2014 Medium Term Budget Policy Statement: briefing by Minister of Finance, with Deputy Minister in attendance

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Finance Standing Committee

23 October 2014
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Minister remarked that the budget policy framework and spending priorities of government for the following three years was produced under trying and unenviable conditions. The Director General explained that the global outlook remained uneven, and that the South African current account and fiscal deficits caused the country to depend on global savings to finance itself. South Africa’s economic performance was weaker than expected, which caused new fiscal challenges. GDP growth forecasts had been revised downwards due to structural constraints. Government would reduce growth in spending by lowering the 2014 Budget expenditure ceiling by R25 billion over the following two years and adjusting tax policy to generate additional revenue of at least R27 billion over two years. Current account and fiscal debt, combined with electricity shortages and low growth prospects were seen as key risks by investors. South African debt was growing faster than that of emerging market peers. Inflation pressures were increasing. Over the following two years, capital injections for Eskom and funding other state owned companies would be raised in a way that had no effect on the budget deficit. Government would dispose of some non-strategic assets to raise resources for financial support.

In discussion, money lost due to wasteful expenditure and corruption, caused concern. There was a suggestion from the Democratic Alliance (DA) that the size of the state be reduced. Private sector investment in Eskom and other state owned companies received attention. There was concern over adjusted tax policies. Questions were raised about nuclear obligations and electricity prices; about the Special Investigation Unit (SIU) and the recovery of money lost through corruption. The privatisation of non-strategic assets was suggested. Questions were also raised about earmarked non-strategic assets; about cost containment measures; and the role of the DPME. There were remarks and questions about downgrading of the Gross Domestic Product (GDP) growth rate; the twin deficit and investor confidence; wage settlements above inflation; rollovers, and vacancies. 

Meeting report

Briefing by the Minister and the Director General of the Department of Finance on the Medium Term Budget Policy Statement
Mr Nhlanhla Nene, Minister of Finance, remarked that the budget policy framework and spending priorities of government had been produced under trying and unenviable conditions.

Mr Ufuzile Lungile, Director General, Department of Finance, briefed the Committee.
South Africa’s economic performance was weaker than expected, which caused new fiscal challenges. The GDP growth expected for 2014 was 1.4 percent, rising to 3.0 percent in 2017. The forecast had been revised downwards due to structural constraints. Government proposed a fiscal package that reduced growth in spending by lowering the 2014 Budget expenditure ceiling by R25 billion over the following two years and adjusting tax policy to generate additional revenue of at least R27 billion over two years. Public spending would rise by 7.6 percent per year over the medium term.

Mr Lungile continued that the global economic outlook was fragile and uneven. Growth had been revised downwards in emerging economies. The “twin deficits” of current account and fiscal deficits remained high in comparison to peer countries. The twin deficits combined with electricity shortages and low growth prospects were seen as key risks by investors. South African debt was growing faster than that of emerging market peers. Commodity prices were lower, but the weaker rand was providing some support. Inflation pressures were increasing as the weak rand fed through to core inflation. Private investment and structural transformation had to support MTSF interventions and growth. There was a freeze on personnel expansion and review of vacancies. To effect a lower expenditure ceiling, government would freeze budgets of non-essential goods and services; withdraw funding from posts that had been vacant for some time, and reduce the rate of growth of transfers to public entities.

Over the following two years, capital injections for Eskom and funding other state owned companies would be raised in a way that had no effect on the budget deficit. In some instances, government would dispose of non-strategic assets to raise resources for financial support. The Committees were taken through risks to the proposed fiscal framework; revised provincial and local government allocations, and changes to conditional grants in the MTEF for provinces and local government.

Discussion
The Chairperson asked how current account and fiscal debt combined with electricity shortage could be dealt with to regain investor confidence.

Mr D Ross (DA) remarked that the budget deficit was a challenge to government. There were ministerial cuts to spending that amounted to R10 billion; there was a deficit of R153 billion per year; and wasteful expenditure of R30 billion per year. He asked if there were programmes in place to curb corruption and wasteful expenditure, and what the weakness in the system was.

The Minister replied that within the context of a global economic crisis, deficit would remain. The base had to be reduced. A buffer had been built in. The right balance had to be maintained. Expenditure would not be reduced, to allow economic growth.

Mr Ross remarked that it might be necessary to cut the size of a bloated state. Growth levels had to be lowered to reduce the size of the state.

The Minister replied that if one were to be consistent, it would also be necessary to cut the size of parliament. The size of the state establishment was linked to what the state wanted to achieve. The size of government did not depend on the number of people in a country.

Mr Ross noted that taxes would amount to R27 billion over the following two years, which could inhibit investment from business. VAT increases hurt the poor.

The Minister replied that tax efficency would be improved. The DG had been clear about tax policy.

Mr Ross asked if private sector investment was recommended to state owned enterprises like Eskom, for funding. Electricity price increases had a negative effect on the public. The low growth rate required pro-active steps. There had been energy constraints. It was hoped that the Medupi station would be completed soon.

The Minister responded that the private sector could get into a space where government had failed. Government had to create an environment for the private sector to thrive in, and the private sector had to build on that. A workable solution would not entail just privatisation, or government holding on to what it had. The financial health of Eskom was being dealt with. Eskom was free to go out and borrow. Eskom was sustainable, there was an environment geared to delivery. There were cost reflective tariffs. Eskom had to cover its own costs, but it was not there yet. Government had to protect the poor.

Mr Ross asked about nuclear obligations and electricity prices.

Mr Ross also askedabout labour reform and labour disputes.

Mr Neels Van Rooyen (ANC, Free State Provincial Department) said that there was a lot of money lying in the SETAs. He asked how the shift of funds to the Maloto road would affect the Free State, and whether there would be further cuts in the equitable share to provinces.

The Minister replied that entities worked with their own resources, there were no allocations to them.

Mr Lungile added that other legislation was involved. Money was not in the general pool, and could not be accessed.

Mr S Swart (ACDP, Finance Standing Committee) referred to wasteful and irregular expenditure of R30 billion per year. Steps taken were appreciated but more could be done. A win-win situation would be if the SIU could collect money. The SIU were saying that they could do so, but there was a lack of capacity.

The Minister responded that capacity had to be built in departments to close the leakage of corruption. Security was a lucrative business. The investigations units could retrieve lost money. Departments could not be expected to put in all their resources to recover money. The matter had to be dealt with decisively.

Mr Swart remarked that R50 billion was a small figure for tax policy and administration. He asked about the closing of loopholes and the increase of the marginal tax rate. The privatisation of non-strategic assets was a good turning point.

Mr D Van Rooyen (ANC, Finance Standing Committee) asked about earmarked non-strategic assets, and about oversight of the unfolding of the process. The intention was noble but there might be side effects. There could be impact on job opportunities.

Mr Van Rooyen asked what would be defined as non-core assets.

The Minister replied that it had to be asked what was strategic, and what the role of the government was with regard to it. There had to be decisions about government playing into private space. The identification of strategic assets was a sensitive and confidential matter.

Mr Van Rooyen remarked that it was not the first time that cost containment measures had been cited. There had to be an analysis presented to Parliament of how containment measures had worked. The Minister had stated that morning that the Department of Monitoring and Evaluation (DPME) would be brought into cost containment. He asked if that would take the form of a common report with National Treasury.

The Minister responded that there would be a report to Parliament about the role of the DPME. An invitation from Parliament would be awaited.

Mr M Figg (DA, Appropriations Standing Committee) asked whether the 1.4 percent GDP growth rate would be adjusted down further.

The Minister replied that the 1.4 percent was based on assumptions. Downgrading could not be avoided. The right fiscal package for the country had to be found. A credible plan would be put together, aligned with the NDP.

Mr Figg asked about the downgrading of the credit rating of banks.

A Member remarked that productivity had been discussed the day before. There had to be increased spending for post-school education. Universities had a 60 percent dropout rate, there was poor academic performance, and Government was not financing higher education adequately.

Mr N Kwankwa (UDM, Appropriations Standing Committee) welcomed cost containment incentives. He referred to the Public Sector Wage Bill. Wages were settled above inflation, which lessened the effectiveness of inflation planning.

Mr Mtileni (EFF, Appropriations Select Committee) asked about funded and unfunded mandates, and debt to municipalities.

The Minister replied that the capacity of municipalities to collect debt could be questioned. The problem was that municipalites did not always manage to pay their own debts. It was a collective responsibility. The Budget Council sat with the provinces about funded and unfunded mandates. The South African Local Government Association (SALGA) was also involved.

Mr Mtileni remarked that there were billions in coffers, but it did not help if it was not spent. Budget rollover was a crime. If there were any rollovers, the Minister had to be replaced.

The Minister replied that rollovers were approved in Parliament. If a department was building a bridge, and it stretched over a multi-year period, the rollover was necessary for the project to continue. Rollovers were not wasteful expenditure. It was legitimate extended spending, approved by Parliament. He told Mr Mtileni, to the consideable amusement of many, that he (Mr Mtileni) would therefore be the one who would have to be replaced.

Mr Mtileni asked about litigation related to human resources and disputes. Roads were rebuilt for the third time in Limpopo, whose budget was used for that?

Mr Mcebisi Jonas, Deputy Minister, remarked that the question of vacancies was a complex issue. The question was how to shift the pattern of spending.

The DG concluded that there had to be control of consumption and expenditure. South Africa had to be more productive, so as not to rely on savings made elsewhere.

The Chairperson adjourned the meeting.
 

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