Fiscal framework and revenue proposals; Division of Revenue Bill: Parliamentary Budget Office briefing

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Finance Standing Committee

03 March 2015
Chairperson: Mr Y Carrim (ANC), Mr C de Beer, Mr P Mashatile and Mr S Mohai (ANC, Free State)
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Meeting Summary

The Parliamentary Budget Office (PBO) presented under various headings:

▪ Fiscal Framework: Budget 2015 recognised that the counter-cyclical approach had reached its limits. Fiscal consolidation could no longer be postponed. The current fiscal package was designed to narrow the deficit and stabilise debt. The poor could face the effects of slower expenditure growth, whereas businesses did not have to bear direct costs of the fiscal package.
▪ Debt: National Treasury agreed with the IMF that a 40% debt-to-GDP ratio  was the upper bound to risk from indebtedness. The main component of contingent liabilities was debt guarantees to State Owned Enterprises (SOEs). Non-commercial and state influenced factors that affected the finance status of SOEs, were not sufficiently coordinated. Shifting of finance burdens through tariffs could relieve demands on the government budget, but possibly at a cost to economic performance and/or intergenerational equity.
▪ Revenue: The central theme was that individual taxpayers might bear a higher burden than businesses. It had to be noted if government incentives to businesses were indeed growing the economy, creating jobs, and dealing with inequality.
▪ Expenditure: There were functional allocations in response to strategic priorities like the energy challenge; revitalising agriculture; adding value to mineral wealth; encouraging private investment; unlocking the potential of small enterprises, and infrastructure investment. Revisions to specific economic affairs votes included the reduction of vacant posts; cost containment measures; providing for growth marginally above inflation; adequacy of accumulated surplus funds and alignment of planned growth to institutional capacity.
▪ Protection of the Poor: The country was not committed to an official poverty line, and there was no official definition of poverty. The social protection system supported 16.4 million beneficiaries. It was questionable whether grant increases were adequate. Low increases in grant values did not make up for inflation. Electricity tariffs and fuel levies would hit the poor harder. The number of taxpayers vs grant recipients posed a risk to the sustainability of grants.
▪ Public Service Wage bill: Cost drivers were the employment level growth of the public service; cost of living adjustments in excess of inflation, and policy initiatives including Occupational Specific Dispensation (OSD). The growth in the public service reached a turning point as of late 2014. The freeze in the funded headcount and the potential scrapping of non-essential vacant posts would deter growth over the medium term. The bargaining power of public sector labour unions exceeded that of government. The Treasury had limited powers to contain the wage bill.
▪  Private Sector Investment: Private sector businesses had reverted to investing in only what was necessary to maintain current operations. Contraction of private sector investment caused problems with regard to joint government and private sector infrastructure ventures.
▪  Division of Revenue Bill: Allocations to provinces and municipalities would grow more slowly than in the past. Changes to the provincial budget since 2014 were due to the conditional grants review. Grant administrators and municipalities had to spend efficiently to maintain planned outputs.

In discussion, the presentation was hailed as magnificent by one Member, and received with interest by various others. However, there were also opinions to the effect that the presentation did not go beyond what National Treasury had stated through the Minister, and that the PBO could do more by way of giving advice. The latter views could be deemed less than fair, as the presentation certainly contained independent views and posed critical questions. It was unfortunate that time constraints prevented full engagement with the PBO on issues presented. There was general interest in SOE funding, the necessity of the 350 000 jobs created in the public sector; the implications of more borrowing, and the balancing of the non-commercial and commercial mandates of the SOEs. There was interest in the quantification of benefits from corporate and company tax incentives. There were remarks and questions about support to small businesses and cooperatives. Inability of municipalities to service their debt to Eskom caused concern. Social grants had to consider needs on the ground. Skills and education had to be supported to make the poor less dependent on grants.

Meeting report

Introduction by PBO Director
Prof Mohammed Jahed noted that the budget had been compiled in a difficult context. Ways had to be found to stimulate the economy within the context of poor domestic growth. Since 2009 there had been increased public spending to support economic recovery, which had led to infrastructure development and job creation. But because of lack of economic growth, the State had to borrow. Finance Minister Nhlanhla Nene announced a turning point in 2014. Fiscal consolidation could no longer be delayed. The current budget stated how the fiscal framework and division of revenue would be affected. A key issue within the fiscal framework was the sustainability of debt levels. The question whether books were balanced on the backs of the poor was still a crucial one.

The Fiscal Framework
Mr Rashaad Amra, Economic Analyst, PBO, noted that in the budget review of 2009, National Treasury announced an increase in non-interest government expenditure of R161 billion to stimulate the economy in response to the global financial crisis. The economy only grew by 1.8% since 2008. Growth was flat in mining, agriculture and manufacturing. The private sector shed an estimated 250 000 jobs, while government employment increased by 350 000. Treasury had noted in the previous week that the counter-cyclical approach had reached its limits. An improvement in revenues could not reduce the budget deficit. At MTBPS 2014 it was noted that fiscal consolidation could no longer be postponed. A fiscal package was announced to  narrow the deficit and stabilise debt. Government spending had supported growth, but that was not sustainable due to high debt. In the MTBPS 2014, the Minister of Finance announced that “the budget would not be balanced on the backs of the poor”. It was important to note the effect of revenue and expenditure proposals on the poor. Only the employed benefited from the Unemployment Insurance Fund (UIF) holiday, whilst the fuel levy increases would affect the poor through inflation and transport costs. The poor could also face the effects of slower expenditure growth. In contrast, business apparently did not have to bear direct costs of the fiscal package.

Discussion
Mr M Figg (DA) [Appropriations Standing Committee] asked if the figure for jobs created in the public service was a net figure.

Mr Amra replied that it was indeed so.

Mr D van Rooyen (ANC) [Finance Standing Committee] remarked that not too much had to be expected from the PBO. It was presenting what the Treasury had presented through the Minister. It was a duplication of what Treasury had presented.

Mr D Ross (DA) [Finance Standing Committee]referred to the composition of the fiscal package. A ceiling had been reached with regard to private sector investment in revenue. The private sector was not involved in policy issues.

Mr Amra replied that the fiscal package would be dealt with later. The weaker Rand did not benefit exports.

Prof Jahed added that the fiscal package was a framework that provided a set of contexts.

Mr Ross said that an expenditure analysis of SOE funding was needed.

Prof Jahed responded that implications around SOE funding would be addressed later on.

Mr Ross asked how corruption levels were taken into consideration. He asked if savings had been made through lowering corruption levels.

Mr A McLaughlin (DA) [Appropriations Standing Committee] remarked that Members had not had sufficient time to prepare themselves. He had only received the PBOs’s presentation one hour in advance. Since the 2008 crisis, 350 000 jobs were created in the public sector. A huge strain was placed on the government wage bill. He asked if increased government employment was necessary.

Mr Amra replied that a detailed analysis of employment went beyond the scope of this work.

Ms P Kekana (ANC) [Finance Standing Committee] remarked that the PBO had referred to increased spending. It was not an austerity budget. She asked about the implications of more borrowing. With regard to the budget being balanced on the backs of the poor, she said that implications for the poor and for business had to be spelled out.

Prof Jahed responded that the account deficit would be dealt with in due course.

Dr Sean Muller, PBO Economic Analyst, added that the impact on the poor would be dealt with later on in the presentation. National Treasury had targetted growth in debt, as it was trying to stabilise debt. Debt had to be sustainable. The question was whether it would be possible to pay debt, or have it rolled over. The composition of debt would be changed.

Mr V Mteleni (EFF, Limpopo) [Appropriations Select Committee] referred to the 350 000 public sector jobs created. But in recent months many people had lost jobs. The wage bill was supposed to empower people. Eskom had promised 50 000 jobs, but nothing was happening. It was clear that SAA and Eskom were going through rough patches. These entities had to appear in Parliament to explain their situation. There was infighting between CEOs and the Minister. CEOs of SOEs were earning too much.

Mr Essack complained that Mr Mteleni was speaking off the topic.

The Finance Standing Committee Chairperson, Mr Y Carrim (ANC), told him that free expression had to be allowed.

Dr B Khoza (ANC) [Finance Standing Committee] remarked that the gravity of the economic situation was appreciated. Parliamentary oversight had to see to it that the Executive sought the outcomes Parliament wanted. The impact of the current account deficit had to be known. The question was how long the downswing would continue. The fiscal framework had to take into account that trade unions wanted a 15% increase.

The Chairperson noted that Parliament had had only 16 days to process the Money Bills Act. The vote on the fiscal framework had to take place only one day after public hearings. The role of the PBO in relation to the MTBPS had to be defined. He agreed that the PBO gave a good summary, but it also had to advise. He asked about increasing the Public Service wage bill for economic stimulus. The increase in social welfare pensions was not enough to avoid a decline in real terms. Economic growth had to be achieved within the context of high debt and low revenue. Parliament represented the poor, and the PBO had to help with that.

Debt
Dr Sean Muller, Economic Analyst, noted that net debt would grow to 43.8% by 2017/18, based on current projections. Treasury agreed with the IMF that a 40% debt-to-GDP ratio  constituted the upper bound to the risk from indebtedness. That was a major reason for the urgency of fiscal consolidation. With respect to contingent liability, Treasury had indicated that a prudent threshold for South Africa would be 50%. The main component of contingent liabilities were debt guarantees to SOEs. Asset sales were a way to obtain funds for direct support to SOEs (notably Eskom), whereas guarantees retained the funding burden in SOEs themselves with support from government. There was little detail about asset sales in Budget 2015.

The financial status of SOEs was affected by factors that were wholly commercial, and others that were within the influence of the State. The problem was that those different influences were not coordinated with respect to their net effect on an SOE’s financial status. Shifting of the financing burden to customers via tariffs could relieve demands on the government budget, but possibly at the cost of economic performance and/or intergenerational equity. Government financing of SOEs was more complex than often appreciated. When the fiscus was under pressure it could be desirable to shift funding burdens to future periods through borrowing, debt guarantees or increased tariffs. However, that had to be done with adequate consideration for debt sustainability, intergenerational equity and consequences for the broader economy and citizens.

Discussion
Mr C De Beer (ANC, Northern Cape) [Finance Select Committee] asked what sustainable debt was considered to be. The country had to adapt to sluggish growth and learn to live within its means.

Ms T Tobias (ANC) [Finance Standing Committee] remarked that Dr Muller had made interesting remarks about fiscal control and the funding of SOEs. Engagement between the government and SOEs had thus far not been examined. There had to be an analysis of sustainable debt. Dr Muller had stated that challenges had not yet been addressed. It appeared that the challenge was to balance the non-commercial mandate with competitiveness, to seek profitability within a regulatory framework. There were risks attached to both aspects. The question was which set of risks to prioritise. Economic growth had to be sustained in a difficult context. Projected growth figures could not be reached. The Minister had said that government expenditure had to be curbed through cost-cutting measures.

Ms Kekana referred to the statement by Dr Muller that counter-cyclicality was not sustainable.

Ms Kekana referred to the non-commercial mandate of the SOEs. The government was injecting money into SOEs. If money was to be generated through tariffs, the poor would pay. She asked what the way forward was to be with Eskom, as it had received a red light on its non-commercial mandate.

Dr Muller responded that the non-commercial mandate was indeed a serious issue. Counter-cyclicality could not be sustained indefinitely, as debt levels would eventually become unsustainable. The IMF set the limit for debt as percentage of the GDP at 40%. The problem was that borrowing costs went up when borrowing became excessive.

Prof Jahed added that the non-commercial mandate of the SOEs was tied to business cycles.

Mr Mohai asked about structural employment and industrial policy.

Revenue
Dr Dumisani Jantjies, PBO Finance Analyst, commented that National Treasury did not provide a clear definition and estimate of mechanisms to maintain or enhance the progressivity of the current tax system. Increased personal income tax rates would add R8billion to the fiscus. Reduced UIF lowered consolidated budget revenue by R15 billion, shared by employers and employees. Consumers of alcohol and tobacco would contribute more through higher excise duties. Direct and indirect users of petrol would pay R6.49 billion more due to higher RAF and fuel levies. Individual taxpayers might be bearing a higher burden than businesses. Over the preceding seven years individual tax had contributed 33.5% towards tax revenue while VAT and Corporate Tax averaged 26.39% and 22.6% respectively. The 2015 Budget speech announced further incentives to business as a continued initiative to boost economic growth. However, it was important to determine whether government incentives to business were indeed growing the economy, creating jobs and dealing with inequality.

The UIF reduction was an important innovation of the current budget. However, the effect of the UIF reduction on the consolidated budget balance was simply a way of drawing down a very large accumulated UIF surplus. Excessive contributions to UIF increased the cost of labour at a time when unemployment was high and job creation a major priority. Returning the UIF surplus was a relatively crude remedy since it might “compensate” employers and employees different to those who made the original contribution. Mandated UIF contributions appeared to be excessive, relative to mandated benefits.

Discussion
Mr Ross referred to personal and company income tax rates. Company tax stood at 19%. He asked if limits could be increased, and what the PBO view on tax increase was.

Dr Khoza remarked that benefits from tax incentives had to be quantified. In 1979/80 corporate tax stood at 35%, and personal income tax at 20%. Corporate tax had had gone down by 20%, whereas the contribution from personal tax had increased to 40%. She asked what had motivated that. She asked about benefits derived from corporate tax incentives. The question was how many jobs had been created. The information had to be processed.

Expenditure
Ms Nelia Orlandi, PBO Policy Analyst, noted that Budget 2015 implemented the MTBPS 2014 proposal to commit to R25 billion in non-interest expenditure over two years. There were functional allocations in response to strategic priorities, including the energy challenge; revitalising agriculture; adding value to mineral wealth; encouraging private investment; unlocking the potential of small enterprises, and infrastructure investment. National macro reorganisation of the State had led to the newly created votes of inter alia Water and Sanitation; Women, and Small Business Development. There were revisions to specific economic affairs votes, namely Energy; Agriculture; Forestry and Fisheries; Economic Development; Science and Technology; Trade and Industry, and Mineral Resources. Main revisions were reduction in the number of vacant posts; cost containment measures; providing for growth that was marginally above inflation; adequacy of accumulated surplus funds, and alignment of planned growth to institutional capacity.

Protection of the Poor
Dr Mmapula Sekatane, Policy Analyst, noted that analysis of poverty in South Africa was still at a very general stage. The country had not committed to an official poverty line, and there was still no official definition of poverty. Particularly vulnerable groups were rural women; children; people living with HIV/AIDS and other diseases, the disabled and the elderly. National and provincial welfare programmes targetted vulnerable groups through particular grants or through geographical targetting of resources (indigent policy). Social protection grew by 7.9% of the budget. The system supported around 16.4 million beneficiaries. The question was if the major grants increases of 4.4% and 4.8% were adequate.

Pro-poor elements included increase in the nominal value of social grants; tax relief for low- to middle income earners and increased tax burdens for middle- and high income earners, and an unchanged VAT rate that shifted the tax burden away from the poor and working class.

Non pro-poor elements were the low increase in grant values that did not make up for inflation; increased electricity tariffs, and fuel and RAF levies that would hit the poor harder as the cost of consumption would increase. The one year reduction in UIF contribution would only benefit those who were employed.

Risks to the sustainability of grants were the adequacy of grants; the number of taxpayers vs grant recipients, and the pace of economic growth. About 11% of registered tax payers brought in 61% of personal income tax payable in South Africa. It could be asked how much longer the 11% could tolerate that. Over half of the country’s children were poor enough to qualify for the Child Support Grant (CSG). If the economy continued to expand at a sluggish pace, debt-to-GDP levels could rise rapidly, pushing more households into low income brackets. Social grants could then cause unbearable strain on the national budget.

Public Service Wage Bill
Mr Brandon Ellse, PBO Finance Analyst, said that the major cost drivers of the public wage bill were the employment level growth of the public service; cost of living adjustments in excess of inflation, and policy initiatives, including the OSD. As of 2011, around 50% of public service employees were linked to OSDs. However, growth in the public service appeared to have reached a turning point as of late 2014. The announcement of a freeze in the funded headcount and the potential scrapping of non-essential vacant posts might further serve to deter further growth over the medium term. Cost of living adjustments in the public service had exceeded government’s inflation plus one percent assumption. During periods of weak economic growth, revenue collection slows and the likely outcome of an increase in the public wage bill is a larger budget deficit. Increases in the public wage bill incurred in recent years were likely to be difficult to reverse.

The fact that the cost of living adjustment assumed in National Treasury’s public wage bill estimate has regularly been exceeded in recent years suggests that public sector labour unions have substantial bargaining power which appears to exceed that of government. The Department of Public Service and Administration (DPSA) has found that this has led to the strong protection of workers against performance-related dismissals and the non-consideration of labour productivity in negotiating public service wage adjustments. This raises the risk of government failing to meet future budgeted-for compensation expenditure limits, should the existing balance of power remain as is.

It is worth noting that Treasury has limited powers in containing the wage bill. Three public wage scenarios were presented, each with a different impact on the fiscus.  The first scenario was called “walking the talk”, which entailed that government stick to its commitment to freeze the personnel headcount with the historical vacancy rate of 10% maintained, and a cost of living adjustment of CPI plus one percent agreed to with public service unions. That scenario could keep the budget deficit in line with what Treasury had estimated over the medium term. If it is agreed that growth in the public wage bill is to be contained, it has to be done so responsibly. It will be critical for Parliament to ensure that the withholding of compensation budgets will not compromise on the state’s capacity to deliver on its mandate.

Private Investment
Mr Ellse noted that with regard to private investment, evidence suggested that private sector businesses had reverted to investing in only what was necessary to maintain current operations. There was a rate of increase in the cash held by corporates and close corporations. The latest data produced by the SARB showed that the cumulative cash balance of corporates had risen to R653.1 billion. Contraction in private sector investment posed problems, including a slowdown in infrastructure development, job creation and economic growth.

Division of Revenue Bill
Ms Orlandi noted that for 2015/16, 47.9% of nationally raised funds were allocated to national government; 43.1% to provincial government, and 9% to local government. Allocations to provinces and municipalities would grow more slowly than in the past. Changes on the provincial level to the provincial budget since 2014 were due to the conditional grants review. On the local level, reductions in 2015/16 ranged between 0.9% and 5.5% of the allocation for each grant. Grant administrators and municipalities had to spend funds efficiently to maintain planned outputs. Rules in the Municipal Infrastructure Grant would be amended to allow funds to be used to refurbish and replace infrastructure, but only if municipalities demonstrated that assets had been maintained on a regular basis. It was likely that there would be additional consolidation of infrastructure grants to municipalities. The review of conditional grants that commenced in 2014/15 would continue in 2015/16. A contributing factor to the complexity of grant management and oversight was the different process flows between the initial transfer and the implementation of the grant.

Discussion
Mr P Mashatile (ANC) [Appropriations Standing Committee] referred to pages 45 to 47. Municipal managers did not know how to spend.

The Finance Select Chairperson, Mr S Mohai (ANC, Free State) noted that Members would receive a report on conditional grants.

Ms R Bhengu (ANC) [Small Business Development Portfolio Committee] referred to debt in the public and private sector. The analysis only spoke of big business. She asked about the situation with regard to small business and cooperatives. Internationally 80% of jobs were not created by big business. The new Department of Small Business Development received a budget that had to be analysed in terms of expectations of job creation. The current condition of small business in terms of support needed attention. The capacity of small business and cooperatives to create jobs could be improved. There had to be skills development as an interim intervention towards job creation.

Ms T Motara (ANC, Gauteng) [Finance Select Committee) remarked that municipalities could not service debt to Eskom. Tariff increases were proposed. The question was how it would be possible to cope with higher tariffs, if debt could not be paid in the current form. She asked if Eskom tariff increases would produce the desired result. The impact on municipalities as a whole had to be considered.

Mr Mteleni agreed with Ms Bhengu that skills development had to be encouraged. He questioned the viability of the Child Support Grant. It seemed that for many young people the easiest way to make money was to make children. It had to be asked if the grant served its purpose.

Ms E van Lingen (DA; Eastern Cape) [Select Committee on Economic and Business Development] cautioned against rushing through budgetary issues. The Finance and Appropriation Committees were in a sense in charge of the budget, and the processes took up time. There had been approvals before budget votes were discussed.

Ms van Lingen remarked that a lot of money was going to cities but money was being taken away from local government. The question was how the rural economy could be stimulated.

Ms van Lingen referred to social grants. Needs on the ground had to be established. Children had to be encouraged to attain a tertiary education, rather than to rely on child support grants. Education and skills had to be prioritised, rather than keeping the poor dependent.

Ms Kekana referred to cost-cutting measures. Freezing of posts that were not related to core functions had to be considered, to prevent the growth of a bloated public service.

Ms Kekana asked if the poor were being sufficiently considered with regard to unemployment. The PBO had to juxtapose its analysis with that of Statistics South Africa. The question was whether gaps were being closed, and whether the unemployed were being reached out to.

Ms Kekana remarked that the Sector Education and Training Agencies (SETAs) could assist government interventions in education. Those who were not in a position to attain tertiary education could be helped. Unemployed youth had to be helped, so that dependency was not created.

Dr Khoza referred to the three scenarios regarding the wage bill. The re-organisation of state administration at the macro level was not interrogated. Administration was growing heavy at the top and thinner at the bottom. There was a need to move towards a developmental state, which was not possible with top-heaviness. Cost drivers were top heavy.

Dr Khoza remarked that pro-poor and pro-growth measures had to be balanced. People were trapped. It had to be known how many people had stopped seeking employment. The question was how the situation could be turned around.

Mr Figg referred to the wage bill. The deficit was growing, due to the cost of maintaining departments. Government could not afford the filling of frozen posts.

Mr Figg remarked that grants were not an adequate monetary mechanism. Not much was happening.

Mr Ross asked about the impact of new electricity prices.

Mr N Gcwabaza (ANC) [Appropriations Standing Committee] said that work done by development finance institutions had to be looked at, with a view to linking up with small business development. There had to be a budget for small and medium enterprises and cooperatives. Transnet had R300 million to spend. The question was how to talk to that sector. The revenue base had to be expanded.

Mr Gcwabaza referred to government incentives to the private sector. The youth employment fund was a disaster. The question was what to do with incentives to the private sector.

Ms S Shope-Sithole (ANC) [Appropriations Standing Committee] commended the PBO inputs. It would enable Members to make up their minds. Parliament had to oversee that what the President said in fact happened. There had to be insistence on the capability of departments to budget. Follow-up instruments had to be used. Departments had to be kept on their toes on a quarterly basis, to see what was happening with money. The question to ask about corruption was whether government had been asleep.

The Chairperson said that with regard to the issues of the poor, NDP prescriptions had to be dealt with.

Prof Jahed remarked that if social grants had to be maintained, the question was whether the same levels could be maintained.

Dr Jantjies remarked that there was research that proved that child support grants did not lead to an increase in children.

The Chairperson asked Mr Mashatile to make concluding remarks.

Mr Mashatile said that more time was needed to consider issues. It was advisable to get the FFC and National Treasury together in one room. Investment in the economy had to be unleashed. There had to be less dependence on social grants.

The Chairperson adjourned the meeting.

 

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