2016 MTBPS: Financial and Fiscal Commission briefing

Meeting report

Financial and Fiscal Commission (FFC) input on 2016 Medium Term Budget Policy Statement
The FFC provided an analysis of the MTBPS under the following headings (see document):
• 2016 Outlook: Walking an Economic Tightrope
• Notable Impact on Debt Profile
• Domestic Dynamics: State Owned Enterprise
• SOE Performance 2009/10 – 2014/15
• Risk Report
• Overview of 2017 Fiscal Framework
• Proposed Division of Revenue Amongst the Three Spheres
• Revenues And Tax Proposals
• Revenue Performance 2009/10 – 2014/15
• Unallocated Resources
• Expenditure by Economic Classification
• Expenditure Priorities (Post School Education and Training / Job Creation)
• Conditional Grant Adjustments
• Review of Actual Spending     
• Total Allocations To Local Sphere
• Local Government Conditional Grants
• Revised Division of Revenue 2016/17

Conclusion
• Lower than forecast growth has compelled Government to raise budget deficits in the 2016 MTBPS
• FFC fully supports Government’s new position on ‘gradual’ fiscal consolidation and tabling of Risk Report which is in line with previous FFC recommendations and tightening measures to maintain expenditure sustainability. This moderates rise in public debt and debt servicing costs while limiting negative impact on future growth and protects much needed social services
• Measures to improve running of SOEs with a view to improving service delivery and limit government’s potential liability (guarantees) are supported by FFC.
• More needs to be done to reignite higher economic growth consistent with NDP and this also requires structural reforms. Strengthening state capabilities should continue to be prioritised with efforts aimed at both economic and social capabilities for citizens and infrastructure and how these will be managed within the context of current consolidation measures.
• The political economy challenge of dealing with long-term fiscal policy issues in relation to free higher education requires provocation of public debate on long-term fiscal challenges. A policy pronouncement on free education by Government will be a big positive step in this direction. Pertaining to fairness, Government should be required to publish analysis of the distributional impact of such new policies. Requiring such analysis as a rule on all new policy would be welcome, as would be a requirement to publish assessments of the inter-generational or long-term impact of policies whose effects vary over time and/or generations such as free education.
• FFC commends efforts by Government to protect conditional grants. FFC supports the proposed conditional grant changes addressing identified weaknesses it has raised in the past and will continue engaging with government and other stakeholders in the exercise. The proposed adjustments estimates are supported subject to matters raised by FFC in its full submission.

Discussion
Ms M Manana (ANC) referred to slide 4 and asked what the South African per capita income is and how it compares to its peers with a similar culture? Slide 10 notes “infrastructural under-spending and the possibility of renewed depreciation in the exchange rate” - what was the extent of the problem of infrastructural under-spending? What were the gains such as the number of jobs acquired from this infrastructure spending? Would this job creation continue? This was necessary for oversight, because knowing the challenges would influence the ability to intervene. Slide 13 notes “that the 2016 MTBS proposes to raise an additional R 28 billion in 2017/18 and R15 billion in 2018/19. The specific tax proposals will be elaborated upon in the 2017 Budget.” In view of the tax efficacy, where would the additional revenue derive from? The same slide indicates a loss of gross tax revenue, was this expected or unforeseen? Slide 20 notes “The Commission welcomes the results of government direct job creation scheme and private sector investment incentives”; what was the view of FFC on the governmental actions of job creation, such as Youth Wage Subsidy and the Job Fund? Had FFC begun to monitor the short-term results of that job creation too?

An MP noted that the practicality of raising tax would become a problem for government. Secondly, consumption was driven by middle and high-income earners, but in society at large we have the poor as well. Who would be affected by the increase of consumption tax? 

Ms T Tobias (ANC) noted that it was pleasing that FFC had indicated the heavy reliance on government measures, but how does the private sector contribute to the economy? It was understood that revenue resulted from tax collection, but a challenge is if local investors were not contributing to the economy. The growth aggregate of 2% reflected lack of ambition. The same tools were used, yet there was the expectation of different results. Government could cut expenditure at national level, but the real challenge was the capacity of Local Government to adequately spend the conditional grants. If FFC was advocating that Government should reprioritize spending on a national level, it would not effectively address that challenge. She noted that on the funding of Post- School Education (PSE), National Treasury was considering new strategies, due to the challenge of students wanting a no-fee school and higher education system. The 0% increase had been an unprecedented pressure on the budget. Could FFC indicate a suitable solution that would not further exhaust the budget? A free higher education, if possible, was an issue that should be considered without incurring repercussions. What kind of planning would be enforced? Also, would one municipality financially assist another municipality, due to the cuts? Service delivery should not be impeded by the cuts. Taxes should not only be raised in a sustainable way, but in a normative way as well. The downward revision spoke of health and education occupations that shall be reserved, but those were not the only occupations, which were crucial. It was also crucial to consolidate the budget.

Mr M Figg (DA) asked the following:
- Financial consolidation - what then, would result should Government continue to pay those goals that proved ineffective to reduce deficit, but had aligned itself with long-term proposals such as the NHI?
- Slide 3 notes that Government needed to reform. It was cited that there was continuous strain on the guarantees. How was this possible, especially since there was still a loss but yet a reliance on the guarantee?
- The new addition of credit rating was noted. However, since South Africa was involved with BRICS (Brazil, Russia, India, China and South Africa) and had wanted global economic assistance; why not introduce a similar credit rating strategy as Russia?
- Slide 20 notes the improvement of the design of Public Employment Programme (PEP). In the past, compliance to government legislation may have meant that the hands of the private sector were tied, but should a program like PEP not be considered in the private sector?

M D Maynier (DA) questioned if the FCC had their own independent model in order to forecast growth rate and other metrics in the fiscal terrain, and if so, would they regard the forecast of National Treasury on growth and other metrics as credible? The Money Bills Amendment Procedure and Related Matters Act mandates that a determination should be made whether the debt level or debt service costs were reasonable. Thus, did the FCC regard the debt level and debt service costs reasonable? If not, what matrix would be used and what levels would be used in order to make that determination? Finally, as an independent body, was there anything in the MTBPS that FFC strongly disagreed with?

Chairperson of the Select Committee on Finance noted that what the Minister had said in his speech, “that we fight corruption with vigour” should be reiterated and that the Minister had also referred to the 'green shoots in the economy'. Having said that, how does FFC see the stimulation of economic growth? What must be done, as it does not clearly reflect in the presentation? Taxes were means of revenue, but ultimately the economy needs to grow first to broaden the tax space. Manufacturing had proved that there must be a demand to manufacture goods to sell. If the demand were low, then manufacturing would be low. Therefore, could FFC make the submission of stimulation of economic growth?

Chairperson of Standing Committee on Finance commented that having the joint meeting was beneficial on the hand, but on the other, due to the constraints of time the need for written responses were paramount. He noted that there was not enough money allocated, as there were constraints in the budget. What would FFC advise to inject more money into economic development and towards consumption? Given the constraints of the Budget, does FFC have a concrete proposal regarding it, so that National Treasury and SARS could be inquired of on a quarterly basis for its implementation? Secondly, tighter implementation of VAT was cited- how would it be enforced?

The Chairperson of the Select Committee on Appropriations agreed that FFC could briefly answer direct questions, but intricate ones should be liaised in writing. One of the issues raised was transfer and subsidies as a spending item in the year with a growth of 1.7%- what were the main drivers and who were the major beneficiaries of the transfer of subsidies? Another query was; to what extent does the NDP target relate to the fiscal framework? Notably, both global and domestic matters were raised, but to what extent does the proposed adjustment budget really gear South Africa towards the NDP targets?

Mr N Gcwabaza (ANC) noted that FFC had cited that additional reports on big projects could be made available upon request, such as the given example of the Post-School Education Fund. He then questioned if FFC could identify other similar big projects of which such report could be requested. Secondly, regarding revenue through tax, the issue of lost taxes through illicit flows was not evident in the presentation. Which steps, would FFC recommend, to be taken urgently that would begin to arrest that situation? Since the amount of money that the fiscal loses through illicit flows was huge and addressing it would make a difference in adjusted fiscal consolidation.

Ms DZ Senokoanyane (ANC) agreed with the heavy reliance on government, because in South Africa there was a magnitude of money, but the private sector was not on board. It served as the biggest challenge, because most of those in the private sector were only interested in benefiting and they were not prepared to come on board and help with the economy of the country. It would make a big difference if they could participate. She commented that a bleak picture of the State Owned Enterprises (SOE) was painted, because it was noted that most of them had deteriorated and a number of matters highlighted suggests the inevitable too. Yet it was said that FFC had supported the measures to improve the running of SOE, but what measures were they? Especially since key SOE was mentioned, and the expectation was that the relevant SOE were already making meaningful contributions to the country?

The Conditional Grant for Local Government was a key element of the Budget. The reduction of Conditional Grant, because of non- performance, may not solve the cause of the problem as the problem may actually be under-performance, due to lack of capacity, understanding or challenges of human resources. Thus, why exactly had the reduction occurred? Also, there was the concern of fees being imposed on children who attend schools within the ‘new townships’, because they were perceived as capable of paying. The Post-School Education and Training Sector (PSET) still suffered issues of transformation and issues of equity, which was a concern, as money could be made available, but inequality was yet promoted and posed the problem of access.

Mr N Steyther, Commissioner, Financial and Fiscal Commission, clarified that the report as well as its suggestions was supported by FFC and had not in any sense compromised the autonomy of FFC. The Minister could not have granted anything better than the Statement, warranted because it was given under very difficult circumstances. Therefore, on the whole, FFC was supportive of it.

Mr R Mabugu, Head of Research, FFC, answered when it comes to assessing the job creation infrastructure spend, FFC had already tabled recommendations on how one could assess the job creation aspect or infrastructure spend, which was in 2012 and FFC had developed a checklist for Parliament to use for tracking the different infrastructure spend. However, more details about the checklist and tabled recommendations shall be given as part of the 2012 input.

He noted that it was correct that there too heavy reliance on government for economic growth, yet how does one see it in terms of financial flaws? The private sector as group actually possessed surplus balance in financial system. Thus, there was much surplus in the backing of the financial system by the private sector. However, at a superficial level, the question posed would be, how does the public sector unlock that? At a superficial level, it was already beginning to be unlocked, when higher than anticipated budget deficits have needed to be financed. The financing thereof would derive from debt that was issued in the financial system. The good thing about it was that, although higher than anticipated budgets from February 2016 would be targeted, the way it would be financed would unlikely be unsustainable. Simply because there was a lot of that money parked in the financial space and when Government issued debt it shall not have an impact of appreciation or interest rates, or all the other things that make financing accessible, even in the short term because that money was already sitting in the financial system. On a superficial level this was the subtle matter that FFC had to deal with in the new higher budget deficits, higher meaning relative to February, but in terms of finance resource/ financial system there should not be any major problem regarding risen interest rates or anything like that because the private sector balanced it. Paradoxically it was a good thing to have had those sitting balances, as now it could be used as though it was public funds, i.e. through the Government borrowing. However, the longer-term answer to that question was, indeed, FFC was hoping to go to the head of the private sector person. The Private sector person was there to make money in the first place and what would affect them was confidence, so when they have had some idea about any uncertainty around something they were not going to do long term investment in it. Hence, what was required of policy was relentless addressing of any uncertainties. It was a new kind of debate, but when you look on the land markets for example, there were a lot of uncertainties that were sitting in the way of somebody unlocking their money and doing long-term investments in agriculture, because they may be apprehensive about the direction in which restitution may be going. The same applied to the mining sector, yet one would expect a lot of investment. Again the immediate measures that Government could take around the uncertainty could easily unlock the private sector sitting balances. Thus, indeed, the private sector was not coming to the market, but also there were reasons why they were not coming onto the table. Government should address at least some of the major concerns and talk to, at least, certain policy pronouncement. Parliament can keep the Executive into account for how and what steps was taken to remove those uncertainties. He empathized that he was not advocating the manner in which policy should go, but any clear pronouncement on what the position was, would distinguish whether it balances or if the private sector was still not coming to the party as a result of uncertainty. 

He explained that FFC not only had its own model but a suite of models, for instance the economic model, and those could issue, not just focus, projections. Regarding FFC assessment of the National Treasury focus; it should be understood that any model was going to differ from the next model, because its dependent on the assumptions that fed in it and the research that goes into that. Therefore, for example, when National Treasury come to 0.5%, but FFC threw out 0.35%, FFC would have no reason to doubt the credibility of the new revised figure and fully understood what was driving that figure towards housing economic growth rate to where it was right now.

He clarified that the cited 2% economic growth rate was a potential growth rate and not the actual growth rate as the stipulated slide shows a growth rate that was much lower. Thus, the actual growth rate may be far from 2% potential growth rate. He illustrated that if you were to think of yourself on a plane and the plane raises until it reaches closing speed that closing speed is what we call potential growth rate when it is a state that is maintaining itself. For South Africa a growth that would sustain itself in the long term was the potential growth rate of 2%, which was different from the actual growth rate workshop today.

Mr Mabugu then elaborated on the debt levels and optimum level of debt as requested. There were ways in deciding on what optimal level of debt was, but agreement on precept or what underlines the guidelines for what level it should be was necessary, The IMF had guidelines on what that should be and the EU had guidelines on what that ought to be too. The MTBPS was not talking about what the optimal debt level should be. The MTBPS was to indicate FFC had seen a doubling of debt level through global economic crises and that the cost should be stabilized irrespective of whether it was optimal, below optimal or above optimal level. The reasoning was, ‘can we stabilize where we are so that open up that discussion in terms of exactly where it should be’? Therefore, where FFC had indicated the consolidation proposal that was being proposed was supported by FFC, it was saying ‘lets stabilize the doubling of debt levels and once its stabilized, then open the more deeper discussion around what was the optimal level of public debt’ after the finance was more stable.

Mr H Amusa, Program Manager: Macroeconomics and Public Finance, FFC, answered how does South Africa compare relative to its margin market peers in terms of GDP per capita growth rate specific to BRICS. What FFC observed about BRICS, was that South Africa like India relative to Brazil, Russia and China had the lowest per capita GDP. On average over the past ten years, South Africa’s GDP hovered around $4500- $5000. Lower than SA was India with $8600- $8700. However, when contrasting the GDP per capita average with the growth rate, what was more important was the growth rate of that GDP per capita. Over the past year, India and China had per capita growth rate of more than 6%, and the countries that performed worst than SA were Brazil and Russia, simply due to internal dynamics, especially recession. Apart from BRICS, other nations like Philippines, Thailand, Chile and Columbia, which were also commodity based in many respects, SA GDP per capita growth was under- performing those particular countries and had a declining trend as observed by FFC. If comparing SA growth to China and India it was at about 6.4%

Prices contradiction in the sense that FFC was supporting reforms and the SEO was not-performing well. FFC welcomed that Government instituted an aggressive campaign of ensuring that SOE was back on track simply because it recognized the poor performance of SOE over the past ten years. In 2007 and in 2008 SOE continued the liabilities of guarantees. SOE was about 8% of GDP at around R107 billion. Right now in 2015/16 guarantees on SOE had almost doubled by more than R500 billion accounting for 14% of GDP. So efforts to ensure that this increased guarantees over time do not become a normal future of the fiscal. FFC welcomed improvement of the efficacy of the SOE, regarding the governance practicing of the SOE and its renewed ability to move to profitability. Notably, in the past six months, the Minister of Finance and National Treasury had instituted a number of measures in SAA to bring this company back to profitability which includes submitting cogent, sustainable and transformation plans to stimulate turnaround strategies. Also, so that they could benchmark over the long term and ensured that they were regularly assessed to result in return to profitability. Measures put in place to address the operational deficiencies of SOE were welcomed. These were reforms that were meant to bring a long-term impact. Therefore the deterioration that was experienced over the past ten years would hopefully revert to aspects of profitability and long-term sustainability within the SOE.

The Chairperson of the Select Committee on Appropriations noted that even if South Africa could improve in term of efficiencies, it would not address what the Minister had raised prominently, that the structural reform of the South African economy was not having competitive edge. Did SA have to take major leap regarding industrialization- building new industries? Compared to its peers, was South Africa safeguarding sacrifice of labour, business and the role of the State, regarding maintenance or driving economic growth of the country?

Mr Mabugu replied that South African economic growth had changed in the 20 years. He then explained that four components drove the economy, and that the government and its policy were merely ¼ of the drives of economic development. Thus, the Government has needed to become tactical, lest it would continue to be overstretched, and yet next year the overstretching would be highlighted as a problem Hence, when the government considers industrialization it should remember the pitfalls that history displayed. Unless Government intervention in the industrialization space was highly focused and served in an incubation role to enable the other three components of economic growth to really express themselves, then Government would have a role in the industrialization space. If Government was a mode of delivery for industrial space, industrialization shall need incorporation in the National Plan. Therefore, the Government had a role to play but was one of the four to support the expression of the other three being, public consumption, investment and the external sector. Another problem posed would be insufficient capital in public services for industrialization. Thus even if the national mandate would newly be extended to include non-public services in the industrialization space, before the foundation was laid, it would be inevitable that South Africa would run into major problems. He empathized that the role of Government was confined to influencing the other three components for economic development only. When reviewing South African economic growth up until the global crisis that was lost, it could be seen that it was really private economic consumption was lost. However, it not as bad as it seemed, because the previous consumption was contingent to raising household debt, so its growth was superficial and premised on an escalated debt rate. Therefore, the prospective potential 2% growth rate might resonate without debt-fueled consumption, but may derive from either investment or the external sector. What role should Government be playing? Should it leap into industrialization? Personally, he noted industrialization with caution and advised Parliament to get the capital state that delivered public services sorted out first, before beginning discussion beyond its basics.

Mr G Dawood, Programme Manager: Provincial Budgets, FFC, answered the queried view of FFC on job creation schemes such as the Youth Wage Subsidy and Job Fund. Previously FFC had made comments concerning those two programs and had welcomed attempts made by Government to target spending on investment. With respect to jobs that stimulate economic growth those schemes were the right approach to take. However, it was previously cautioned that regarding the Youth Wage Subsidy, the jobs created should be new jobs created and not jobs that would have been created in the absence of the subsidy. The assessment made of the quintile schools system was agreed by FFC. Within the submission made last year, FFC had made a range of recommendations around equitable sharing of schools for better outcomes after which FFC had assessed the quintile schools system as well as issue of funding, with respect to equitable outcomes. Reference to the details outlined in the chapter of the submission made last year was made.

Mr M Ncube, Programme Manager: Local Government Unit, FFC, answered the query of the reduction of grants as well as why some SOE were underperforming. He clarified that the reduction of grants were on specific grants and did not entail one municipality financially assisting another. Underperforming amounts of money or non-used money allocated equated wastage. The particular grants, which were targeted, have had wastage, as that principal guided the choice of grant to reduce. Besides that, there should be an evaluation of the historical performance of the SOE before a final decision was made to reduce those particular grants. When evaluating the reasons of the under-performance, for the proposed reduction of grant, the risk of disadvantaging the poor was always taken into consideration. However, FFC have had reviewed the caused reasons in the reduction process. For example, underperformance proved an issue of capacity in Municipalities, because it takes capacity to relate Government policy into practice as well as for it’s monitoring. Additionally, there was a change of priority in the implementation and with the Municipalities reprioritizing there was weakening of the initial implementation or its outcome of the grants. Lastly poor capacity to plan resulted in under-performance too. Two years ago, FFC had made the submission that the accounting mechanisms in Municipalities were very weak, and should the issue of accountability be addressed first, they could deal with the recurring non- performance.

Ms S Peters, Manageress: National Budget Analysis Unit, FFC, answered that the tax revenue was not really thriving, particularly if the strong correlation between tax revenue and economic growth performance was considered. Where was tax revenue likely to come? Over and above the usual personal income tax, the Government tax shall impose a carbon tax as well as tax on sugar. The National Health Insurance and the Nuclear Build Program were examples of big projects that had distributional works.

The Chairperson of the Select Committee on Appropriations thanked FFC as well as the delegation of National Treasury that was yet present in the meeting. Although none presentations were made by Treasury it was expected of them to follow-up on the submissions made by other stakeholders. Since it was the collective mandate as per Chapter 9 of the Constitution to advise on the fiscal framework.

The Chairperson of the Standing Committee on Appropriations thanked FFC for the engagement, because it assists with deepening insight on the MTBPS. The proposal given by FFC could assist with strengthening and reigniting the economy, as it was collectively understood that it was introduced during a difficult economic environment. The empathize was the re-ignition of economic growth so that other aspects that it affected; such as the appropriation of money, Budget, increase and the appropriation to National, Provincial and Local Municipal departments could be better handled. However, could FFC elaborate on the distributional report? Did it have a framework or was a framework proposed? Since the distributional report could be used as a tool for the oversight function.

Mr Mabugu replied that FFC would submit written responses that included a framework to be used in discussion around what the distribution report could contain. FFC had specific ideas regarding the distributional reports. Additionally, without over-committing the Commission the FCC would be in a position to capacitate the researchers of Parliament regarding the interpretation of that framework too.

The Chairperson of the Standing Committee on Appropriations concluded with appreciation to everyone in attendance as well as their meaningful and constructive engagements. The joint meeting of four Committees had achieved its objectives as a result. The report by FFC had been welcomed, as it was enlightening in retrospect of 2015/16, because it was broadly understood that the MTBPS did well in maintaining fiscal consolidation as a mechanism for reigniting economic growth, and the stabilizing of Budget deficits and debts. Parliament was confident that it would enable a good stead by December during the review by Credit rating agencies. It was also comforting that the continued fiscal consolidation had not negatively impacted on the provision of social protection. It was agreed that expenditure smoothing should occur, as departments should have spent at least 50% of their overall budget by September 2016, but it was November and yet that was not evident. However, when broken down to individual departments discrepancies of under or over expenditure would be evident. Hence, it was advisable of departments to confine themselves to the 50% benchmark to ensure quality service delivery as well as reignite exclusive economic growth. The proposed SOE reforms were welcomed, such as the Government standardized framework to improve the position of the SOE. It was strongly believed that it would incur long-term economic growth and investor confidence, as creating a conducive environment for investing was aimed for. Currently the SOE was deemed as liabilities for Government, but with the persistence for turnaround strategies, it could stimulate economic growth, as opposed to being the burden it had proven to be. The engagements on both levels should verify if a response was triggered that would take the economy to greater heights. If the turnaround strategies were unable to stabilize Government guarantees, it would pose a very high risk of being a further burden in the fiscal year, which was an unwanted situation. On the issue of conditional grants, it was agreed that the historical performance of the particular grant should be considered before reduction took place. However, analogy of the underlining causes of under-performance was necessary to review too. The proposal on conditional grant reform was noted, especially since there was a need to liberate budgets for education. Since the Constitution both binds and orders Parliament to respond to the need of the people, the current social need for no-fee education was essential to address. It was also agreed that the maintenance of road was of paramount importance. It was agreed with FFC that the concern of Project Manager witnesses should be addressed. The additional PSET sector funding was welcomed to address the current challenges, but the Committee would appreciate of FFC to advise where more funds could be attained from to achieve free education for the poor and middle class citizens. Parliament would like to make an informed decision about such instead of a mere reaction. The Committee would have further deliberations of the input of FFC before reporting to the House of Parliament for adoption. To garner greater return on investment it was advisable to reconvene with FFC on a quarterly basis, because the approaches previously taken have had limited outcomes. The e meeting was adjourned.