Minister of Finance on 2013 Medium Term Budget Policy Statement; Parliamentary Supply Chain regulations: Committee Report

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Finance Standing Committee

23 October 2013
Chairperson: Mr CJ de Beer (ANC, Northern Cape) and Mr T Mufamadi (ANC)
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Meeting Summary

The Minister of Finance and National Treasury officials briefed four committees (Joint Meeting of the Standing Committee on Finance, Standing Committee on Appropriations, Select Committee on Finance and Select Committee on Appropriations) on the 2013 Medium Term Budget Speech. The country was comfortable with the current levels of debt. The growth in the gross domestic product was not as fast as anticipated. It was felt that the private sector could be doing more. Government was looking to create jobs. The implementation of projects under the National Development Plan would stimulate the economy. Government would continue to fund skills development. Other expenditure would be curbed. There would be a gradual increase in the gross domestic product over the medium term. There would be a focus on the development of infrastructure. The biggest component of government spending was the compensation of employees.
 
Members posed several questions. The impact of cost cutting should not negatively impact local industry, and the Minister was urged to reconsider the extent on the ban on spending on alcohol for government functions as South African wines were ambassadors for the country. Members asked if the trimming of perks would also apply to retired Ministers. While efforts to curb government spending were commended, this had to be seen against a background of rampant corruption that was thought to far exceed the planned savings. The Minister was asked about the cohesion of the ruling alliance over the National Development Plan as labour organisations had rejected it. The effectiveness of internal audit was questioned.
 
Members criticised the speech as being light on policy. The correctness of economic forecasts was doubted. Other countries in similar circumstances were still managing to record higher growth levels. The contingency reserve had been drained. Members challenged the practice of including extraordinary receipts in the budget process. The effects of high administered prices were queried. Members expressed concern over the debt that would be passed on to future generations. Members asked how the equitable share formula was determined. While government policy was moving towards renewable energy, the country was still dependent on new coal-fired stations.
 
The Minister and National Treasury team responded that forecasts could not always be reliable. There was often bias in findings. Government was committed to implementing the National Development Plan.
 
The Standing and Select Committees on Finance adopted the Committee Report on the Draft Regulations on a Supply Chain Management System for Parliament. Opposition Members object strongly, claiming that the matter had not been properly debated while Members of the ruling party retorted that Members had walked out of the previous meeting where the report had been considered.
 

Meeting report

The Chairperson welcomed the Minister and Deputy-Minister, but stressed that time for the meeting was limited as Members had to return to the House later in the afternoon.
 
Presentation by National Treasury 
Minister of Finance, Pravin Gordhan, introduced the National Treasury (NT) presentation on the 2013 Medium Term Budget Policy Statement (MTBPS). A fiscal path was being followed to balance the requirements of support for the economy and recognising the fact that the private sector was not completely fulfilling its role in the economy. Government would still play an important role in job creation. On the other hand there was a commitment towards bringing the deficit down and sustaining debt levels over the longer term. The current level of debt was not a major concern, but growth was needed to counter this. The growth of the gross domestic product (GDP) had been 2.1%, and that was not enough.
 
Min Gordhan said that space was needed in the fiscal framework for more spending on the right areas, and not just on servicing debt. Provision also had to be made for the possibility of another economic crisis. Provision was also needed for the implementation of the National Development Plan (NDP) as this was the key to fostering growth. Government needed to work with the private sector and labour to stimulate growth and to develop a partnership between private and public sectors. Revenue had to be broadened and this would be done through economic growth. The sectors had to complement each other.
 
Min Gordhan said that there were various possibilities to achieve this. Finger-pointing had to end. A common purpose had to be developed if the country was to be taken on a different path. About 80% of employment came from the private sector. 70% of the economy was driven by the private sector. The relationship between private and public sector had to be balanced. This was crucial.
 
Min Gordhan said that skill development had to be addressed. Spending had to be sustained in this area. The various programmes had to be reinforced. The so-called double deficit needed to be considered. The flexible exchange rate provided a buffer against international events. There had been many engagements in the preceding months between developing and advanced economies. A message had to be given that it was an interconnected world, and the steps taken in bigger economies affected the smaller ones.
 
Min Gordhan said that there would be continued efforts to save money and to align expenditure to the NDP. Tough decisions would have to be taken where necessary.
 
Mr Lungisa Fuzile, National Treasury Director-General, said that growth in GDP would accelerate from 2.1 to 3.5% by the end of the Medium Term Expenditure Framework (MTEF). There would be growth in gross fixed capital formation. In household consumption, expenditure would initially slow to 2.5% in 2013 but would reach approximately 3% in 2014. Investment was needed.
 
Mr Fuzile said that global conditions were expected to contribute to the American situation normalising. The situation in the United States of America (USA) was normalising. If the risks associated with the debt ceiling were addressed the situation would improve. China was the second biggest economy, especially regarding the export of commodities.
 
Mr Fuzile explained that continued investment was needed in infrastructure. There were three principles which formed the fiscal stance. These were countercyclicability, debt sustainability and intergenerational fairness. NT supported the implementation of the NDP. NT continued to support the economy in trying times. The amount and extent of support had been considerably reduced. NT was mindful of the principle of debt sustainability. Debt levels could not be allowed to rise unchecked. On intergenerational fairness, it was important to ensure that debt was accumulated and serviced through borrowing. This would leave future generations with debt and no assets. Government's goals were moderate expenditure growth, stabilising debt and improving the impact of public spending.
 
Mr Fuzile added that the MTBPS set out a framework aimed at achieving growth of 2%, stabilising debt by 2016/17 and deriving the maximum value from every Rand spent.
 
Mr Fuzile continued that the main business of the MTBPS was the consolidated fiscal framework. The operating account had been set out. He referred to a table of revenue collected, which would rise from R998.9 billion in 2013 to R1.3 trillion by the end of the MTEF. The biggest expense was compensation for employees, expected to be R409 billion in the current financial year (FY). The current balance was expected to be 0% by next year, and that would lead to a current surplus. An important item was the budget balance, which was expected to be R144 billion or 4.2% of the GDP in the current FY. In February the projection had been 4.6%. The reporting system now included extraordinary payments, and this reduced the amount to be financed.
 
Mr Fuzile referred Members to slide 25 which depicted the division of revenue. It was significant for the Committee to see this. Three numbers stood out. Of the revenue of over R1 trillion, 47% would go to national government. This would service a whole range of national functions with security and justice cluster being one of the biggest. Social security grants had also increased. Provinces would receive 43.5% to cover mainly education and health functions. These were highly personnel intensive. This would cover inflation related increases for employees. The consumer price index +1% index had been exceeded. Local government would get a share of 9.1% Local government was largely self funded, with revenue from water and electricity supplies.
 
Mr Fuzile was not talking about grants which would incentivise planning. Rigorous compliance was needed.
 
Discussion 
The Chairperson advised Members that there would be a joint meeting the following day for the appropriation process. The question of unauthorised expenditure had to be addressed, and this had been mentioned in the MTBPS.
 
Mr N Koornhof (COPE) congratulated the Minister and his team. The media had headlines of a 'war on perks'. He supported the Minister in this measure. He was not happy with the ban on alcohol. This was a knee-jerk reaction. All purchases of imported products and hard liquor should be stopped, but to say that a state banquet or presidential guest house could be complete without South African wine was nonsensical. South African wines should be ambassadors at foreign missions. Some soft drinks cost as much as alcohol. Min Gordhan had let retired Ministers off the hook as they had very nice travel perks. On debt stabilising in 2016, the promise had been for 2014. He asked if there was any guarantee this would not be deferred further.
 
Mr S Swart (ACDP) also congratulated the Minister. He asked what was expected to be saved through the cost-cutting measures on perks in a climate of widespread corruption. Much more was being lost to corruption than could be saved. He asked what had been achieved regarding procurement. On implementing the NDP, which all parties supported but not certain trade unions, these unions would have to be brought on board to ensure cohesion. The new outer year of 2016/17 was aiming for a total loan debt of 43%. While this would be reduced, it was still R1.9 trillion in debt and should be a cause for concern. This was within the Southern African Development Community (SADC) target of 60% of GDP, but took money away from service delivery.
 
Mr M Swart (DA) said that a lot of money was being wasted due to ineffective internal audit functions. He asked what the status was of the chief procurement officer.
 
Mr N van Rooyen (ANC) said that there were several references to South Africa not relying on the global economy to drive domestic growth. The Minister had emphasised that the private sector was not yet fully on board, and asked for an explanation.
 
Mr T Harris (DA) had found it interesting that the Minister had said that there were options to work together to increase growth. The MTBPS was light on such proposals. This was normally an occasion to float new policies. He asked what the options would be. The second major problem was the growth issue. The debt consolidation forecast was contingent on the growth forecast of over 3%. He asked what was making NT believe that growth would increase. The forecast for the current year had been over 4% in 2011. Countries facing the same circumstances as South Africa were experiencing double the growth. Given these optimistic projections, he asked how the issue of debt could be tackled. The ruling party's coalition parties were opposed to the NDP, and the Minister needed to show his commitment. There were still barriers to trade, and this was why he believed that growth was again being overestimated and debt underestimated. The entire contingency reserve had been spent. He asked what would happen in the case of some unforeseen event before the new year. There had been a reliance on departments underspending by 3.5%. This was a bizarre situation. Without the contingency reserve and underspending the situation would be dire. Members had been caught off guard as the speech had not been distributed before the time. He welcomed the cost-cutting measures. Some of the big benefits might be from cutting the bail-outs to state owned enterprises (SOE). He was deeply concerned by the inclusion of extraordinary receipts. It was like selling off the family silver to balance the budget. His party supported privatisation as a way of deriving revenue, but selling off state assets should be used to clear debt rather than cover operating costs. He could not believe that this was the opinion of the International Monetary Fund (IMF).
 
Mr D Ross (DA) asked if a more effective implementation of infrastructure Bills would help the under-investment. Spending was only 7% as opposed to the planned 10% of GDP. On administered prices, especially the recent petrol price increases, he asked if the Min agreed that this was impacting on growth. Inflation levels were high. Containing these prices would help. Electricity prices had been brought under control. Other problem areas were piped gas. Future taxes would influence business. There were unintended consequences from the proposed carbon tax.
 
Ms J Tshabalala (ANC) said that the Minister had mentioned the growth targets not being achieved. She asked how the issue of debt could be stabilised. The new generation should not be inheriting debt. She asked when debt would be stabilised. If the deficit was increased, the country's credit rating might be degraded. On the carbon emissions tax and the renewable energy provisions, the thrust was still towards coal-powered power stations. Savings should be invested into job creation. Times were tough and government must curb spending, but household spending should also be curbed. She asked how the poor could be assisted in avoiding debt.
 
Ms Z Dlamini-Dubazana (ANC) thanked the Minister for his realistic forecasts. The country was in a comfortable zone at present. NT had assisted Members with the new format of including extraordinary payments. This showed Members how the budget balance was achieved. The balance of 4.2% should be applauded. It was difficult if one did not understand the economy. The equitable share was used to finance provincial health and education functions. The departments might not be performing because Statistics South Africa was not providing accurate information. She asked if the Minister could apply his mind to this. The equitable share formula (ESF) information was not accurate.
 
Mr A Lees (DA, KwaZulu-Natal) asked the DG for an explanation on how the figures of R5 and R5.9 billion had been arrived upon for bonds and revaluation. The amount for extraordinary receipts fell away rapidly in the following three years. The deficit would therefore grow, jumping from 4.3% due to IMF policy to 4.5% in 2014/15. The amount of extraordinary receipts was declining over the MTEF. The question of inter-generational debt was vexed. Many would argue that the current generation was making an undue contribution through funding for plants and excessive tariffs. Future benefits were being funded from the current fiscus. This would have a negative impact both on current and future generations, and the effect on the economy was depressing. While future generations should not be overly burdened, spending too much at present would depress the economy at present.
 
Min Gordhan noted the pleas regarding the wine industry. He was not aware of the perks for retired Ministers. There was no magic solution on the growth side. Macroeconomic stability was needed. There was a NDP in place with a number of projects in a number of sectors addressed. He rejected the scoring of cheap political points. Growth would be due to a combination of factors, including investment in the economy and the enablers being put in place. The more important issue was that all had to become growth focused. The bottom 40% of the population should be assisted. The poor were being ignored by the majority of the self-styled pundits. Such people should declare their interests. Not all commentators were neutral. There was a link between debt and growth management. Up to 2009, real growth and expenditure was 11.5%. This had been cut systematically. It was not possible to give guarantees about recessions. The question was whether the economy was resilient enough to withstand such shocks. The government would do what was necessary, and had not been shy to cut expenditure. It was incorrect to say that the contingency reserve was gone. This was being revived over the following three years.
 
Min Gordhan said that the it was not enough to dismiss the global economy as being a permanent influence over the South African economy. There were new investors coming into South Africa. It was time to experiment with many of the good proposals put forward. The new growth policies were in the NDP. The policies were not new, but now needed to be implemented. This was the best formula to achieve growth. Forecasts were just that. When the crisis had reached its height in 2009, there had been debate over the future of macroeconomics and forecasting. Forecasting was the process of taking a number of assumptions and anticipating a result.
 
Min Gordhan said that there had been a saving of R2 billion thanks to a clean-up of social grants being incorrectly paid. The implementation date of the cost-cutting measures would be 1 December.
 
Mr Fuzile said that the starting point for a budget was anticipating growth in the economy. The most useful debate was on believing in the growth focus. Not too many people focused three years ahead. Some people were more optimistic than others. It was a question of whether the anticipated figures came to pass. There was a lot of global and domestic volatility. The protracted mining strike could not have been anticipated. NT had a responsibility to be pragmatic in its forecasts. Every time a stance was taken on how much expenditure would be incurred it had to be realistic. Growth in expenditure was expected to be a third less than the growth in GDP. This revealed a more cautious attitude, Locking expenditure to a hard ceiling and reallocating priorities made budgeting tough. If circumstances changed, He believed that the net debt reaching 43% by 2014 would be the highest point.
 
Mr Fuzile said that the ESF was based both on census data and on administrative records. The education component would take records from schools ten days after they had opened so that changes of enrolment could determine allocations.
 
The Chairperson said that NT had been asked if there was an accounting method for the spending of the ESF.
 
Mr Nhlanhla Nene, Deputy Minister of Finance, said the Member had not bothered to look at the MTBPS speech as he had already prepared his comments. He presumed that other Members had taken the trouble to read the speech. The Minister had addressed implementing the NDP. There was a long list of verifiable issues. The NDP might have been delayed but it was well on the way. He listed a number of initiatives including tax incentives and regional projects related to the NDP. All strategic plans were aligned to the NDP. On renewable energy and the use of coal, this was a matter to be addressed. A balance was needed between an abundant resource like coal and meeting environmental restrictions.
 
Mr Kenneth Brown, Head: Intergovernmental Relations, NT, had been appointed recently. There had only been two Chief Directors at the time, but there would now be six. The entire micro-structure was now in place but some posts still had to be filled. One Chief Directorate was already undertaking work on a price referencing system.
 
Mr Andrew Donaldson, Head: Public Finances, NT, wished it was true that prices could be passed on to future generations. The savings rate was too low and this prevented investment. The long term price path for electricity was upwards for the next 20 years. It had started low because of huge subsidies in the 1980s. The taxpayer had been forced to bail out the Reserve Bank. Eskom was still heavily reliant on debt. Regarding oil, there were market-determined prices. Administrative prices were only a portion of the price. There was still considerable under-recovery for the Road Accident Fund. Historic cost pricing had been applied for costing for raw water tariffs, and this would have to b adjusted. Benefits were not being passed to future generations.
 
Mr Matthew Simmonds, Head: Budget Office, NT, said that the contingency reserve was being dealt with as in the past. The fund had been allocated in full in the past. The Public Finances Management Act (PFMA) made provision for emergency allocations and there were reserves at provincial level. The issue of the fiscal framework was more complicated. There were a number of important macro-economic factors. There was a need for openness and accountability. The framework was therefore presented in two blocks. The first was an operational block. The fiscus should meet spending from revenue. The second block was for investment. The decision to include financial transactions was an attempt to improve transparency. Should the situation arise, the opportunity for citizens and Parliament to engage on the decisions proposed would be enhanced by bringing the transactions above the line. NT would continue to provide the details. Revenues were the result of changes in the exchange rate.
 
Min Gordhan said that taxes were not normally revealed before the budget speech. There was a lot of campaigning happening, but these people were not willing to make commitments on climate change and reduce emissions. The country had committed itself to reducing emissions. The sectors must bring positive alternatives in order to reduce emissions. The fiscal situation had been clarified considerably. The agencies would take note of this. Some were saying that it was just a matter of negative news flow. The dialogue should rather be about how the country was being placed on the road to recovery. Elections were forthcoming and there were temptations to spread bad news in order to make political gain. The once- in-70 year recession was being dealt with. NT had proposals to reduce the indebtedness of households. There were many nasty practices which the Committee could interrogate. Garnishee orders had a negative impact on resource-less people.
 
The Chairperson announced that there would be public hearings later in the month on the MTBPS. Members had to go out to their constituencies to explain the NDP. There were still matters to be dealt with on supply chain management.
 
Committee Report on Parliament's Supply Chain Management System Draft Regulations
 While Members of the Select and Standing Committees on Appropriations withdrew, the Standing and Select Committees on Finance continued with the meeting.
 
The Chairperson asked if there was a mover and seconder for the report on the Draft Regulations on a Supply Chain Management System.
 
Mr Lees was not prepared to move or adopt the report . There were significant issues to be addressed wished he table.
 
Mr Mufamadi assumed the Chair for this discussion. He said that the debate had been exhausted, and no more discussion would be tolerated.
 
Ms Dlamini-Dubazana moved that the report be adopted.
 
Mr Harris said that a seconder could not be called for before Members had expressed their opinion. Members had been asked to put questions to the law advisers. There had been no deliberations on many clauses. The regulations had not been considered. The debate had not been completed.
 
Mr van Rooyen seconded the adoption of the report.
 
Mr Ross had great concern that expert opinion was needed. Procurement was an important issue.
 
Mr van Rooyen said that there had been an opportunity to debate the issue at the previous meeting but Members had walked out. The meeting should be adjourned.
 
Mr Ross requested that the objections of the DA be noted.
 
Mr Harris said that due process was not being followed.
 
The Chairperson said that the objection was noted but would not allow further discussion.
 
The meeting was adjourned.
 

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