2017 Budget: Minister of Finance briefing

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Finance Standing Committee

23 February 2017
Chairperson: Mr S Mohai (ANC) (Free State), Mr C De Beer (ANC) (Northern Cape), Ms Y Phosa (ANC), & Mr Y Carrim (ANC)
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Meeting Summary

The Minister of Finance, Mr Pravin Gordhan, and officials from National Treasury, briefed the Committees, sitting jointly, on the 2017 budget. It was reported that 95% of the country’s wealth remains highly concentrated, with the minority having control over the resources. The 2017 budget plays a central role in transforming the country’s economic landscape, as it seeks to promote redistribution and directing scarce resources towards transformation and growth. The budget also aims to mobilise private and public capital investment in tandem to help modernise and diversify the economy. Stronger and more inclusive growth is needed; in order to do this the country must concentrate on transforming patterns of asset ownership and production, promote competition and de-concentrating product market. It should also mobilise private and public capital investment in tandem to help modernise and diversify the economy. It should also improve the quality of education and training to meet the needs of modern economy.

A summary was given of growth comparatively in the world and in South Africa. South Africa’s economic growth is expected to increase moderately in several developments: the exports growth is expected to grow by 1.9% in 2017 and 4.9% in 2018. However the gross tax revenue for the 2016/2017 financial year is R30.4 billion lower than the original estimated at the time of the 2016 budget. During 2016, real value in the mining sector contracted by 4.1% due to safety stoppages, lower commodity prices and rising operating costs.

Government is committed to a measured path of fiscal consolidation that contains the budget deficit and stabilises public debt. Allocations were listed for pre-school education and training, which has been allocated with R77.5 billion; agriculture and rural development, which had been allocated with R26.5 billion; and defence and public order where the allocation was R198.7 billion. It had been decided that where large firms are awarded tenders of R30 million or more, 30% of the contract value must go to small firms. National Treasury will give private companies access to its supplier database and allow them to publish their own tenders on the eTender portal. The Chief Procurement Officer aims to save R25 billion over the medium term by negotiating contracts with government’s top 100 suppliers, consolidating spending on common goods, using technology to reduce duplication and cutting red tape.

The National Health Insurance is expected to be established in 2017/2018. The focus will be on expanding access to a common set of maternal health services and making hearing aids and spectacles available through the school health programmes. National Treasury and the Department of Health will work with a wide range of stakeholders to publish the final NHI White Paper.

Members asked a wide variety of questions and several expressed thanks to the Minister and National Treasury for their substantial efforts in balancing a budget in difficult times. One Member questioned the growth forecasts, pointing out that the forecast different this year, as it had also in the past, from those made by other institutions, and wondered if this did not affect the credibility of the figures. The differing views on the focus of the policy, between economic growth, radical economic transformation in 2016 and transformation for growth in 2017 seemed to cause confusion. In relation to tax, the suggestion was made that instead of the SuperTax, it might be possible rather to reduce costs by reducing the numbers of ministerial posts. The points were also made that this might prejudice pensioners in particular who do not fall into this category, and that it was still possible that people may try to avoid tax. Members asked if National Treasury could prevent fixing of prices in financial institutions, and questioned what had caused the increase rather than the promised stabilisation of debt. Questions were asked on contingency reserves,

the proposed VAT on fuel, special dispensations announced in October 2016, and capital allocations to and efficiency of State Owned Companies, and whether consideration might be given to selling shares in these companies. Questions were also directed to the proposal for a merger between SAA and SA Express, and one EFF Member suggested that more needed to be done to address tax paid by the large companies and transformation in their leadership. Members asked how government would ensure that infrastructure funding was properly allocated and used, transformation plans made more effective, manipulation of the industries stopped and costs better contained. Whilst the increased allocation to higher education was welcomed, Members expressed doubts that it would solve the problems in the sector. Comment was sought on the contract for payment of social grants and when this would be regularised, how investment, particularly in agriculture, could be promoted, and further assistance to students given. One Member asked how the withdrawal from the ICC would affect credit, and suggested that separate boards should be responsible for tax and customs. A report on payment of contractors within 30 days would be given later, and Members suggested that it would be useful to hold workshops with the National Treasury and Reserve Bank, and for National Treasury to report on municipalities as it had done in the past.  
 

Meeting report

2017 Budget briefing: Minister of Finance
Mr Pravin Gordhan, Minister of Finance, reported that the income growth has been uneven – the bottom 20% have benefitted from social grants and better access to services. The country’s wealth remains highly concentrated with 95% of the wealth in the hands of 10% of the population. More than half of all school levers each year enter the labour market without a Senior Certificate pass. South Africa’s towns and cities still remain divided and poverty is concentrated in townships and rural areas. The growth rate has also been slow, with just 1% a year in real per capita terms over the past 25 years.

Mr Lungisa Fuzile, Director General: National Treasury, reported that growth without transformation would only reinforce the inequalities of wealth inherited from the past. Transformation without economic growth would be narrow and unsustainable. The budget plays a central role in transformation by promoting redistribution and directing scarce resources towards catalytic investments in human and physical capital. Stronger and more inclusive growth is needed; in order to do this the country must concentrate on transforming patterns of asset ownership and production, promote competition and de-concentrating product market. It should also mobilise private and public capital investment in tandem to help modernise and diversify the economy. It should also improve the quality of education and training to meet the needs of modern economy.

The world economy is expected to grow by 3.4% in 2017 and 3.6% in 2018. Between 2000 and 2008 the country’s economic fortunes rose on the strength of the boom and robust domestic investment. By 2011 the decade-long upswing in commodity prices had begun to turn, signalling shifts in the global economy. South Africa’s development rests on a fair, rules based global trading and financial system. It is expected that South Africa’s economic growth will increase moderately in several developments. The real exchange rate has depreciated, which has boosted competitiveness and it is expected that the improved labour relations to boost job creation. The exports growth is expected to grow by 1.9% in 2017 and 4.9% in 2018.

The services sector is increasingly important in growth and job creation. He noted that unemployment recorded its highest level since 2003 in the third quarter, but it recovered again in the fourth quarter. During 2016, real value in the mining sector contracted by 4.1% due to safety stoppages, lower commodity prices and rising operating costs. Real value added in the agriculture, forestry and fishing sector contracted by 7% in the year to September 2016, due to drought conditions.

However, the gross tax revenue for the 2016/2017 financial year is R30.4 billion lower than the original estimated at the time of the 2016 budget. Personal income taxes and import Value Added Tax (VAT) are all expected to show large shortfalls, with smaller and shortfall forecast for the fuel levy and specific excise duties. Government is committed to a measured path of fiscal consolidation that contains the budget deficit and stabilises public debt. The combination of a lower expenditure ceiling and higher taxes will narrow the consolidated budget from an estimated 3.4% of the Gross Domestic Product (GDP) in 2016/2017 to 2.6% by 2019/2020.

The national budget is strongly aligned with constitutional imperatives. Two-thirds of the 2017 budget is allocated to functions dedicated to realising constitutionally mandated social rights – including education, healthcare, social security and housing. The pre-school education and Training has been allocated with R77.5 billion; agriculture and rural development is allocated with R26.5 billion; defence and public order is allocated with R198.7 billion, economic affairs is allocated with R215 billion and human settlements and municipal infrastructure is allocated with R195.8 billion.

The Chief Procurement Officer aims to save R25 billion over the medium term by negotiating contracts with government’s top 100 suppliers, consolidating spending on common goods, using technology to reduce duplication and cutting red tape. Where large firms are awarded tenders of R30 million or more, 30% of the contract value must go to small firms. In order to increase the market access and competition, the National Treasury will give private companies access to its supplier database and allow them to publish their own tenders on the e-Tender portal.

It is important that all South Africans have access to affordable healthcare. As such, the National Health Insurance (NHI) will be established during the 2017/2018 year. The focus of the NHI will be to expand access to a common set of maternal health services and to make hearing aids and spectacles available through school health programmes. It will offer improved psychiatric care, and services for people with disabilities and the elderly. The fund will be established through a combination of reorganisation and legislative amendments. During 2017/2018, National Treasury and the Department of Health will work with a wide range of stakeholders to publish the final NHI White Paper.

Discussion
Mr D Maynier (DA) said that the National Treasury’s economic growth forecast was for  growth by 1.3% with GDP. However, the World Bank has forecasted the economic growth at 1.1%, the Reserve Bank forecasted a 1.1% growth and the Internal Monetary Fund forecasted a 1.0%.These different figures speaks to the National Treasury’s credibility on the growth forecast and the credibility of the budget. Given these figures, he asked why the National Treasury believes its forecasts are correct when other financial institutions have forecasted differently.

Mr Maynier pointed out that in the 2016 budget, the focus of the economic policy was inclusive growth, but in the State of the Nation Address the President mentioned the adoption of a more radical economic transformation. However, in the 2017 budget speech the economic policy now seems to focus on transformation for growth. There is now a confusion about what the government’s economic policy is, and that must lead to further policy uncertainty.

Mr Maynier next commented on the tax proposals, noting that the government promised to raise R4.4 billion from the Super Tax that was announced during the 2017 budget speech. However if the number of Ministers and Deputy Ministers could be reduced from 74, and the number of departments down to 15 or 16 departments the government could save up to R4.7 billion. That also spoke directly to the whole point of being efficient in spending.

Dr C Madlopha (ANC) asked what type of financial leadership the National Treasury is providing to prevent financial institutions from fixing prices. During the 2016 budget, National Treasury had promised that systems would be put in place to stabilise the debt to 46.2% of the GDP in 2017/2018 but the debt is still sitting at 50.7%; she asked what has caused the increase in the debt. Has the Treasury set a debt limit? Are there any other breaking approaches since the public was told that the country would be stabilising its debt. In terms of the contingency reserves, the question was how are they planned and allocated, and is there a policy that guides the process of planning and allocations?

Mr A Lees (DA) said the additional tax bracket that is meant to bring in R4.4 billion may be problematic as it seems that Treasury has not considered that the public will still try and avoid payment in this bracket. Also, he asked how effective, and how possible to implement,  the National Treasury thought that the VAT on fuel would be, as a means of increasing its budget. The SDPD initiative had been running since October 2016, and there have been declarations of R3.8 billion, but at the moment the Treasury has only accounted for R600 million. This amount is low regarding the number of submissions that were made for the SDPD. He asked if the public should expect an increase of the R600 million. The 2017 budget also indicated that an additional capital would be allocated to State Owned Companies,  but the amount left will not be enough to finance and sustain all the SOCs. He asked if the National Treasury will consider selling some of the SOC shares like it did with Vodacom and Eskom.

Mr S Swart (ACDP) thanked the Minister and his team for stabilising the rand and for the Minister being able to deliver his transformational 2017 budget under tough economic and political conditions. He asked the Minster if he thought that he had done enough to satisfy the sovereign agencies who will be credit rating the country. According to the credit rating agencies, and a report published by the Public Protector, some of our SOCs are becoming major risks to the fiscal stability of the economy. He asked National Treasury to further explain the merge between South African Airways (SAA) and the South African Express (SAX) and the capital injection that was proposed as being deficit neutral. He asked the Minister if the relationship between National Treasury and the South African Revenue Services (SARS) is possibly not affecting the efficiency of revenue collection, given that a number of senior staff at SARS have left for various reasons.

Mr F Shivambu (EFF) said corporate tax seems to be declining each year, while income tax and VAT seem to make up the largest portion of revenue. This meant that the companies who make large amounts of money are not contributing to the revenue. The aggressive tax plan implemented by the private sector has allowed private companies to avoid tax and so he suggested that the government should develop a plan against the tax avoidance strategies. The National Treasury is not clear about its transformation strategies: it has not planned anything concrete with regards to transforming the economy or unemployment. He maintained that the big corporate companies must be managed by people from the previously disadvantaged backgrounds. The Transformation Charters had not been meaningful for young people, nor the majority who continue to be oppressed.

Mr A Shaik Emam (NFP) said National Treasury has allocated large funding to infrastructure, and the Eastern Cape has in the past been a victim of having the poorest infrastructures when it comes to schools, water and electricity. How will the government ensure that the funds allocated to infrastructure will be used effectively? Over 80  000 jobs have been lost in the mining sector in 2016/2017 and this is symptomatic of the poor transformation plans by the government. Besides the financial institutions, many other sectors have been colluding to manipulate the economy and the sector itself. This kind of manipulation affects the poor people. He asked if there are any measures in place to stop the manipulation of the industries. Issues relating to cost containment were also alluded to in the 2016 budget as being of major concern, yet these problems seem to have increased. This points to the fact that the measures that were put in place in the previous year are obviously not working. He asked then what plans does the National Treasury have to change this situation.

Mr M Hlengwa (IFP) commended the National Treasury for adding an additional R5 billion towards higher education, but he doubted if the sum of the problems faced by university students relate to financial issues. He suggested that Treasury should instead look into whether universities and schools have enough capacity, instead of allocating any more funds to the departments. He added that more and more students are opting to drop out of university, and the issues are often not related to the non-availability of funds. Although there has been an increase in social grants, he asked what were the National Treasury’s thoughts on the Cash Paymaster Services (CPS) contract, and Department of Social Development's unconstitutional and illegal contract. He said that National Treasury cannot continue to allocate large amounts of money to an unconstitutional contract.

Mr B Topham (DA) said the dividend tax, which has been increased by 33%, is understandable in view of what Mr Fuzile had called “horizontal equity”, to stop high income earners from changing their salary structure. He said he is concerned with the unintended consequences, specifically on other people who rely on dividends and are not in this high income bracket. In particular, this related to companies who use dividends to finance equity deals, and the substantial group of pensioners who were receiving money through dividends. He proposed that National Treasury should consider a form of exemption for these groups, and set up a two-tier system to soften the blow for these groups. The unfunded mandates in healthcare systems were problematic. He suggested that consideration should be given to how National Treasury can intervene, because local government does not seem to implement any plans regarding this.

Ms T Tobias (ANC) said the agriculture sector will need at least R30 billion, but only R28 billion will be able to be raised in taxes. This amount will certainly not be enough for the sector to implement its transformation plans. The National Treasury has improved in many respects but none of the Members so far speaking had congratulated them on their improvements, especially for the increase of the economic growth. In terms of the investment incentives, the public engaged immensely on the government’s proposal. Many felt that the allocation of investment incentives needed to be reviewed. She said National Treasury perhaps needs to consider how it can encourage investment, especially to the sectors that are likely to make bigger changes to the economy. Although an additional budget has been allocated to education, the private sector should also play a role in ensuring that it helps government in awarding students with bursaries.

Mr Gordhan replied saying the variations in projections between the Treasury and financial institutions are common, and that the projections had been different for the past couple of years. National Treasury tends to be a little optimistic but they are often not that far off the mark. Also, he reminded Members that National Treasury did have the ability to adjust the forecast twice a year to take into account other intervening factors that come into play. National Treasury has tried to show that transformation, with growth and inclusivity being combined, meaning that they have a particular history with marginalisation. Secondly, Treasury has reached a point of intolerance for the various levels of distress that a large percentage of the population suffers at this point in time. Growth inclusivity and transformation need to be combined and the current circumstances demand that everyone should be contributing to elaborating upon how one can combine the three demands. He pointed out that the GDP number does not mean much to the population, but the distribution of benefits is the biggest issue and that is when inclusivity becomes an issue. The word “transformation” means different things; the more developed economy speaks to economic development and employment.

He commented on the suggestion around the numbers of ministers. He pointed out that the Cabinet consists of 34 Ministers, plus their deputies, which means the Cabinet does not consist of 74 ministers, but 34 ministers. However, the Committee would be within its rights to write  a proposal for the President, because he is the person who decides on the numbers of the Cabinet. The National Treasury is not in any position to make changes to the Cabinet. In terms of leadership in the financial sector, the National Treasury is responsible for creating a broader framework for the financial sector, and hence in the 2017 budget speech  references were made to changes to the Great Recession that is in line with the G-20 pattern. This had resulted in the formation of the twin-peaks model. In terms of the trading saga, the Competition Commission had been investigating the financial institutions and the National Treasury had not taken any part in the investigations. It is unfortunate that greed has become a common thing in a capitalist society; and that a person making money would invariably try to manipulate the system to make sure that they continue to make more money. Parliament should invite the tax planners of South Africa to address Parliament on their suggestions how they contribute to better tax morality and how they often walk the tight-rope between tax avoidance and tax evasion.

Mr Gordhan felt that Parliament should be a lot more active in holding the SOCs to account. It should not be the National Treasury’s role to intervene into the management of the SOCs because the Treasury had its other work to do. The SOCs are facing serious financial issues and Parliament should take this seriously because the financial issues relate to manipulation. In relation to the merger of the SAA and SA-Express, there is a process under way, which is subject to a discrediting exercise through fake Twitter accounts. A consultant had been appointed to look into the feasibility of merging the two; but that consultant will not be responsible for undertaking the mechanics of the process.

Mr Gordhan agreed that government is spending a lot of money on the education sector but its value chain is not working as it should. The sector has all the necessary elements but none of them are being put into good use. Money is not the sole issue. This point applies to other government sectors as well – where better outcomes are required, skilled young people should be employed and the drop-out rate should decrease.

In terms of the social grants, he noted that Mr Fuzile was approached in early December 2016 for assistance, and he then grouped together a team that would come up with possible solutions to the social grants problem. The team included the SA Reserve Bank, National Treasury, the Department of Social Development and CPS. The team met quite intensely and came up with about four or five options; these options were communicated to the Minister and the final decision lies with the Minister.

Mr Mcebisi Jonas, Deputy Minister of Finance, responded to other questions. He said that the Committees should also refer to the 2017 budget book, because many of the answers to their questions are answered in that book. In relation to transformation, he maintained that one of the dangers was to think that one can always use legislation all the time to deal with everything. If anything, the experience has shown that legislation is sometimes quite limited in how far one can make advances. There is a need to create serious consensus among stakeholders about what needs to be done for transformation. He also made the point that transformation should not be a short-term plan.

Mr Fuzile said that a number of points are taken into account when making the economic growth forecast; and at some stage even some of the points are taken out of the equation to reconsider. The points that had been considered had put the Treasury in a good position to believe that it will achieve the 1.3% growth. He said that National Treasury could not underestimate the impact of growth of some or other one event which have occurred in each one of the previous years, whether it was the protracted strikes that affects mining, strikes in the auto sector, because all those kinds of things affect the economy. Although National Treasury constantly consults with the Reserve Bank, the Bank often publishes different economic growth figures, which demonstrate that the National Treasury is able to interact with other financial institutions, but it also has people who can think independently.

Mr Michael Sass, Accountant General, noted that National Treasury was audited by the Parliamentary Budget Office (PBO) who had  found that the National Treasury's own growth forecasts were more accurate than those of the World Bank and IMF. The real worry about growth forecast is more the medium term, rather than quibbling over whether they should be stated at 1.1% or 1.3%, which is not a train smash.

Mr Fuzile said the attainment of a real forecast is directly connected to the issue of revenue and debt accumulation and the stabilisation thereof. The reason why the government missed the revenue target in the past is related to the growth forecast. Government has in the past made decisions that have taken the National Treasury a step back on achieving their economic growth target – such as the lowering of the expenditure ceiling and the raising of taxes. In terms of the contingency reserves, he explained that the reserves are not carried to the next year because the system does not allow for it. The fact of having contingency reserves, however, does not mean that government has money in the bank that needs to be spent Instead, it means that the law provides that if the country runs into a deficit it may make use of the reserves. The biggest concern about reserves always relates how much the contingency reserve should be.

Mr Christopher Axelson, Director: Personal Income Taxes and Saving, National Treasury, added that Treasury is aware of the impact the fuel levy would have on citizens, including its large cost increase. It was suggested that perhaps freezing the fuel levy or decreasing its cost would help in trying to mitigate the impact. The direct cost of households purchasing fuel will also be looked at, as well as other technical points. The findings to these points will be made clearer in the 2018 budget. In terms of the dividends tax and BEE deals, National Treasury is aware that not all BEE deals are paid off using dividends to pay off the loan within the BEE structure. The dividend tax will not undermine the role of ownership but it may influence the way the deals are structured. Most pensioners will have built up funds within their retirement funds, there are however no dividends  without funds in the retirement fund.

Mr Sass said, in terms of the voluntary disclosure, the window has been opened since October 2016 but the legislation was only promulgated in January 2017. The more substantial players generally want to wait until they have absolute certainty with regards to legislation. As the realisation starts to kick in, the information will start flowing between tax administrators from September 2017, and he anticipated that there will be a lot more interest to take up the offer on the table.

Mr M Figg (DA) asked what the consequences are if the government does not pay contractors within the prescribed 30 days. He said the cost of debt is substantially high, and asked the Minister to indicate what the cost of debt for RSA is, given that some European countries pay between 0-0.5%.  

Ms S Shope-Sithole (ANC) said she is happy that the Minister did not raise the value of VAT because this tax affects the majority of women in the rural areas. She asked if it is possible to implement a Bill that would prevent banks from fixing prices for their own benefit. Credit rating agencies often lie about the credit rate, and she asked whether it was possible that these agencies can be reported to the International Criminal Court (ICC) if they are found to have done so on purpose.

Mr Maynier said he was concerned when Mr Fuzile had said the National Treasury does not have a fiscal target, or a fiscal objective. He maintained that the National Treasury’s key fiscal objective should be to stabilise debt, as indicated in the 2016 budget, which they said would be 46% of GDP. It appears that Treasury has failed to achieve its central fiscal objective.

Mr Maynier asked the Minister to comment on the appointment of Mr Brian Molefe as a Member of Parliament.

Mr Shivambu said the African National Congress (ANC) will find it difficult to report credit rating agencies to the ICC if they succeed in withdrawing from the ICC. The Minister said he agrees with the Dividends Tax Committee that the customs administration and customs collections should not be fragmented. He added that he thought there would be a separate Board that would be responsible for the customs administration and collections; it was previously agreed upon that Cabinet would make decisions regarding tax and customs.

Mr de Beer proposed that the Committees should hold a workshop with the National Treasury and Reserve Bank as part of the Committee Programmes. He suggested that the National Treasury should also account for the financial management of municipalities, as was done in the previous year. The focus of the country should be on the main aim of the 2017 budget, which is to intertwine transformation and inclusivity.

Ms Phosa said the budget is balanced, regardless of the fact that the Minister found himself having to manoeuvre in a small space. She thanked the Committees for their useful engagements.

Mr Carrim said he welcomed the Charter on Economic Rights. He urged that all the Committees must apply the Public Financial Management Act (PFMA) strictly. The PBO felt that although we have all the balancing Acts the fiscal objectives may still be questionable. In the past government has focused on reducing unemployment, poverty and growth but he asked what signs if now had to prove that these objectives were achieved. Looking at the past 20 years, everyone must ask if the country has been able to achieve some of these objectives. 

Mr Mohai also added the announcement on the Financial Sector Summit is welcomed to help the Committees and country deal with the financial sector. The challenge of having to deal with monopolies and cartels is difficult as they undermine development goals.

Mr Fuzile replied to the points about the customs administration and customs collections .National Treasury has been in conversation with the Minister of Home Affairs and Deputy President to try and look into the matter. The customs value chain cannot be fragmented, and it was necessary to try to protect the value chain and ensure that it remains integrated. There is also a lot of evidence that shows that once the country started doing that, it impacted on the revenue that is collected.

Mr Gordhan concluded  that the National Treasury's procurement office would respond on the questions around the 30 day payments. He made the point that the reality is that anyone borrowing money should have a balanced budget, but sadly RSA is not in that position. He also highlighted that the government does not allow the country to be governed by the credit rating agencies, nor do they have influence on the financial decisions made by National Treasury as RSA is a sovereign country.

He said to Mr Maynier that one should welcome any new Member of Parliament.

Finally, the Minister requested that the National Council of Provinces (NCOP) should not take too long to consult on the twin-peaks legislation so that it can be signed into law as soon as possible.

The meeting was adjourned. 

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