2014 Budget: Minister of Finance & National Treasury briefing

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Finance Standing Committee

27 February 2014
Chairperson: Mr C de Beer (ANC, Northern Cape), Mr T Mufamadi (ANC)
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Meeting Summary

Mr Pravin Gordhan, Minister of Finance, said that this budget ended the speculation whether South Africa was implementing the National Development Plan (NDP). He said that notable aspects were the cost containment measures and expenditure and fiscal ceilings. He maintained that the “financial ship” was stable and running well. Notwithstanding the financial constraints, the social wage was being supported at 57% of consolidated expenditure, and there were several support mechanisms in place, particularly for small business. The economy, however, still needed to transform, with increased efforts necessary to ensure black participation, increase entrepreneurship and competition, and make the economy agile enough to seize opportunities. Over the next three to five years, the building blocks laid down by this budget should result in better and sustained growth, more job creation and more opportunities to move out of poverty and reduce inequality. This introduction was followed by a brief summary by the Director General of National Treasury on what the slide presentation contained, although none of the slides were actually presented in detail. He emphasised that the slides illustrated the global context, including recovery, but increased volatility since an announcement of tapering in the US. It was believed that the South African growth would accelerate by the third year of the Medium Term Expenditure Framework. There was an emphasis on adherence to inter-generational fairness and sustainability. Growth was estimated at around 2%, but there would be fiscal consolidation. Tax proposals aimed at giving relief to individuals whilst also helping to support business, with specific incentives in some areas. The recommendations of the Financial and Fiscal Commission had been taken into account. One important area in relation to grants was increased use of indirect grants.

Members all expressed their appreciation to the Minister and his Deputy on a sound budget. Questions were asked on whether the amounts budgeted for land restitution were sufficient, in view of the passing of the Land Restitution Amendment Act, whether the National Development Plan could be implemented despite there not being 5% growth as was assumed previously, and the peaking of debt at 44% of Gross Domestic Product. Members supported the cost containment measures but asked how they would be achieved, including curtailment of the public sector wage bill and State Owned Companies, and what might be the consequences should departments fail to comply. Questions were also asked about solar water heater rollout and maintenance, unemployment figures, whether jobs created were sustainable, whether thought was given to privatization of state assets, global turbulence, how National Treasury was taking leadership in regard to municipalities, as well as municipal debt, and clarity on retirement reform and when the new tax legislation could be expected. Members wanted to know more about the borrowing position, debated whether incentives were positive, asked which sectors had been keen to take up with youth tax incentive, and how it was being communicated. They said that government must pay careful attention to social grants and cooperative empowerment. Concerns were expressed over transfer pricing, and how Treasury would address it, political economic issues, cash balances held by public entities, protracted labour disputes, stability in municipalities, and securitization by the banking industry. 

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed the Minister and Deputy Minister of Finance and a team from National Treasury (NT). He congratulated the Minister on a fine budget. He commented that in January the Minister had led a team to the World Economic Forum, to put South Africa’s case, and the message that the country had a plan was very important. Yesterday the allocation of funds to that plan was seen. It was the responsibility of all MPs to explain to the people how the plan and the budget fitted together, to take matters further.

2014 Budget: Minister of Finance briefing
Mr Pravin Gordhan, Minister of Finance, said that he wanted to make six points to introduce the budget. This budget ended speculation about whether the country was implementing the National Development Plan (NDP) – as seen in the budget and recognised by what had been done. Secondly, the budget noted the continuation of the cost containment measures and expenditure and fiscal ceilings. Thirdly, the “financial ship” was stable and running well and there was no need for concern. The fourth important aspect was that, notwithstanding the financial constraints, the social wage was being supported at 57% of consolidated expenditure, and there were several support mechanisms in place, particularly for small business. The fifth point was that the economy needed to transform. Black participation was still too limited and needed to increase, and that meant the need to ramp up efforts to increase entrepreneurship and competition and make the economy more agile, to seize opportunities. Lastly, this budget laid the foundation to the next three to five years. Many different building blocks had been laid down and there was a need for better and sustained growth, more job creation and more opportunities to move out of poverty and reduce inequality. Whether it could be achieved depended on actors working effectively to achieve the aims. He pointed out that the budget contained many numbers to support the narrative.

Mr Lungisa Fuzile, Director General, National Treasury, did not present the slides (see attached presentation) in any detail but briefly indicated to Members what they outlined and what they supported. Slide 2 set the scene, with figures. The next few slides touched on the issue of the global setting within which the budget was framed, which showed a picture of a global economy that was recovering and doing better than it had done in the past. Slide 5 indicated the volatility since the announcements of tapering in the US. Slides 6 to 9 focused on the South African economy, and why it was believed that the figures would accelerate by the third year of the Medium Term Expenditure Framework, as well as how it was achieved.

He noted that slide 10 indicated how, moving from the focus from growth and revenues, the fiscus was likely to look over the next few years. The implications of slide 10 restated the principles already known around adherence to inter-generational fairness and sustainability. Slide 12 showed that growth rates were adjusted for inflation but also were in double figures at one point, but it was estimated that the rate should be around 2%. Slide 13 set out the consolidated fiscal framework and it was important to concentrate on the budget balance, which would be R153 billion in 2014, but dropped to 2.8% of GDP by the third year, which was a good story about fiscal consolidation, although the final analysis would depend on how things performed. He skipped over the next few slides, saying that they gave different ways of how the fiscal framework appeared. Slide 18 showed how South Africa would be financed and set out in summary the different instruments through which money could be raised, from Treasury bills to domestic long term loans. Slide 19 also went into more detail about bonds, but he said only that it showed the yield curve, and explained that in April 2013 the cost of borrowing was 200 basis points lower than in January 2020, showing that the cost of borrowing was rising.

Tax proposals were set out in slides 22 to 25 and these were summarised as giving relief to individuals whilst also helping to support business. Firstly, there would an assurance that the levels of turnover at which a person first began to pay tax was raised, so that it was easier for taxpayers to comply whilst also paying less tax. There was a move to specific incentives that amounted to tax expenditures, as set out in slide 23.

He concluded that the next set of slides looked at the Division of Revenue Bill (DoRB) and that would be discussed thoroughly in the House, so there was no need to deal with that comprehensive legislation now. The Minister of Finance and government had taken into account the recommendations by the Financial and Fiscal Commission (FFC), working out the formulae in detail, so that anyone, from anywhere, could access all the data and apply it to arrive at the allocations, and this would help people also in re-calculating if they so wished.

In relation to slide 31, he wanted to emphasise that there was an indication of increased use of indirect grants. Instead of these grants being appropriated through the Division of Revenue Bill, they were reflected on the national departments’ votes, who would be responsible for building infrastructure and then handing over that infrastructure to the relevant province or municipality, which would reflect it as part of the assets.

Mr Fuzile said that this was a very brief summary of the presentation.

Chairperson de Beer noted the presence of Chairpersons of Provincial Legislature committees dealing with finance from the Eastern Cape, Northern Cape, Free State, North West and Limpopo. He noted that the Division of Revenue Bill captured what municipalities were to get, so they were able to start planning now and the major issue for this coming financial year was about municipal planning.

Mr M Swart (DA) said that in this week the Land Restitution Amendment Act, alluded to in the Budget Speech, had been approved. In the Medium Term Expenditure Framework (MTEF) for the 2013/14 financial year, an amount of R2.9 billion for land restitution had been shown. However, this budget showed a figure of R2.6 billion only. He noted that now that the Land Restitution Act had been approved, there were suggestions that up to R169 billion would be needed for implementation, and he therefore questioned if this year’s figure should not be substantially higher.

Mr Lungisa Fuzile, Director General, National Treasury, noted that of course land restitution as a process had been implemented now for several years, so the government was better aware of what was required to implement it properly, and the process to go through, and that translated into what would be needed as cash outflow, and exchange and change of ownership. The allocations were not imposed by the NT on the Department of Rural Development and Land reform, but had been agreed upon after careful consideration, and with an understanding of the pending changes to be brought about by the Amendment Act before the end of the MTEF. There was an appreciation of the time taken between lodgment, settlement and payment, and it was also necessary to understand that whilst these were the figures for the moment, the situation was being carefully monitored, and if matters changed or the speed of processing increased, this figure might need to be weighed up against other priorities and changed. The re-examination of allocations would be done. NT obviously did not want to put money to a project in a year when it was not sure that the money could be spent, so it was also setting the figures with due consideration to avoiding under-expenditure and inefficient management of state resources.

Mr R Lees (DA, KwaZulu Natal) thought that the National Development Plan (NDP) had been predicated on 5% growth in the country (but he asked to be corrected if that was not so) and wondered about the forecast of 2%.

The Minister responded that NT had been frank on the issue and had not attempted to hide behind the numbers. NT would tell the country if it was in trouble. Equally, it would tell the country if it was impossible to match the numbers. He agreed that there was a gap between what was predicted initially and what was the case now, but the country could not afford to feel paralysed by that and had to get down to business, and implement matters that would result in strong commitments and results.

Mr Lees raised questions about the debt. Last year, it was expected that this would peak out at 40% of Gross Domestic Product. In the outer year, there was an indication that it would now peak out at 44%. He said that this seemed to be a moving target and asked whether the Minister was certain that this would be achieved.

Mr Fuzile said that there were in fact no targets set for the debt, but rather it was seen as an outcome from a series of decisions that would be made to ensure that any amount of debt was sustainable for the country. This spoke to the issue of growth. GDP would in fact grow if the denominators were favourable. He summarised that these would include whether the GDP growth forecast was achieved as hoped, and if the country attended to the various matters set out in the NDP (some of which the Minister had covered in his speech), and if the country managed to unlock constraints imposed by inadequacy of energy generation, regulatory impediments to growth, such as streamlining approvals relating to mining licences, or water licences, and cutting the time taken to approve applications in order that operations to sink shafts could be commenced sooner. Larger revenues meant less borrowing, and the numerators would be smaller. The NT was confident that the country could translate its plans into actions.

Mr Lees agreed with the cost containment measures and said a very clear indication of commitments had already been given by National Treasury (NT).  His main concern was how to measure the cost containment and what exactly NT would say; whilst it was very important to send out the message there was no precise indication of how much would be saved, how it would be measured and the consequences if the cost containment measures were not implemented.

Mr N Koornhof (COPE) congratulated NT and the Minister on the budget. However, he felt that the state wage bill was problematic at 39%, and he asked how realistic were the Minister’s hopes to contain it and to get support of the unions for the next round of negotiations around a 6.4% increase.

Mr C van Rooyen (ANC, Chairperson of Free State Provincial Committee) asked how the cost containment measures would be enforced in the provinces and the public entities, where there was much waste at present.

The Minister responded that the first three year round on cost-containment would end this year, and there would then be a new round of negotiations. The public sector workers were a vital part of delivery of the National Development Plan (NDP) goals. The Department of Public Service and Administration was primarily responsible for the public sector affairs and it was hoped to have constructive engagements.

Mr Nhlanhla Nene, Deputy Minister of Finance, also touched on areas of cost containment. Page 35 of the budget review set out a much fuller story. One of the incorrect assumptions was that because of cost containment, certain things would not be done, but this was an incorrect assumption because in fact it was necessary simply to find a most cost-effective way of doing the same things. The containment was really about getting those responsible for spending to consider how they would spend the money if it was their own, and whether “they would die” if certain purchases were not made. NT had isolated certain areas already where it was easy to make changes, and this had been done. The NT was working with the department of Performance Monitoring and Evaluation (DPME) to do reviews and that report would be brought before the Committee. In addition, cost containment was important within the State Owned Companies, all of whom reported to Parliament, and the NT expected that Parliament would engage with those companies rigorously and ensure that proper oversight was done over spending.

Mr Lees said that there had been a budget of R4.7 billion for rolling out one million solar water heaters (SWHs), and in his province the project had started well, but wanted to know, overall, whether the budget was used, and whether the SWHs had been installed. In his own constituency, heavy hailstorms had resulted in several panels being smashed, and there seemed to be no way of reinstating them. He wondered what budget provision there had been for maintenance and repair.

Mr Simmonds, National Treasury, said that SWHs remained a significant programme to bring water to local households. There was about R3 billion allocated, which the Estimates of National Expenditure would talk to, and it remained a policy of the programme that 70% of the SWHs were to be manufactured locally. To date there was R1 billion rand invested, with 420 000 units expected to be installed by the end of the financial year.

Mr D Ross (DA) thanked the Minister and said that he was concerned about the unemployment figures, currently at 35% if the disillusioned workers were also considered. He appreciated the comment about the need to run a stable fiscal ship, but the constraints were huge and he noted that 1.9% growth in South Africa, compared to 6% growth on the Continent, seemed to put South Africa in a weak position and it faced several challenges around decent employment and creating jobs. Quite apart from that, there were twin deficit budgets still to contain. He believed that the reduction of debt from 4.2% to 4% was a step in the right direction, and somehow the economy had to be kick-started to get on track to create jobs. The deficit in the current account was problematic, because there were not enough exports.

Mr Ross believed that there was a need to “think out of the box”. An economist quoted this morning had suggested that the fiscal constraints would not get worse, and Mr Ross questioned if there had been any consideration to perhaps privatising some state assets and pointed out that the Independent Systems Market Operator Bill had opened up the market to independent market producers. He said that whilst the NT solutions on the cost of borrowing and methodology were innovative, there was perhaps more innovation needed to address growth. His colleague had mentioned the percentage (40%) of debt in relation to GDP – which had risen. His question on that related to the new global turbulence – an interesting remark and self-justifying. South Africa needed the developed world for trade relations, and he would like to hear some comment on the current account links to turbulence. He wanted to know  how much “fiscal space” South Africa had to address the challenges.

The Minister said that each political party worked within different paradigms and contexts and should not be “held hostage” by any situation. The challenges were faced by everyone, and everyone in government would be approached to put forward different views for consideration. He believed that government was “doing an honest day’s work” and it would continue to hold its line. There was no magic formula for unemployment. Within the State’s capability, it must offer what it could in terms of training, apprenticeships, first opportunities for job experiences, put out a shared response to developments, try to promote opportunities for small business and find ways also to stimulate the economy, which was the key, ultimately, to stabilization. The private and public sectors and the unions all bore responsibility. In relation to the whole fiscal space, constraints, growth and revenue, NT would be constantly monitoring developments and ensuring that the country stayed within sustainable limits.

The Minister said that in relation to the current account deficit, economists would give very elaborate answers about growing, investing, and capital equipment, and note that this had depreciated currently. It was true that exports had been damaged by events over the last year and manufactured exports had switched largely to Africa and SADC destinations, and it was necessary to encourage more foreign direct investment, but was it possible to direct the way that things were moving.

Speaking to the “privatisation” suggestion, the Minister commented that “privatisation” was an old work with connotations back to the Reagan and Thatcher eras, and history had shown what happened when a country lost sight of the balance in the economy. He agreed it was necessary to find innovative ways of raising finance. However, he urged that the cart not be put before the horse, and said that if a project was put forward, there would be appropriate ways found to source the money, rather than speculating what might be available if something might happen.

Mr Fuzile added that the financing of infrastructure projects could be looked at as an innovative way of raising funding. For instance, there were currently about 47 Independent Power Producer contracts, worth around R45 billion, and essentially under these, the private sector was putting in its own money and taking the construction risks around building of the plants, and only when they were generating energy would the people of the country need to start paying, which was an excellent arrangement as long as the sharing of risk in that arrangement was managed correctly.

Mr Ross agreed that there were some very interesting NT innovations in regard to local government, including withholding funds. He asked what NT was doing to take leadership, and to bring discipline to a sector that was in disarray. He noted the situation in several municipalities in his province, including Kroonstad.

The Minister, responding to both this question and one asked later by Ms S Nkomo in relation to municipalities, said that there were some issues in municipalities which had led to interventions, and Chapter 7 and the table on page 101 of the budget document spoke to provincial and local government and the need to improve audit outcomes and reduce audit findings. This was not only, however, to do with the findings, but also with improving the capacity of the municipalities and seeing whether that actually translated to better service delivery to citizens. Page 103 spoke to building that capacity and how much had been put into that to ensure that the municipalities could deliver.

He added that borrowing by municipalities was also a component, and there was a responsibility to ensure that municipalities also borrowed within the framework and, when they got into borrowing mode, would do so in line with their capacity to manage the debt.

Mr Ross appreciated the benefits in relation to retirement funding. He noted that there had recently been statements from prominent Ministers on the possibility of redesigning the Government Employee Pension Fund for lending.

Mr Ismail Momoniat, Deputy Director General, National Treasury, said that in the next week or two more information would be provided on retirement reform.

The Chairperson interjected that the National Development Plan (NDP), in itself, was a product of innovative thinking.

Mr Koornhof said that there had been major speculation around the Minister’s own position and he wanted to ask whether, if the President asked Mr Gordhan to do so, he would be available to stay on as Minister of Finance.

The Chairperson said that this was a very personal question which the Minister was not obliged to answer.

The Minister said that he would give a direct answer, which was that Mr Koornhof must wait. On the day after the President’s inauguration he would announce a new Cabinet. He quipped that he could not even offer to buy Mr Koornhof a whisky after the announcement, as it was getting too expensive.

Mr Koornhof asked if the Tax Laws Amendment Bill was to be tabled to this Parliament, or the Fifth Parliament.

Mr Kosie Louw, Chief Officer: Legal, South African Revenue Service, said that the tax laws for 2014 would be passed in the second half of the year, as there was not sufficient time left for the Fourth Parliament to attend to them.

Ms J Tshabalala (ANC) thanked the Minister for making sure the fiscal position remained stable. Looking to figures on borrowing, she asked what would bring an appetite for borrowing and what was likely to be the turbulence that the country needed to be wary about. She was worried also about the inter-generational debt.

The Minister responded that South Africa did not have “a limitless appetite” for borrowing, but, in answer also to questions posed by Mr Ross and Mr Lees, it was necessary for the NT to assess carefully, at each stage, where the economy was, what was a sustainable level of borrowing and what would be the optimal level of debt to manage that South Africa could, with credibility, say to the world that it could repay. He did not think that there were concerns about inter-generational debt at this point. As correctly pointed out, the global turbulence would determine costs of borrowing. Some political parties were “making a meal” out of this. He said that he had information about the relative costs of borrowing in a number of countries and South Africa was by no means the worst in the world. The negative stories were unnecessarily harming South Africa’s own reputation in the debt market and were not in fact giving any political advantages to anyone.

Ms Tshabalala said there had been about 56 000 applications for the youth tax incentive, and asked which, in the main, were the industries that had shown interest, and when the scheme was going to start, and whether the figures related to the next three years.

Mr Ivan Pillay, Deputy Commissioner, South African Revenue Services, said that there were three main sectors accessing the employee tax incentives at the moment, according to the latest reconciliation figures, and these were the financial, intermediary, insurance, real estate and business sector, the manufacturing sector, and the wholesale and retail trade, catering and accommodation sector.

Dr Z Luyenge (ANC) congratulated the Minister for his input into the budget speech, that had answered many questions. His first question also related to the tax incentive. He asked what methodology would be employed to ensure that in every corner of the country business people were made aware of the incentive, and how it would be ensured that youth institutions were making a contribution to ensure that this important initiative was widely publicised.

Mr Momoniat assured Members that there were very many workshops being held to spread the word.

Dr Luyenge noted that there had been much said on the graduation to social development. He asked if there was an emphasis to ensure that community cooperatives were up and running, to ensure that wholesale privatisation of services was done away with (but not in totality (sic)), and ensure that there was empowerment of communities – for instance through South African National Cooperatives, to ensure that the database was up to date, and that beneficiaries of the social grants would at some stage be assisted to enter the mainstream and into work, graduating out of their reliance on social grants.

The Minister responded that it was correct to try to connect people to work opportunities, but cooperatives did not start easily and were not so easily sustainable. There was money in the budget for cooperative development – the majority of which was with the department of Trade and Industry. He pointed out that many cooperatives were doing work for government, such as providing services to correctional centres or schools. Parliament should engage with the social grant continuously, looking at whether it was sustainable and whether there were perverse incentives, as well as ensuring that it was accompanied by the necessary communication and other incentives to ensure that people’s lives were actually improved and that they did not see it merely as a way to avoid taking responsibility themselves.

Ms Z Dlamini-Dubazana (ANC) noted that when speaking of fiscal sustainability through economic growth, it would assist the country to pay more attention to price. For example in the mining sector, a miner would produce coal, and a local company may buy that coal for export. However, she was not sure that SARS was always getting what was due to it. She cited the example of Indonesia, where company 1 might own another company 2 in another country, who would manage to get the products at a cheaper price, benefiting the purchaser in another country, rather than the seller in own country.

The Minister noted that the example used was a good one of transfer pricing, which was a major concern for developed and developing countries, where two companies in different countries would lower or increase costs or charge management fees in order to pay less tax, because it was not legitimate for them to decrease their profits. This was a problem for most revenue services in all countries. The G20 and OECD had recognised base erosion and profit shift as a problem. Mr Louw of SARS chaired a forum on information exchange, and the information would in future be provided and circulated automatically to try to address the problems.

Mr Louw added that SARS was concentrating on the tax implications, and he agreed that over the last few years transfer pricing had had a huge impact in different industries. In relation to the automatic exchange of information he said that according to new standards now set by the G20 countries, financial information would be passed on from one government to the next, as it was collected by financial institutions, and these exchanges should help SARS to start addressing the problem in 2015/16. It would be doing its own monitoring from 2017.

Mr CJ van Rooyen (ANC, Chairperson of Free State Provincial Committee) also commended the Minister on a good budget. His first concern was in relation to the global risk and he made the point that whilst there was talk of qualitative easing, the debt ceiling in the USA was still a concern, as some departments even closed down and there were temporary interventions and the risk and fiscal cliff were still there. He asked if this was still also a risk for South Africa.

The Minister said that Mr van Rooyen was correct about the US position. Europe used to be accused of never finally resolving a dispute, but in the US this had been resolved, and by the end February deals should have been finalised. Frankly speaking, in every country there were political economic issues, where the politics determined how economic decisions were made. Another interesting example, in addition to the US, was South Africa.

Mr van Rooyen referred to the cash balance of public entities, which was increasing, because they were not in line on their capital expenditure. He asked how NT would be releasing funds so that that surplus would be put into infrastructure, especially for the water sector, which was a big problem.

Mr Fuzile noted that there was a process of inter-governmental cash coordination between NT, government and provinces, to ensure a proper pooling of resources, and this would ensure that none of the State Owned Companies ended up having to borrow at expensive rates when others might have a positive cash balance – which could arise if, for instance, the rate of draw-downs had been slower – so that one entity may be able to borrow from another if there was a risk of running out of cash, with a proviso that if the one company felt that the interest was not high enough, in an inter-government transfer, they could invest in instruments of the other entities, provided that they were also state owned.

Ms S Nkomo (ANC) thanked the Minister and his team. She wanted clarity on three points. Firstly, slide 2 showed the progress and the second point addressed jobs created, but she asked if these were permanent or temporary jobs, such as those under the Expanded Public Works Programme, and whether all jobs had been put together to reach this total.

Mr Michael Sacks, Chief Director: Fiscal Policy, NT, asked Members to refer to the budget review showing the jobs since 1996, and stated that the figures had been drawn from Statistics South Africa, and included both formal and informal sector employment. Behind every quantity there were many questions of quality. There had been a sustained increase in the number of people employed in the economy.

Ms Nkomo mentioned that secondly, slide 9 mentioned protracted labour disputes, but she noted that some of these were also affecting the introduction of new infrastructure and were leading to some civil action. She asked how much the labour problems were linked with service delivery areas, and what needed to be taken care of in this regard.

The Minister made the point that protracted labour disputes did not help anybody, as the workers and their families, and ultimately the economy would suffer. In the mining sector the disputes were leading to bad reputations. Workers did have genuine grievances about working, living and pay conditions, and he said that it was vital to move to labour disputes being solved across the table, not through disruptive action, and government hoped that this would happen. He said that it was important to remember that it was not always the workers to blame as management also acted incorrectly, and a balanced perspective was required.

Slide 17 on page 18 made reference to local government remaining stable and borrowing low. She thought that there was not enough clarity on this point, and asked how could be described as “stable” when there were so many labour disputes in those municipalities. The borrowing could be low if municipalities were practicing the proper quality care and looking into other issues. Perhaps it was a question of the wording but she wanted more explanation on the juxtaposition of the terms stability and low borrowing.

This question was answered in part by the Minister’s earlier response to Mr Ross on municipalities.

Mr B Mnguni (ANC, Free State), quipped that he had expected no less than this good budget from the Minister and Deputy Minister, and remarked that another of his colleagues maintained that one did not praise a fish for swimming. He raised the point that some economists held the view that tax incentives were not a positive move, because they eroded the tax base and left the country with trying to recover the money not paid over because of those tax incentives. He asked for comment on the tax incentives in the budget.

The Minister said that Mr Mnguni had described the position held by some economists – and he particularly remembered lectures from Mr Louw as to why tax incentives were negative. However, it was necessary to take a pragmatic view. Incentives should not be given to the point where the country was wide open to the risk of lobbying, or where they were undermining the tax base, but it must also take cognisance of the particular operating environment and see if incentives worked by getting people to do things that the situation required – for instance, getting young people working. Tax incentives had been used since 2008 in other countries, and perhaps South Africa should have moved to this more quickly. The incentives would be managed in a way to ensure that they were providing impetus to move forward. Incentives had proven important for the motor industry, where they had been used since 1996, and other schemes had operated from 1990 onwards. If a total was taken of all the money that had gone into the motor industry, it would be substantial, but in return the industry had employed and trained tens of thousands of workers, despite the fact that the unions also maintained that incentives were not to be encouraged. He reminded Members also that the urban development scheme had produced good results. Department of Trade and Industry managed many ongoing incentives..

Mr Mnguni wanted to question securitisation of the debt by the banks, which he said could lead to a tendency of concealing household debt. There was much debt that banks were exposed to, and, in the US, this had been one of the reasons leading to the financial crisis. He asked how many banks in South Africa had securitised their debt, and how it might pose a threat.

The Chairperson said that Chapter 9 onward in the budget review covered some of these points and the Minister had already had replied to recommendations from the four Parliamentary committees dealing with finance and appropriations. He noted also that the Select Committee on Finance interacted frequently with the MECs and Provincial Treasuries (PTs) to monitor the fiscal position in the provinces and he was pleased to note definite improvements in the fiscal position of provinces, since starting this process in 2009.

Mr Momoniat said that whether to securitise or not was one issue on its own. There was greater concern about what happened to the borrowers, and the role of the bank. This was something that NT would be taking up with the banks.

Mr D van Rooyen (ANC) said that in some quarters of the developed economies there was talk of self-justification. He wondered if this was a blanket approach where good efforts were not recognised, or whether it happened because of a few emerging economies to whom this was related. He thought that the good work should be recognised in emerging markets.

The Minister said that since May last year, when the Federal Reserve Chair had announced  (some said this had been done awkwardly) that the federal reserve could contemplate easing, this had led to some over-reaction in several countries. Tapering then began in December 2013, for the first $10 billion, with the second $10 billion in January. At the moment the figure was about $65 billion per month, coupled with rising interest rates in the USA, which meant it was more attractive to invest there. He had referred, in his speech, to the fact that since October some developed countries, possibly for reasons of political deflection, had said that it was the emerging markets who had to get their house in order. South Africa believed in multilateralism and cooperation and believed G20 was the right forum. At different stages, different parts of the world would be in trouble whether from an individual or regional standpoint. In 2008, the developed world was in trouble. He was suggesting that the situation should not be aggravated through unnecessarily negative narrative.

Mr van Rooyen said that whilst he did not have a lot of knowledge about the way the commissions worked, some of the work of the Tax Commission had been mentioned in the speech and he asked if this meant that there was a preliminary report, and how that interacted with the oversight role of the Committee.

The Minister responded that there was reference to the “Tax Committee” (not Commission) and it was complementing the work done by the Katz Commission. The world was changing fast so it was felt that it would be useful to find other ways also of looking at the tax system. There was a preliminary report on small businesses, as addressed in the budget review and this would be taken further.

The Minister thanked the Members for the compliments paid to his team.

The Chairperson also thanked the Minister and Deputy Minister and the officials from National Treasury, as well as thanking Mrs Gordhan for her support to the Minister. He noted that public hearings would be held on 4 and 5 March to consider the fiscal report and revenue proposals.

The meeting was adjourned.

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