2016 Budget Review Analysis by Parliamentary Budget Office & Financial and Fiscal Commission

Meeting report

Financial and Fiscal Commission (FFC) on the 2016 Fiscal Framework and Division of Revenue
Mr Bongani Khumalo, CEO of the FFC, said the key message of the FFC was that stronger economic growth remained unattainable because global growth was flat arising from a rebalancing of the Chinese economy and the normalisation of the US monetary policy, while domestically, South Africa was experiencing drought conditions. There had been an increase in maize import prices and South Africa would become a net importer of grain in seven years’ time. Weak growth was expected through to 2017/18. This necessitated a ‘growth friendly’ fiscal consolidation because sound public finances were a prerequisite for national development and would create a solid foundation for long term development. Structural policy implementation was needed to address human capacity issues, the rapid rate of urbanisation and to revive the pace of productivity.

Mr Khumalo said there had been a progressive slowdown in South Africa’s growth forecasts. He said more resources had been spent on consumption and not on investment and that there were fewer new value investments by the private sector. The government had committed to reducing the budget deficit and stabilising debt while avoiding socio-economic dislocation.

Dr Ramos Mabugu, Research and Policy Director at the FFC, said the budget had taken into account long term issues in the budget formulations and spending was based on tax revenue. It recommended that the growth in the public sector wage bill expenditure be moderated and that the government explicitly consider economic growth as an important factor for fiscal consolidation. The tax changes were small and designed to plug gaps. As part of the fiscal consolidation, the FFC was discussing tax revenue buoyancy, which was a concern, with the Davis Tax Commission and were trying to get it above one. The FFC had made two proposals on VAT and these issues were being discussed.

On the Division of Revenue Bill, Dr Mabugu said money was added to the contingency reserve which had increased but was still far from sufficient to act as a buffer against an economic crisis. Government had agreed to the FFC’s recommendations and were already implementing some of them.

The major revisions to the Bill were: allowing grant funds to be reprioritised for disaster relief; responding to procurement corruption; transitional measures for the 2016 municipal elections; clarifying the provisions for withholding and stopping of allocations, and gazetting human settlement allocations to cities.

The total Local Government baseline allocation would have a net decrease of R968m. The FFC’s view was that the local government equitable share should be ring fenced for municipal serial offenders who did not pay for their electricity and water.

The FFC welcomed the demarcation changes but emphasised that the full financial impact of all demarcations should be established before boundary changes occurred and that affected municipalities be made aware of such costs.

The FFC felt that there were too many changes regarding the NHI grants which ran the risk of eroding previous priorities. It should stick to something and not chop and change every year.

Parliamentary Budget Office (PBO) 2016 Budget Review Analysis
Prof Mohamed Jahed, PBO Director, said the purpose of the PBO was to provide technical analysis and highlight salient budget matters to reflect on. It looked at critical issues and policy proposals could be solicited from them while they could also provide information on theoretical frameworks, like Keynesian policy, which focused on fiscal spending.

Dr Dumisani Jantjies, PBO Analyst, gave a historical overview of South Africa’s fiscal policy and frameworks over the years. Growth had declined from 3.3% in the 1990s to below 1.5% after 2014.

Mr Brandon Ellse, PBO Analyst, looked at the debt outlook. The slower growth and weak currency meant that South Africa risked a downgrade by ratings agencies to non-investment grade which would increase the cost of borrowing and trigger a sell off from institutional investors. Tax revenue was below forecast and that there was a strong relationship between growth and revenue. He spoke to revenue proposals to address the structural deficit, the alignment of expenditure with the National Development Plan (NDP), the reprioritisation of funds, provincial and local government spending, and unauthorised, irregular and fruitless expenditure.

Dr Sean Muller, PBO Analyst, spoke to GDP growth forecasts, the sustainability of social grants and State Owned Enterprises (SOE) financing risks.

Discussion
Mr A Shaik Emam (NFP ) asked how Barclays’ withdrawal from South Africa would affect the economy. Why was there a need for direct and indirect grants? What would the impact of the increase in taxes be on the poor? What impact did labour regulations have on business and the economy? He was concerned about imports of products which local industry could manufacture. What was the FFC’s view on child support grants? He believed the high cost of wage compensation to government employees meant less money was available for goods and services.

Mr A Lees (DA) asked if more resources should be put into metros because of the continuing trend of urbanisation. Was there a positive outcome to productivity measures? How realistic were the outer year estimates of the MTEF?

Mr M Figg (DA) asked if more emphasis should not be put on cutting expenditure. He asked whether the depreciation of the rand balanced the reduction in revenue that was earned by the country. What was the actual demand for maize and wheat in the country. On fiscal consolidation through tax measures, he asked whether the tax was an unnecessary burden on taxpayers who could afford to pay. Should the emphasis not be on increasing the tax base. Has the costing for boundary changes by the Demarcation Board been done?

Ms S Shope-Sithole (ANC) asked the FFC’s view on giving the South African Reserve Bank unemployment and poverty targets as well.

Ms C Madlopha (ANC) said the NHI was still in its pilot stages. What recommendations could the FFC give based on its concerns. She asked if the indirect grants were eroding the capacity of municipalities. She said there were no interventions to capacitate local government.

Mr O Terblanche (DA) asked what would kick start the economy given that the anticipated growth rate would not be achieved. It was very important that policy issues were addressed to make South Africa a more investor friendly destination because people did not feel comfortable to invest here currently.

Ms B Khoza (ANC) asked if South Africa was able to withstand economic shocks or had it become complacent and was it competitive enough. What was meant by growth friendly fiscal consolidation? What were the human capacity issues that needed to be resolved. Had the FFC quantified the spending pressures on municipalities caused by rapid urbanisation? She said regional integration issues and foreign policy were not speaking to the situation of the country and added that many people had not been counted in the census. Was the labour environment responsive to a growth friendly environment?

Mr B Topham (DA) said that the budget should increase capital expenditure to create jobs rather than spend on consumption expenditure.

Mr A McLaughlin (DA) said that the previous year, it had been said that debt was not being reduced. If debt was being reduced, would it result in an upgrade by the ratings agencies? What was the gross debt figure?

Mr Y Carrim (ANC) asked what was meant by the theoretical framework of the budget. Was the budget an austerity budget or not? What was meant by structural deficit? He said the fuel tax levy was a more regressive tax than CGT. He said he had concerns over the process the Bill took through Parliament. He felt that the Committee needed to meet the Minister after it had met with the FFC and the PBO rather than the day after the budget speech. He said that the role of Parliament needed to be looked at to prevent sovereign downgrades, by holding departments to account.

Mr Khumalo replied that the two written submissions of the FFC would cover the points raised by Ms Khoza. He said that direct and indirect grants were for spill over effects across provincial or municipal boundaries and for national priorities. Indirect grants should be a last resort and capacitation of the municipality should be attempted first.

On the question of imports, he said that it depended on how competitive the domestic product was.

On the child social grant , he said it had a positive effect and had a significant role and that the grants had to be protected. It was not a question of whether they were sustainable or not, rather it was a question of whether they were being used correctly.

On wage compensation, he said it was about the link to the value the wages generated. The bulk of the money was spent on health and education.

On the question of Barclays, he said he did not know the answer offhand.

On the question of urbanisation, Mr Khumalo said it was an important conversation and he did not believe there was a trade off, as the NDP recognised rural development. He said the FFC Annual Report when tabled later in the year, would address urbanisation from a rural economy perspective.

On Mr Figg’s question on whether expenditure was being moderated or cut, he said expenditure was still growing but at a lower level.

He said inflation targeting and unemployment and poverty were managed together but that SARB’s responsibility was monetary policy while Treasury looked after the fiscal policy. The policies were supposed to support each other.

Mr Khumalo agreed that the NHI was involved in pilot projects but he said he could not get an idea of what the pilot projects had shown. What was missing was the Intergovernmental Fiscal Review (IGFR) because the finances needed would impact on national and the provinces.

Dr Mabugu said the maize figure was based on maize consumption figures of 5 million tons. Demand was conditional on income and price.

On the employment incentive tax, the FFC had made the point that the basis for an employment incentive subsidy was youth unemployment. It was a very small incentive scheme and questions were raised whether the magnitude of the incentive could do the job. It had to be seen as a pilot because an incentive scheme could not on its own influence youth unemployment.

On Mr Figg’s question about the Rand’s depreciation, he said it depended on the elasticity of imports and exports.

On social grants and job creation, Dr Muller said that while job creation may be preferable to providing social grants, most social grants do not actually benefit the unemployed directly since they are targeted at groups like older persons and the disabled.

Dr Muller said it was not an austerity budget since total real government expenditure had not been reduced. However, some analysts have pointed out that because population growth is higher than expenditure growth, the real government expenditure per person would be lower.

On actually reducing debt, Mr Ellse replied that Treasury said they were stabilising it and if the growth of debt was kept lower than the GDP growth rate it would reduce the debt-GDP ratio. Gross debt stood at 50.5%.

On Ms Shope-Sithole’s question, Prof Jahed replied a secondary objective to inflation targeting could be job creation and this was an issue that could be taken up. He said patterns of trade had changed and that a discussion needed to be held on a theoretical framework.

The meeting was adjourned