Minister of Finance on the 2016 Budget

Standing Committee on Appropriations

25 February 2016
Chairperson: Mr Y Carrim (ANC) Mr C De Beer (ANC)
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Meeting Summary

In the presence of the Minister of Finance, the Director General of National Treasury briefed the Committee on the 2016 Budget and the Minister answered questions. Taking the Committee through the presentation, the DG focused on the reasons for tough decisions and why South African needed to act pre-emptively. The economic growth appeared to be worsening, but South Africa was responding positively to restore confidence through expenditure reductions and increasing revenue. Fiscal consolidation was accelerated. In so doing, consolidated fiscal deficit would be narrowed sharply over the medium term. Yet, real non-interest spending growth had been lowered over the medium term.

The DG noted that allocation of budget was aligned with the National Development Plan (NDP). In terms of allocations, wages and interest payments took a large share of the budget. The following were noted as challenges: Expenditure grew faster than inflation in most policy areas; expenditure on core priorities continued to expand rapidly; weak tax revenue due to poor economic growth. Finally, he talked about state-owned companies and noted that these companies ought to generate sufficient return to contribute strategically to development without draining resources. Hence a series of reforms were underway, intended to strengthen their ability to support the NDP outcomes.

Members welcomed the 2016 Budget Speech and raised their concern about the fight against corruption which theme they felt came out strongly in the speech but there were no clear new methodologies to fight against it. More clarity was sought on the sugar tax, what measures would be taken to ensure improvement in performance and compliance, PetroSA's R14.8 billion loss, what the phrase “improper involvement negatively impacting on entities” meant, what Treasury was going to do to address those improper involvements, the nuclear deal proposal, whether there was a feasibility nuclear study for the allocated budget, the effect of the national debt of R48 billion on economic growth, what the government could do differently to boost economic growth, and why South Africa was claiming that it was facing difficult times, while the economies of neighbouring countries such as Zambia, Mozambique and Zimbabwe, were growing.
 

Meeting report

Minister of Finance and National Treasury on 2016 Budget
Mr Pravin Gordhan, Minister of Finance, provided a short summary of the budget speech. In sum, he stated that South Africa faced exceptionally difficult global and domestic conditions over the next several years and that all the choices before South Africa was disagreeable, some more than others. Drawing on the country’s resilience, it was necessary to make tough decisions. He handed over to the Director General of National Treasury, to take the Committee through the presentation.

Mr Lungisa Fuzile, Director General: National Treasury, noted that the 2016 Budget proposals would return them to a sustainable path. The 2016 Budget set out tax increases and spending reductions to narrow the fiscal deficit and stabilise growth of public debt, while protecting social and economic programmes. Fiscal measures were not enough. To expand the social wage in a sustainable manner, create jobs and reduce poverty, South Africa needed much faster rates of inclusive economic growth. From an existing conditions perspective, doing so required a sense of common purpose. The 2016 Budget emphasised both public- and private-sector contributions to development. Over upcoming periods, South Africa was stepping up its partnership with business, labour and civil society to realise the vision of the National Development Plan, and to carry out the reforms needed to transform the economy.

Mr Fuzile noted that South Africa needed to act pre-emptively and that global growth was revised down due to weak emerging market outlook. Emerging markets were not rebounding as quickly as forecast, due to low commodity prices, China's rebalancing, and rising financial market volatility. Economic outlook reflected worsening growth. In that regard, growth was reduced across the forecast period and headline inflation was above target band until 2018 due to the weaker rand, drought-related food inflation and electricity price increases. However, government had responded to restore confidence. This was done through fiscal policy that responded pre-emptively to avoid the risk of a negative cycle, declining confidence, lower growth and increased borrowing costs and through fiscal consolidation measures totalling R18 billion in 2016/17, R25 billion in 2017/18 and R30 billion in 2018/19 due to higher revenue, lower spending and reprioritisation. Also, confidence was restored through net debt, which was projected to stabilise the economy at 42.6 per cent of GDP in 2017/18 and through net MTEF additions of R33.7 billion to the provincial equitable share and R4.2 billion added to the local government equitable share.

Mr Fuzile noted that fiscal consolidation was accelerated through tax measures, reduced spending ceiling and reprioritisation. As a result, the primary deficit closed more rapidly than as it was proposed in 2015. The budget deficit narrowed sharply to 3.2% of GDP in 2016/17 and to 2.4% in 2018/19. Consequently, South Africa would experience a primary surplus in 2016/17 for the first time since 2009. This would result in the national debt stabilising in 2017/18 to around 46.2% as a percentage of GDP.

Mr Fuzile noted that risks to the fiscal outlook remained, but National Treasury was managing them and that allocation of budget was aligned with the NDP objectives. In doing so, wages and interest payments took a large share of the budget and real non-interest spending growth had been lowered over the medium term. However, normal expenditure growth grew faster than inflation in most policy area, while spending on core priorities continued to expand rapidly. Whilst tax revenue was weaker due to poor economic growth, tax policy proposals were initiated and were aligned with broader goals of reducing inequality, developing skills, encouraging environmental sustainability and promoting public health.

Mr Fuzile explained in more detail matters involving the division of revenue, changes to transfer to provinces and municipalities, responses to funding pressures within provincial and municipal budgets, financing of national government's borrowing requirement for 2014/15-2018/19, government bond switch programme to reduce bond payments and state-owned company reforms. On the latter matter, structural reform was needed to accelerate growth.

Mr Fuzile noted tourism and agriculture as areas of economy in which more could be done to create growth-enablers. The Department of Finance should therefore provide interventions aimed at unleashing the private sector to try to flourish and there should be no attempt to control it. He concluded that South Africa was well positioned to grow its services in an expanding African market – and the Tripartite Fee Trade area negotiations were underway.

Discussion
Mr Shaik Emam (NFP) welcomed the budget speech and sought clarity on the sugar tax. He remarked that South Africa was committing itself to tackling obesity and the taxation of sugar was significant in contributing to such commitment. He welcomed the privatisation of South African Airways (SAA) and cutting down its expenditure. He noted that the SAA was underperforming and that there was a need to identify challenges faced by SAA.

Mr Emam noted that there was always a general problem of non-compliance and under-performance and sought clarity on what measures National Treasury would take to address those problems. On similar note, he sought clarity on how the misuse public resources would be dealt with.

Mr S Swarts (ACDP) welcomed the budget speech and remarked that it was so positive, to a such degree, it was supported by the EFF. He sought clarity on the PetroSA R14.8 billion loss, on what the phrase “improper involvement negatively impacting on entities” meant, on what Treasury was going to do to address those improper involvements, and on the nuclear deal proposal and on whether there was a feasibility nuclear study for the allocation of budget. What would be the impact of the nuclear deal on the national budget given that it was a long-term project? He sought clarity on how the Department saw the role of the private sector in the economy and on the duplication of roles and functions between private and public sector or between departmental entities.  

Mr M Figg (DA) sought clarity on the effect of the national debt of R48 billion on economic growth. He remarked that the social grant was increased by 3% whereas a number of recipients of social grants – in all ages – increased by 5% in addition to inflation. Taking these factors into account, could it be concluded that there was an increase in social assistance grants? He sought clarity on what would be affected if there was reduction in the forecast? He remarked that it was apparent that the taxi fare would go up and the public had to bear the brunt. He sought clarity on whether the merger of SAA and SAX would not cause a problem.

Mr D Maynier (DA) sought clarity on what the government could do differently to boost economic growth. On revenue, he welcomed the government move to sell non-strategic assets, as declared by the Minister in 2015. He sought clarity on whether such a move had been abandoned. The DA welcomed Treasury's approach to reform state-owned enterprises and sought clarity on how reformation would be implemented. He praised the move to be tough on the question of ministerial transport and sough clarity on why such move was not applied to the four VIP jets. Why was the VIP jet transportation not terminated?

Mr A Lees (DA) sough clarity on whether allocation of R4.8 billion was enough to resolve the FeesMustFall disputes and whether the issue of equity was given much thought

Mr F Shivambu (EFF) remarked that there was a contradiction between the State of Nation Address and the Budget Speech, especially, because the President did not know what he wants. He sought clarity on whether the downgrading of Brazil to junk status would not have a serious impact on the national economy. He asked why South Africa could claim that it was facing difficult times, while the economies of neighbouring countries such as Zambia, Mozambique and Zimbabwe, were growing. To him, South Africa should identify subjective weaknesses and be honest with itself in order to remain competitive in the global economy. He asked if there was a plan to impose a levy on tyres and, if yes, what would happen to the tax paid by tyre producers? Finally he sought clarity on farms. He commented that all political parties should find a common ground and be able to have the right direction.

Ms S Nkomo (IFP) welcomed the budget speech. She remarked that the government has been talking about corruption. However, there was no clear plan to fight against corruption. How did Treasury intended to alleviate corruption. She further sought clarity on what the phrase “so may Africans” used in the budget speech meant. Why South Africa was focussing on imported products while it was well aware that this approach had the potential of increasing the unemployment rate in the country.

On the sugar tax versus obesity, Minister Gordhan responded that more clarity was needed, perhaps, through a legislation that defined the impact of the sugar on people’s health and the context in which sugar could be dealt with. This should be initiated by the Department of Health which was entrusted with the duty to take care about of the health of South Africans. It should be noted that some people did not want to help themselves from drinking sugary drinks that could affect their health. He was aware that communicable diseases were on increase.

On SAA, Minister Gordhan replied that what he had said in the speech was “a mere intent” of his Department to privatise SAA and this could not occur over night. A new management team, supported by a clear financial plan, was required for the privatisation to be successful. More was needed to address the challenge of implementation. He remarked that perhaps the Committee should be recruited to assist in the implementation.

On recruitment, Minister Gordhan said that departments and entities should look at what were critical and essential positions. There were senior positions that had been vacant for a while and needed to be filled.

On nuclear, Minister Gordhan responded that R200 billion was about setting up capabilities and the rest was about the increasing of energy.

On duplication, Minister Gordhan responded that he was not aware of matters raised in relation with Tshwane municipality. However, he agreed that it was very difficult to allocate money to provincial and municipal governments without the possible duplication of budget.

On downgrading, Minister Gordhan responded that the downgrading would be a cost because there might be reluctance in lending money. He suggested that there should be a workshop to unpack this issue. Drawing from Mr Shivambu’s comment, he stated that there should be collective determination to protect South African sovereignty. South Africa did not want to be dictated by international financial institutions with regards on what South Africa was doing and how it defended its currency.

On  social grants, Minister Gordhan said that the increase was what the Government could afford.

On revenue, Minister Gordhan replied that this was a simple equation, if the revenue went down, expenditure would of course go down. Public should sensitised about what the government did to enhance economic growth.

On the four VIP jets, Minister Gordhan replied that he was unaware of these VIP jets and commented that the person who asked the question about them should enlighten members about them. Treasury needed a package of solutions and a road map of financial solutions.

On privatisation, Minister Gordhan replied that what people call privatisation and what people call minority equity shareholding were not necessarily the same. He did not know what that would be, but it would be known when the finalisation phase was reached.

Minister Gordhan stated that Mr Shivambu was right about the comment made on Brazil. Operating on a low base was so difficult and everyone was open to learning.

Minister Gordhan stated that he had highlighted weaknesses in his budget speech and that the budget speech was about economic growth and about the direction that the economy could take.

Mr P Chauke (ANC) echoed Mr Shivambu’s comment that a common ground was needed to take South Africa forward economically. On the other hand, Mr Shivambu had missed a point on what President said. Mr President had made it loud and clear that departments had to implement what was laid down in the State of the Nation Address (SONA), and that was what Treasury was implementing. He remarked that there were certain weaknesses in the banking system. For example, foreign nationals had no significant access to the banking system, especially those who were doing business in the remote rural areas. For instance, a Mozambican national was arrested at the border of Limpopo with R100 million cash money, stashed in the back of a bakkie. This example illustrated that there were many people whose proceeds are not ending in the banks. This issue ought to be reconsidered.

Dr B Khoza (ANC) sought clarity on whether the fiscal policy was aligned to political policy and international relations strategies. Even though economic growth was so important, the achievement of equality or addressing economic inequality and alleviation of poverty ought to be taken into consideration when dealing with matters of global economy and financial markets. She remarked that learners were not receiving assured quality education that would enable them to contribute to the economy and this needed to be revisited.

Ms T Tobias (ANC) felt that a different approach to the development of the economy was needed. With regard to curbing expenditure, she sought clarity on whether Treasury was considered borrowing vehicles from government garage that may be needed by state agents. Procurement of governmental vehicles should be done by national government. There should be disclosure of all assets of the state.

Mr N Mathias (EFF) remarked that the determination to fight corruption came out strongly in the budget speech, but what the Minister of Finance would practically do to fight against it remained unclear. He further remarked that local people were too strong in claiming that local government should deliver services. He sought clarity on whether more money would be allocated to municipalities to enable them to deliver. Municipal capacity was so essential.

The Chairperson remarked that the following day, the Committee would be dealing with issues affecting local governments. All members were welcomed to attend and raise their concerns.
           
Mr A Maclaughlin (DA) sought clarity on expenditure and budget cutting in the face of entities having concluded contracts and how this might be reconciled and on aspects of water and sanitation which were essential in the socio-economic domain.

Mr Y Carrim (ANC) suggested that a focus should be on weaknesses in the labour force, on the progress on appropriation projects, and on laws governing banking. He sought clarity on whether 50 million jobs would globally disappear and how Treasury thought unemployment could be tackled.

Minister Gordhan agreed with the comments made by Mr Chauke and said that fiscal policy was aligned with political intent. The issue of foreigners and where their money went was a something that could be open to debate. Money-laundering matters would be discussed in depth in upcoming forums. On properties, he replied that people were not paying high rates. About the claim of poor quality education, he cautioned that they should not wipe South African education out on the basis of poor quality education; hence there might be quality education aspects. From financial point of view, the provision of education should be characterised by value for money. There was enough money in the system. Money should be used well to produce a good result. Value for money should be obtained by way of implementing policies and this had to be done in a transparent way.

Minister Gordhan agreed that assets of the state should be declared and if people wanted to see a welfare state, citizens should be activated to participate in the municipal affairs. People should get involved. Indeed, some of demographic dividend that citizens were supposed to enjoy were not there. Most people were not reached and, as a result, were outside of the economy because they were unable to benefit from the state’s social programmes such as employment and education and training programmes. More work in these areas needed to be done. There was the problem of people who wanted to lend money according to their own interest rates. Foreigners might not be familiar with conditions in which financial matters were operating and the matters on which tax impinged. There was an issue of the centralisation of the finance system. On the corruption question, aluta continua (struggle continues). This meant that the government should commit itself to fighting corruption. Parliament had an important role to play in holding people to account. There were various portfolio committees that could ensure accountability including the standing committees on appropriations and on finance. These committees had power to investigate the actions of state agents and to interrogate agents on why they acted in a particular manner.

Minister Gordhan said that insufficient money was an issue in some municipalities and was not an issue in others. Rather, misuse of money was a huge problem. Where money was a problem such a matter could be resolved by Treasury and where the money was an issue of misappropriation, officials responsible should be held to account. Political parties could play a part in bringing officials to account.

The Chairperson thanked the Minister for his time, presentation and clarity and stated that there would be further engagement with Treasury – not always in the presence of the Minister – to clarify certain fiscal matters. He noted that it was the role of the Committee to enhance a good relationships between tiers and organs of the government.

Meeting was adjourned.

 

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