2015 Budget: Minister of Finance briefing

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Finance Standing Committee

26 February 2015
Chairperson: Mr Y Carrim (ANC) and Mr C de Beer (ANC, Northern Cape)
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Meeting Summary

The Minister of Finance and a team of senior delegates from the National Treasury presented a summary of the presentation of the 2015 Budget to the joint meeting of the Select Committees on Finance and Appropriations and the Standing Committees on Finance and Appropriations. Members kept their questions short and to the point and in turn, they were answered directly.

Discussion focussed primarily on the performance of state-owned entities such as Eskom and South African Airways. The electricity supply was considered to pose the greatest domestic constraint to growth. An allocation of R23 billion would be transferred to Eskom. National Treasury was asked to submit an Appropriation Bill to Parliament by 10 May in order to expedite the transaction in June.

Increased taxes were also debated with specific reference to personal income tax, corporate tax and the fuel levy. Members queried if the 2% growth rate was realistic. Concerns were raised about the centralisation of the procurement process, with Members asking whether this would inhibit the accessibility of small businesses to enter the arena.

The Minister was asked what was happening with the sale of non-strategic state assets. It was time that Members got to know the details of the funding model and how the money would be raised. Energy supply constraints were public enemy number one to South Africa’s economic growth. The Minister replied that the Department would be sharing with the Committee in particular the one option for Eskom, but did not want to actually identify the non-core state assets. It was not prudent and proper to share the names when the Department was very close to concluding the transaction. The information was market sensitive and could have an adverse effect. He reaffirmed the R23 billion coming from the sale of some of the non-core state assets. The funds would flow as per the arrangement with Eskom.

The co-chairperson concluded the meeting by congratulating the Minister on his first Budget.  

Meeting report

A joint meeting of the Select Committee on Finance and Appropriations (National Council of Provinces) and Standing Committee on Finance and Appropriations, (National Assembly) met to discuss details of the Budget 2015, as presented by the Minister on 25 February.

Mr Lungisa Fuzile, Director-General: National Treasury, delivered the overview presentation, and began by reminding Members that South Africa faced a difficult period ahead as a result of a weak global outlook and domestic constraints to economic growth. In the short term, electricity was the most important constraint.
 
Since 2008, expenditure had been sustained at high levels in the face of revenue shortfalls.
Cushioning the economy by borrowing to spend had raised debt from below R500 billion in 2008 to more than R1.6 trillion today. Since 2012, expenditure growth had been constrained, and cost containment and efficiency-enhancing measures had been taken.
 
The 2015 Budget built on those measures, reducing expenditure growth by R25 billion in the next two years. Despite this, non-interest spending continued to grow in real terms by 2.1% over the medium term. It was necessary to introduce moderate increases in tax revenue.
 
Changes to personal income tax and the fuel levy would raise an additional R16.8 billion in 2015/2016. Government continued to prioritise infrastructure investment for economic development and social programmes that supported those citizens most in need.
 
Capital was the fastest growing element for non-interest expenditure, and the real value of the social wage was protected. To create work and reduce poverty and inequality, South Africa required higher rates of growth.

(See document)
 
Eskom
The electricity supply constraint on the economy was difficult to gauge, but the forecast assumed that gross domestic product (GDP) growth remained below 2.5% for the next two years. Government was working to limit the impact by ensuring outages were predictable and consumers were informed, that there was additional capacity for co-generation, gas and coal, and by improving operations and maintenance at Eskom.

Over the medium term, solutions would include stabilising Eskom’s finances through the R23 billion to be raised, shifting towards cost-reflective electricity tariffs, ensuring adequate investment in production, and incentives to conserve energy and limit consumption.
 
Balancing revenue and expenditure
Debt was growing too fast. South Africa owed R1.6 trillion, which would rise to R2.2 trillion in 2017. Interest payments were the fastest growing element in spending, and took up 12% of revenue. The budget proposed to share the burden of fiscal consolidation.
 
Revenue and tax measures
- Personal income tax rates, except for lowest bracket increase by 1 percent, generating R9.4 billion in 2015/16;
-  Fuel levies increase by 80.5c/litre;
- Temporary reduction in the monthly Unemployment Insurance Fund (UIF) contributions threshold from R14 872 to R1 000, reducing the surplus by about R15 billion in 2015/2016;
- Tax measures to increase energy efficiency to be discussed with industry and stakeholders;
- Improvements to reporting and revised rules to address transfer pricing and base erosion;
- Changes to transfer duties on the sale of property to give relief to middle income households.
 
Supporting State-Owned Enterprises (SOEs) without raising government debt
- Short term measures included the allocation of R23 billion to Eskom through the sale of non-core government assets;
- South African Airways would be granted a R6.5 billion going-concern guarantee to finalise its 2013/2014 annual report. This was in addition to the R7.9 billion in guarantees already extended;
- The South African Post Office had been provided with a R270 million overdraft guarantee and a R1.7 billion going-concern guarantee.
 
Discussion
Dr D George (DA) referred to the assertion that state-owned entities were drivers for economic growth. He asked, however, how companies such as Eskom and SAA -- which had financial burdens -- could be growing the economy.  
 
Mr W Wessels (FF+, Free State) said he could understand how a state-owned enterprise like SAA could grow the economy but the fact of the matter was, it was not happening. There were guarantees given year after year, but what was the plan to make SOEs functional and operational? Was there some light at the end of the tunnel?
 
Minister Nene replied that there were challenges with some state-owned companies, but they were a major contributor to economic development. For that reason, it was necessary to ensure that they performed. This required public and private assistance.
 
Dr George asked what was happening with the sale of non-strategic state assets. It was high time that Members got to know the details of the funding model and how the money would be raised. Energy supply constraints were public enemy number one to South Africa’s economic growth.
 
Minister Nene replied that the Department would be sharing with the Committee in particular the one option for Eskom, but did not want to actually identify the non-core state assets. It was not prudent and proper to share the names when the Department was very close to concluding the transaction. The information was market sensitive and could have an adverse effect. He reaffirmed the R23 billion coming from the sale of some of the non-core state assets. The funds would flow as per the arrangement with Eskom. The first amount of R10 billion would flow in June and the tranche before the end of the year.
 
The Minister said the government was invested in some areas in the public sector where it was not supposed to be. This would need to be discussed, and the issue would be brought to the Committee at an opportune time.
 
Dr George asked about the public sector wage bill. In October, the Minister had mentioned that steps would be taken to restrain the bill. Had any action been taken on that?
 
The Minister replied that the Department did not want to pre-empt the outcome of negotiations. There was also a review under way to look at whether people were employed at the right levels and in the right positions, and whether the learner/teacher ratio was correct. The Department was also looking at a freeze on the expansion of head count, to ensure that people were deployed efficiently.
 
Mr D Ross (DA) asked about the cost-reflective electricity tariffs and multi-year price determination, which was at that point of time inflation-related. If one implemented cost-reflective tariffs over the medium term, how would one enhance the supply constraints and funding constraints within Eskom? If there was an immense increase in electricity prices, could that lead to a perception that there was double taxation?
 
The Minister said cost-reflective tariffs were logical. Eskom needed to sustain itself and recover the costs of what it had delivered. It was a matter between Eskom and the National Energy Regulator of SA (Nersa), which government supported. Eskom needed to justify to Nersa what it needed, backed by evidence.
 
He said some of the levies and some taxes that were being imposed were meant to deal with demand behaviour.
 
Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, said it was not double taxation. The levy was a proposal put forward to the “war room” that had been set up to deal with the electricity supply shortage. There was also another component which applied to intensive users who had managed to avoid paying their electricity levy. That was not equitable, and was something that National Treasury would be discussing with the industry.
 
Mr Ross asked for detail on helping Eskom to sustain its position through gas-fired turbines driven by diesel. Was the increase in the fuel levy also applicable to diesel? Would that cost reflect negatively on consumers?
 
Mr Momoniat said Eskom used the most diesel.
 
Mr Ross asked for an update on the corruption investigation involving procurement fraud.
 
The Minister replied that no matter the amount involved, gaps and loopholes needed to be closed. The investigation was ongoing.
 
Mr M Figg (DA) said central procurement might be good idea for control, but would it disadvantage suppliers in local municipalities? Not all small suppliers had the business infrastructure to register online.
 
Mr Wessels asked if it was realistic to think that centralised procurement would solve supply chain management problems, or would it just centralise irregularities?
 
The Minister replied that there was a perception that small and medium enterprises operated under trees, with no facilities, mobile phones or any connectivity. Local offices would be set up to help smaller businesses to register if they were unable. The same system of centralisation as that of the SA Revenue Service (SARS) would apply.
 
Mr Kenneth Brown, Deputy Director-General: Chief Procurement Office, National Treasury, replied that safeguards for smaller businesses could be looked in to.
 
Mr S Swart (ACDP) asked what the prospects were of reaching a 2.6% deficit. Was it possible that personal income tax might be increased further to reach the target in light of the electricity crisis?
 
Minister Nene replied that in his view, it was not out-of-reach.
 
Mr Swart expressed concern over the fuel levy and the Road Accident Fund’s R98 billion unfunded liability.
 
Mr Nene said the R98 billion was the result of the way in which claims had been processed. The funding model had not caught up with processing of claims. It was sad that the bulk of the R98 billion was actually not due to the victims of road accidents, but to the middle men who had assisted the victims. For that reason, legislation was coming to Parliament to find a new model to ensure the money went to the victims. He asked the Committee for its assistance in expediting this legislation.
 
Mr Figg asked if growth of 2% was optimistic or realistic. With the interest payment of debt at 12%, was there a possibility of a further downgrading of the credit rating?
 
The Minister replied that it was government’s task to do what was good for the country, and to look at a credible plan for investors. If it worked for the country and the investors, then it would work for the credit agencies.
 
Ms Nomfundo Tshazibana, Deputy-Director General: Economic Policy, National Treasury, said the 2% growth was the best number, based on the budget balances. Unlike private sector economists, National Treasury did not have the leeway of adjusting the figure on a month to month basis. National Treasury could adjust its forecast only twice a year.
 
Mr D van Rooyen (ANC) asked about the R90 billion surplus in the Unemployment Insurance Fund. Was the surplus a result of over-contribution by employers or employees?
 
The Minister said it was not clear. In order to deplete the excess funds, both contributors to the Fund would each be given a so-called “contribution holiday”. This would also give a bit of a cushion on the one percentage point increase in their taxes.
 
Mr Michael Sass, National Treasury Accountant-General, said there had been a fundamental imbalance between the revenue the fund received from contributions and the benefits it paid out to unemployed workers. The surplus had grown, even while unemployment had remained high. The surplus could grow by another R60 or R70 billion over the next three years.
 
Co-chairperson Carrim commented that it was almost surrealistic that in a country with such huge unemployment, the UIF was the only public entity that seemed to have a such a huge surplus.
 
Mr Wessels asked if a differential VAT was a possibility, considering an increase would extend revenue more than personal tax income.
 
Mr Momoniat replied that the three big taxes were personal income tax, corporate income tax and VAT. This amounted to over 85% of all revenue. In assessing tax, National Treasury felt that on balance VAT would have a bigger impact on growth. When there was slow growth, looking at personal income tax and the fuel levy were better options.
 
Ms E van Lingen (DA, Eastern Cape) asked why the budget was silent on nuclear energy.
 
Minister Nene said Parliament had not engaged with the Treasury on that, but it would be happy to look at it in the Medium Term Budget Policy Statement.
 
Drawing to the close of the meeting, Mr Carrim asked the Minister to bring the Eskom Appropriation Bill to the Committee by 10 May. The first R10 billion tranche was a large sum of money, and the Committee would need time to consider and expedite it.
 
Co-chairperson De Beer congratulated the Minister on his first Budget.
 
The meeting was adjourned.
 

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