Medium Term Budget Policy Statement 2016: Minister of Finance and National Treasury briefings

Meeting report

Medium Term Budget Policy Statement
Introductory remarks
Chairperson De Beer noted his appreciation for the presence of the Chairpersons of finance committees in provincial legislatures and MECs. These people would be present at the Medium Term Budget Policy Statement (MTBPS) lock up and would again be present when the Minister briefed the Committee on the Division of Revenue Amendment Bill.

National Treasury briefing
Mr Lungisa Fuzile, Director General, National Treasury, said the first slide summarises the main messages of this budget. It reflects some of the realities being lived through, including both external and domestic factors. In a large measure, it is a result of investor confidence being at historical lows, and structural constraints weighing on the economy’s performance. A growing economy yields high revenue and enables the government to fund its programmes in a sustainable way. Given that the challenge is largely growth, National Treasury (Treasury or NT) makes the point that while adjustments can be made to expenditure and revenue to meet the fiscal objectives, it is necessary, in the longer term, ,for government to be working with all other constituencies, including labour and business, to grow the economy. This will allow opportunities can be created for everyone and also will allow the extension of services to those who need them. It is important to note that when times were good, government was able to extend expenditure considerably. Over the last 20 years, spending per person has been doubled in real terms. Now that the economy is not performing well, government has to try to align growth in expenditure to what the economy can afford.

The Minister had made the point quite eloquently that this MTBPS proposes “a measured, balanced and careful attempt at fiscal consolidation”. Measures have been introduced to reduce expenditure by just over R20 billion over the next three years, in addition to what was proposed in February. There are also proposed tax measures which will, in 2017/18, bring in R28 billion. There is also additional funding for higher education. Mr Fuzile reminded Members that the budget speech had noted that government had to reprioritise just over R16 billion to add to the National Student Financial Aid Scheme (NSFAS), to help reduce outstanding debt and extend its coverage. Now government had had to top that up with an additional R17 billion over the medium term. This would take spending on higher education to the second fastest growing item, next to debt service costs. Government continues to spend on infrastructure, to ease the bottlenecks to raise production capacity of the economy.

Mr Fuzile said growth forecasts for different parts of the world, and the International Monetary Fund’s global growth forecast had been revised down for 2016, to 3.1%. For most parts of the world growth forecasts have been revised down and importantly this was also true for those countries with whom South Africa trades. For example the BRICS countries are not growing as robustly as they used to. South Africa’s growth forecast has also been revised down to 0.5% since January 2016 and next year was 1.3%.

Mr Fuzile said there has been slowing growth for sub-Saharan Africa, as a result of low commodity prices. The importance for South Africa is that when Europe slowed its demand for South African manufactured goods had fallen, Africa took a lot of that slack. This can be seen in the growth forecasts for Nigeria and South Africa, Africa's two largest economies.

Mr Fuzile spoke to South Africa’s trend in growth. Before the 2008 crisis growth was “roaring”, with rates averaging 4.3% for seven or eight years. There was the dip in 2009, when the global financial crisis broke, followed by a fairly robust rebound. Since then growth had tended to decelerate, year after year, to the 0.5% of this year. Some green shoots are being seen and Treasury believes that in the period ahead growth rates of 2% could be reached.

Mr Fuzile said that of course, nothing was automatic, and it would take confidence to reach levels higher than now, and those matters affecting lack of confidence would need to be addressed. He noted a very close correlation between business confidence and GDP growth, as seen by the fact that  whenever business confidence improves, growth tends to follow. A number of things would support this recovery including real exchange rate depreciation not being eroded by inflation; a moderate rebound in commodity prices;  and anticipated change in the drought and electricity supply situations.

Mr Fuzile said there are two major fiscal challenges. Firstly, in the medium term, it was necessary to avoid the low growth trap. The setting of fiscal policy - both the reduction in expenditure and the proposed increase in taxes – has been informed by the desire to ensure that a delicate balance is struck between demonstrating a firm commitment to returning the fiscus to a strong footing, and acting too hastily, damaging the nascent growth. In the longer term, in order for South Africa to realise its aspirations, as set out in the Constitution and elaborated upon in the National Development Plan, government must make sure it does what was needed to grow the economy. If not, it will not be able to afford the expansion of public services, financed on a sustainable basis over the long term.

Mr Fuzile said a package of actions are proposed, aimed at restoring investor confidence. There is a need to give certainty on regulatory frameworks for different sectors of the economy, including those relating to the governance of state owned enterprises, and, where appropriate, collaborative efforts with the private sector. A lot of progress has been made to getting this in place and some of it is being implemented already. Others are being put through government processes, including some of the labour market reforms which have been under discussion within NEDLAC. Efforts between government, labour and business were bearing fruit in the run up to June. Discussions were held with investors and ratings agencies, and these continued post June. Business made firm commitments and set up an SMME fund, which will not only give funding to deserving small businesses, but also offer mentorship and support. Furthermore, business has committed itself to donating financial and other resources to hiring young people, with the processes already under way and 1 to 1.5 million targeted for assistance over five years. This shows that all constituencies are working together for the greater good of the country.

Mr Fuzile said the measures which have been taken have led to stabilisation of debt as a share of GDP. This applies to both gross (before taking into account cash balances) and net (after adjusting for cash balances) share. The projections anticipate a peak and level off in the medium term. This is not going to be automatic and is predicated on the growth forecasts being realised with the right revenues to be derived, as well as the policy measures being implemented.

Mr Fuzile said in the pre-crisis period, revenue ran consistently above non-interest expenditure, which meant a substantially positive primary balance was being run. The crisis led to over borrowing. The idea is to bring back the pre-crisis position, which is projected to occur post 2016/17, as a result of the efforts which government has made. These include
- further reductions to the expenditure ceilings, to R10 billion in 2017/18 and R16 billion in 2018/19
- additional tax measures, both from 2016 and for 2017/18, would bring in an additional R28 billion
- combined with the expenditure measures for 2017/18 these measures would add up to R48 billion which is roughly 1% of GDP. That gives the consolidation required.

He said that there had been a marginal slip in budget deficit to 3.4% from 2.2% as at February 2016, expected to reduce to 2.5%. If all the measures are put in place it is expected that total revenue will equal R1.4 trillion, which is 30% of GDP. Expenditure would be R1.5 trillion or 33.3% and the difference is the projected 3.1% budget deficit.

National and provincial government headcount rose between 2006/7 and 2011/12, reaching a peak of about 1.2 million people. Whatever was to happen in 2015/16 would be a function of the wage bill growth, which would determine how many people the system can afford. Real growth in public non-interest expenditure grew steadily until 2009/10, at about 10%, but as the economy slowed it became harder to sustain those levels of expenditure. In the period ahead, not much growth will occur in spending.

Mr Fuzile turning to spending priorities, and said the most important part is the growth rates. Post- school education and training does grow quite fast, at 9.2% on average annually. Health and social protection also saw relatively high growth. One of the things which will be assisted by stabilisation of debt is the growth in the cost of debt servicing, which is projected to grow by 10.1% over the medium term.

Mr Fuzile spoke to containing spending on non-essentials. He said it is often asked whether the measures imposed by government are working. On many items, spending has reduced, in some cases due to hard budget cuts, but in others due to efficiency improvements – which he illustrated by saying that this would be where the same quantity of something was bought, but ,due to some intervention, less was being paid.  Textbook procurement was one such  area and this had been extended also to telecomms and travel and accommodation. These savings have been achieved through interventions by the Chief Procurement Officer, by asking suppliers the hard questions about government paying more than private clients, even where government’s volumes are higher.

Mr Fuzile on funding post school education, said the growth rates in this area are far higher than any other spending area and the distribution sees subsidies to universities growing by 10.9% annually and transfers to NSFAS growing at 18.5%. The R16 billion in 2016/17 and R17 billion in 2017/18 includes funding of historical NSFAS debt which prevents students from registering at R2.5 billion in 2016/17 and an extension of coverage in 2017 to students from households earning up to R600 000 per year at R8 billion in 2016/17, growing to R9.2 billion in 2017/18. There was an allocation the previous year for the “zero fee increase”, because although it was zero for the people who had to pay the tuition, the universities did get their increase.

Mr Fuzile, on the division of revenue, said Chapter 13 of the Constitution requires that each sphere receives an equitable share of nationally raised revenue. Looking at 2017/18, the national allocation will be R598 billion, provincial will be R538.1 billion and local government R112.5 billion. He emphasised that in relation to the local government allocation, a sizeable proportion of the funds which flow through local government accounts come from sources other than nationally raised revenue, including property rates or user chargers for services which they buy and on-sell. These shares translate to national government receiving 47.5%, provinces 43.4% and local government 9.1%. These proportions hardly change over the medium term.

Mr Fuzile said actions which have been taken to improve state owned enterprises (SOEs) are important, because this had been highlighted as one of the risks. The significance for budgeting is that government has guaranteed some of the debt owed by SOEs. Government has to act carefully so that its contingent liabilities do not become actual liabilities tomorrow.

Mr Fuzile, in conclusion, said South Africa would emerge out of the present situation if it acted decisively and the Minister had emphasised several points in his speech the previous day. Government needs to get on with its reforms as underpinned by the National Development Plan and the Nine Point Plan. South Africa needs to deal with the other things which stand in the way of growth.

Minister of Finance briefing
Mr Pravin Gordhan, Minister of Finance, said he would like to reinforce some aspects. Firstly, that the “green shoots” of growth are there, but these need to be nurtured politically, economically and socially. As was said in the speech, it is up to the nation to decide how it approaches this question.

Secondly - and he hoped Parliament would join the executive in this venture - the singular focus needs to be on inclusive growth, and how to create conditions for growth in this economy? This could be through confidence building or increases in investments by the state (which was happening), or encouraging private sector and foreign investment, in portfolios but also in particular in the real economy. If South Africa did not get the growth figure right and achieve growth in the same way, then all these other fiscal numbers would continue moving the wrong way.

With respect, he did not think Parliament engaged adequately on these issues of growth. There may be political party views, but there was a lot of room to really get into some deep thinking about what the structural blockages are in the economy, where reform will be required, who will undertake the reforms and when results can be expected. This was not just a talk shop, because it affected the futures of 55 million people.

Thirdly, he stressed that fiscal and budgetary manipulation or management would not give all the answers. Government was walking a very delicate and measured path at present to ensure that the expenditure cuts and tax increases do not crowd out growth. That is the disaster which needs to be averted. This was extended also to revenue, with R23 billion being lost in revenue and much more going forward if the scenario remains the same. This is something which the country cannot afford. The performance of the South African Revenue Service comes to mind. The fiscal issues need to be complemented by what he had called, in the speech, a multi-faceted approach. This meant that:
- Firstly, the country must get the growth dynamic going.
- Secondly, it was necessary to build confidence, investment and partnerships, because government cannot do everything that needs to be done on its own.
- Thirdly, it must ensure that government programmes like the Nine Point Plan are actually implemented, with concrete evidence, milestones and delivery. This would show South Africans and others that this is a government at work.
- Fourthly, the reforms which have been undertaken need to be put into practice. Some of these lie in Parliament’s hands. Electricity certainty is not in Parliament’s hands. The Deputy President was leading a process on the labour market side, and there have been good advances with labour stability in 2016. More needs to be done, but work is going on - for example with balancing the minimum wage.
- Fifthly, there needs to be more support for small business. There were still entities sitting in the wrong place, which had not been consolidated and Parliament must ask questions about when this would happen.

He added that there were some growth areas like tourism and the oceans economy which need to be explored. There were bills in the parliamentary process, including the Minerals and Petroleum Resources Development Bill and the Communal Land Tenure Bill which need to be cleared for more certainty. Parliament cannot be contributors to uncertainty, when it is within Members’ powers to deal with these matters. He would appeal for a sense of urgency on the side of Parliament to enhance these processes in the right ways. There were other areas where quick decisions would help create a climate of certainty and gain the rewards for the economy. He was unsure how Parliament would do it, but it was a contribution to building national consensus around a plan of action that would reinforce the hope seen, and strengthen the fact that there are green shoots available. This would turn the economic picture around, and also turn the fiscal picture around. He was optimistic that there is more potential for this to happen than to not, but a lot of hard work and consensus building was needed to get there.

Discussion
Ms T Tobias (ANC) congratulated the Minister for the increase in the education budget. The difficulty would be that it has been offset from other areas, although the fact that this could be done was an achievement that had to be commended.  She had looked at the projections for growth, and in the outer year the 2% worried her, because it may be a bit ambitious. Government should not be intimidated by people who wanted the economy to grow at fast pace, which may not be achieved. She raised this point, because the presentation repeatedly emphasised the need for a culture change in government departments around spending. Perhaps the reductions in spending could be interrogated between February and the present. Perhaps the estimates for growth should be revised down, to be more realistic about what can be achieved.

She noted the strong message that the intention is to focus on value added tax (VAT), as opposed to company tax but she believed that a balance had to be struck between all the forms of taxation, so that there is not pressure on certain areas.

Co-Chairperson Carrim said no decisions were being taken about any form of tax, because those typically come in the Budget. It was not usual to address tax issues in the MTBPS.

Mr Gordhan said this was correct.

Mr S Swart (ACDP) commended the Minister for the MTBPS and for sticking to the strict fiscal consolidation path. On page 33 of the MTBPS document, it was indicated that the consolidation measures proposed in the MTBPS are likely to have some dampening effect on economic activity. He asked that further details be given on this. The document further stated that over the medium term, further losses of confidence and a ratings downgrade, which could prompt high interest rates and large capital outflows, remained greater risks to the economy than the risks of fiscal consolidation. He asked that the Minister share his thoughts on the ratings downgrade and whether he believed that what he had presented would prevent a ratings downgrade at the end of the year. He then pointed out that one of the largest risks to the fiscal consolidation path is the SOEs and the exposure of the state guarantees, and he asked that the Minister comment on the risks attendant in giving Eskom the right to engage in the nuclear procurement problem, given the problems it had experienced at Medupi and Kusile. He particularly wanted to know what risk that presented to the fiscal consolidation path, should the government guarantees have to be called upon in the future. Lastly, he asked to what degree National Treasury or the Minister was able to contest contracts which had already been entered into.  He was thinking specifically of the sale of strategic oil reserves, which was declared unlawful by the Auditor General. Parliament had a role, but he wanted clarity on the role of National Treasury.

Mr D Maynier (DA) said there was one burning and unanticipated question. A story had broken in the media about an incident at the South African Revenue Services (SARS), where it was alleged that a senior SARS official was held hostage by the Hawks. He wanted to know if the Minister was aware of the incident, had been informed officially of it, and what his thoughts were on how that incident was to be dealt with.

Chairperson Carrim questioned whether that was relevant, but left it to the Minister to respond if he thought that it was.

Mr Maynier then said the Minister correctly pointed to the imperative of economic growth and asked what the Minister thought was the root cause of the lack of investor confidence in South Africa. He pointed out that the Minister had indicated that there would be R13 billion of additional revenue-raising measures in the next financial year, and wondered if the Minister shared Judge Denis Davis’ views or concerns about a tax revolt? He explained that this would amount to a situation where ordinary tax payers are faced with additional taxes, equivalent to being “shoved off the road by a 12 car cavalcade.”  He asked if the Minister thought the institutional independence of National Treasury was under threat and if so, who was threatening that institutional independence? Lastly, he welcomed the announcement in the MTBPS that NT would make available the Performance and Expenditure Reviews and reminded the Minister that there had been correspondence on this point earlier in 2016. Mr Maynier had withdrawn his application in terms of the Promotion of Access to Information Act on the understanding that NT would make the Performance and Expenditure Reviews themselves available. The Minister had indicated that the results would be published. He asked if the Minister intended that the actual reports themselves would be published.

Mr A Lees (DA) noted Mr Gordhan’s view that, in order to get the economy going, there needed to be consensus and operate as ‘Team South Africa’, and the DA believed that this was very important. In relation to the SOEs, the Minister would have seen frequent comments about “a certain airline” and page 55 of the MTBPS document indicated that the guarantee of R14.3 billion was set to increase to R19 billion, without which South African Airways (SAA) would be insolvent. Mr Lees referred, however, to an SAA/NT Memo which, as early as August 2016, had indicated that the R4.6 billion was insufficient to give the airline the capacity to continue trading, even until the end of the financial year, let alone for a further twelve months. Was the Minister aware of that situation, and what did he anticipate, if it was true; would further guarantees have to be provided for SAA?

Dr M Figg (DA) said the Minister had indicated that in order to stabilise debt the budget deficit needed to be narrowed, but he wanted to know how this would affect service delivery and social protection, particularly given the announcement that the grants would increase by “a measly” R10 from October 2016. It was indicated that taxes would increase, but household consumption and growth was projected to grow to 2.9% by 2019. In the same document, it was indicated that household consumption was slowing, and he asked if the increase in tax would not lead to a further slowing of household consumption. Thirdly, the MTBPS document indicated that unemployment had increased from 25% to 26.6%, and as at June 2016, 112 000 jobs were lost. He wanted to know the employment projection for the following year?

Ms S Shope-Sithole (ANC) thanked the Minister for the MTBPS speech, because it had allayed her fears. What particularly struck her was the call for working together. She believed government was doing everything in its power to try to build confidence, but Members should assist in that confidence-building by doing effective oversight to ensure that all departments were performing as they should, and stopping the negative rhetoric.

Mr A Shaik Emam (NDP) said he knew the intention was to create about 6 million jobs by 2019, either short or medium term, through the Expanded Public Works Programme. However, as Dr Figg had pointed out, 112 000 jobs were lost in the last six months. He knew the manufacturing sector had made some progress, but he did not think enough was being done to create jobs in the country overall. He asked what effect the political instability was having on the economic growth. He asked what was stopping government from putting the SOEs under curatorship and bringing them back to profitability. Lastly, it was estimated that about 40% of the R600 billion was being lost due to over-pricing and not getting value for money. He asked if this was a correct assessment and what was stopping the government from ensuring that this money was actually saved. He wondered also if any action would be taken against those who had been regarding the state as a cash cow.

Co-Chairperson De Beer said it is important that the MTBPS be read with the budget review. He asked what coordination was in place regarding the Nine Point Plan? In relation to manufacturing, he suggested that a developing country like Mexico could be used as an example when it came to manufacturing and regional integration, although it did have the huge advantage of the United States. Regional integration in Africa came up every year as a topic, and he wanted to know the progress, and what was preventing progress. Lastly, he pointed out that the Select Committee on Finance deals with a lot of provincial treasuries and the Committee’s report had been tabled in the NCOP, which reported on progress in the provinces. Given the Minister’s question about what Parliament was doing to assist, he would like to propose that the Finance and Appropriations committees, the Portfolio Committee on Trade and Industry and Portfolio Committee on Economic Development should, as a cluster, have an engagement with the respective Ministers on cross cutting issues to be taken forward.

Mr N Matiase (EFF) said the projections for growth provided by the Minister have been declining and continued to decline for the foreseeable future, as seen by the projections for the outer years. This does not impart any confidence or show a government which is determined to focus concretely on planning, reprioritise key priorities and put in place growth measures, all of which would put the economy on an upward trajectory. It does not show government creating any stimulus for investor confidence. This was precisely because of the environment. The Minister, in using the Setswana metaphor, was actually drawing Members’ attention to the fact that the environment undermines any efforts towards economic growth. The consolidated government expenditure does not inspire any new hope, when a marginal expansion for fee free education is presented. The proposals of the EFF have fallen on deaf ears and once again the students and youth have been betrayed. It was hoped that there would be a new perspective going forward.

Co-Chairperson Carrim said he thought the Pedi metaphor used was really evocative and stirring. There were multiple meanings to it, but at least one was, as indicated here, to “pull together”. He liked Mr Lees' comment on Team South Africa. The Minister had asked for Parliament to play its role in trying to secure national consensus. Furthermore, the Minister had, on the previous day, stated that “what we seek - and more - can be done, if we collectively make the right choices, support confidence and investment in our economy, create a predictable and stable policy and political environment”. Essentially this was saying that it was up to us. One of the themes coming through repeatedly was whether Parliament was doing enough to ensure that the decisions which government comes up with are actually implemented. It was now even more necessary to hold the executive to vigorous and rigorous account. He endorsed what Mr De Beer had suggested about bringing the Committees together. He felt one of the problems with the Nine Point Plan was that there was no coordination at the top, and that the President or Deputy President should coordinate it. He also felt Members need to look at having an ad hoc Committee, because it was so difficult to get all the requisite Committee together. He also liked the idea of measured, balanced fiscal consolidation. The main point there was something that the Committee needed to consider in its report, and that was how to create the conditions for rapid growth. He also liked the point that either we work together or we are doomed, and that too should be a key point in the Committee’s report to Parliament. Parliament should try to reach out, across the political parties, civil society and trade unions, to secure a more coherent approach. Budgets alone do not fix the problem. Members have to be more proactive.

Mr Fuzile said that in relation to contracts, National Treasury had instituted a mechanism which gave more transparency. NT was trying to ensure that the process pre-emptively would subject certain matters to review. Procurement above a certain threshold must require sign-off from the Chief Procurement Officer, to check if all the prescripts had been complied with. Sometimes there were inconsistencies because of something untoward, but these could also be due to carelessness. Such a mechanism would prevent problems before they arise. Where something has already gone wrong, NT can get involved, but it is not a law enforcement agency, and if the budgets of the law enforcement agencies were added it would not be fair for the Treasury contingent of 1 200 people, who were mainly accountants and economists, to now try to do things which do not fall within their mandate. National Treasury assists law enforcement agencies very diligently where the violations may relate to matters such as the Public Finance Management Act (PFMA). There is a special audit services unit within the Accountant General’s office, which undertakes forensic audits when something is suspected and passes that to the other institutions. None of the problems can be stopped if law enforcement does not play its part. He was not suggesting that currently they were not. It does encourage NT a lot, if things are to proceed to the point of conviction or acquittal, but that does not happen very often. He confirmed that it will be the performance reviews themselves that will be published. In some instances, an outside expert will be brought in. Not everything found in the reviews will be the view of government, but there will be an objective assessment of the programmes which will then signal what is working or not.

Mr Fuzile said it stands to reason that when households are taxed, they will consume less if VAT is increased. The point is that although this is a risk of growth, there can be a far more painful risk if government fails to attempt fiscal consolidation, as this would cause far more negative things.

Mr Fuzile said that in relation to the goods procurement budget, he could not recall precisely how the Chief Procurement Officer Mr Kenneth Brown had described it, but there were instances in which NT knew that government had been made to pay more – examples being the stadia for the 2010 World Soccer Cup, and textbooks, but he cautioned that these few observations should not be over-generalised. NT knows there is inefficiency in the system and there are people who overcharge. Therefore, there is reason to squeeze, but he would hesitate to put a number as this would allow people to expect NT to find the R200 billion, which may be impossible; however there should be every attempt to try to get to that saving. The Minister had commended the provinces on the previous day for getting much right, although there were also improvements expected, including delayed payment of invoices (which was not solely seen in the provinces). This was being monitored by NT, because it could affect budgeting, where goods or services are received, but no payment is made. A tick-box approach to spending cannot be used, because the spending is not an end in itself as money is spent to have an impact. That is what had to be answered, and was what was changing lives.

Mr Monale Ratsoma, Deputy Director General: Economic Policy, National Treasury, said he was responsible for the growth projections found in the documents. These projections, as carried through in the MTBPS, reflect the state of the economy and the fact that business and consumer confidence were as they are. If these did not improve, then there was not a good environment in which business could invest. This would depend much on consumption trends which would be the lead for companies to be able to predict profitability. Unfortunately, South Africa was at the point where both indicators were signalling a certain position. The Minister had correctly pointed out the indications of growth. Sector performance, over the past few years, had seen some contraction in the primary goods sector, and to an extent also in manufacturing. There were some signals of abating decline. Some of the headline numbers had largely been driven by the services sector, and retail, finance and telecommunications were growing in the aggregate at over 2%. If the overall numbers, as projected, were closer to zero and there were some sectors growing at around 2% then this suggested that other sectors were providing a drag of 2%. Stability in mining, agriculture and manufacturing were needed to make a growth number like 2% attainable. If the contraction noted in mining and other primary sectors abated then South Africa could easily achieve the 2%, although this was still some distance away from the 5% where job creation might happen. If the framework carries on at 2%, then this was still a rate consistent with job destruction. If unemployment is currently 26.6%, and 2% growth is projected for 2016, then there will most likely be unemployment of 26.6% in 2018. This all emphasised that the constraints to growth in the system around mining, agriculture and tourism needed to be addressed; until this is done, employment will be hard to come by.

He said that in relation to regional integration, the numbers indicated that Africa was only doing 11% of its trade internally. With the estimates of trade in the continent at about $4 trillion, and Africa only having 11% of this, it meant that $3.6 trillion is leaking to the rest of the world. We have not moved with speed on thinking about an Africa integration strategy, but recently there had been some momentum coming through from the Department of International Relations and Cooperation and Department of Trade and Industry. The new thinking was looking at Africa as one trade bloc, with a free trade agreement on the continent, which might address the leakage. The macroeconomic outlook and regional integration signalled that many of these matters could be resolved through South Africa's own decision making, and growth can be generated.

Mr Gordhan said Ms Tobias had made a good point about the need for a culture change on expenditure. Parliament could play a more assertive role, holding officials to account. There had been a shift from 2013, when the cost containment measures were put in place, but looking at the question around the 40%, there was a lot of room to cut fat, do things more smartly and make sure the resources were spent in the right way. Fiscal consolidation and its impact on growth were covered both in his own and Mr Fuzile's remarks. He wanted to reiterate that there were encouraging signs but growth was still at 0.5% and government had to tread a delicate path to ensure that neither excessive fiscal consolidation or the tax increases have a negative effect. That must be taken as a calculated risk, government must move forward, be agile and watchful, making the necessary changes.

He repeated that taxes are not discussed at the MTBPS, but the Committee must debate the Davis Tax Committee’s various proposals. In relation to the ratings downgrades, he said that he was stressing to Members and the public the consequences of all these possibilities, in an open and transparent manner that set out the facts, the possibilities for improvement and the consequences if nothing was done. In relation to Eskom and the nuclear matters, he noted that there was as yet no On decision on the value chain that the process was to follow, and it was still under discussion. The owner/operator responsibility, with Koeberg under Eskom, had to be considered by the Minister of Energy and it was clear that there are different stages in the process. For the purposes of transparency and public confidence, the Department of Energy should come forward and indicate the necessary steps so everyone understands the rules of the game, the legislative framework and indeed the affordability framework as well. When government has a proposition on the entire value chain, then further engagements can be held.

In relation to the incident at SARS, the Minister said he had heard whispers about it, but had received no formal report, and had not had a chance to look into the media articles. He would ask Mr Tom Moyane, Commissioner of SARS, for an explanation. If this was true, it was totally unacceptable behaviour, but the facts should be obtained first. With low investor confidence, South Africa must be careful to not shoot itself in the foot repeatedly.

Looking at the G20 meetings and the World Bank and International Monetary Fund meetings, the global outlook is very poor and these are very volatile global circumstances. The growth trap, spoken about in the South African context, is a possibility globally. The investor confidence issue is also a global one, which is why there is a glut of funds, with no one sure where to invest their money, leading overall to hesitancy to invest and lack of confidence in the global system as a whole. Geopolitical and political actors are at play globally, and South Africa is really a minor stakeholder. Trade and trade finance were both down, and those were the known facts within which a determination must be made.  South Africa was admittedly responsible for some things itself.

The Minister had pointed out some of the structural blockages, but there should also be an element of boldness in making the necessary changes. Mr David Lipton, Deputy Managing Director of the International Monetary Fund, was quoted in the MTBPS speech speaking about the highly concentrated nature of our economy. Some work had been done on the competition side, with the Competition Commission and relevant Ministers. A conversation would have to be held on how to restructure this economy in a way which allows it to grow, while allowing opportunities for the large marginalised population also to be included. South Africa can do much, itself, to boost confidence. As Mr Fuzile had pointed out, work has been done with the private sector, trade unions and international investors.

The Minister said that Judge Davis was warning that government needed to maintain credibility, and if credibility is lost by the way in which government spends public funds (even over a protracted period) it must be aware that taxpayers are a lot more knowledgeable. Their perceptions of government generally, not just of the ruling party, are not necessarily only based on whether it is working in their interest. A new global phenomenon is the trust deficit between elites and citizens. The Minister personally was not worried about a tax revolt because there is a transparent budget process, with Parliament being transparent in its approach, and interest groups being able to come forward. The additional taxes will have to be explained to the people who have to pay them, but South Africa has a progressive tax system which does not hurt the middle classes or the poor. That very important peg  in the fiscal landscape must be maintained. National Treasury, like any other institution which has money, is watched by those who would dearly love to lay their hands on the money. He believed that NT could be relied upon, and it must be remembered that it did not make its own decisions but collective government decisions. NT had to be wary of whims and wishes. History demonstrated the importance of constitutional institutions constantly being strengthened, retaining their integrity and above all maintaining legitimacy in the eyes of citizens.

The Minister noted that Mr Lees had received an answer on SAA from the Deputy Minister. In summary, SAA is a state asset, which is not in good shape at present, and before anything else is considered, it has to be put back on its feet. Government had assisted it with an additional guarantee of R4.7 billion, which the auditors had indicated was required for a credible audited statement. There was a new board which was due to hold its AGM on the following day to account publically for the financials. Both Parliament and the executive need to insist that the board follow the turnaround strategy and ensure that it returns to a position of financial stability sooner, rather than later. No SOE should be a liability on the fiscus. The gremlins in SAA must be cleaned up, to recognise that this is a public institution, running on public funds, which must be publicly accountable for the way it operates. A decision can be made on what further to do once it had reached a point of profitability and stability.

The Minister said that in relation to taxes and service delivery, government would not hurt the poor and there was room to ensure that the poor were not affected and were supported, which was why grants were being increased. The focus should not be whether less money is going into a particular infrastructure project, but how efficiently it is being spent – something should not be allowed to cost more than it should, and everyone had a responsibility to close the loopholes. There was a possibility that household consumption could decrease, but the whole picture should be considered.

Ms Shope-Sithole’s suggestion about Members’ own narrative and rhetoric was something which parties themselves needed to sort out.

On Mr Shaik Emam’s point, NT had predicted 6 million job opportunities, not jobs. Mr Ratsoma had indicated how jobs are created in the macroeconomic context and if the right conditions are created for growth, the right conditions are created for jobs. One global concern was where jobs would be found in some years time when there were driverless trucks and technology replacing human beings. No one knows what the requirements of a job will be at that time, or what type of retraining will be required.

The best example of how politics and economics could be intertwined was Brexit. A particular decision was taken on a referendum, assuming it would go one way, and it went the complete opposite, with results still to be seen. That had created huge uncertainty for that part of the world and everyone who trades with it.

The Minister noted that there had been reports recently that curators were within the South African Reserve Bank with regard to African Bank, but he did not think that matters had gone too far. He said that Mexico was different from South Africa, being neighbour to an economy which was 25% of the world’s economy; but the point is still important, that talk of regional integration gets translated into regional integration. There are many possibilities for South Africa in Southern African Customs Union (SACU)-related value chains and SADC value chains, but transforming these ideas into everyday practice had proven to be a hurdle.

He noted the points about coordination for the Nine Point Plan, and said there is an economics cluster within Cabinet where coordination happened. However, he thought that coordination was not a problem but urgent implementation by officials, as guided by politicians, is needed.

The Minister reiterated that provinces had done well, especially on headcount, where they had taken the major burden. He heard Mr Matiase's point that the growth path did not inspire confidence, but the present aim was to explain where we are today and extrapolate the outcome if no interventions were made. That was all that was being done and it was not a path ingrained in stone but could change. That was the essential element of the MTBPS – to work together, to change that path and create a better environment. Many presentations had been made about reprioritising, and this was all in the budget reviews. If there were any areas needing to be looked at, Members should raise these, and they would be considered by NT. Stimulus is a fair point. The graph which depicts the nominal increases in expenditure shows debt servicing being the highest , post-school education being the second highest, but economic affairs being the third lowest, which is not a good picture. More money needs to be shifted to economic affairs. In relation to education expenditure, he would beg to differ with Mr Matiase. Within six weeks of the Minister taking office, he was required to find R16 billion for post-school education. It was achieved, through reprioritising and making sure the right shifts took place. Another R17 billion is on the books currently, and he was engaging with many technical proposals. He was confident that those who were in need of post school environment would have their needs met by this government.

Ms Tobias said she was trying to avoid people asking frivolous questions about why growth projections may not be reached, and that was why she held the conservative view that 2% may be ambitious, but would accept it if it was the stance of NT.

Mr Maynier said the cost containment measures are clearly important, because they send the right fiscal signals. The presentation shows clearly that some interventions have been successful, but at others, government is simply not succeeding in lowering expenditure. He wondered if one way that could assist government with cost containment would be for National Treasury to produce and publish a regular  and detailed report on compliance, by each department and entity, with cost containment measures. The public and Parliament can then be aware who is complying and who is not, and hold them to account. He noted that the deficit blows out marginally in this financial year, but debt service costs remain constant and he asked for an explanation. Thirdly, he said that a new and welcome section to the MTBPS document is the fiscal risks section, which gave three scenarios. He asked what the probability was of each. He asked if the Minister believed there was the possibility of a downgrade at this stage, and if it was more likely now than when the budget was presented.

Mr Maynier reiterated that he was hugely frustrated with NT on the nuclear build, because his letter on this matter had remained unanswered for 271 working days and his parliamentary question was now overdue by 20 days. He asked that the Minister attend to this matter.

Mr A McLaughlin (DA) said the presentation speaks to debt servicing cost, but does not indicate anything about debt reduction, so he asked if there were any plans to reduce the debt in the near future. In relation to the sale of non-strategic assets, he noted that a payment of the next BRICS bank instalment was due in January 2017 and he assumed this would be funded by selling off another non-strategic asset. If so, then he questioned what would happen when the State had sold off all its non-strategic assets.

Co-Chairperson Phoza said whilst unemployment remains a major concern, government has proposed extending the Employment Tax Incentive and Learnership Tax Incentive, along with continued monitoring. She asked about the success levels of the programme and the response of the private sector. On page 28 of the MTBPS document, government was considering the introduction of a financing facility for social infrastructure, which would fund large infrastructure projects such as hospitals which require national budget allocations, and she asked the Minister to indicate how this would work. Lastly, the Minister had indicated that much of the public debt stemmed from an unwillingness or inability of government to control expenditure, hidden deficits, uncontrolled spending in lower tiers of government and unanticipated bail-outs of private sector financial institutions, and asked what NT was doing to address this, and how Members could assist?

Chairperson Carrim said he thought it very good that Mr Gordhan went to receive the petition the previous day, despite the other pressures that he had been under. He also was pleased that the fiscal consolidation would not be at the expense of the poor, and liked the phrase inclusive growth and inclusive transformation. Finally, the notion of building on hope and resilience was very good. The circumstances may be extremely challenging, but it was not necessary to simply wilt; it was possible to change circumstances with enough willpower. He noted that global growth is weak and fragile, too low, for too long and benefitting too few. The Minister, and his predecessor, had repeatedly indicated that more could be done. That is a challenge for Parliament as well.

Mr Gordhan said the fiscal risks statement is not based on probabilities or proven data. A world comparison will show reference to uncontrolled expenditure and bailouts with other governments also.  The fiscal risk statement needs to be read in the right way, and that applied equally to the media, so that it is not read as a form of lurking danger. In the spirit of transparency, it is important to know where we are going.

Mr Michael Sachs, Deputy Director General, Parliamentary Budget Office, said the highest probability scenario was the baseline scenario, and that was set out in the MTBPS document. That is what Treasury thinks is most likely to happen so it plans on that basis. The risk statement does highlight that we live in an uncertain world and other scenarios are possible, which have also been considered and responses planned. In relation to debt service costs, it must be remembered that the predominant instrument is a fixed income bond, and a bond will be issued with interest payments paid for the life of the bond. There is a historical debt of R2 trillion, but yearly borrowing is only around R150 billion, so the stock of debt is not increasing that rapidly. Since most of the debt is fixed income, even interest rate shocks take time to translate into shocks in debt service costs. That is why there would not be an immediate knock-on effect from the deficit to the debt service cost.

Mr Sachs said that the points raised by Ms Phosa, on the finance facility for social infrastructure, were currently being worked on by the Minister and the Department of Economic Development, in the context of the Presidential Infrastructure Coordinating Commission. The question was how to improve planning and financing of social infrastructure, in the face of a number of problems. These included how government would approach a multi-year appropriation rather than annual appropriations for infrastructure spend, and whether a different instrument, such as Authority to Spend, might be better. That happened in the USA, where Parliament would agree to pass an Act giving authority to spend over a number of years. The annual amounts would still need to be appropriated, but once the authority to spend was passed, the budget process becomes much simpler. It would enable Parliament to set conditions, such as requiring a feasibility study where there are significant cost overruns. National Treasury had identified that within infrastructure projects the main problem was not financing, but appraisal. In theory if a project is giving higher returns than the cost of government borrowing, it should be prepared to invest, but a problem is that the way in which the likely returns are determined is very weak. It was suggested that a facility should be established which allows a more efficient appraisal by government to check that the project is worth financing. Often NT is asked to invest in projects without properly taking into account long term operational spending – for instance, a hospital might be built without considering whether the budget would support staff. He hoped to be able to present more by the time of the 2017 budget, but said that this reform would allow for more efficient processing of decisions.

Mr Fuzile said it was not easy to measure the impact of the ETI, but it was known that in 2014/15 roughly R5 billion was claimed as incentive. A soft estimate would be that about 500 000 people were helped to access employment, although it was difficult to say which of those would have been hired anyway. Given the current high rates of unemployment, this effort was required. NT had committed to a thorough study to understand what had happened and see how best to measure it, and that would inform how it would proceed.

He noted that reduction in debt was a good aspiration but the first thing that had to be done was reduce the running deficit, because otherwise government was merely adding to its stock of debt. South Africa seems on course with stabilising debt. Delayed invoices were a fact and NT has agreed to work with provincial treasuries to see who is owed what amount. It was not too rampant, but it is important that it be addressed, given the poor effects on small business by depriving them of working capital, and then making the cost of business too high. Part of the solution could be for portfolio committees to ask some strong questions when departments failed to abide by this time limit.

Mr Gordhan spoke to cost containment measures, and said Mr Maynier’s proposal would be considered, but the Auditor General may be a better source of an independent audit. In relation to downgrades, the approach adopted had been to do right for the country, and everything else would take care of itself. The right things had been done, with the focus on growth and investment, and getting the right kind of balance with fiscal consolidation. The ratings agencies were independent and would decide if enough had, in their opinion, been done.

Mr Gordhan apologised for the late response to Mr Maynier, given the lack of clarity that had been holding NT back, but said that he would look into this. He said that South Africa was not hooked on debt, but it is  necessary to recognise it and find a plan to start phasing it down. A good point was reached in 2007/08, where it was  at 27% of GDP. He reminded Members that debt is not only the R2 trillion, but is also a percentage of GDP and if GDP increases then the proportion automatically changes. That was why a focus on growth again makes a big difference. In relation to BRICS, he said that he allocation is already in the budget, that nothing else was being sold and there was no specific intent to “sell the family silver”. The plan was workable and if all was done correctly, South Africa's position would be improved. 

Ms Tobias said Mr Sachs made an important input on authority to spend and this should be engaged upon by Members, because it could be a solution to unauthorised expenditure.

Co-Chairperson Carrim said that the Committees on Appropriations would be best placed to take that matter forward. Things were very challenging, but he felt the mood in the meeting was unduly bleak. The matter mentioned by Mr Sachs was very novel and it could be put into the report of the Standing Committee on Finance, although the Standing Committee on Appropriations would take the lead.

Co-Chairperson Phoza thanked all participants for their involvement in this critical MTBPS. She thanked NT for the work put in into ensuring South Africa’s fiscus stays stable and sustainable. She welcomed the high level of transparency and comprehensiveness in the documents tabled, including the fiscal risk statement. These mechanisms empowered Parliament to discuss and shape government’s approach to the Budget and would be most useful in finalising the various reports. Accelerated growth remains the key concern for Members and they agreed that the most significant fiscal risk was lower than expected economic growth. It was clear that everyone, as Members had suggested, will have to contribute to all efforts to remove obstacles and to attain faster growth in the economy with inefficiencies in public spending being eliminated. It is clear that fiscal policy cannot act in isolation. Building consensus and working together has emerged as a dominant theme in deliberations and everyone must work together towards building confidence, encouraging core investments and partnerships, applying appropriate consequences for insufficient performance, and ensuring that budget execution is effective and efficient. It is clear that proactive and collaborative oversight will be the core business of Parliament, and such oversight, coupled with strong consequence management, will go far to building credibility. These are the key ingredients for a faster growing and more inclusive economy.

The meeting was then adjourned.