vision, and a different economic model. However, once in power, they found themselves unable to do what they had intended. South Africa was not insulated from the rest of the world. Even if South Africa did everything right domestically, what would be the impact of external shocks on South Africa's domestic economy? Other than diversification of trade, what else did the IMF think ought to be done?

Finding a common ground
The Chairperson said that there were political challenges, but as one attempted to fix certain problems, one must examine the sustainability of the new policies and be sure that they did not lead to greater instability. It was necessary to find a common ground in which everyone could participate. Different sections of the society were affected differently by the current economic crisis. Of course, unemployment remained very high. Unemployment, poverty and inequality were the key issues. The response to these challenges, even internally, would not be the same. It was necessary to find a balancing act to keep society together with a common objective in dealing with the challenges.

Follow-up responses
Debt sustainability and external shocks
Mr McDonald felt that the Chairperson's comments were very insightful and went to the heart of what the IMF had been discussing. His point about the balance between the external shocks and domestic shocks was quite interesting. It was related somewhat to the Chairperson's first comment about the public debt ratio and whether one should be concerned about its absolute value in terms of how it compared with that of many countries in Europe that were now facing much higher public debt ratios, for example. The key point that the IMF had made in the Article IV Consultation, and with which he thought that the National Treasury agreed, was that one of the reasons why South Africa could respond relatively well to the global economic shock in the early years of the crisis, 2008/09/10 in particular, was because it started off with very low public debt. Before the crisis, the public debt ratio was under 30% of GDP. This meant that South Africa then had a good deal of fiscal space to respond to the external shock. South Africa had made use of that room in the early phases of the crisis by appropriately allowing a larger fiscal deficit. It allowed the debt ratio to rise, because it had the fiscal space to do so. Also South Africa was able to mitigate somewhat the impact of the external shock. It was true that South Africa could not do anything about external shock, except to make its economy more resilient. If it was affected mainly through trade channels it could try to diversity over the course of time, but it could also try to mitigate that impact by counter-cyclical fiscal and monetary policies. To the extent that South Africa had the fiscal space to do so, it was more likely to be successful. If a country was already at its debt limit, then it would be less likely to be able to do that. Even though South Africa might consider its current debt levels not to be very high, for investors who would finance this debt, it was very important for them to have confidence that South Africa had credible medium to long term fiscal policies that would restore or enhance South Africa's long term solvency. The higher the debt: GDP ratio, the more a country entered that gray area of weakening investor confidence that the country could recover afterwards and bring its debt levels down. The strategy that the South African Government had adopted in the budget, and with which the IMF had agreed, was that South Africa had, appropriately, used up much of its fiscal space early in the crisis, but now it was the time for consolidation over the medium term and bring that debt level down.

It was true that the horizon that was presented was only three years, and in that period one could not see the debt: GDP ratio coming down, but in the long term fiscal report that the National Treasury was planning to produce the expectation was that the debt: GDP ratio would in the long term come down. In the IMF's Article IV Consultation report, it could be seen that the IMF's projection was that it would come down outside of that three-year horizon period. The IMF had discussed this with the Government, whose overall strategy was to achieve that objective. This was the way to restore confidence in South Africa's long-term finances. It was in that context that the IMF believed that if there was any further deterioration in the global economic environment, South Africa would have to rely more on monetary policies because South Africa did not have much more fiscal space. If South Africa wanted to ensure that it had that fiscal space in the future, it would have to rebuild those buffers that it had, because those had served South Africa very well in 2008/09/10. Then when the next financial crisis hit, South Africa would have more flexibility to respond.

Infrastructure projects
Mr McDonald said that Mr Perrelli's example was specific to Brazil, and the fiscal system might be somewhat different there. The IMF had not discussed with the South African Government any special funds for capital projects. In the Brazilian case such special funds had served its government well in ensuring that capital projects were well-funded and implemented as planned. It was necessary to find a way in the South African fiscal system to do the same. However that was done, the critical thing was to address the underlying bottlenecks in terms of formulation, planning, and execution of the projects.

Dr Yibin Mu, IMF Senior Economist, said that 20 years ago China's unemployment was also very high. China had financed infrastructure projects by issuing infrastructure bonds.

The impact of the leadership change in China would be positive for the world economy. He explained the special characteristics of the leadership change in China. There was a tendency to slow down growth in an election year, to give the new leadership a low base from which to start and build its credibility. Also China's economic reforms had faced some new bottlenecks. For example, there were still many restrictions on labour market mobility, for example, restrictions on where a person could enroll his children in school. If the new leadership could ease these restrictions, the Chinese economy could experience new growth in the coming years.

Mr Ross found very interesting the alternative funding models mentioned by Mr Perrelli and by Dr Yibin, especially China's example of the infrastructure bonds. One acknowledged that Eskom had gone a long way with the Eskom bonds that it had issued. In terms of alternative funding, South Africa had made much progress.

Administered prices
Mr Ross noted, in terms of the National Development Plan (NDP), that there should be a specific section in terms of funding and pricing, to lessen the burden on the consumers in terms of taxes and tariffs. This was becoming a huge risk. Smaller businesses could not afford electricity and could not expand and create jobs.

Perhaps the Committee should make a submission to the Hon. Trevor Manual, Minister of Planning, to insert that section in the NDP on funding and pricing, and also suggest the Brazilian example of special budgets for infrastructure funding. A coherent approach was needed to funding infrastructure projects.

The Chairperson thanked the IMF delegation. He thought that the delegation had detected a slight gap between what the Executive did, and what Parliament knew. He thought that the Brazilian example of special budgets was perhaps what in South Africa might be called 'top slicing' – funding reserved for a particular infrastructure spend. It might be that South Africa did not have a problem of resources, but had a problem in terms of capacity and planning for implementation. He agreed with Dr Yibin in terms of what regime change meant. Change in leadership had always been accompanied by investor confidence, because every new leader came with a new plan. This was something that South Africa, as an emerging democracy, still had to perfect, so that it did not have the challenge of some uncertainty of investor confidence when there was the prospect of a change of leadership. There were a number of countries that had perfected that art, even in the African continent, for example, Mozambique and Botswana. China was a perfect example of managing transition in leadership.

The Chairperson pointed out that the IMF had heard the views of the Committee, not party political positions.

Taxation Laws Amendment Bill [B34-2012]: adoption
The Chairperson read the Committee's Report:

'The Standing Committee on Finance having considered and examined the Taxation Laws Amendment Bill [B34-2012], National Assembly, Section 77, referred to it and classified by the Joint Tagging Mechanism (JTM) as a Money Bill, reports that it has agreed to the Bill.'

The Committee adopted its report.

Tax Administration Laws Amendment Bill [B35-2012]: final deliberations and adoption
The Committee held its final deliberations on Tax Administration Laws Amendment Bill [B35-2012] and debated some amendments proposed by the DA. Some compromise was achieved.

Statutory legal privilege for tax practitioners
Mr Harris thought it wrong to defer the consideration of statutory legal privilege for tax practitioners to after a period of 18 months. He agreed with those who had submitted that they would like to see the chance taken now. There was merit in their request, and he proposed drafting an amendment to this effect.

Mr Koornhof was totally against statutory legal privilege for tax practitioners. It was highly inappropriate even to consider it at this time, without an opinion from the best legal experts available. It was highly contentious amongst the legal fraternity, not only in this country, which came from a Roman-Dutch legal background, but elsewhere.

Mr Van Rooyen agreed with Mr Koornhof. It would not be helpful to rush. He was more comfortable with SARS' view on statutory legal privilege for tax practitioners as supported by Mr Koornhof.

Mr Harris acknowledged the amount of work required, but suggested that the Committee should undertake that work as legislators. He would be willing to defer his suggested amendment, if the Committee would take on the project of investigating the pros and cons of statutory legal privilege for tax practitioners. He agreed with Mr Koornhof that the Committee needed experts to advise it, but the Committee should not simply leave the matter to the National Treasury.

The Chairperson saw little difficulty with Mr Harris' new proposal.

The Committee agreed.

Clause 15 (draft Bill) / Clause 23 (in the Bill as introduced) – provisional tax penalties
Mr Harris was not satisfied with SARS' responses around this Clause. He suggested leaving out the amendments and considering them carefully next year when perhaps the Committee could include them.

Mr Koornhof asked Mr Harris to be more specific.

Mr Harris said that if the amendments were removed, the tax administration laws would remain as they were.

Mr Tomasek said that it was Clause 23 in the Bill as introduced. There were several issues. The 20% automatic penalty was historically where South Africa came from. The present position was something that had been in place for only a few years. Also in this Clause was an amendment to ensure that where a taxpayer's employees tax and provisional tax met the taxpayer's liability, even if the taxpayer's estimate was understated, the taxpayer was not subject to the penalty. As it stood at the moment, one had the anomalous situation that if the taxpayer's estimate was wrong, but the taxpayer had paid the right amount of tax, the taxpayer was subject to the penalty. SARS had, generally speaking, waved the penalty, because there had been no prejudice, but it had to be asked why one should be in the space of imposing the penalty in the first place. This was one of the purposes of the amendment. The amendment in sub-clause (b) was to align the provisions of 'paragraph' 20 to the Tax Administration Act (No. 28 of 2011). What was currently sub-clause (c) then excluded the retirement lump sum withdrawal benefits and severance benefits from the provisional tax system because they were subject to their own separate schedule and should not therefore be part of the provisional tax system. What was currently sub-clause (d) was the one the changed the discretion of the Commissioner to remit to ensure that it covered both 'items' (a) and (b) in 'sub-paragraph' (1) of 'paragraph' 20. Thus there were three different things happening in this Clause. One was a pair of concessions. The other was a change to an automatic penalty. Then there was the related change to a discretion to remit the penalty if the taxpayer gave good grounds to the Commissioner.

Mr Harris' problem was only with 'the automatic imposition of the 20%', which several of those who had made submissions had flagged. Perhaps one could simply change the word 'must' to 'may' in Clause 15 (draft Bill) / Clause 23 (in the Bill as introduced) – provisional tax penalties, or even simply revert to the previous formulation, which used the word 'may' and then qualified it.

Mr Tomasek replied that, technically, that could be done. The reasoning for the proposal, as he had said on a previous occasion, was twofold. Firstly it put the people with incomes over R1 million in the same position as the people with incomes under R1 million. Also, the automatic penalty applied only if the taxpayer was outside a 20% margin of error. To use the word 'may' meant that SARS would have to treat all those taxpayers as exceptions to the rule, which applied to all the other taxpayers who were currently subject to the 'must'. Did the Committee wish to give that exception to those with incomes over R1 million or not? The proposal was that SARS should retain that exception for those with incomes over R1 million and not move them back to being subject to the general rule.

The Chairperson discouraged Mr Harris from elaborating his argument.

Mr Harris pointed out that the Commissioner still had the ability to impose the 20%. The question was whether it should be automatic or not. He had no problem with leaving it to the discretion of the Commissioner.

Mr Tomasek said that to use the word 'may' would introduce certain systems challenges for SARS as it would now have to treat the 120 000 taxpayers who found themselves in this situation as exceptions across the board. One was dealing with the subset of the 120 000 taxpayers who were outside the 20% margin for error. So there would have to be a fairly significant change to ensure that essentially what happened was that the opportunities for giving reasons for being outside the 20% margin for error were not given after the penalties were imposed but before the penalties were imposed. It was the timings of giving reasons for missing one's margin of error that was at issue, not whether there was a penalty or not.

Prof Keith Engel, National Treasury Chief Director: Legal Tax Design, explained that SARS' motivation was one of equity. It seemed unfair to put the higher income earners under lighter rules than the smaller tax payers. As a matter of equity, he favoured retaining the word 'must'. He favoured keeping the amendment as it was already.

Adv Jenkins agreed with Mr Tomasek and Prof Engel. Moreover, the Constitution required public officials to be development-orientated in their approach.

Mr Harris conceded defeat on this particular point.

Clause 58 (draft Bill)/ Clause 83 (in the Bill as introduced) which introduced Section 240A
Mr Harris said that there had been submissions that the required qualifications, experience and continuing professional education of tax practitioners be specific to tax. These submissions had merit. No one in the Committee had argued against including this focus. He wanted to include a provision to this end.

Mr Tomasek pointed out that if the legislation prescribed a minimum tax qualification there would be an issue with people who had relevant prior experience. Also there were composite bodies, where it might be difficult to distinguish the body's tax focus. He read the provision as currently drafted.

The Chairperson was satisfied with the provision as currently drafted.

The majority of Members agreed.

Mr Harris disagreed. He registered his objection.

Regulation of tax practitioners should apply also to SARS officials
Mr Harris thought that the regulation of tax practitioners should apply also to SARS officials.

Mr Tomasek pointed out that what SARS was aiming at was essentially consumer protection, and ensuring that they had an avenue through which to address their issues with practitioners. He explained in detail. The Tax Ombud was one of several prospective and existing mechanisms through which to address any issues with SARS and its officials.

Mr Harris disagreed.

The Chairperson asked Mr Harris to listen to what SARS was saying.

Mr Harris wanted the same minimum standards to apply to SARS officials.

Mr Koornhof asked if the State Attorney and National Prosecuting Authority could be taken as examples. Were legal practitioners in the service of the state regulated by the relevant professional associations?

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said that he could not be a member of the Bar while he worked for Government, because, employed in such a capacity, he lost his professional independence. So the question was, who was one's supervisor. The Bill was addressing regulation of tax practitioners in private practice. The issue of professional standards for SARS officials was a separate issue – a human resources (HR) issue for Government. It was not a tax administration issue.

Mr Koornhof was satisfied.

Mr Van Rooyen was comfortable.

Mr Tomasek thought that Adv Jenkins' view was an excellent summary.

Mr Harris maintained his position.

The Chairperson understood Mr Harris' reasoning but did not think it needed to be part of the amendment. It was a point of emphasis in terms of what SARS needed to do to ensure that it had the right human resources capacity.

Mr Van Rooyen wanted to separate the issues completely, to avoid insinuating that SARS was not doing its job.

The Chairperson agreed.

Implementation date
Mr Harris thought that 01 April was too early, and thought that 01 July should be afforded and stated in the commencement Clause rather than in the regulations.

The Chairperson asked why.

Mr Harris explained.

The Chairperson thought that realistic deadlines were necessary. It was also necessary to exercise some pressure. He gave the example of the introduction of credit card style driving licences. If any extensions beyond 01 April were required, SARS would be able to handle that.

Mr Koornhof could not see any harm in allowing 01 July as a date.

Mr Tomasek said that the Committee could determine a date later than 01 April if it thought necessary. Alternatively, the Minister's discretion could be extended to specify a later date if necessary. SARS thought that the 01 April was achievable, but the Committee must make its own decision.

Dr Luyenge agreed with the Chairperson on how South Africans responded to time-lines. He favoured 01 April.

Mr Ross thought that the views of those who had made submissions should be taken into account. Why not accept 01 July, as this was indicated in the Consultation process.

Mr Tomasek could not say more than he had. If the Committee wanted to give more time, it was for the Committee to decide.

The Chairperson favoured accommodating those who had argued for an implementation date of 01 July.

Mr Tomasek clarified that what the Committee had proposed was an amendment to the legislation, rather than a commitment from SARS to specify the new date in the regulations.

Mr E Mthethwa (ANC) suggested leaving the choice of date to the Minister.

Mr Tomasek said that 01 April had, as a result of the consultations, been inserted into the Bill as introduced, as otherwise the date of implementation would have been the date of promulgation. The original wording of Section 240 did not include a date. The Bill as introduced would have to be changed.

The Chairperson again proposed 01 July.

Members agreed.

Mr Tomasek said that it would be necessary to prepare a 'B Bill' and correct a few typographical errors.

The Chairperson read the Committee's Report:

'The Standing Committee on Finance having considered and examined the Tax Administration Laws Amendment Bill [B35-2012], National Assembly, Section 75, referred to it and classified by the Joint Tagging Mechanism (JTM) as a Section 75 Bill, reports that it has agreed to the Bill with amendments.'

The Committee adopted its report.

The meeting was adjourned.

Apologies
Ms J Tshabalala (ANC), who was writing examinations, and Ms Z Dlamini-Dubazana (ANC), who was attending a conference.

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