Revised Fiscal Framework: public hearings

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Finance Standing Committee

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

A joint meeting of the Standing and Select Committees on Finance heard briefings from the Financial and Fiscal Commission (FFC), the Parliamentary Budget Office (PBO), and the SA Reserve Bank (SARB) on the revised fiscal framework.

The Financial and Fiscal Commission (FFC) presentation gave an overview of the Medium Term Budget Policy Statement (MTBPS) and then covered the country’s economic performance, the fiscal package of the MTBPS, the implications for expenditure, the assumptions, risks and implications inherent in the package, and the division of revenue.

The Parliamentary Budget Office (PBO) presentation considered SA’s growth performance and outlook, and noted increasing debt levels and interest payments. It covered the economic performance and the fiscal package -- in particular, the revenue collections for 2014/15 -- and where additional revenue could be raised. It looked at SOEs and public entities and the risks facing them due to the fiscal outlook, and at the public sector wage bill. It gave a breakdown of implications for expenditure and the change in spending priorities. It covered the assumptions and risks inherent in the MTBPS, among which was the ability of entities to implement budgets, the prospects for revenue collection, the ability of SOEs and public entities to be ‘deficit-neutral,’ with a reduction in transfers, and public sector wages linked to inflation. It then looked at the division of revenue and the division of expenditure and at changes to the provincial equitable share baseline.

The SARB said the global outlook was slowly improving. Like many emerging markets, SA’s growth had trended lower since 2010. Growth forecasts had fallen, with global demand softer, affecting prices for exports with no clear relief in sight. There had been subdued credit extension by banks to households in particular, and growth in household consumption spending had been moderating steadily. Household debt remained high, while the economy had suffered from a series of supply shocks. The impact of the shocks to mining and manufacturing had been very large. The unemployment rate had fluctuated around the 25% level for some time. The current account deficit was large, and persistent swings in the current account tended to be driven by the trade account, where imports consistently outpaced exports. Global inflation was trending down, but SA’s inflation was near the top of its target range. Further volatility in inflation was forecast. Global pressures were mounting as the Federal Reserve shifted its policy stance. The exchange rate mirrored domestic and global events. Domestic confidence and spending was weak.

Members asked what the domestic factors for the decrease in South Africa’s growth rate were. Had any work been done on improvements in the labour environment, and on possible tax increases in February? What progress had been made on selling off some State Owned Enterprises (SOEs)? How large had the shocks been in the job creation sectors of mining and manufacturing -- would it not be negative to consider tax increases on these sectors? Members asked whether the intervention of Treasury, when SOEs like South African Airways needed refinancing, was sustainable. Across the board expenditure ceilings should be avoided. The equitable share formula had to be reviewed. Regarding wage settlements above the inflation rate, Members said that if one continued on that path, one lessened the effectiveness of the inflation targeting monetary policy as an instrument to anchor people’s inflation expectations. Members asked the PBO what assumptions were used regarding expectations that an improvement in the labour environment would occur.

Members asked what role the FFC played when executive power took decisions -- for example, the decision on nuclear power stations by the President. Was the FFC playing any major role there? Was Parliament playing second fiddle to the executive power? Regarding inconsistent budgets of Gautrain, why was there no consistent budget? They wanted a clear indication of what the PBO suggestions regarding sustainable SOEs were. What was the view of the presenters, as it was the Committee that advocated changes in spending patterns? What were the principles that needed to be adhered to regarding the sale of non-strategic assets? Members said the FFC had presented very specific recommendations, but that this was not the case in the analysis of the PBO. It was pointed out that there had been only three submissions for the hearings, and no voice from civil society.

The Director of the Parliamentary Budget Office (PBO), said the presentations reflected that SA was presently in an economic downturn -- and a serious economic crisis -- and could not address poverty through redistribution. The MTBPS appeared to carry on as if nothing was going to change. The question was whether this was the policy direction, as the Committee had the power to amend it. Parliament had to guide the PBO on how to take the research forward. For example what did a tax cut mean, and could it be implemented? Parliament should tell the PBO what to investigate, otherwise one ran the risk of interrogating the PBO. It was clear from the meeting that the Committee had no clarity on what the MTPBS policy direction was.

Members said it was clear the Committee had to make recommendations on structural defects in the MTBPS. SOEs could not afford to pay for dysfunctional enterprises, and how to fix this needed to be looked at. If one carried on doing the same thing, one would get the same result. Members said the PBO should not do policy, but present different scenarios for the Committee to consider.

Meeting report

Financial and Fiscal Commission (FFC)

Mr Bongani Khumalo, Acting CEO, FFC, spoke to the key recommendations of the Commission which had been tabled in May, and the overall assessment of the Medium Term Budget Policy Statement (MTBPS). The Commission welcomed efforts geared towards fiscal consolidation.

Dr Ramos Mabugu, Research Director, FFC, addressed the issue of balancing fiscal sustainability with socio-economic impact. Internal factors which had an adverse impact were labour-related disturbances, and infrastructure bottlenecks on consumer spending and private fixed investments. A key component was containing the public sector wage bill. The cuts would result in a lower rate of increase in public sector remuneration and on government improving its efficiency, to get more productivity out of the lower spending. Any wage deal should be a multi-year agreement to encourage stability.

He gave an overall assessment of the economic outlook, with downward revisions in the GDP forecast to translate to lower growth in revenues and an increase in the budget deficit. He gave an overview of public finance and then referred to the consolidated fiscal framework, where the depressed macroeconomic outlook with projected weaker revenue and higher debt servicing costs, imposed constraints on the broader fiscal framework. In total, government was expected to spend R3.947 trillion over the three years relative to revenue of R3.497 trillion. He talked about non-interest allocations to the division of revenue over the 2015 medium term expenditure framework (MTEF) period, where real annual average growth in expenditure was projected at 4.7%. The bulk of resources were allocated in respect of non-interest allocations in the form of equitable share and conditional grant funding to the provincial and local spheres. He then referred to provincial and local government divisions of revenue, to the growth in local government equitable share adjustments, to conditional grants revenue and tax proposals, and to unallocated resources.

Mr Khumalo said the MTBPS had been crafted in a constrained environment characterised by downward economic growth forecasts. Government had done a good job that promised a deficit reduction programme for the next three years, and would thereby prevent public debt from spiralling out of control. To enhance growth and employment, the government should continue re-directing government spending towards activities that directly or indirectly created jobs through enhancing productivity performance. The emphasis on education as the number one priority would count towards productivity improvements.

It was very clear that the economy remained far below the economic growth rate required to make a dent on unemployment and inequality.

Parliamentary Budget Office (PBO)

Mr Sean Muller, Economic Analyst, (PBO) considered SA’s growth performance and outlook, and noted increasing debt levels and interest payments. He addressed the economic performance, the fiscal package -- in particular, revenue collections for 2014/15 -- and where additional revenue could be raised. He looked at SOEs and public entities, and the risks arising from the fiscal outlook, and at the public sector wage bill. He gave a breakdown of the implications for expenditure and the change in spending priorities. He discussed job creation initiatives and the assumptions and risks inherent in the MTBPS. He then covered the division of revenue and the division of expenditure and looked at changes to the provincial equitable share baseline.

Spending plans had been adjusted in line with lower than expected economic growth and the need to ensure debt sustainability. The forecast was for 1.4% growth in 2014/15, and expenditure ceilings had been lowered. Key assumptions and risks were related to the ability of departments to implement budgets, the prospects for revenue collection, the ability of SOEs and public entities to be ‘deficit-neutral,’ with a reduction in transfers and public sector wages linked to inflation.

SA Reserve Bank (SARB)

Dr Chris Loewald, Head of Policy Development and Research (SARB), said global outcomes were slowly improving. Like many emerging markets, SA’s growth had trended lower since 2010. Growth forecasts had fallen, with global demand softer, affecting prices for exports, and with no clear relief in sight. There was subdued credit extension by banks to households in particular, and growth in household consumption spending had been moderating steadily. Household debt remained high, while the economy had suffered from a series of supply shocks. The impact of the shocks to mining and manufacturing had been very large. The unemployment rate had fluctuated around the 25% level for some time. The current account deficit was large, and persistent swings in the current account tended to be driven by the trade account, where imports consistently outpaced exports. Global inflation was trending down but SA’s inflation was near the top of its target range. Further volatility in inflation was forecast. Global pressures were mounting as the Federal Reserve shifted its policy stance. The exchange rate mirrored domestic and global events. Domestic confidence and spending was weak.

Discussion

Dr D George (DA) asked what the domestic factors for the decrease in South Arica’s growth rate were. How did one determine the probability of an assumption happening? Had any work been done on the labour environment improving, and on possible tax increases in February? He asked SARB what SA’s most unhelpful idiosyncratic factor was.

Mr D Ross (DA) asked what progress there had been on the selling off of some state-owned enterprises (SOEs). He asked how large the shocks had been in the job creation sectors of mining and manufacturing. Would it not be negative to consider tax increases in these sectors?

Ms T Tobias (ANC) asked whether the intervention of Treasury, when SOEs like South African Airways (SAA) needed refinancing, was sustainable. She asked to be warned in advance if there was movement in the repo rate. Regarding South Africa’s trade balance, SA was losing market share to BRICS countries -- what would the approach be in the next five years?

Ms S Nkomo (IFP) said with a weaker rand, SA would get more imports. She asked how much of the projections would become reality?

Dr M Khoza (ANC) said across the board expenditure ceilings should be avoided. SA did not have much control over external factors, but did have over internal factors. SARB should unpack the hierarchy of risks. Regarding the wage bill, she was wary to put together the national, provincial and local governments. Out of the 2.3m employees, how many were in the national and provincial government? Local government employed 270 000 public workers and national and provincial governments were employing the bulk, with most of them “paper pushers.” Productivity issues were not being addressed. Regarding the raising of revenue, she said personal income tax already had the major share of revenue collection.

Ms P Kekana (ANC) said the equitable share formula had to be reviewed. She asked what one could do about internal factors.

Mr N Kwankwa (UDM) said that if one continued on the path of wage settlements above the inflation rate, one then lessened the effectiveness of the inflation targeting monetary policy as an instrument to anchor people’s inflation expectations. He asked the PBO what assumptions were used regarding expectations that an improvement in the labour environment would occur.

Mr V Mtileni (EFF) asked what role the FFC played when executive power took decisions -- for example, the decision on nuclear power stations by the President. Was the FFC playing any major role there? Was Parliament playing second fiddle to the executive power? Regarding the inconsistent budgets of Gautrain, why was there no consistent budget. He had heard that R80m was injected monthly into Gautrain. SAA ran out of their budget every year. There were problems with Eskom, SABC and SA Post Office, where R21bn had vanished into thin air.

Mr D van Rooyen (ANC) said he wanted a clear indication of what the PBO’s suggestions regarding sustainable SOEs were. What was the view of the presenters, as it was the Committee that advocated changes in spending patterns? What were the principles that needed to be adhered to regarding the sale of non strategic assets? The FFC had presented very specific recommendations, but this had not been present in the analysis of the PBO.

The Chairperson said there had been only three submissions for the hearings. There had been no voice of civil society. Previously the venue used to be full, but civil society did not come any more as they realised that they could not change the budget. Treasury had said it was not an austerity budget -- what was the presenters’ view on that. What was meant by normal interest rates? What was excise duty? Should there be a minimum specified for unallocated resources? How does one improve labour productivity? How can government move more towards the NDP? What were the presenters’ proposals in this regard? On what were the assumptions based, and what were the consequences of them not being realised? Given the severe constraints on the economy, the committees needed a programme to monitor the Minister’s statements. What, for example, could be done in the meantime to make SOE’s functional? Something needed to be said in the Committee’s report about the feasibility, practicality and practicability of statements.

Mr Khumalo said the FFC had predicted in 2011 the pessimistic outlook currently facing the country, and had been looking only at the external factors. Now domestic factors were seriously impacting the economy -- like the structural challenges in education, health, energy, transport and, on the non structural side, labour issues, the current account deficit and household consumption spending constraints -- and its weight was becoming more important than the external factors. There was a need for a united front to tackle the internal challenges. A foundation, in the form of the National Development Plan (NDP), was there and therefore the National Economic Development and Labour Council (NEDLAC) became important. The FFC was in no way underestimating the impact of internal factors. The FFC had identified key issues that needed to be addressed. The FFC did not have all the answers. The FFC had been in discussions with Treasury since May, and also with the provinces. Now it was up to government to say to the FFC how to further the debate as to how the targets were to be addressed.

Ms Tobias said there was a policy difference between what government needed to be implemented and what other societal structures thought the interventions should be.  NEDLAC did not necessarily play an adequate role. She asked how labour was to be engaged. Maybe a different approach to engagement was needed.

Mr Khumalo said, regarding Ms Khoza’s question on the wage bill, that the FFC and the Public Service Commission had done a joint exercise to link the wage bill with productivity. In some instances, there were too many administrators, even to the point of what norms were being applied. The mistake was to think it was about salaries. It was not about salaries -- the wage bill included productivity.

Regarding Ms Kekana’s question on provincial fiscal frameworks, when one looked at the responses by the three spheres of government, the least affected was provincial government because expenses in the provinces were managed. On what role the provinces could play, he said Gauteng, for example, was trying to move to a different level regarding provincial economic development.

Regarding Mr Mtileni’s question, the role of the Committee was to make recommendations on fiscal and financial matters. The FFC had no role in executive decisions, unless those impacted on finance.

On the nuclear power station issue, he said he had no knowledge about what was happening. If Parliament wanted the FFC’s views on the matter, then the FFC could come in.

Regarding the budget process, it was not about rubber stamping executive decisions because the FFC had already tabled its recommendations to the Treasury in May, ten months before the budget.

Regarding the Gautrain and bailouts for SAA, the FFC had dealt with these issues since the first guarantees to Eskom eight years previously. There had to be a way for contingent liabilities to be linked to the guarantees. The FFC was working on SOEs and issues raised by the Minister of Finance, and had put together some documents in preliminary work.

Regarding Mr Van Rooyen’s question on cost containment measures and compliance, there had been substantial compliance on travel, conference and catering expenses.

Regarding the sale of non strategic assets, the FFC had been requested to look at this by the previous Minister of Finance. The FFC had identified certain principles to be adhered to.

Regarding the Chairperson’s question on the austerity budget, he said an austerity budget was a technical term when expenditure was cut. In this case, however, there was a slowing down of the budget to prevent an austerity budget, and so the issue of taxes which should not hurt the poor had also been raised. He had no idea what the Davis Tax Review Committee was doing, and was awaiting their preliminary reports.

Dr Mabugu said, regarding the question on what was meant by normal interest rates, that low interest rates were currently in effect, following the global financial crisis.

Regarding unallocated reserves, these were contingency reserves. There was not a norm, but that portion of funds should not be raided.

Excise duty was an indirect tax, like on alcohol and tobacco, for example.

On labour productivity, the FFC thought the foundation of productivity was getting a basic education.

Regarding SOEs, three issues could be tackled for an immediate turnaround. The first was that SOEs were back on board for discussion. The second was clarity of tariffs going forward -- for example, electricity prices being increased from 8.5% to 12.2%, although this might be insufficient to get Eskom on a sustainable path -- and when would cost-reflective tariffs be allowed, because there were social ramifications. There needed to be a clear disentanglement of social and tariff issues. A fourth issue was where private sector financing could be drawn from, to finance state utilities.

Prof Mohammed Jahed, Director of the Parliamentary Budget Office (PBO), said the presentations reflected that SA was presently in an economic downturn -- and a serious economic crisis -- and could not address poverty through redistribution. The MTBPS appeared to be carrying on as if nothing was going to change. The question was whether this was the policy direction, as the Committee had the power to amend it. Five issues had been raised: wage assumptions from the MTBPS, taxation, SOEs, inflation targeting and local government. One could argue, why cut wages as wages would stimulate the economy? Why sacrifice SOEs as they addressed market failures? These were the discussions to have. Was parliament prepared to reduce debt? Parliament had to guide the PBO on how to take the research forward. For example, what did a tax cut mean, and could it be implemented? Parliament should tell the PBO what to investigate, otherwise one ran the risk of interrogating the PBO. It was clear from the meeting that the Committee had no clarity on what the MTPBS policy direction was. A lot of fundamental issues had been raised, and the PBO could give recommendations and discuss them.

Mr Van Rooyen felt the PBO’s role was to come up with recommendations. They fell short about what it was they wanted Parliament should do.

Dr Khoza said she had not heard anything from the PBO on the ability to service the debt and how best to address issues of productivity.

Ms Tobias said it appeared that Parliament was giving the PBO the go-ahead to take policy decisions, and that was Parliament’s responsibility.

Mr Ross said the consensus was the need for significant interventions and to look at the practical level, like Eskom increases by the National Energy Regulator of South Africa (NERSA).

The Chairperson said the final decision was with the Committees. What was important was what was done regarding the recommendations.

Prof Jahed said a PBO recommendation on SOEs, for example, could be that they were created because of market failures. The Development Bank of SA (DBSA), for example, had been created because no financial institution wanted to enter the development finance market. The DBSA had fulfilled its role and now with an established market, banks would enter that space and ask the DBSA why it was there, as it could be better utilised elsewhere. Once the market failure had been addressed, there was no role for the DBSA. That recommendation would be discussed, and a decision would have to be taken.

Mr Loewald said that after the global crisis, BRICS had quickly improved. The market share of SA relative to BRICS had declined because of the lack of competitiveness of the SA economy, and the demand for commodities had decreased. The import bill was large and could be split into capital and intermediary goods (75%) and consumption goods (25%), largely because of SOE purchases, and rand depreciation causing nominal values to rise and high oil prices. The biggest problem looking back was the platinum strike, which cost the economy 1.6% of the GDP. Household consumption patterns, based on their perception of what the future held, and global GDP figures were also contributors. Commodity price increases would have a decreasing impact.

Regarding the hierarchy of risks, he said these were the global GDP, inflation, the currency and concern over global food prices.

Regarding public sector wages, he said when wages rose, it put pressure on the inflation rate. The public sector bill accounted for 20% of the economy’s wage bill.

Dr George said it was clear the Committee had to make recommendations on structural defects in the MTBPS. SOEs could not afford to pay for dysfunctional enterprises, and how to fix this needed to be looked at. If one carried on doing the same thing, one would get the same result.

Dr Khoza said the PBO should not do policy, but should present different scenarios for the Committee to consider.

The Chairperson said Members should submit questions on SOEs for the PBO to work on, and the Committee would expect an interim report around the beginning of next year. The public sector wage bill issue would be highly contested, so a research projected could be considered. Meetings on the SOEs should include the Portfolio Committee on Public Enterprises.

The meeting was adjourned.

 

 

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