Medium Term Budget Policy Statement (MTBPS) 2015: Minister of Finance briefing

Meeting report

Minister of Finance: Medium Term Budget Policy Statement (MTBPS)
Mr Nhlanhla Nene, Minister of Finance, said that it was a tough time for the presentation of this Medium Term Budget Policy Statement (MTBPS). The world economy was going through a period of sustained low growth, and this affected developing economies severely as they attempted to adapt to the situation. In SA’s own backyard, it was dealing with electricity constraints, low business confidence and declining household demand, which compounded the weak economic situation. Government had identified the structural reforms needed for a higher growth path in order to reduce SA’s vulnerability, by maintaining the health of public finances. The National Development Plan needed to be implemented with rapidity and seriousness. The 2015 MTBPS built on previous commitments to stabilise public debt and improve the effectiveness of government spending. A proposed long-term fiscal guideline would improve SA’s chances of benefiting from future economic expansion.

The provision of electricity and sanitation, and infant mortality and life expectancy had all improved markedly in the past year. These were indicators of good fiscal planning, which was encouraging in the midst of a low-growth environment. However, the resources available to the fiscus were not sufficient to maintain this development in the long- or short-term.

Economic growth was expected to be only 1.5% in 2015, rising marginally to 1.7% in 2016. This was lower than the original 2% forecast. Growth would hopefully reach 2.8% by 2017. These lower expectations were due to the low confidence of investors in SA, and also because of the debt that had accumulated in SA’s households. Inflation might go slightly above the target range of 6% this year, but should move back into the target range next year. Without a change in the pace of growth, SA would not be able to substantially reduce unemployment, poverty and inequality.

Obstacles to economic growth
The relatively poor performance of SA’s economy was partially due to the way it was involved in global trade, generally using a free-market approach. This meant that when the global economy grew slowly, the economic growth of SA also naturally suffered. Growth in both the Euro area and China had slowed down marginally, which had directly affected SA’s growth negatively.

If the electricity constraints were overcome, SA could improve growth by up to 1% per annum by supplying sufficient energy to its manufacturing and other energy-intensive sectors. Private sector investment had contracted by 0.1% in the first half of 2015, partially linked to this energy issue.

The South African Rand had depreciated markedly in the past year, but SA had enjoyed some real gains due to its relatively high inflation rate. SA’s capital markets had been resilient, enabling continued inflows of portfolio capital to sustain external imbalances. However, the efforts to improve domestic constraints such as energy needed to be stronger, to enable the South African state to effectively combat issues of inequality, poverty and unemployment. Without an improvement in these areas, the state would not be sufficiently resourced to overcome these issues.

Government’s response to obstacles
Government’s priorities to restoring economic momentum were related to speedy action by entities in response to obstacles, continued investment in infrastructure and reforming the governance of many entities. The labour market was also a concern, as protracted strikes seriously damaged the country’s image. Reforms were being carried out in these areas. The autonomy of entities to react to situations would also be examined and increased.

Poor growth had been reflected in poor tax revenue for the state, as the state had projected a revenue of R7.6 billion less than originally forecasted for this year. Serious revisions were needed in the tax revenue system, because to increase expenditure the state needed to improve growth in order to raise revenue. The base that was taxed by the government needed to iincrease to achieve this goal. Various reforms were being investigated by the Davis Tax Committee to improve the efficiency and progressiveness of the tax revenue system.

No decision had been made on value-added tax (VAT) as of yet, and the Davis Committee was also examining this facet of the fiscal system. It was important to look at the entirety of the fiscal system when making these decisions. Expenditure of revenues was a vital part of these systems, and needed to be discussed simultaneously with revenue systems. Revenue growth had been quite high in SA during the past few years, related to GDP growth, and this had allowed the state to do many things, such as give people tax breaks and increase expenditure in certain areas.

The commitment to stabilise debt as a proportion of the gross domestic product (GDP) looked feasible, as forecasts showed that SA should be able to bring the growth of debt as a percentage of GDP down in the next six years. It should stabilise at 45.7% by 2021 and begin to decrease. This was slightly later than originally projected and presented in February, but it should still stabilise.

The Department was still adhering to the new guideline that sought to anchor good fiscal management in all its policies. This was based on principles of counter cyclicality, debt sustainability and inter-generational fairness. Borrowing to finance consumption would decline, and a spending ceiling had been introduced to reduce debt. Enhanced budget transparency would also be enhanced in the budgeting system. Budgeting systems were often based on annual appropriations, and did not often capture the investment potential of the government’s different options. Enhancement in transparency would hopefully improve this.

One of the risks to the fiscal outlook was a further deterioration in economic growth, which would result in falling revenue growth and a host of other problems. Another risk was that expenditure pressures would be linked to inflation, as this would increase the likelihood of unplanned expenditure. Weak financial positions of several major public entities also posed risks to economic growth, as government remained committed to deficit-neutral capital financing of state-owned companies in the years ahead.

Spending growth had outstripped inflation in many policy areas, such as health, social development and welfare, basic education and general public services.

Accommodating the public wage legislation had seriously impacted on the ability of public spending growth to stay in line with inflation. This meant that there was little room for new spending priorities over the next three years, but core areas of need were being addressed within spending limits. R13 billion would go to accommodating higher-than-expected growth in grant beneficiary numbers, and R6 billion would go to the local equitable share to support the rising cost of free basic services. Substance-abuse and HIV/AIDS treatment and other infrastructure centres would also be prioritised. The allocation to individual departments had not been discussed or decided upon yet.

The interest on debt grew the fastest, followed by the compensation of employees, in the government’s spending portfolio. It had to be made easier for businesses to do business with government, and a removal of red tape and bureaucracy in various sectors of the state would allow for this. New potential systems would be examined and if costs could be cut while maintaining the same service delivery, these new systems would be rapidly executed.

The Division of Revenue Bill would clearly set out the reforms to conditional grants, and more differentiation would be introduced to many grants. The maintenance of infrastructure would be improved in order to avoid unnecessary spending on new systems that could be avoided through maintenance of old infrastructure. The government wanted to move towards a system that used objective criteria in order to be able to plan ahead, which was vital for infrastructural investment.

Discussion
The Minister was asked to comment on the ongoing student demands for no increase in tertiary education fees, and how the Treasury planned to react to the unexpected deficit in revenue. The budget deficit forecast had increased since the February presentation. How would this affect the consolidation efforts of the government? The long-term fiscal guidelines also needed to be clarified. Issues related to nuclear expenditure should also be addressed.

Mr M Figg (DA) asked if the increase in tax rates had successfully stabilised the growth of public debt. Had the spending over the medium term of R4.7 trillion shown significant state benefits in the face of SA’s corruption problems? Would corruption be combated? Why was the shortfall on the wage bill being funded by contingency reserves? R2 billion was being used to fund the BRICS bank, but $10 billion seemed to be required for this project to be successful. Would the Davis Tax Commission be introducing tax increases?

Mr F Essack (DA) asked how funding from the International Monetary Fund (IMF) and the World Bank would be structured in the next two years. What plans did the Treasury have to stimulate household demand? As the mining industry declined worldwide, what plans did the Department have to invigorate SA’s export sector? How would permanent increases in government revenue be sourced? Was there a time frame for this expectation?

Ms S Mchunu (ANC) also asked about what plans the Treasury had for the increased funding demanded by students. The infant mortality rates were declining, but due to unemployment and other issues, some diseases and viruses were returning to prominence in the country. Issues of drought in rural areas had caused serious issues related to agriculture and personal suffering. Were funds available to combat these kinds of issues?

A Member asked when chronic, structural problems would be addressed. Although productivity through government spending had been prioritised, the civic wage bill was daunting and not enough had been done to overcome this issue. Government had not spent sufficiently or correctly on training and skills development. How would the Department overcome this?

The impact of equitable share allocations to municipalities had been serious, but what lessons had been learned about service delivery? What had been the impact of this interaction? To what extent was the National Treasury prepared to impose its will on entities to pay back what they owed to certain municipalities? The stated objective of the envisaged labour reforms was to curb protracted strikes, but was this really the overarching vision that the Department should have regarding labour reform? The mooted Border Management Agency Bill suggested that SA should transfer customs functions to certain external entities. However, SARS had done a good job in this capacity, so what was the rationale for this bill?

A Member of the Standing Committee on Finance said there were a number of remarks in the MTBPS documentation which indicated that the increased civic service spending was temporary in order to maintain a certain standard of delivery. How would the government overcome this? What was the Department, or the government in general, doing to attract additional corporate interest in the country?

Another Member asked what exactly universities were funding when they increased their fees. How did these universities interact with the National Treasury and the Department of Higher Education and Training? A year and a half ago, about 350 000 expatriates had returned to SA, and they had soon all been absorbed into the economy. Why was the country itself not producing individuals with the skills required to be involved in the economy?

There seemed to be no improvements in rollovers and the consequences for rollovers in various departments. What was being done to combat this issue? Municipalities continued to use consultants at an alarming rate -- was this necessary? The higher fees these individuals and companies charged did not necessarily lead to better services, and may be indicative of corruption.

Co-chairperson Carrim had raised the issue of meeting for an hour and a half. This length of time was not appropriate -- when so many committees met, there was not enough time to speak to the various issues that needed to be addressed.

Response by Minister
The Minister said that government had started an inter-departmental task team to deal with various issues. Their chief objective was to identify the inefficiencies of SA’s governance structures. The issue of post-school systems was important to the government and the National Treasury, and there were many stakeholders involved in addressing this problem, including entities from the private sector. This matter needed to be resolved to enable the country to grow economically. The reasons for proposed increases in fees earlier this year by institutions of higher learning needed to be addressed and examined.

Although SA’s debt as a percentage of GDP was still rising, it was well below the unsustainable levels of 50% or more. It needed to be stabilised, but could not be reduced yet for the governance of SA to remain at current levels.

Various investigations were being made into the viability of the investment into the nuclear power systems that had been proposed, and it would be some time before these investments started to be actually executed.

The increase in income tax of 1% had kept tax points at the levels they needed to be, which was indicative of a stable revenue system. Corruption needed to be combated, and various departments had to collaborate and take responsibility for any misdirected spending. Accounting officers and the executive authority needed to take account of funds and ensure that they were spent appropriately.

The Department of Agriculture had been allocated some funds for droughts in certain areas, but National Treasury had not as yet been approached about an increase in these funds or a necessity for more availability in rural areas.

The MTBPS would not address tax or VAT increases yet, and Members would have to wait until the budget period before these issues could be addressed. There would be a consultation process that arrived at an informed decision, with various stakeholders, including Parliament, taking part in the design of these systems.

SA did not qualify to be funded by IMF or the World Bank, so these sources of income had not been examined.

The only thing that would stimulate household spending was an economy that involved households in economic growth, and this might need to be adapted in order to assist households in a period of low economic growth.

Other departments were responsible for identifying alternative streams of revenue for exports in the face of a diminishing demand for SA’s minerals.

Budgeting was a game of trade-offs, and when there were new priorities that took precedence, some other priorities had to be shelved. What this would mean after the student demands for cheaper tertiary education was not yet clear, as the National Treasury would have to consult with various other stakeholders in order to make a decision.

National Treasury continued to allocate funding to the Department of Health to combat issues such as infant mortality, and it was hoped that this issue would continue to improve even in the face of low economic growth.

National Treasury had learned many lessons from engaging with external or semi-external public service delivery entities. It would not allow the same interactions with entities that had previously defaulted on promises to municipalities and would avoid making these mistakes again.

The Commission for Conciliation, Mediation and Arbitration (CCMA) was now able to intervene in issues much more expeditiously in order to avoid protracted labour disputes and strikes. By getting mining houses and miners together in order to negotiate, deals had been struck which had left both parties satisfied.

Fiscal incentives were the main attraction for foreign investment, and were the most exciting attraction at the moment for SA’s economic growth.

The Department had identified imbalances in the fiscal system due to earmarked taxes. In areas such as the Unemployment Insurance Fund (UIF), which regularly accumulated a surplus every year, investigations were being conducted to allocate funds more appropriately. Some institutions budgeted for surpluses, while others budgeted for deficits, and these strategies needed to be consolidated for both the short-term and long-term.

National Treasury had said that guidelines for national spending were based on long-term expectations for economic growth. If the economy faltered in the short-term, then expenditure would be greater than economic growth, and if the economy boomed, expenditure would be constrained compared to economic growth. This related to sustainability in the long-term.

Affordable access to tertiary education was a key facet of the NDP, and the National Treasury aimed to provide this.

If there were investments that seemed to benefit the economic growth of the country, then borrowing would be encouraged for those investments. However, the success of these schemes rested on the ability of the government to identify potential areas of investment correctly.

The adjustments for this year showed rollovers at R1.6 billion. The notion that this implied that regulations should be tightened was incorrect.

The meeting was adjourned due to a shortage of time, the relatively short period of one and a half hours allowing insufficient time for further discussion to take place.